Supply chain management (SCM)
- Supple chains: the interlinked organisations involved in the creation,
- distribution and sale of goods or services.
- SCM: the management of key business processes that extend across the supply chain from the original suppliers to the customers who purchase the final product.
- Effective SCM management involves:
- creating collaborative relationships with customers and suppliers
- measuring performance of activities, suppliers and customers
- managing costs and processes
- accelerating time-to-market of new products
- Effective SCM can lead to performance improvements for organisations as well as their suppliers and customers. These improvements may include improved efficiency, cost performance and profitability, as well as improvements in product quality, product innovation and delivery performance.
- In practice, many organisations that focus on improving SCM consider only linkages and activities that involve their immediate suppliers and customers, and focus on optimising the value chain across those linkages. However, some organisations extend their focus to encompass second tier suppliers and customers.
Customer relationship management (CRM)
- Collecting and analysing data to understand individual customers’ behaviour patterns and needs and developing strong customer relationships
- May lead to improvements in customer service, customer retention, new customers, more effective and efficient marketing (more tailored, increased sales and customer profitability
- E-commerce applications may allow customers to access interactive web sites and initiate and complete transactions over the internet
- CRM also involves considering the type of data that should be collected and how that data can be made available for real-time use across the organisation. Eg. customer inquiries arising from online systems and call centres should be made available to sales and marketing staff to help them better understand customer needs and preferences.
- Easily accessible and detailed profiles of specific customers stored in a centralised database may be used for targeted marketing campaigns
Why is customer management important?
- Most companies do not know the contributions made by different customers!
- 20/80 rule: 20% of the customers generate 80% of profits
- Transforming unprofitable relationships: typically, all companies have some unprofitable relationships and they need to be addressed
- Strengthen profitable relationships
Reliance on major customers
- Long term contracts of this nature are generally viewed as being efficient as continually shopping for new suppliers can be expensive.
- Such contracts allow for an ongoing relationship between customer and supplier, allowing suppliers over time to develop better understanding of the customer's needs.
- However an over reliance on major customers can be problematic
E-commerce- a customer perspective
- Increasingly, firms are establishing electronic relationships with their customers, which allow existing customers and potential customers access to interactive web sites and enable transactions between a firm and its customers to be initiated and processed over the internet.
- Electronic data interchange connections allow sales orders, invoicing, payments and analyses to be undertaken electronically.
- Customers also gain from these systems, as they receive products as soon as they are required, without having to incur the expense associated with raising and processing purchase orders.
Customer Profitability Analysis (CPA)
- Activity-based costing techniques can be used to determine the profitability of customers. Customers can be identified as cost objects, and activity-based costing can be used to estimate the costs of doing business with particular customers or with groups of customers that require similar service levels.
- In determining customer profitability, it is usually not practical to identify the profitability of individual customers, unless there are only a few of them. Therefore, customers may be grouped by size, industry, market or distribution channel
- Reporting and analysis of revenues earned from customers and the costs incurred to earn those revenues
- Relative profitability of customers can be determined and used for a range of strategic decisions
Customer cost analysis
- The costs of products purchased by the customer are assigned to customers, along with the costs of any other customer-driven activities.
- Activity-based techniques may be used to assign costs to customers or customer groups
- Customer-driven activities may relate to marketing and selling, packaging, order entry, loading and shipping goods, invoicing and collecting sales revenue, technical and administrative support, and after-sales service.
- In customer profitability analysis the costs of all the activities used to support a customer or a customer group are accumulated and compared with the revenue generated by that customer or customer
- The relative profitability of particular customers or groups of customers can be determined and used for a range of strategic decisions.
How do customers differ?
- Differences in customer profitability may be due to differences in revenues received from customers and to differences in resources used (costs) to service customers.
- Differences in revenue can arise because customers are charged different prices (through different distribution channels) or are given different discounts, sales volumes differ or customers purchase a range of different products.
- In a manufacturing business, differences in the cost of servicing customers usually relate to manufacturing costs and the costs of downstream activities. Customers differ through:
- Requirement for customisation of products and services- eg. hotels requiring their name sewn onto towels and sheets
- Marketing and selling activities: Advertisements may be developed to attract specific customer groups or industries. Some customers may purchase products online, while other customers may purchase products from the store. Customers who place frequent sales orders will use more resources than those who place only occasional orders.
- Distribution channels: some customers may purchase products directly from the firm, while other sales are made through warehouses, agents or the internet.
- Customer support activities: Various levels of support are offered to customers, including technical support, training, on-site visits and help lines. These activities may not be dependent on the products sold but on the particular type of customer.
Comparison of activities used by high-cost and low-cost customers
- Customer that cost us more or less
- Manufacturing/order entry: How the customer purchases the product makes a difference on how much it costs us to process the order
- Order entry: salesperson taking orders directly vs customer submits electronically
- Distribution: customer requires overnight delivery vs satisfied with 3 day delivery
- Credit collection: pays in 90 days by cheque and requires receipt vs 7 days by electronic direct deposit
- Technical support: customer requires specialised training for their staff vs customer provides own in-house training.
Why calculate customer profitability?
- Customer profitability analysis can be used to address questions such as:
- Which customers generate the greatest profits? And how can we retain those customers?
- Which customers generate the lowest profits? And what can we do to make those customers more profitable?
- On what types of customers should we focus our business efforts in order to maximise profitability?
- Customer profitability analysis provides a different perspective on the
- profitability of the business from that provided by product profitability and allows managers to make a series of strategic decisions about which customers, markets or distribution channels to focus on. It also helps to identify areas for cost control and cost reduction.
Traditional Profitability Analysis
- Customer profitability= gross margin
- Revenue minus COGS= gross margins
- All other expenses recorded as period costs or lost in overhead costs
- Easy to think gross margin represents how profitable each customer might be however this is not capturing all the cost of doing a business with the customer
- Must take into consideration- how they pay for it, overnight delivery, degree of customisation, marketing costs for different groups
Customer Profitability Analysis graph
- Activity-based costing can be used to assign non-manufacturing costs to customers to reflect the ways in which they use resources.
- What are the different activities consumed by customers and how much does it cost us to perform those activities for them
- We can get a clearer picture of the costs of the different customer groups
- Under the activity-based costing approach there are three customer-driven activities (and costs)
- 1. Order level activities: costs that relate to individual orders (e.g. processing customer order, raising an invoice, packing products ordered, delivering the goods and collecting amounts owed)
- 2. Customer level activities: costs related to acquiring new customers or maintaining a particular customer /group. Negotiating with a new customer may trigger activities, such as credit evaluation and making the initial customer contact. Maintaining an existing customer can involve ongoing sales calls, technical support, complaint handling, provision of samples and catalogues, and cash collections
- 3. Market (channel) level activities: costs attributable to particular market, or class of customers performed to define and analyse customer needs, develop new technologies to satisfy customer needs, maintain a presence in the market place, or attract new customers (e.g. market research, advertising in retail trade magazines, advertising in consumer magazines)
Calculating customer costs
- The costs per customer group for order level and customer level activities are based on the number of times the activity was performed multiplied by the cost per unit of activity driver
- Costs per unit of activity for order level and customer level activities are based on activity cost divided by the total number of times the activity was performed.
- Contribution= profits over total profits
- Large retailers are extremely profitable
- Losing money on direct customer
- Maybe can't afford to offer free delivery anymore to direct customers or set a minimum for sale amount per order.
- Eg. free delivery over $100, because anything below this, delivery is too expensive. Incentivise to order in larger quantities if not then at least recoup those costs
Why calculate customer profitability?
- Which customers generate the greatest profits? And how do we retain them?
- Which customers generate the lowest profits? And how can we make them more profitable?
- What types of customers should we focus on to maximise profitability?
Benefits of customer profitability analysis
- Gives visibility to customer costs, some of which are ‘hidden’:
- –Rushed orders
- –Returning goods ordered in error
- –Wanting a high level of service
- –Requiring frequent customer visits
- –Late payments
- Improved strategic decisions: Which customers, markets, or distribution channels to focus on?
- Improved allocation of scarce resources/time among customers
- Identification of areas for cost control and cost reduction
- Monitoring and improvement of the ongoing profitability of the business
What to do with CPA information?
- Drop unprofitable customers? Should be last thing to consider. Should first look at next two points
- Transform unprofitable customers into profitable ones? change customer behaviour eg. order in larger quantities. Or look at ourselves- why is it so expensive for us to place an order? Can we do that in a cheaper way?
- Re-structure service offerings and pricing?
- –ABM can help! (Activity-based management)
Activity-based management (ABM)
- Two-dimensional activity-based costing: provides information about activities, cost drivers and performance, as well as about the costs of cost objects such as products.
- Activity-based management (ABM): refers to the process of using information from ABC to analyse activities, cost drivers and performance so that customer value and profitability can be improved
- Let’s look at a diagram to understand how ABM works
- What do we see from the diagram?
- ABM in action:
- Having identified and analysed all activities
- Group activities together into processes to have a better picture of the flow of production
- Look at the activities and ask- what is the value contributed to the customer from us performing those activities? Can we identify any activities which are not value adding?
- Target non-value added activities within each process
- Ask ‘why’. What are cost drivers of these non-value added activities?
- Ask ‘why’ again. Are they the real causes? Keep on asking
- Find out the real causes (root cause cost drivers) and ELIMINATE them
- Introduce new performance measures to monitor the effectiveness of cost reduction efforts
Redefining activities for ABM
- Activities need to be identified at a greater level of detail to reflect individual tasks or steps in a process. The six activities identified in Chapter 8 for ABC— machine-related, inspection, setup, material handling, engineering and facility sustaining—need to be disaggregated into smaller activities.
- The total cost of each activity will include not only manufacturing overhead cost but also the cost of the direct labour used to undertake activities.
- The cost of non-manufacturing activities will be included. Under ABM, activities are built into processes that often extend into non-manufacturing areas.
- Activity (value) analysis: a method that classifies activities as value added or non-value added
- VA activity: an activity that provides essential value to the customer, or is essential to the functioning of the business
- NVA activity: does not add value product from the customer's perspective or for the business and, therefore can be eliminated.
- In many businesses, major sources of non-value-added activity include waiting, inspection, rework and the unnecessary movement and storage of inventories.
- Determine the real (root) causes of non-value-added costs: the underlying factors that cause activities to be performed and their costs to be incurred.
Paintbrush activities adding value for customer
- Cut and shape wood: add value
- Inspect quality: does not add value
- Rework: does not add value
- Material movement handling: not adding value for customer
- Why are we inspecting (appraisal cost)? Maybe need to retrain staff (invest more on prevention costs)
An activity-based costing model
Customer Performance Measures: Customer management p.1680/676
- Five core customer measures that apply to all forms of organisation are market share, customer retention, customer acquisition, customer satisfaction and customer profitability. These five measures can be regarded as lag (or outcome) measures.
- Customer management may also involve the use of a range of performance measures to determine the value
- 1. the company creates to its customers
- 2. customers provide to the company
- Customer performance measures
- –Market share
- –Customer retention, acquisition and satisfaction
- –Customer profitability
3. Managing time
- Managing time is a key aspect of supply chain management (SCM), affecting supplier and customer relationships
- Time is a driver of costs and revenue
- Time dictates the rate at which products and services are produced and revenue is generated and, so, it is critical in meeting customer expectations for timely delivery
- Time determines how long resources are tied up during processing and therefore unavailable for other profit-generating activities.
- Time delays often cause a build-up of inventories and associated carrying costs.
- For some businesses, innovation is a critical success factor. They compete on the basis of time to develop new products, and delays in the launch of new products will lead to a loss of customers and market share.
- Time can be a source of competitive advantage
- Managing time focuses on compressing the time it takes to undertake all of the business’ processes, from product development through to production and delivery.
- At the extreme, time-based management (TBM) considers time as the primary focus for managers’ decisions.
Measure of time
- Many businesses do recognise the importance of time, by measuring and managing:
- 1. Time taken to develop new products and services
- Innovation can be a key source of competitive advantage for some businesses. For example, digital camera producers, such as Canon and Pentax, constantly compete on the basis of new and enhanced product features
- Time-to-market: or new product (or service) development time is the time from the identification of an initial concept through to the release of the product (or service) for sale.
- Break-even time (BET): which measures the time from the identification of an initial concept through to when the product has been introduced and has generated enough profit to pay back the original investment, is another measure of the effectiveness of the new product development process.
- However, BET can encourage incremental projects rather than major innovations, as incremental projects are likely to involve lower development costs, and returns that flow more quickly, easily and predictably. In contrast, major innovations are likely to involve longer life cycles, with later sales significantly exceeding sales early in the life cycle.
- Moreover, the BET measure is not timely, as it cannot be estimated until some time after the product development cycle has been completed
- 2. Time taken to fulfil a customer’s order
- customer response time: time taken to respond to a customer’s order for a product or request for a service.Made up of 3 major elements
- Delivery schedule reliability: which assesses the extent to which a business meets predetermined delivery schedules.
- Note that a business can improve its delivery schedule reliability by setting longer customer response time targets, but customers may not perceive this as improved customer responsiveness!
Customer response time
- Time from when order is placed and when order is delivered
Managing time drivers
- Time driver: any factor that changes the duration of an activity.
- Understanding and measuring time drivers is necessary to improve time management
- Common drivers:
- Creating customer relationship management systems, analysing customer profitability, and measuring and managing customer performance
- –Activity-based costing techniques to determine customer profitability; CPA removes the guesswork as to which customers are worth keeping. ABM then helps revamp CRM practices.
- –Performance measures used to assess various areas customer relationships
Time can be a driver of customer value and various time-based performance measures can be used to increase efficiency, manage costs and increase customer satisfaction