Tag Archives: cost

Increasing / Decreasing Costs – “Smart” Cost Decisions

Richard Sharpe Analytics & Big Data

Increasing / Decreasing Costs – “Smart” Cost Decisions

cost-cutting decisions can hurt your most profitable customers

Summary: With the uncertainty of an economic downturn, companies in 2019 will look to cut costs in an attempt to meet shareholders’ earnings expectations.  Typically, cost reduction programs are established by functional areas of the business (sourcing, supply chain, inventory, etc.) and may be tailored to certain groups of customers based on top line revenue contributions. Why is this a problem? Simply stated, not all customers are the same as it relates to their true profit contributions.  In fact, for most companies, a small minority of customers actually provide the vast majority of profits that subsidize marginal and unprofitable accounts. 

Cost cutting decisions made across a customer base can have serious, unwanted consequences.  Reduction in service levels or inventory availability for highly profitable customers can cause them to become dissatisfied and to look to your competition for alternative choices.  The end result, your cost cutting measures may actually have the unwanted effect of significant decreasing the profitable performance of your company.

Case In Point:  Prior to looking for ways to reduce operating costs, a profitable 5 Billion dollar company in Chicago decided to accurately measure the profit contribution of each customer and customer delivery location.  Their customer base comprised of 110,000 delivery locations across the United States.  Want to venture how many locations provided the vast majority of their profits?  Most people would say use the 80 / 20 rule and therefore over 20,000 customer locations.  The actual answer was less than 3%.  Without knowing this and relying on higher level revenue or gross margin information, typical cost cutting measures could have had catastrophic results.

Action:  The approach that this company used for this analysis ensured that the entire organization had confidence in the profit performance information.  As a result, the information was very actionable.  Cost reductions were implemented for the unprofitable and very marginal customers while protecting the service and support of the high yield customer group.

Takeaway:  Wholesale cost reduction programs can be dangerous.  It is imperative to identify customers that provide significant profit contributions to your bottom line and protect that business relationship.  However, determining the root cause for poor performance is equally important.  With that information in hand, cost cutting programs can be tailored to customers or customer segments to not only reduce operating expenses but also improve these customer’s margin contributions.

I would love to know your thoughts on this.  Please comment on this posting or email me at [email protected] .

 

All the best,

Richard Sharpe

Richard Sharpe

Richard Sharpe is CEO of Competitive Insights, LLC (CI), a founding officer of the American Logistics Aid Network(ALAN) and designated by DC Velocityas a Rainmaker in the industry. For the last 25 years, Richard has been passionate about driving business value through the adoption of process and technology innovations. His current focus is to support CI’s mission to enable companies to gain maximum value through specific, precise and actionable insights across the organization for smarter growth. CI delivers Enterprise Profit Insights (EPI) solutions that enable cross-functional users to increase and protect profitability. Prior to his current role, Richard was President of CAPS Logistics, the forerunner of supply chain optimization. Richard is a frequent speaker at national conferences and leading academic institutions. His current focus is to challenge executives to improve their company’s competitive position by turning enterprise wide data from a liability to an asset through the use of applied business analytics.

Knowing Your Actual Cost To Serve For Each Customer

Richard Sharpe Analytics & Big Data

Knowing Your Actual Cost To Serve For Each Customer

transportation

Summary: Most companies can measure gross margin contributions for customer or store sales orders.  However, when it gets down to decisions regarding servicing those orders it becomes a little grayer.  Often the incremental and varying levels of costs associated with fulfilling those orders is buried and certainly not visible through the P&L.  So whats at stake?  Missed opportunities to realize significant cost reductions!  This is particularly true as companies struggle with the current shortages around transportation capacity.

Case In Point: One Chicago based company created an initiative to accurately measure the Cost To Serve of every customer through every sales channel.  The results were shocking.  For one specific channel, all customers were receiving 24 hour service deliveries (a one size fits all approach).  However, less than a third of these customers generated a positive contribution to the company’s operating margin.

Action: Taking action on this discovery was made easier because the decisions were being made on fact based insights on the true cost to serve to each customer location.  Customers were categorized into performance segments based on sales volume, the cost to service those sales and the profit generated by those sales.  Delivery service levels were then aligned based on financial performance and an immediate $3.2 million dollars in transportation cost savings was realized.

Takeaway:  Ongoing knowledge about the specific and accurate costs to serve your customers or stores should be a core competency of your organization.  It is essential in managing the dynamic variations of operational costs and their direct impact to profit performance.  Using generalized information in managing your operation can lead to missed cost reduction opportunities.  Accurate, specific and repeatable Cost To Serve insights will allow you to out pace your competition and delight your stakeholders.

I would love to know your thoughts on this.  Please comment on this posting or email me at [email protected] .

All the best,

Richard Sharpe

Richard Sharpe

Richard Sharpe is CEO of Competitive Insights, LLC (CI), a founding officer of the American Logistics Aid Network(ALAN) and designated by DC Velocityas a Rainmaker in the industry. For the last 25 years, Richard has been passionate about driving business value through the adoption of process and technology innovations. His current focus is to support CI’s mission to enable companies to gain maximum value through specific, precise and actionable insights across the organization for smarter growth. CI delivers Enterprise Profit Insights (EPI) solutions that enable cross-functional users to increase and protect profitability. Prior to his current role, Richard was President of CAPS Logistics, the forerunner of supply chain optimization. Richard is a frequent speaker at national conferences and leading academic institutions. His current focus is to challenge executives to improve their company’s competitive position by turning enterprise wide data from a liability to an asset through the use of applied business analytics.