In order to define what makes a customer good or bad we need to first define what the parameters are that we are making this decision on. I am sure for most people the first parameter that would leap to mind is…profitability. The customer I make the most profit from must be a good customer. This is probably true IF you truly understand what profit you are making from a customer. Profit is not necessarily a case of invoice minus cost because most organizations have something called overhead which is divided to become a per unit cost. This fractional cost is then included in the total cost for each product. In other words – most companies do not, and cannot, trace their overhead costs to a specific customer or order. For some costs such as light, heat, or power this is not really a problem as customer behaviour does not substantially affect usage. There are however a number of overhead costs that can be, and are, affected by customer behaviour but since we are not tracking cost to this behaviour we do not truly understand their effect on profitability. An example of behaviour that can directly affect overhead cost can be found in the typical customer service department. The headcount in this area is controlled by the workload which involves – contacts with the customer base to provide information, taking orders, modifying orders, processing order requirements into the company system and communicating changes back to the customer. Who specifically does these tasks, and how, is obviously different in each company but someone does these tasks and unless you have a different person assigned to each customer it would be very difficult to track back the cost of this connection back to specific customers. This means the cost of the department is usually just summed up and added to the overhead costs.
Now let’s look at the normal behaviour of two customers. Customer A provides a realistic forecast of requirements, places orders with at least the required lead time, does not normally make changes to the orders and always pays within the limits of the terms & conditions of the PO. Customer B does not believe in forecasts or lead time, constantly put a rush on orders, changes orders within the lead time and cancels orders at the last minute. In addition they regularly withhold payment for material that is delivered, usually because their internal paperwork is incomplete. Customer B is also your biggest single customer. Which is the better customer? More importantly, which is the more profitable customer? Every one of those bad habits I listed for Customer B costs you money. They are consuming far more of the customer service resources than customer A is, which you have to pay for in additional headcount and tools (desk, computer, phone, etc). They are also creating problems in your planning system, production and logistics area’s as everyone tries to react and keep this very important customer happy. Every one of these problems, reschedules, emergency change overs and expedited shipments of raw materials and finished goods cost you money. Possibly even more importantly, all these issues may be impacting your ability to deliver On Time, In Full to your other customers which is putting their business in jeopardy as well. Finally, because they are your biggest customer, you are probably offering them a discounted price due to higher volume. So tell me again… which customer is more profitable?
Please note, I am not advocating firing the customer but instead, that you need a realistic understanding of relative profitability. If you decide you want to keep the business then you need to decide how to modify the relationship. Assuming you have competitors, and most of us do, this is not exactly an easy thing to do but there are possibilities. One method that I like is to provide the customer free training on process improvement. The intent would be that, as they improve their processes, you should see improvement in the way they place orders. Obviously a difficult thing to do if the customer is substantially larger than you are but there are some ways of working around that. For instance, if you are hosting training for your own people invite the customer to send a couple of their people as well. Maybe even host a customer session where you invite people from several different customers. APICS has a Lean Enterprise Workshop Series that could be used for this purpose. If Lean is working for you, why not help your customers have it work for them as well. It might improve their processes and if it makes them more competitive they will need to buy more from you to cover the additional sales.
Another possibility is to add upcharges to the bill when the customer does specific things. As an example if they place a rush order there will be an upcharge of $X. I am not much of a fan of this method both because it annoys the customer and because the sales staff have a bad habit of waiving the charge “this time” so it really loses it effect. Another way of accomplishing the same effect, (behaviour change) could be to offer “good behaviour discounts”. Quote them a price that is a little higher but has discounts tied to the behaviour you want to change, such as so many dollars off if the order is received outside the lead time. This would then give them the ability to receive a very competitive price if they control the orders properly but if they do not, then you get to recoup some of the costs by not paying the discount.
If you would like to discuss how to measure the true cost of your customers’ behaviour I would be more than happy to meet with you and to explore this in more detail. Please feel free to contact me firstname.lastname@example.org to discuss how a Customer Value Survey can help your organization.
If you would like to read more about this topic check out the other posting on my website – http://jadetrilliumconsulting.com
Hope you enjoyed this posting. Talk to your friends and co-workers about their experience and thoughts about customer value, especially what it means for your organization. And, as always, I would love to hear back on your (and their) thoughts. Just fill in the comment box below along with your contact information to let me know what you think.