Understanding Customer Profitabilit

Understanding Customer Profitability
With TFC profitability suffering in October 1992, General Manager John
one began to question the appropriateness of the distribution charges.
"The Business Forms Division in 1988 earned a 20 percent Return
Vestment (ROI). But returns have been dropping for several years. TFC is
jected to earn an ROI of only 6 percent for 1992. Something tells me the
are not managing this business very well! Mt seems to me that the charge
services needs closer scrutiny. I believe we should charge our clients for
services they use. It doesn't seem fair that if two clients buy the same
of product from us, but one keeps a lot of inventory at our distribution
and is constantly requesting small shipments and the other hardly bother
at all, both should pay the same service fees."
John looked through his records and found two accounts of similar size
Counts A and B, which were handled by different sales people. Accounts A
Both had annual sales of $79,320 with the cost of the product being $50











Under the current system, these accounts carried the same service charges, the
John noticed that these accounts were similar only in the value of the product
sold; they were very different on the lever of service they required from Allis
In the past year, customer A had submitted 364 requisitions for product
a total of 910 lines (all of them ,,pick-pack,,) while customer B had submit
790 requisitions with a total of 2500 lines (all ” pick-pack” ). Customer A kept
Average of 350 cartons of inventory at the distribution center while customer kept 700 on average. Customer B's average monthly inventory balance
$50,000 ($7,000 of which had been sitting around for a whole year) while
of customer A was only $15,000. Because of the greater activity on customer
account, a shipment went out three times a week at an annual freight cost
$7,500 while customer A required only one shipment a week at an freight cost of $2,250. In addition, customer B had requested desk top 26 times during the past year, while customer A did not request desk top livery at all. John Malone turned to TFC controller Melissa Dunhill and rector of Operations Tim Cunningham for help.

John said, "How can I better understand customer profitability?" "well” Tin
said, "if we can figure out, without going overboard of course, what exactly
on in the distribution centers, maybe we can have a much better idea of
it costs to serve our various clients." Tim knew that two primary activities
place in the distribution centers-the warehousing of forms and the of those forms in response to a customer requisition. He and John decider to talk to some people in the field to get more specific information.