During the preparation phase of a recent margin review engagement, I was proudly advised by the client’s finance director that they were achieving an estimated 37% net margin from sales (supply) to their largest customer.
With this in mind, I wondered why I had been engaged in the first place! However, over the ensuing weeks of cross-functional workshops and interviews, it became obvious that this largest customer was causing a mountain of cost and disruption throughout the supplier’s business.
95% of their total overtime expense was attributable to the demands of this customer!
Extra customer service staff had been employed because orders were routinely submitted incorrectly and required reworking. Minimum order quantities were simply not enforced, so supplier-born delivery charges were excessive. Worst of all, the manufacturing line managers frustratingly acknowledged that at least 25% of their forward production plans were routinely changed with less than 48 hours’ notice.
The resulting net margin calculation produced a figure closer to 11%, and the negative impact on staff engagement was extreme.
Whilst the client did not have the systems to automatically produce a monthly net margin calculation for this customer, upon completion of my review they did have a team of people who were now eager to meet routinely and put together a report with the finance director that more accurately measured what it was costing to serve this customer. From there a margin recovery plan was constructed and implemented.
What are your systems for measuring customer margin?