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Published: 12/04/02
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The Customer Profitability Conundrum: When to Love 'Em or Leave 'Em

Consumer products. Major consumer-products manufacturers have any number of ways to use business streams that are tailored to the needs of customers, explains Les Moeller, vice president in Booz Allen's Cleveland office. For instance, a consumer-products company can use different models to serve three customer segments:  a mega-retailer such as Wal-Mart; a national supermarket chain that is a major player but smaller than Wal-Mart; and a small regional or local retailer.

It turns out that larger customers, like Wal-mart and some regional grocery chains, are better able to order in more efficient quantities, because of their size and distribution capabilities.  The real trick is to get those orders from larger customers and to get the inefficient smaller accounts to order and take delivery through a more efficient delivery system, or pay for their increased service requirements.

Moeller, says achieving higher efficiency requires both the retailer and the manufacturer to make complex choices. Should, for instance, the buyer order a full truckload of a product? Or, if the buyer orders a pallet, does it order a full pallet of one stock keeping unit (SKU, or barcode), or does it order layers of one SKU? Or does it order layers that consist of mixed SKUs?

Moeller describes the process this way: “When a product comes off the production line, it’s one SKU and it all ends up on one pallet. If you order a full pallet of one product, all the same size — laundry detergent with bleach or lemon-scented dish detergent — the forklift operator picks that pallet up and puts it on the delivery truck. It’s simple. But if that buyer doesn’t move enough products in his stores to warrant buying a full pallet of a single item, he may have to mix, on one pallet, regular dish detergent with the lemon-scented kind. That means the warehouse worker has to break pallets apart and reconfigure pallets to fill an order. That can become very expensive.” Once the product is delivered to the buyer, other costs come into play: Who, for example, unloads the truck and how much time is allotted to unload it?

There are ways, however, for consumer-products companies to ensure that the buyers are getting the right kind of service and are still a profitable segment to serve. If the retailer is large enough, the consumer-products company can provide incentives to entice them to buy full pallets. If the retailer is not large enough to buy full pallets, they should be pushed to buy from a distributor instead of directly from the factory. This way, the supplier can keep its costs down, while at the same time getting its products on shelves.

Or, a buyer could strike a deal with the supplier regarding delivery. If the truck arrives on time, the buyer agrees to unload the truck within 30 minutes. That way, the driver can quickly get back on the road and make more deliveries. In return, the supplier gives the buyer, say, $50 for every truck that is unloaded in the allotted half-hour. Another option would be for the consumer-products company to offer a deal whereby the buyer orders in full pallets, or even full truckloads, unloads the truck in 30 minutes, and always pays its bill on time. In return, the supplier gives the buyer a rebate of $300 per delivery. “These are the kinds of incentive programs that consumer products companies can put into place to make their customers more profitable and their supply chain more efficient,” Moeller says.

Health insurance. Health insurers face a somewhat different set of circumstances in trying to develop tailored business streams to deal with good and bad customers. Typically, people obtain health insurance in one of three ways: through their employers, which is most common; as individuals dealing directly with an insurer, which is the least common way; or through a government program like Medicare or Medicaid. To a health insurer, a good customer is someone for whom their employer pays a premium and never files a claim. Bad customers are people who are genetically-predisposed to a particular illness, or who are sick or injured as a result of an event beyond their control, such as an accident.

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