Customer profitability disadvantages

But customers who purchase a mix of relatively high-profit-margin products may demand so much in extra services that they also could potentially be unprofitable. Estimates must be able to foresee these costs. A 2PL works often on call e.

Ineffective strategy formulation and implementation relies on concepts like imitation, caution and blending in with the rest of the pack.

Third-party logistics

The power of an ABC model is that the cost assignment paths and their destinations trace costs from beginning to end — from resource expenses to each type of customer and optionally to each specific customer.

A wider span of supervision also reduces labor costs. Then for each cost driver, we determine the duration in time these cost drivers incur, and together with their frequency multiplied by the capacity cost rate, determine the activity cost. The companies we're comparing ourselves to may all be performing at lower levels than the market requires.

Compensation incentives should be a blend of both customer sales volume and profits. Writing in his book Developing Business Strategies, David Aaker suggested that business owners should concentrate their analysis efforts in four major areas: That reduces costs and the 4PL have to have an overview about the whole logistics market to choose the ideal 3PL for all operative logistic activities.

Services that utilize process layouts include hospitals, banks, auto repair, libraries, and universities. Since a breakdown of a system can halt the production of an employee, a department, or an entire plant, the cost of technical support or maintenance contracts are no longer optional.

In other words, what actions can an organization take to increase profits from its customers. Other fixed-position layout examples include construction e. Many employees in staff positions need to have access to financial and personal data from customers and clients.

The 3PL provider improves the logistics dramatically, but does not develop a new service. Items that are ordered frequently should be placed close together near the entrance of the facility, while those ordered less frequently remain in the rear of the facility.

Work is performed by employees or assets, and resources are converted into some type of output in the work activities module. For outright unprofitable customers, a company can explore passive options of gradually raising prices or surcharging for extra work, hoping the customer will go elsewhere.

Bad Customers Some customers purchase a mix of mainly low-profit-margin products. Once a company has determined its strengths, it can go about the process of utilizing those strengths to improve its position in the marketplace.

LCC provides best results when both art and science are merged together with good judgment as is true with most engineering tools. More specialized attention is necessary for both products and customers. The object of LCC analysis is to choose the most cost-effective approach from a series of alternatives so the least long term cost of ownership is achieved.

The general approach for dealing with customers or segments that are less attractive due to lower profitability is to improve their profitability through one of three approaches: Setups are more frequent, hence higher setup costs. Management And Accounting Web.

Looking at investment appraisal involves us in stage 3 and 4 of this cycle. The 2PL is not integrated, in contrast to the 3PL he is only an outsourced logistics provider with no system integration.


Cellular manufacturing allows for the production of small batches, which provides some degree of increased flexibility. These shipments do not usually move under the "lowest rate wins" scenario and can be very profitable to the 3PL that wins the business. Inbound Logistics' glossary of transportation, logistics, supply chain, and international trade terms can help you navigate through confusion and get to the meaning behind industry jargon.

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Measuring and Managing Customer Profitability

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Whether your business is large or small, there are several advantages of enterprise resource planning software. Enterprise resource planning software, or ERP, is a suite of customizable applications that allow businesses to integrate and manage their most important processes.

Jun 28,  · About the Author. Mary Nestor-Harper has more than 12 years as a human-resources director and more than 19 years experience as an HR/management consultant.

Customer profitability analysis is best conducted with a technique known as Activity based costing or ABC analysis.

Advantages & Disadvantages of Six Sigma

Customer profitability analysis helps the company understand the net profit coming from each customer which can be calculated by revenue less costs. These costs are various type of costs. The end results in hiring any consultant should be improved productivity, quality, customer service, and/or profitability.

Clients should comprehend that there will be a timeframe in systematic implementation planning to accomplish these results.

Customer profitability disadvantages
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