Design an Activity-Based Costing system for a supply chain

Analyze a business case, recognizing how to deal with customers based on their contribution to cost

Assessing customer profitability

Using customer cost and profitability data to make strategic decisions

UVAC-220 DARDEN BUSINESS PUBLISHING LY/ BOHNSON BEVERAGE, INC. As president and primary owner of Jose Bage. In Jacke Begining to waithalaing long-term come was becoming a challenge. During delivery run yesterday driver Joe Steven hadice compete's sales manager walking with Jose's sales manager, Marsha Ketchum, had meticed that, during her with theme managers Wednesday, he was starting to make more about wanting to meet lower price. This could come dilemma because this customer had been one of the company Largest and mostlyal customers for your Johnson and back in his chair. These things always seemed to come priday just in time to monopol his thoughts on what there would have been reden Deciding to the head on behaleda meeting with Strum, Kachoma velthen for later that almo Company Background JB distributed beverages to retail comers. The company had been in business for the primarily distributed botted port drinks made by small penalty beverage companies and Sono had grown adily with the popularity of posts over the past 10 year Last you are totaled 512 million. The company serviced how whose brape puhassad here from 100.000 ever i milli The undiscounted list price on the port drinks the distributed was $15.30 peta bottles The Maillot descading customer services of the buildik 513.10 per ce. The company officredit to some of its customers, which vanied by come honed amber of factors, including the volume of drink the customer purchased are pate come and the main of the complete VA A wap. UVA-C-2200 Jason pened the meeting by summarizing what he had heard from Stevens and Ketchum over the past couple of days look like we've got some competition for beil clienSaver Superto. I got ped. They're a big come "This isn't the time time this has happened. added Ketchum You might remember that this one composite has approached Save Superstore. But that time we were able keep the baby offering a bit more of a discothink we'll have to do this time, and we lose the customer Jobcended quickly. We can't get me price ware this know this is a big customer and a loyal come to, but it's certainly not one of our most profitable. I had impul members together as welfare Saver Superstis one of our customers. Take a look som Thomas in ting, who was also in the meeting had prepared report Exhibit , which one and on the ble for the others to look Thomas explained how the coming prep compiled the number For each custom we just pull the weight of the coming We know what they were and what we shipped and we w And the cas, cacluding co. So we camily 13.10 por case by the user of cases we shipped to pole of goods Then we wtract cu col of goods from even for each customer and get arom margin. Now, you may remember that we've talked about how hard it is to trace Comer service costo any particularme Orucos 1.2 million a year of Tomake things can allocate the accustomer red share of the company reve. So if a customer for of our re, we alcate - Than. - articulae - Johnson looked at the number and said: I don't think we can lower our price to Swer Supersone much more and make any eyes this. And just think if we offer a larger discount to them, then we have our other customers wanting the same thing-especially the other big . to Oscar's Odde has heard about the deal struck with Set Superstores been talking with the competits, and they want the same thing Guarda lage local talent the edge of town mother of the Jesse Redpers, the operations manager for bl. was listening cucully. This was the fie had Sead of the station but a careful serveis sod would have revealed what he was You know, I'm a bit more to hear all this Sana Superiore is a great wome. They by lots of leverages, and they're easy to deal with the place their orders on a regular basis and almost ever ask for anything special. I don't remember the last time we had to run around in the war polling thera ushnder from them. Who wouldn't want the business! Stevemagreed. You're right. It never be to change my delivery schedule became they've ked for quick Gelivery. And they're right on the come they I think about some of our other customen. They come hele anticipate that they'll be out of sted. Then they call and make it our problem to deal with It come we have some customers that we work on all day every day. Why can come the customers! believe that some of the custom profitable than Saver See Maybe we ought to add what we guys in the warehouse call info those other customers and then we who is most profitable for ) As Jobcened, beralired Radgons might be como something what type of costs included in these comer service Thomas replied, "Well, the number includes several things. He continued Radesting related to handling the beastlike picking the bene from the waichouse shelves according to the order is moving the beverages over to the deck, and leading them on the delivery track includes any colated to taking coordinating and administering these tech we pay the people in the settice who take phone andere from customer, supervisory costs to administer the order and similar things indiades anything cited to delivering the beverages to the customer's location like the cost of delivery www maintenance, and what we pay and people like him drive the tracks includes anything related to all these roeders you're talking out, like evertime. Crechen also like that. And it includes what we there's quite a bit of stuff in there UVAC Joe thought about the "So you're ling me that there are some customers that you we spending a lot more time on than others? And it's Saver Superstar "Thalight Redgreplied Second Busine er ingen is allocating the customer costs based on and since Saver Suns dering a large share of these caso San Superstore." "Exactly." Thomas said Le do this amepend ople of days collecting om information need some help from each of you because I want to try to find out how much your time you are ending on the outcome. Maybe time sophisticated about how we look at the customer service may be worth Stry. Ketchum and Redgallagreed to spend time with Thomas he could summarize the amount of activity they deed each customer. They will meet in the following Friday. The promised to compleanalyse that might help them determine how profitable cach of the women Before he left for the weekend. Thomas desde o pull there info the customer service costs he had described in the meeting handling the product, aking the andere delivering the product expediting room witing the customer. We arched ugh the conting system determined how much of the 1.2 million service costs wasted with each of the categories (Table 1 Table I. Customer ce costs during the prior you by cathy Arce of the 140.000 Taking orders from customers Delivering the produse Expediting down there Total UVAC Then, Monday. These individually with Steven, Kitchen, und der their help, be determined what he thought to be the primary driver of the celineadh of these Table 2. Cost driven by arca ed activity Aresti Product handling Taking orders from customers Number of purchase in Number of all traveled Expediting deliveries other than tode) Number of expedited edities Sales Number of sales Thomas determined from the company's acting cards that the company 100,000s of beverages and proceed 500 pundhene nder the previous year. Steve checked the mileage records for the delivery vehicles and determined that the vehicles had veled of 44.300 miles Radhe demine that the company male 440 deliveries, 2.500 of which expedited deliver And finally, Kachum checked her daily naved log to determine she had made anal files vaata to the company.com Thomas's next ep was to determine how much of these cost drivers worthlete schomw. Again, he was able to in some of the formation les her of relatively coily from the company's Then his colleagues helped him determine customer sumbers for the rest of the activities Exhibit penis data for the four UVAC JOHNSON BEVERAGE, INC. Report Customer Profitability during the Previous Year SorFour Customer Prepared by Jim Thom S100 SL.000 SI 54545 SO $ 120,000 UVAC JOHNSON BEVERAGE, INC. Mini for Year for Four Customers Separare 514 Price Modelle C. Super 514.90 SIS. 19 20 SI SISIS 300 30 Number of orders Number of deliver Miles traced per delivery Number of expired device Number of sales vides 16 110 5 10 11 130 UNIVERSITY/VIRGINU JOHNSON BEVERAGE, INC. As president and primary owner of Johnson Beverage, Inc. (JBI), Jack Johnson was beginning to realize that retaining long-term customers was becoming a challenge. During a delivery run yesterday, driver Joe Stevens had noticed a competitor's sales manager talking with the general manager of Saver Superstore, one of JBI's largest customers. Then, that morning. Johnson's sales manager, Marsha Ketchum, had mentioned that, during her visit with the same general manager on Wednesday, he was starting to make some noises about wanting to negotiate a lower price. This could cause a dilemma because this customer had been one of the company's largest and most loyal customers for years. Johnson leaned back in his chair. These things always seemed to come up on Friday, just in time to monopolize his thoughts over what otherwise would have been a restful weekend. Deciding to address the situation head on, he scheduled a meeting with Stevens, Ketchum, and several others for later that afternoon. Company Background JBI distributed beverages to retail customers. The company had been in business for two decades and had become a preferred distributor among several retail outlets in the local area. JBI primarily distributed bottled sports drinks made by small specialty beverage companies, and its business had grown steadily with the popularity of sports drinks over the past 10 to 20 years. Last year, JBI's revenues totaled $12 million. The company serviced about 20 customers whose beverage purchases totaled anywhere from about $100,000 to over $1 million annually. The undiscounted list price on the sports drinks that JBI distributed was $15.20 per case of 24 bottles. The full cost (excluding customer service costs) of the bottled drinks was $13.10 per case. The company offered discounts to some of its customers, which varied by customer based on a number of factors, including the volume of drinks the customer purchased the future potential of the customer, and the negotiating success of the company's sales representative, among others This case was prepared by Associate Professor Luan Lynch. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative station Copyright 2009 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To ander copies, al or email to salesa dardenbusinesspublishing.com. No part of this publication may be reproduktored in a retrieval system. sed in a spreadsheet, or transmitted by any form or by any medectromechanical photocopying recording, rather with the prof the Danies School Fondo Rex. 609. 19 UVA-C-2292 The Meeting Johnson opened the meeting by summarizing what he had heard from Stevens and The Meeting Johnson opened the meeting by summarizing what he had heard from Stevens and Ketchum over the past couple of days. "It looks like we've got some competition for one of our best customers: Saver Superstore. I guess I'm not too surprised. They're a big customer." "This isn't the first time this has happened," added Ketchum. "You might remember that this same competitor has approached Saver Superstore before. But that time, we were able to keep the business by offering a bit more of a discount. I think we'll have to do more of that this time, or I'm afraid we'll lose the customer." Johnson responded quickly. "We can't get into a price war on this. I know this is a big customer, and a loyal one too, but it's certainly not one of our most profitable. I had Jim pull some numbers together on several of our accounts. Saver Superstore is one of our lowest-margin customers. Take a look." Jim Thomas in accounting, who was also in the meeting, had prepared a report (Exhibit 1), which Johnson laid on the table for the others to look at Thomas explained how the accounting group compiled the numbers: For each customer, we just pull the revenues right out of the accounting system. We know what they ordered and what we shipped, and we know what price we charge cach customer, so that part is pretty easy. And we know that the cost per case, excluding our customer service costs, is $13.10. So we can multiply $13.10 per case by the number of cases we shipped to get our cost of goods. Then, we subtract our cost of goods from revenues for each customer and get a gross margin. Now, you may remember that we've talked about how hard it is to trace our customer service costs to any particular customer. Our customer service costs run about $1.2 million a year, roughly 10% of revenues. To make things casy, we allocate those to each customer based on its share of the company's total revenues. So if a customer accounts for 5% of our revenues, we allocate it 5% of our customer service costs. Then, we calculate a customer margin for each customer. Johnson looked at the numbers and said: ced Operations and Supply Chain Man Yorkville huby Vatos Presses from October 7, 2017 October 07, 2022 Use outside these parameters is a con I don't think we can lower our price to Saver Superstore much more and make any money on this one. And just think, if we offer a larger discount to them, then we'll have our other customers wanting the same thing especially the other big ones. I can see it now: Marsha is going to walk in here next month and tell us that Oscar's OddLots has heard about the deal we struck with Saver Superstore, has been talking with that competitor, and they want the same thing, 20 UVA-C-2292 Oscar's OddLots, a large local retailer on the edge of town, was another of JBI's large customers. Jason Rodgers, the operations manager for JBI, was listening carefully. This was the first he had heard of the situation, but to a careful observer, his nod would have revealed what he was thinking. He said: You know, I'm not a bit surprised to hear all this. Saver Superstore is a great customer. They buy lots of beverages, and they're easy to deal with. They place their orders on a regular basis and almost never ask for anything special. I don't remember the last time we had to run around in the warehouse pulling together a rush order from them. Who wouldn't want that business? Stevens agreed, "You're right. I almost never have to change my delivery schedule because they've asked for quick delivery. And they're right around the corner, so they're easy for us to get to." Rodgers continued I think about some of our other customers. They seem to never be able to anticipate that they'll be out of stock. Then they call us and make it our problem to deal with. It seems like we have some customers that we work on all day every day. Why can't that competitor go after those customers? It's hard for me to believe that some of those customers are more profitable than Saver Superstore. Maybe we ought to add what we guys in the warehouse call a "pain factor onto those other customers and then see who is most profitable for us. As Johnson listened, he realized Rodgers might be onto something. "Jim, what types of costs are included in those customer service costs?" Thomas replied, "Well, that number includes several things." He continued It includes anything related to handling the beverages, like picking the beverages from the warehouse shelves according to the order instructions, moving the beverages over to the dock, and loading them on the delivery truck. It includes any costs related to taking, coordinating, and administering the orders, like what we pay the people in the sales office who take phone orders from customers, the supervisory costs to administer the order, and similar things. It includes anything related to delivering the beverages to the customer's location, like the cost of the delivery trucks, truck maintenance, and what we pay Joe and people like him to drive the trucks. It includes anything related to all those rush orders you're talking about, like overtime, extra scheduling, and stuff like that. And it includes what we pay Marsha for what she does, like visiting the customers to check in on them. So there's quite a bit of stuff in there. Use ou For use only in the course Advanced Operations and Supply Cha 21 UVA-C-2292 Johnson thought about this. "So you're telling me that there are some customers that you are spending a lot more time on than others? And it's not Saver Superstore?" "That's right," Rodgers replied. Johnson continued, "But since our accounting system is allocating these customer service costs based on revenues, and since Saver Superstore is one of our biggest customers, it's allocating a large share of those costs to Saver Superstore." "Exactly." Thomas said Let me do this: Let me spend a couple of days collecting some information. I'll need some help from each of you because I want to try to find out how much of your time you are spending on cach of our customers. Maybe it's time to get more sophisticated about how we look at these customer service costs. It may be worth Professors from October 2011 October 2022 the fant summarize the amount of activity they devoted to each customer. They would meet again the following Friday. Thomas promised to compile an analysis that might help them determine how profitable each of their customers really was Activity Analysis Before he left for the weekend, Thomas decided to pull together some information about the customer service costs he had described in the meeting: handling the product, taking the orders, delivering the product, expediting rush orders, and visiting the customer. He searched through the accounting system and determined how much of the annual $1.2 million in customer service costs was associated with each of those categories (Table 1). Table 1. Customer service costs during the prior year by area of activity. Area of activity Totals Product handling $ 672,000 Taking orders from customers 100,000 Delivering the product 140,000 Expediting deliveries (other than automobile) 198,000 Sales visits to customers 90.000 Total SL.200.000 he deepesis ay For we only in the course Advanced Operations and Supply Chain Manat Yorkville University Then, on Monday, Thomas met individually with Stevens, Ketchum, and Rodgers. With their help, he determined what he thought to be the primary driver of the costs in each of those customer service categories (Table 2). Table 2. Cost drivers by area of activity. Area of activity Cost driver Product handling Number of cases sold Taking orders from customers Number of purchase orders Delivering the product Number of miles traveled Expediting deliveries (other than automobile) Number of expedited deliveries Sales visits to customers Number of sales visits Suppy Chain Mana Yorkville University taught by Various Professor on October 7, 2019 to October 7, 2022 the outside these pais acion Thomas determined from the company's accounting records that the company sold 800,000 cases of beverages and processed 500 purchase orders the previous year. Stevens checked the mileage records for the delivery vehicles and determined that the vehicles had traveled a total of 44.800 miles. Rodgers was able to determine that the company made 4,480 deliveries, 2,500 of which were expedited deliveries. And finally, Ketchum checked her daily travel log to determine she had made a total of 360 sales visits to the company's customers. Thomas's next step was to determine how much of these cost drivers were attributable to each customer. Again, he was able to obtain some of that information (c.g., number of cases) relatively easily from the company's records. Then his colleagues helped him determine customer numbers for the rest of the activities. Exhibit 2 presents this data for the four customers included in Thomas's first report (Exhibit 1). Exhibiti JOHNSON BEVERAGE, INC. Report of Customer Profitability during the Previous Year for Four Customers Prepared by Jim Thomas Net revenues Cost of goods Gross margin Customer service costs Customer profit Customer profit % of net revenues) Saver Superstore $ 1.168,000 1.048.000 $ 120,000 116.800 3.200 0.3% Oscar's Odd Lots $ 1,192,000 1.048.000 $ 144,000 119.200 24.800 2.1% Midwellen Supermarket $ 121,520 104.800 $ 16,720 12.152 4.568 Downtown Retail S 454,500 393.000 $ 61,500 45.450 16.050 3.5% Total for JBI $12,000,000 10.480.000 $ 1,520,000 1.200.000 320.000 2.7% danced Operations and Supply Chan Mana York University out by Varos Professors from October 07,20 Veron 3.8% VA-C-2292 Exhibit 2 JOHNSON BEVERAGE, INC. Additional Information from Prior Year for Four Customers Saver Superstore $14.60 80,000 16 110 S 10 12 Price per case Number of cases Number of orders Number of deliveries Miles traveled per delivery Number of expedited deliveries Number of sales visits Oscar's Odd Lots $14.90 80,000 40 400 19 250 25 Midwellen Supermarket $15.19 8,000 20 200 Downtown Retail $15.15 30,000 30 Total for JBL $15.00 800,000 500 4,480 10 2.500 360 Man. Yori hivatby Vrous Posts from October 7, 2019 10 230 130 18 90 9 Obudo Sede non JOHNSON BEVERAGE, INC. As president and primary owner of Johnson Beverage, Inc. (JBI), Jack Johnson was beginning to realize that retaining long-term customers was becoming a challenge. During a delivery run yesterday, driver Joe Stevens had noticed a competitor's sales manager talking with the general manager of Saver Superstore, one of JBI's largest customers. Then, that morning, Johnson's sales manager, Marsha Ketchum, had mentioned that, during her visit with the same general manager on Wednesday, he was starting to make some noises about wanting to negotiate a lower price. This could cause a dilemma because this customer had been one of the company's largest and most loyal customers for years. Johnson leaned back in his chair. These things always seemed to come up on Friday, just in time to monopolize his thoughts over what otherwise would have been a restful weekend. Deciding to address the situation head on, he scheduled a meeting with Stevens, Ketchum, and several others for later that afternoon. Company Background JBI distributed beverages to retail customers. The company had been in business for two decades and had become a preferred distributor among several retail outlets in the local area. JBI primarily distributed bottled sports drinks made by small specialty beverage companies, and its business had grown steadily with the popularity of sports drinks over the past 10 to 20 years. Last year, JBI's revenues totaled $12 million. The company serviced about 20 customers whose beverage purchases totaled anywhere from about $100,000 to over $1 million annually. The undiscounted list price on the sports drinks that JBI distributed was $15.20 per case of 24 bottles. The full cost (excluding customer service costs) of the bottled drinks was $13.10 per case. The company offered discounts to some of its customers, which varied by customer based on a number of factors, including the volume of drinks the customer purchased, the future potential of the customer, and the negotiating success of the company's sales representative, among others. The Meeting Johnson opened the meeting by summarizing what he had heard from Stevens and Ketchum over the past couple of days. "It looks like we've got some competition for one of our best customers: Saver Superstore. I guess I'm not too surprised. They're a big customer." "This isn't the first time this has happened," added Ketchum. You might remember that this same competitor has approached Saver Superstore before. But that time, we were able to keep the business by offering a bit more of a discount. I think we'll have to do more of that this time, or I'm afraid we'll lose the customer." Johnson responded quickly. We can't get into a price war on this. I know this is a big customer, and a loyal one too, but it's certainly not one of our most profitable. I had Jim pull some numbers together on several of our accounts. Saver Superstore is one of our lowest-margin customers. Take a look." Jim Thomas in accounting, who was also in the meeting, had prepared a report (Exhibit 1), which Johnson laid on the table for the others to look at. Thomas explained how the accounting group compiled the numbers: For each customer, we just pull the revenues right out of the accounting system. We know what they ordered and what we shipped, and we know what price we charge each customer, so that part is pretty easy. And we know that the cost per case, excluding our customer service costs, is $13.10. So we can multiply $13.10 per case by the number of cases we shipped to get our cost of goods. Then, we subtract our cost of goods from revenues for each customer and get a gross margin. Now, you may remember that we've talked about how hard it is to trace our customer service costs to any particular customer. Our customer service costs run about $1.2 million a year, roughly 10% of revenues. To make things easy, we allocate those to each customer based on its share of the company's total revenues. So if a customer accounts for 5% of our revenues, we allocate it 5% of our customer service costs. Then, we calculate a customer margin for each customer. Johnson looked at the numbers and said: I don't think we can lower our price to Saver Superstore much more and make any money on this one. And just think, if we offer a larger discount to them, then we'll have our other customers wanting the same thing-especially the other big ones. I can see it now: Marsha is going to walk in here next month and tell us that Oscar's OddLots has heard about the deal we struck with Saver Superstore, has been talking with that competitor, and they want the same thing. Oscar's OddLots, a large local retailer on the edge of town, was another of JBL's large customers. Jason Rodgers, the operations manager for JBI, was listening carefully. This was the first he had heard of the situation, but to a careful observer, his nod would have revealed what he was thinking. He said: You know, I'm not a bit surprised to hear all this. Saver Superstore is a great customer. They buy lots of beverages, and they're easy to deal with. They place their orders on a regular basis and almost never ask for anything special. I don't remember the last time we had to run around in the warehouse pulling together a rush order from them. Who wouldn't want that business? Stevens agreed, "You're right. I almost never have to change my delivery schedule because they've asked for quick delivery. And they're right around the commer, so they're easy for us to get to." Rodgers continued: I think about some of our other customers. They seem to never be able to anticipate that they'll be out of stock. Then they call us and make it our problem to deal with. It seems like we have some customers that we work on all day every day. Why can't that competitor go after those customers? It's hard for me to believe that some of those customers are more profitable than Saver Superstore. Maybe we ought to add what we guys in the warehouse call a "pain factor onto those other customers and then see who is most profitable for us. As Johnson listened, he realized Rodgers might be onto something. "Jim, what types of costs are included in those customer service costs?" Thomas replied, "Well, that number includes several things." He continued: It includes anything related to handling the beverages, like picking the beverages from the warehouse shelves according to the order instructions, moving the beverages over to the dock, and loading them on the delivery truck. It includes any costs related to taking, coordinating, and administering the orders, like what we pay the people in the sales office who take phone orders from customers, the supervisory costs to administer the order, and similar things. It includes anything related to delivering the beverages to the customer's location, like the cost of the delivery trucks, truck maintenance, and what we pay Joe and people like him to drive the trucks. It includes anything related to all those rush orders you're talking about, like overtime, extra scheduling, and stuff like that. And it includes what we pay Marsha for what she does, like visiting the customers to check in on them. So there's quite a bit of stuff in there. Johnson thought about this. So you're telling me that there are some customers that you are spending a lot more time on than others? And it's not Saver Superstore?" "That's right," Rodgers replied. Johnson continued, But since our accounting system is allocating these customer service costs based on revenues, and since Saver Superstore is one of our biggest customers, it's allocating a large share of those costs to Saver Superstore." "Exactly," Thomas said. Let me do this: Let me spend a couple of days collecting some information. I'll need some help from each of you because I want to try to find out how much of your time you are spending on each of our customers. Maybe it's time to get more sophisticated about how we look at these customer service costs. It may be worth the effort. Stevens, Ketchum, and Rodgers all agreed to spend some time with Thomas so he could summarize the amount of activity they devoted to each customer. They would meet again the following Friday. Thomas promised to compile an analysis that might help them determine how profitable each of their customers really was. Activity Analysis Before he left for the weekend, Thomas decided to pull together some information about the customer service costs he had described in the meeting: handling the product, taking the orders, delivering the product, expediting rush orders, and visiting the customer. He searched through the accounting system and determined how much of the annual $1.2 million in customer service costs was associated with each of those categories (Table 1). Table 1. Customer service costs during the prior year by area of activity. Area of activity Total $ Product handling $ 672,000 Taking orders from customers 100,000 Delivering the product 140,000 Expediting deliveries (other than automobile) 198,000 Sales visits to customers 90,000 Total $ 1.200.000 Then, on Monday, Thomas met individually with Stevens, Ketchum, and Rodgers. With their help, he determined what he thought to be the primary driver of the costs in each of those customer service categories (Table 2). Table 2. Cost drivers by area of activity. Area of activity Cost driver Product handling Taking orders from customers Delivering the product Expediting deliveries (other than automobile) Sales visits to customers Number of cases sold Number of purchase orders Number of miles traveled Number of expedited deliveries Number of sales visits Thomas determined from the company's accounting records that the company sold 800,000 cases of beverages and processed 500 purchase orders the previous year. Stevens checked the mileage records for the delivery vehicles and determined that the vehicles had traveled a total of 44,800 miles. Rodgers was able to determine that the company made 4,480 deliveries, 2,500 of which were expedited deliveries. And finally, Ketchum checked her daily travel log to determine she had made a total of 360 sales visits to the company's customers. Thomas's next step was to determine how much of these cost drivers were attributable to each customer. Again, he was able to obtain some of that information (e.g., number of cases) relatively easily from the company's records. Then his colleagues helped him determine customer numbers for the rest of the activities. Exhibit 2 presents this data for the four customers included in Thomas's first report (Exhibit 1). 23 -6- UVA-C-2292 Exhibit 1 JOHNSON BEVERAGE, INC. Report of Customer Profitability during the Previous Year for Four Customers Prepared by Jim Thomas Net revenues Cost of goods Gross margin Customer service costs Customer profit Customer profit (% of net revenues) Saver Superstore S 1,168,000 1,048,000 $ 120,000 116.800 S3.200 0.3% Oscar's OddLots $ 1,192,000 1,048.000 $ 144,000 119.200 24.800 2.1% Midwellen Supermarket S 121,520 104.800 $ 16,720 12.152 4.568 3.8% Downtown Retail S 454,500 393.000 $ 61,500 45.450 S 16.050 3.5% Total for JBL $12,000,000 10,480,000 $ 1,520,000 1.200,000 S320,000 2.7% UVA-C-2292 Exhibit 2 JOHNSON BEVERAGE, INC. Additional Information from Prior Year for Four Customers Saver Superstore $14.60 80,000 16 110 5 10 12 Price per case Number of cases Number of orders Number of deliveries! Miles traveled per delivery Number of expedited deliveries Number of sales visits Oscar's OddLots $14.90 80,000 40 400 19 250 25 Midwellen Supermarket $15.19 8,000 20 200 Downtown Retail S15.15 30,000 30 Total for JBI $15.00 800,000 500 4,480 10 2,500 360 230 4 90 130 18 9 UVAC-220 DARDEN BUSINESS PUBLISHING LY/ BOHNSON BEVERAGE, INC. As president and primary owner of Jose Bage. In Jacke Begining to waithalaing long-term come was becoming a challenge. During delivery run yesterday driver Joe Steven hadice compete's sales manager walking with Jose's sales manager, Marsha Ketchum, had meticed that, during her with theme managers Wednesday, he was starting to make more about wanting to meet lower price. This could come dilemma because this customer had been one of the company Largest and mostlyal customers for your Johnson and back in his chair. These things always seemed to come priday just in time to monopol his thoughts on what there would have been reden Deciding to the head on behaleda meeting with Strum, Kachoma velthen for later that almo Company Background JB distributed beverages to retail comers. The company had been in business for the primarily distributed botted port drinks made by small penalty beverage companies and Sono had grown adily with the popularity of posts over the past 10 year Last you are totaled 512 million. The company serviced how whose brape puhassad here from 100.000 ever i milli The undiscounted list price on the port drinks the distributed was $15.30 peta bottles The Maillot descading customer services of the buildik 513.10 per ce. The company officredit to some of its customers, which vanied by come honed amber of factors, including the volume of drink the customer purchased are pate come and the main of the complete VA A wap. UVA-C-2200 Jason pened the meeting by summarizing what he had heard from Stevens and Ketchum over the past couple of days look like we've got some competition for beil clienSaver Superto. I got ped. They're a big come "This isn't the time time this has happened. added Ketchum You might remember that this one composite has approached Save Superstore. But that time we were able keep the baby offering a bit more of a discothink we'll have to do this time, and we lose the customer Jobcended quickly. We can't get me price ware this know this is a big customer and a loyal come to, but it's certainly not one of our most profitable. I had impul members together as welfare Saver Superstis one of our customers. Take a look som Thomas in ting, who was also in the meeting had prepared report Exhibit , which one and on the ble for the others to look Thomas explained how the coming prep compiled the number For each custom we just pull the weight of the coming We know what they were and what we shipped and we w And the cas, cacluding co. So we camily 13.10 por case by the user of cases we shipped to pole of goods Then we wtract cu col of goods from even for each customer and get arom margin. Now, you may remember that we've talked about how hard it is to trace Comer service costo any particularme Orucos 1.2 million a year of Tomake things can allocate the accustomer red share of the company reve. So if a customer for of our re, we alcate - Than. - articulae - Johnson looked at the number and said: I don't think we can lower our price to Swer Supersone much more and make any eyes this. And just think if we offer a larger discount to them, then we have our other customers wanting the same thing-especially the other big . to Oscar's Odde has heard about the deal struck with Set Superstores been talking with the competits, and they want the same thing Guarda lage local talent the edge of town mother of the Jesse Redpers, the operations manager for bl. was listening cucully. This was the fie had Sead of the station but a careful serveis sod would have revealed what he was You know, I'm a bit more to hear all this Sana Superiore is a great wome. They by lots of leverages, and they're easy to deal with the place their orders on a regular basis and almost ever ask for anything special. I don't remember the last time we had to run around in the war polling thera ushnder from them. Who wouldn't want the business! Stevemagreed. You're right. It never be to change my delivery schedule became they've ked for quick Gelivery. And they're right on the come they I think about some of our other customen. They come hele anticipate that they'll be out of sted. Then they call and make it our problem to deal with It come we have some customers that we work on all day every day. Why can come the customers! believe that some of the custom profitable than Saver See Maybe we ought to add what we guys in the warehouse call info those other customers and then we who is most profitable for ) As Jobcened, beralired Radgons might be como something what type of costs included in these comer service Thomas replied, "Well, the number includes several things. He continued Radesting related to handling the beastlike picking the bene from the waichouse shelves according to the order is moving the beverages over to the deck, and leading them on the delivery track includes any colated to taking coordinating and administering these tech we pay the people in the settice who take phone andere from customer, supervisory costs to administer the order and similar things indiades anything cited to delivering the beverages to the customer's location like the cost of delivery www maintenance, and what we pay and people like him drive the tracks includes anything related to all these roeders you're talking out, like evertime. Crechen also like that. And it includes what we there's quite a bit of stuff in there UVAC Joe thought about the "So you're ling me that there are some customers that you we spending a lot more time on than others? And it's Saver Superstar "Thalight Redgreplied Second Busine er ingen is allocating the customer costs based on and since Saver Suns dering a large share of these caso San Superstore." "Exactly." Thomas said Le do this amepend ople of days collecting om information need some help from each of you because I want to try to find out how much your time you are ending on the outcome. Maybe time sophisticated about how we look at the customer service may be worth Stry. Ketchum and Redgallagreed to spend time with Thomas he could summarize the amount of activity they deed each customer. They will meet in the following Friday. The promised to compleanalyse that might help them determine how profitable cach of the women Before he left for the weekend. Thomas desde o pull there info the customer service costs he had described in the meeting handling the product, aking the andere delivering the product expediting room witing the customer. We arched ugh the conting system determined how much of the 1.2 million service costs wasted with each of the categories (Table 1 Table I. Customer ce costs during the prior you by cathy Arce of the 140.000 Taking orders from customers Delivering the produse Expediting down there Total UVAC Then, Monday. These individually with Steven, Kitchen, und der their help, be determined what he thought to be the primary driver of the celineadh of these Table 2. Cost driven by arca ed activity Aresti Product handling Taking orders from customers Number of purchase in Number of all traveled Expediting deliveries other than tode) Number of expedited edities Sales Number of sales Thomas determined from the company's acting cards that the company 100,000s of beverages and proceed 500 pundhene nder the previous year. Steve checked the mileage records for the delivery vehicles and determined that the vehicles had veled of 44.300 miles Radhe demine that the company male 440 deliveries, 2.500 of which expedited deliver And finally, Kachum checked her daily naved log to determine she had made anal files vaata to the company.com Thomas's next ep was to determine how much of these cost drivers worthlete schomw. Again, he was able to in some of the formation les her of relatively coily from the company's Then his colleagues helped him determine customer sumbers for the rest of the activities Exhibit penis data for the four UVAC JOHNSON BEVERAGE, INC. Report Customer Profitability during the Previous Year SorFour Customer Prepared by Jim Thom S100 SL.000 SI 54545 SO $ 120,000 UVAC JOHNSON BEVERAGE, INC. Mini for Year for Four Customers Separare 514 Price Modelle C. Super 514.90 SIS. 19 20 SI SISIS 300 30 Number of orders Number of deliver Miles traced per delivery Number of expired device Number of sales vides 16 110 5 10 11 130 UNIVERSITY/VIRGINU JOHNSON BEVERAGE, INC. As president and primary owner of Johnson Beverage, Inc. (JBI), Jack Johnson was beginning to realize that retaining long-term customers was becoming a challenge. During a delivery run yesterday, driver Joe Stevens had noticed a competitor's sales manager talking with the general manager of Saver Superstore, one of JBI's largest customers. Then, that morning. Johnson's sales manager, Marsha Ketchum, had mentioned that, during her visit with the same general manager on Wednesday, he was starting to make some noises about wanting to negotiate a lower price. This could cause a dilemma because this customer had been one of the company's largest and most loyal customers for years. Johnson leaned back in his chair. These things always seemed to come up on Friday, just in time to monopolize his thoughts over what otherwise would have been a restful weekend. Deciding to address the situation head on, he scheduled a meeting with Stevens, Ketchum, and several others for later that afternoon. Company Background JBI distributed beverages to retail customers. The company had been in business for two decades and had become a preferred distributor among several retail outlets in the local area. JBI primarily distributed bottled sports drinks made by small specialty beverage companies, and its business had grown steadily with the popularity of sports drinks over the past 10 to 20 years. Last year, JBI's revenues totaled $12 million. The company serviced about 20 customers whose beverage purchases totaled anywhere from about $100,000 to over $1 million annually. The undiscounted list price on the sports drinks that JBI distributed was $15.20 per case of 24 bottles. The full cost (excluding customer service costs) of the bottled drinks was $13.10 per case. The company offered discounts to some of its customers, which varied by customer based on a number of factors, including the volume of drinks the customer purchased the future potential of the customer, and the negotiating success of the company's sales representative, among others This case was prepared by Associate Professor Luan Lynch. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative station Copyright 2009 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To ander copies, al or email to salesa dardenbusinesspublishing.com. No part of this publication may be reproduktored in a retrieval system. sed in a spreadsheet, or transmitted by any form or by any medectromechanical photocopying recording, rather with the prof the Danies School Fondo Rex. 609. 19 UVA-C-2292 The Meeting Johnson opened the meeting by summarizing what he had heard from Stevens and The Meeting Johnson opened the meeting by summarizing what he had heard from Stevens and Ketchum over the past couple of days. "It looks like we've got some competition for one of our best customers: Saver Superstore. I guess I'm not too surprised. They're a big customer." "This isn't the first time this has happened," added Ketchum. "You might remember that this same competitor has approached Saver Superstore before. But that time, we were able to keep the business by offering a bit more of a discount. I think we'll have to do more of that this time, or I'm afraid we'll lose the customer." Johnson responded quickly. "We can't get into a price war on this. I know this is a big customer, and a loyal one too, but it's certainly not one of our most profitable. I had Jim pull some numbers together on several of our accounts. Saver Superstore is one of our lowest-margin customers. Take a look." Jim Thomas in accounting, who was also in the meeting, had prepared a report (Exhibit 1), which Johnson laid on the table for the others to look at Thomas explained how the accounting group compiled the numbers: For each customer, we just pull the revenues right out of the accounting system. We know what they ordered and what we shipped, and we know what price we charge cach customer, so that part is pretty easy. And we know that the cost per case, excluding our customer service costs, is $13.10. So we can multiply $13.10 per case by the number of cases we shipped to get our cost of goods. Then, we subtract our cost of goods from revenues for each customer and get a gross margin. Now, you may remember that we've talked about how hard it is to trace our customer service costs to any particular customer. Our customer service costs run about $1.2 million a year, roughly 10% of revenues. To make things casy, we allocate those to each customer based on its share of the company's total revenues. So if a customer accounts for 5% of our revenues, we allocate it 5% of our customer service costs. Then, we calculate a customer margin for each customer. Johnson looked at the numbers and said: ced Operations and Supply Chain Man Yorkville huby Vatos Presses from October 7, 2017 October 07, 2022 Use outside these parameters is a con I don't think we can lower our price to Saver Superstore much more and make any money on this one. And just think, if we offer a larger discount to them, then we'll have our other customers wanting the same thing especially the other big ones. I can see it now: Marsha is going to walk in here next month and tell us that Oscar's OddLots has heard about the deal we struck with Saver Superstore, has been talking with that competitor, and they want the same thing, 20 UVA-C-2292 Oscar's OddLots, a large local retailer on the edge of town, was another of JBI's large customers. Jason Rodgers, the operations manager for JBI, was listening carefully. This was the first he had heard of the situation, but to a careful observer, his nod would have revealed what he was thinking. He said: You know, I'm not a bit surprised to hear all this. Saver Superstore is a great customer. They buy lots of beverages, and they're easy to deal with. They place their orders on a regular basis and almost never ask for anything special. I don't remember the last time we had to run around in the warehouse pulling together a rush order from them. Who wouldn't want that business? Stevens agreed, "You're right. I almost never have to change my delivery schedule because they've asked for quick delivery. And they're right around the corner, so they're easy for us to get to." Rodgers continued I think about some of our other customers. They seem to never be able to anticipate that they'll be out of stock. Then they call us and make it our problem to deal with. It seems like we have some customers that we work on all day every day. Why can't that competitor go after those customers? It's hard for me to believe that some of those customers are more profitable than Saver Superstore. Maybe we ought to add what we guys in the warehouse call a "pain factor onto those other customers and then see who is most profitable for us. As Johnson listened, he realized Rodgers might be onto something. "Jim, what types of costs are included in those customer service costs?" Thomas replied, "Well, that number includes several things." He continued It includes anything related to handling the beverages, like picking the beverages from the warehouse shelves according to the order instructions, moving the beverages over to the dock, and loading them on the delivery truck. It includes any costs related to taking, coordinating, and administering the orders, like what we pay the people in the sales office who take phone orders from customers, the supervisory costs to administer the order, and similar things. It includes anything related to delivering the beverages to the customer's location, like the cost of the delivery trucks, truck maintenance, and what we pay Joe and people like him to drive the trucks. It includes anything related to all those rush orders you're talking about, like overtime, extra scheduling, and stuff like that. And it includes what we pay Marsha for what she does, like visiting the customers to check in on them. So there's quite a bit of stuff in there. Use ou For use only in the course Advanced Operations and Supply Cha 21 UVA-C-2292 Johnson thought about this. "So you're telling me that there are some customers that you are spending a lot more time on than others? And it's not Saver Superstore?" "That's right," Rodgers replied. Johnson continued, "But since our accounting system is allocating these customer service costs based on revenues, and since Saver Superstore is one of our biggest customers, it's allocating a large share of those costs to Saver Superstore." "Exactly." Thomas said Let me do this: Let me spend a couple of days collecting some information. I'll need some help from each of you because I want to try to find out how much of your time you are spending on cach of our customers. Maybe it's time to get more sophisticated about how we look at these customer service costs. It may be worth Professors from October 2011 October 2022 the fant summarize the amount of activity they devoted to each customer. They would meet again the following Friday. Thomas promised to compile an analysis that might help them determine how profitable each of their customers really was Activity Analysis Before he left for the weekend, Thomas decided to pull together some information about the customer service costs he had described in the meeting: handling the product, taking the orders, delivering the product, expediting rush orders, and visiting the customer. He searched through the accounting system and determined how much of the annual $1.2 million in customer service costs was associated with each of those categories (Table 1). Table 1. Customer service costs during the prior year by area of activity. Area of activity Totals Product handling $ 672,000 Taking orders from customers 100,000 Delivering the product 140,000 Expediting deliveries (other than automobile) 198,000 Sales visits to customers 90.000 Total SL.200.000 he deepesis ay For we only in the course Advanced Operations and Supply Chain Manat Yorkville University Then, on Monday, Thomas met individually with Stevens, Ketchum, and Rodgers. With their help, he determined what he thought to be the primary driver of the costs in each of those customer service categories (Table 2). Table 2. Cost drivers by area of activity. Area of activity Cost driver Product handling Number of cases sold Taking orders from customers Number of purchase orders Delivering the product Number of miles traveled Expediting deliveries (other than automobile) Number of expedited deliveries Sales visits to customers Number of sales visits Suppy Chain Mana Yorkville University taught by Various Professor on October 7, 2019 to October 7, 2022 the outside these pais acion Thomas determined from the company's accounting records that the company sold 800,000 cases of beverages and processed 500 purchase orders the previous year. Stevens checked the mileage records for the delivery vehicles and determined that the vehicles had traveled a total of 44.800 miles. Rodgers was able to determine that the company made 4,480 deliveries, 2,500 of which were expedited deliveries. And finally, Ketchum checked her daily travel log to determine she had made a total of 360 sales visits to the company's customers. Thomas's next step was to determine how much of these cost drivers were attributable to each customer. Again, he was able to obtain some of that information (c.g., number of cases) relatively easily from the company's records. Then his colleagues helped him determine customer numbers for the rest of the activities. Exhibit 2 presents this data for the four customers included in Thomas's first report (Exhibit 1). Exhibiti JOHNSON BEVERAGE, INC. Report of Customer Profitability during the Previous Year for Four Customers Prepared by Jim Thomas Net revenues Cost of goods Gross margin Customer service costs Customer profit Customer profit % of net revenues) Saver Superstore $ 1.168,000 1.048.000 $ 120,000 116.800 3.200 0.3% Oscar's Odd Lots $ 1,192,000 1.048.000 $ 144,000 119.200 24.800 2.1% Midwellen Supermarket $ 121,520 104.800 $ 16,720 12.152 4.568 Downtown Retail S 454,500 393.000 $ 61,500 45.450 16.050 3.5% Total for JBI $12,000,000 10.480.000 $ 1,520,000 1.200.000 320.000 2.7% danced Operations and Supply Chan Mana York University out by Varos Professors from October 07,20 Veron 3.8% VA-C-2292 Exhibit 2 JOHNSON BEVERAGE, INC. Additional Information from Prior Year for Four Customers Saver Superstore $14.60 80,000 16 110 S 10 12 Price per case Number of cases Number of orders Number of deliveries Miles traveled per delivery Number of expedited deliveries Number of sales visits Oscar's Odd Lots $14.90 80,000 40 400 19 250 25 Midwellen Supermarket $15.19 8,000 20 200 Downtown Retail $15.15 30,000 30 Total for JBL $15.00 800,000 500 4,480 10 2.500 360 Man. Yori hivatby Vrous Posts from October 7, 2019 10 230 130 18 90 9 Obudo Sede non JOHNSON BEVERAGE, INC. As president and primary owner of Johnson Beverage, Inc. (JBI), Jack Johnson was beginning to realize that retaining long-term customers was becoming a challenge. During a delivery run yesterday, driver Joe Stevens had noticed a competitor's sales manager talking with the general manager of Saver Superstore, one of JBI's largest customers. Then, that morning, Johnson's sales manager, Marsha Ketchum, had mentioned that, during her visit with the same general manager on Wednesday, he was starting to make some noises about wanting to negotiate a lower price. This could cause a dilemma because this customer had been one of the company's largest and most loyal customers for years. Johnson leaned back in his chair. These things always seemed to come up on Friday, just in time to monopolize his thoughts over what otherwise would have been a restful weekend. Deciding to address the situation head on, he scheduled a meeting with Stevens, Ketchum, and several others for later that afternoon. Company Background JBI distributed beverages to retail customers. The company had been in business for two decades and had become a preferred distributor among several retail outlets in the local area. JBI primarily distributed bottled sports drinks made by small specialty beverage companies, and its business had grown steadily with the popularity of sports drinks over the past 10 to 20 years. Last year, JBI's revenues totaled $12 million. The company serviced about 20 customers whose beverage purchases totaled anywhere from about $100,000 to over $1 million annually. The undiscounted list price on the sports drinks that JBI distributed was $15.20 per case of 24 bottles. The full cost (excluding customer service costs) of the bottled drinks was $13.10 per case. The company offered discounts to some of its customers, which varied by customer based on a number of factors, including the volume of drinks the customer purchased, the future potential of the customer, and the negotiating success of the company's sales representative, among others. The Meeting Johnson opened the meeting by summarizing what he had heard from Stevens and Ketchum over the past couple of days. "It looks like we've got some competition for one of our best customers: Saver Superstore. I guess I'm not too surprised. They're a big customer." "This isn't the first time this has happened," added Ketchum. You might remember that this same competitor has approached Saver Superstore before. But that time, we were able to keep the business by offering a bit more of a discount. I think we'll have to do more of that this time, or I'm afraid we'll lose the customer." Johnson responded quickly. We can't get into a price war on this. I know this is a big customer, and a loyal one too, but it's certainly not one of our most profitable. I had Jim pull some numbers together on several of our accounts. Saver Superstore is one of our lowest-margin customers. Take a look." Jim Thomas in accounting, who was also in the meeting, had prepared a report (Exhibit 1), which Johnson laid on the table for the others to look at. Thomas explained how the accounting group compiled the numbers: For each customer, we just pull the revenues right out of the accounting system. We know what they ordered and what we shipped, and we know what price we charge each customer, so that part is pretty easy. And we know that the cost per case, excluding our customer service costs, is $13.10. So we can multiply $13.10 per case by the number of cases we shipped to get our cost of goods. Then, we subtract our cost of goods from revenues for each customer and get a gross margin. Now, you may remember that we've talked about how hard it is to trace our customer service costs to any particular customer. Our customer service costs run about $1.2 million a year, roughly 10% of revenues. To make things easy, we allocate those to each customer based on its share of the company's total revenues. So if a customer accounts for 5% of our revenues, we allocate it 5% of our customer service costs. Then, we calculate a customer margin for each customer. Johnson looked at the numbers and said: I don't think we can lower our price to Saver Superstore much more and make any money on this one. And just think, if we offer a larger discount to them, then we'll have our other customers wanting the same thing-especially the other big ones. I can see it now: Marsha is going to walk in here next month and tell us that Oscar's OddLots has heard about the deal we struck with Saver Superstore, has been talking with that competitor, and they want the same thing. Oscar's OddLots, a large local retailer on the edge of town, was another of JBL's large customers. Jason Rodgers, the operations manager for JBI, was listening carefully. This was the first he had heard of the situation, but to a careful observer, his nod would have revealed what he was thinking. He said: You know, I'm not a bit surprised to hear all this. Saver Superstore is a great customer. They buy lots of beverages, and they're easy to deal with. They place their orders on a regular basis and almost never ask for anything special. I don't remember the last time we had to run around in the warehouse pulling together a rush order from them. Who wouldn't want that business? Stevens agreed, "You're right. I almost never have to change my delivery schedule because they've asked for quick delivery. And they're right around the commer, so they're easy for us to get to." Rodgers continued: I think about some of our other customers. They seem to never be able to anticipate that they'll be out of stock. Then they call us and make it our problem to deal with. It seems like we have some customers that we work on all day every day. Why can't that competitor go after those customers? It's hard for me to believe that some of those customers are more profitable than Saver Superstore. Maybe we ought to add what we guys in the warehouse call a "pain factor onto those other customers and then see who is most profitable for us. As Johnson listened, he realized Rodgers might be onto something. "Jim, what types of costs are included in those customer service costs?" Thomas replied, "Well, that number includes several things." He continued: It includes anything related to handling the beverages, like picking the beverages from the warehouse shelves according to the order instructions, moving the beverages over to the dock, and loading them on the delivery truck. It includes any costs related to taking, coordinating, and administering the orders, like what we pay the people in the sales office who take phone orders from customers, the supervisory costs to administer the order, and similar things. It includes anything related to delivering the beverages to the customer's location, like the cost of the delivery trucks, truck maintenance, and what we pay Joe and people like him to drive the trucks. It includes anything related to all those rush orders you're talking about, like overtime, extra scheduling, and stuff like that. And it includes what we pay Marsha for what she does, like visiting the customers to check in on them. So there