Is it time to "fire" some customers?
By John J. Keough -- Industrial Distribution, 5/1/1999
A DISTRIBUTOR WE KNOW has a major contract to supply MRO products to a large transportation carrier. He's had this contract for a number of years and each year he's expected to reduce his customer's costs by a specified percentage. It gets tougher each year to meet those demands and now this distributor is deciding whether to take the drastic step of firing the customer.This distributor is ahead of many of his competitors in that he knows exactly what it costs him to do business with the customer. He has used activity based costing to determine the profitability of supplying product to that customer. His conclusion: he is actually losing money with this company.
Several years ago, a distributor of hose and accessories in the Northeast sent letters to long-time customers whom, he determined, were not profitable for him. He also ended up firing those customers, concentrating on others who had greater potential for buying more products. "What I found out is that these accounts required more service than others. They were more demanding and frankly took too much of our time,'' he told us.
You all know these customers. They require more of your salespeople's time, complain about price and pay their bills later than other customers. Yet, you think because they're steady customers, you're making money on them. You always thought you could "make it up in volume." But nothing could be further from the truth.
Today, a distributor has to analyze his operation and determine if all the activities he is performing to generate those sales exceed the profit with that customer. And the only way you can determine that is through an effective method, such as activity-based costing.
A few years ago, several distributors in the Michigan area walked away from business with one of the Big Three who demanded substantial pricing reductions every year. One distributor concentrated on other areas he had previously neglected, such as food processing. He's doing more business than ever before.
No one is saying you should walk away from high sales volume. But in many cases distributors do not know the exact cost of doing business with individual customers. Without that information, your company may not be one of the survivors in the years ahead.
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