Strategic Activity-Based Management for Customers and Suppliers

1. Strategic Activity-Based Management for Customers and Suppliers Dr. Nancy Mangold California State University, East Bay

2. 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

3. 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

4. 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

5. 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.

6. 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)

7. 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

8. 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 Price-sensitive and few special demands • Aggressive: • Leverage their • buying power • Low price, lots of • customized service Low Cost to Serve Hi

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

10. 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

11. Challenging Set of Customers • Lower right hand corner • High cost-to-serve • Low margins

12. Challenging Set of Customers • Conduct operational ABM • Improve the performance of the processes • Reduce the cost of activities associated with serving these customers

13. 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

14. 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

15. 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

16. 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.

17. 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

18. 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.

19. 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

20. 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.

21. Firing Customers • If customers resists all the company’s 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

22. 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

23. 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

24. 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

25. 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

26. Purchasing –Standard Costing • Such actions would lower purchase prices • But lead to much higher costs in organization for performing procurement activities

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

28. 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

29. 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

30. 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.

31. 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

32. 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.

33. 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)

34. 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.

35. 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.

36. 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

37. 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

38. Product and Product Line Profitability

39. Customer and Channel Profitability