The client in question is the subsidiary of one of the world’s leading vehicle manufacturing companies. The client’s product portfolio includes Motorcycles and Scooters.
The company has a deeply penetrated PAN India network comprising of ~550 dealers spread across 29 states and union territories. The company’s problem statement is three-fold:
To gauge accurate costs of serving different customer segments.
To identify the profitability earned at varied customer/ geographical segments since at present profit earned is at the overall level (standalone entity)
To evaluate the performance of the company’s marketing efforts through metrics that are more holistic since at present the company is deploying maximum sales/ marketing workforce in the state/ region where it is earning maximum revenues.
The company strived to develop a meticulously crafted customer profitability system that identifies, measures, analyses, and manages the customer profits and its key drivers. Apart from the problems identified above, other reasons for creating this detailed oriented system were:
Holding Company’s Mandate - The global corporation wanted to revisit its customer strategy and therefore mandated the company to focus on better customer contact and closer customer relations.
To expand the global competition horizon - Companies worldwide are pressured to become more customer-focused and to increase stakeholders' value.
After rigorous deliberations and continuous collaboration with the client for over a period of three months, our team at Chandra Wadhwa & Co. implemented a detailed oriented customer profitability framework, which offered eye-opening insights for the management to perform business operations in a more productive and efficient manner. The framework offered the following salient features:
A shift from product-centric approach to customer-centric approach
Identification of states (geographic factors) as well as the age of the customers (demographic factors) as the reporting segments
Capture revenue and costs estimates at the transactional level for reporting customer/market segments as identified above
Reorganisation of cost-centers/profit-centers hierarchies based on the customer/market segments
The selling and distribution overheads comprise 10% of the total cost, which were assigned to segments following the principle of cause-and-effect (approx. 70% of the selling and distribution overheads). These costs include:
inventory carrying costs;
quality control and inspection costs;
customer order processing;
order picking and order fulfillment;
billing, collection, and payment processing costs;
accounts receivable and carrying costs;
customer service costs;
wholesale service and quality assurance costs; and
other selling and marketing costs
Re-mapping of around 20% gross value of the capitalized fixed assets based on the reorganised cost-centers/ profit-centers to help achieve effective and accurate cost assignments.
Hold employees accountable for customer profitability including those employed in marketing as well as other functions.
Subsequent to the implementation of the customer profitability framework, our team pointed out that while the company was earning profits at the overall entity level, they were making losses in one of the states, where maximum turnover was being achieved. This provided an excellent insight to the management about how these state losses were being cross-subsidized from the states earning profits.
Refer Exhibit 1
Following were the hidden takeaways:
Exceptional sales focus
Exposed unprofitable and low-value customers
Better quantified customer value proposition
Improved conversion from unprofitable customers to profitable customers
Superior marketing segmentation, which includes:
Reach us if you have any concerns regarding cost management accounting issues in your organization.
Partner, Chandra Wadhwa & Co. (Cost Accountants) | B.Com, FCMA, ACA, DISA | Certified SAP-CO Consultant | Executive Program on Management and Finance (IIM, Ahmedabad)
Address: 1305 & 1306, Vijaya Building, 17, Barakhamba Road, New Delhi - 110001, India Mail: firstname.lastname@example.org
Tel: +91-8800018190, +91-7503703599.