Managing customers for profit – the pathway to riches

Numerous manufacturing companies could be sitting on a goldmine, according to Sydney-based management consultancy Logistics Bureau – and their secret to success lies in managing customers for profit.

Manufacturing is one of many industries facing rapidly changing business environments. As a result, the need to streamline product distribution is becoming a key focus. And Logistics Bureau Director Rob O’Byrne claims that the key lies in measuring, managing and improving the cash flow and profitability of all customer services.

“Many companies claim to be customer-focused. So it is paradoxical that some managers still do not measure or report on the cost to serve their customers,” O’Byrne says.

“Understanding exactly how much it costs to serve each customer can bring about a full understanding of profitability within the organisation. In fact, it has never been so paramount to business success.”

O’Byrne says many manufacturing and food-related companies do not understand the true cost to serve – they simply identify one big distribution cost and do not realise that some customers are far more expensive and hence much less profitable than others.

“It is as simple as calculating the difference between the revenue earned from a customer and all the costs associated with that customer – from warehouse cost, cost to pick the product, assemble the order and then deliver the order,” he says.

“When you know the cost of serving your customers, you can then identify those customer groups that cost too much and develop more viable ways to service them,” he says. “We would rarely advocate dropping less profitable customers, but finding more appropriate, more economical ways to service them.”

This could include such strategies as ‘differential service offerings’, resulting in more effective ways of distribution to ‘lower-value’ customers:

“Many manufacturers have a diverse customer-base that could include large grocery chains, independent supermarkets, small corner shops, milk bars, cafeterias and the like,” says O’Byrne.

One tactic could be to place a minimum order value of $100 on all milk bars, with a delivery of only twice per week, whereas a large supermarket will receive deliveries every day. Alternatively you could look at piggy-backing deliveries with someone else who visits your customers. For example, a truck driver who delivers fruit could also deliver your chips.

“Thinking outside the square is the key to the ‘cost to serve’ theory.”