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Which are Your Most Profitable Customers? Leveraging Your ERP System to Analyze True Customer Profitability

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Strong ERP software systems can enable companies to more accurately assess true customer profitability.  While gross profit margin is an obvious measure of customer profitability, there are a number of other factors which can affect true customer profitability dramatically.  Executives and sales managers are encouraged to include the below gross margin costs in their overall customer profitability calculations.  An obvious place to start is to make sure you’re including all of the costs of promotions, allowances, and rebates that the customer qualifies for in the cost equation.

Next, consider the internal administrative costs associated with entering customer sales orders into your system.  These costs can vary substantially depending upon the methods by which your customers place their orders.  Do they email, fax, or phone in orders, or do they require a company representative to call out to them to get their orders placed?  Or, do your customers place orders via EDI transactions where there can be little or no manual interaction required beyond the initial setup of the transactions in the EDI translation solution being used?

Assuming you have a company representative speak with your customers to get orders placed in your system, you may have the opportunity to perform cross-selling or up-selling to those customers.  Likewise, the company representative can discuss with your customer contacts about products they may have ordered from you in the past and how they’re sourcing those currently.  You might be pleasantly surprised by how much information you can receive from your customers by merely asking the appropriate questions.  You can potentially find out from whom your customers are buying and the associated prices they’re paying your competitors for these items.

Does your customer access order status electronically through your Web site or via EDI transactions, or do they call your customer service personnel to inquire about the status of their orders?  One of the most interesting facts about enabling customer self-service has been that not only has this process resulted in reductions of administrative costs by companies, it has also produced increased customer satisfaction by enabling their customers to get the information they desire any time of the day or night, 24 hours a day, 365 days a year.

One of the costs that is frequently overlooked when analyzing true customer profitability is the rate at which your customers change their orders once they’ve been placed in your system. If you’ve enabled your customers to be able to change their orders themselves via the Internet or electronically via EDI transactions, this will result in reduced administrative costs over customers who communicate their order changes via email, fax, or phone which requires your personnel to make these changes manually in your systems.

Of course, your customers’ orders must be picked, packed, and shipped.  Are your customers ordering in bulk quantities where there are efficiencies gained through picking case or pallet quantities, or are they buying in eaches where individual products must be picked and packed for shipment?  Similarly, you may be making margin on the shipment of your products to your customers by charging the customer at standard transportation rates while you’re paying a reduced rate to your carriers.  Alternatively, you may be giving your customers free or reduced freight due to their status as a preferred customer or based on the overall pricing of the given order.

Once your customer receives its products, what is their frequency of returning products to you via RMA’s?  Some organizations may be charging their customers restocking fees in an attempt to offset some or all of the cost for the RMA processing while others may not.  Additionally, you may want to analyze how frequently your customer places a shipment variance claim with you where they’re claiming they’ve received less than the quantity you believe you had shipped them.

Next, there are costs associated with customers short paying invoices or taking unauthorized discounts.  Likewise, it costs you money to provide your customers with a professional, well-trained account management team that may include direct sales reps, indirect sales reps, inside sales reps, and sales management.  There will be costs associated with traveling to see your customers and sales related travel and living expenses for activities such as golf outings or other entertainment activities.

The bottom line is that strong ERP systems can better enable executives and sales management to more accurately assess the true profitability of their customer base by including all relevant costs to get a handle on the bottom line.

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