Strategic Activity-Based Management for Customers and Suppliers

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Strategic Activity-Based Management for Customers
and Suppliers

• Dr. Nancy Mangold
• California State University, East Bay

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ABM-Customers and Suppliers

• Extend the ABC analysis beyond manufacturing and
  factory costs
• Analyze expenses below the gross margin line on
  the income statement
• Marketing and Selling expenses
• Procurement expenses
• Administrative expenses

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Actions

• Protecting and expanding business with highly
  profitable customers
• Repricing expensive services, based on
  cost-to-serve
• Discounting, if necessary to gain business with
  low cost-to-serve customers

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Actions

• Negotiating win-win relationships that lower cost
  to serve with cooperative customers
• Conceding permanent loss customers to competitors
• Attempting to capture high-profit customers from
  competitors

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Customer Costing

• Assigning the costs of selling, marketing,
  distribution and administrative expenses is
  valuable.
• Not all customers consume resources at the same
  rate.
• ABC identifies the characteristics that cause
  some customers to be more expensive or less
  expensive to serve.

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High Cost to Serve Customers

• Order custom products
• Small order quantities
• Unpredictable order arrivals
• Customized delivery
• Change delivery requirements
• Manual processing
• Large amounts of pre-sales support
• Large amounts of post-sales support
• Require company to hold inventory
• Pay slowly (high accounts receivable)

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Low Cost to Serve Customers

• Order standard products
• Higher order quantities
• Predictable order arrivals
• Standard delivery
• No changes in delivery requirements
• Electronic processing (EDI)
• Little to no pre-sales support (std pricing)
• No post-sales support
• Replenish as produced
• Pay on time

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Customer Profitability
More profitable customers
Types of Customers
Profits
Costly to serve, pay top dollar

• Passive
• Product is crucial
• Good supplier
• match

Net ABC Margin Realized

• Aggressive
• Leverage their
• buying power
• Low price, lots of
• customized service

Price-sensitive and few special demands
Cost to Serve
Hi
Low
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Profitable Customers

• Wal-Mart
• Lower left hand corner
• Low Prices
• Low margins
• Also the cost-to-serve is low.

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Profitable Customers

• High cost-to-serve can be profitable
• If the net margins earned on sales are more than
  compensate the cost of all the resources deployed
  for these customers
• Upper right hand corner

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Challenging Set of Customers

• Lower right hand corner
• High cost-to-serve
• Low margins

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Challenging Set of Customers

• Conduct operational ABM
• Improve the performance of the processes
• Reduce the cost of activities associated with
  serving these customers

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Challenging Set of Customers

• The bill of activities will show the activities
  for the high cost-to-serve customers
• The company can share this information with the
  customer
• indicate the costs associated with such actions
• Encourage customers to reduce the number of
  activities and to work in a less costly manner

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Challenging Set of Customers

• If the customer is unwilling to shift its buying
  and delivery patterns to lower cost-to-serve
• May increase revenue by
• Lowering the discounts
• Adding price surcharges for special services and
  features

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Managing Unprofitable Customers New Customers

• Large expenses incurred to attract these new
  customers
• Customers testing new supplier by giving only a
  small portion of its total business
• Assess how well the new supplier can perform

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Managing Unprofitable Customers New Customers

• View initial losses as investment in obtaining
  new customer
• Hopes to grow these customers into long-term,
  profitable relationships
• Track them to ensure such customers will reach
  profitability through higher volumes, higher
  margins, and lower cost-to-serve in subsequent
  years.

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Managing Unprofitable Customers

• Some companies are prestigious to have as
  customers because they are known to be demanding
  on their suppliers for quality and performance
• The company gain benefits that it can leverage
  with other customers
• Loss represents advertising or promotion costs
• Or price of establishing reputation and
  credibility

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Managing Unprofitable Customers

• Another benefit - Opportunity for learning
• Japanese companies (Toyota, Nissan and Honda)
  established mfg presence in the US have demanded
  performance from US based suppliers
• US suppliers found it quite costly to meet the
  stringent requirements for quality, delivery
  times, and flexibility from their new Japanese
  customers.

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Managing Unprofitable Customers

• Recognize the working relationships with such
  customers provide a learning opportunity
• Demanding customers will work with new suppliers
  to show them how new management processes,
  equipment, and technology will enable them to
  satisfy the customers demands without incurring
  excessive cost penalties

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Managing Unprofitable Customers

• The initial losses incurred in satisfying these
  customers demands represent cost of education
  about new manufacturing and logistics processes
  that can be beneficially deployed to all of its
  customers in the future.

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Firing Customers

• If customers resists all the companys attempts
  to transform the unprofitable relationship into a
  profitable one for a long time
• Consider firing the customer
• Or refuse to grant discounts and reducing or
  eliminating marketing and technical support

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Supplier Relationships

• Purchasing managers search for and negotiate with
  potential suppliers to obtain the lowest possible
  purchase price
• US auto companies will not enter long-term
  relationships with their suppliers

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Purchasing Standard Costing

• Such continual spot-market contracting is
  consistent with standard costing view
• Production managers responsible for meeting
  quantity or usage standard
• Purchasing managers are accountable for meeting
  the price standard

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Purchasing Standard Costing

• Purchasing managers try to reduce purchase price
  variance by identify lower-priced supply sources
  by purchasing
• In bulk quantities, earning volume discounts from
  suppliers
• From marginal suppliers whose quality reliability
  and delivery performance were less than
  outstanding

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Purchasing Standard Costing

• From distant domestic suppliers who offered lower
  prices if freight costs were not traced to
  individual shipments
• From suppliers in low wage countries
• From suppliers with low overhead
• From suppliers with limited engineering and
  technical resources

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Purchasing Standard Costing

• Such actions would lower purchase prices
• But lead to much higher costs in organization for
  performing procurement activities

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Procurement Activities

• Receive materials
• Inspect materials
• Return materials
• Move materials
• Store materials
• Scrap obsolete materials
• Scrap and rework products because of defective
  incoming materials

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Procurement Activities

• Order materials
• Delay production because of late deliveries
• Expedite materials to avoid shutdowns because of
  late-arriving materials
• Design, engineer, and determine materials
  specifications
• Pay for materials

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Purchasing Standard Costing

• Stage II system buries the cost of resources in
  large overhead pools
• Allocate to products using unit-level drivers
  (Material , DL, Machine Hrs)
• Can not distinguish suppliers with high demand
  for internal procurement activities versus those
  that make minimal demands on the procurement
  resources

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Choose Low-cost Not Low-price Suppliers

• The best suppliers are the ones who can deliver
  at the lowest total cost, not lowest price.
• The total cost of acquiring materials includes
  the purchase price plus the cost of all the
  procurement-related activities.

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Purchasing - ABC

• Standard cost reports net purchase price from a
  supplier.
• Only ABC system enables a company to understand
  the total costs of working with an individual
  supplier
• Ordering
• Receiving
• Inspecting
• Expediting
• Storing and other purchase related activities

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Purchasing - ABC

• An ideal supplier may have higher purchase price
  but will have lower total cost.
• ABC enable a company to engage in fact-based
  discussions on how it wishes to work with
  suppliers and how cost savings from efficient
  supply can be shared between supplier and
  customer.

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Vendor Sustaining Costs

• Purchase price unit related
• Other purchasing costs are batch-related
  (ordering, receiving, inspecting, moving and
  paying for materials).
• Some costs are product sustaining (costs of
  designing and maintaining specifications on
  individual components)

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Vendor Sustaining Costs

• There are costs associated with a given vendor
  that are independent of the quantity and variety
  of items ordered
• Ongoing discussions-product plans, delivery
  requirements, and production plans
• Maintaining files on vendor identity,
  characteristics, and performance
• Periodic review of vendor performance.

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Vendor Sustaining Costs

• Companies discover that because of
  vendor-sustaining costs, they have too many
  vendors.
• With this information, they can attempt to
  consolidate their vendor base
• They can work more effectively and more
  efficiently with few vendors.

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Assigning Business and Corporate-Level Expenses

• Arbitrary allocation using percentages, distorts
  profitability
• ABC is the same as for manufacturing costs or SMD
  costs
• Look for quantitative measure or measures
  representing the output of the staff department

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ABC Profitability Branches
Channel Profits
Product Line Profits
Location Profits
Product Line Exp
Country Exp
Product Line
Channel
Country
Channel Exp
Brand Sustaining Exp
Brand
Customer
Customer Sustaining Exp
Facility Sustaining Exp
Facility
Customer Order
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Product and Product Line Profitability
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Customer and Channel Profitability