Outside the manufacturing environment, there are a multitude of well-known examples where a refinement of key reporting measures has become the benchmark for performance – occupancy rates as the primary key indicator of hotel performance, gold medals won as the primary benchmark for allocating funds to the Olympic team, or cash flow as the primary assessment of the health and viability of a business.
Pitfall: Net margin not measured
What do business to business (B2B) suppliers use as their key performance measurement? Beyond year-end financial reporting obligations, if you were asked to nominate the essential one or two metrics that best articulate business performance, what would you select?
The answers are many and varied, but I offer that systematic and ongoing measurement of customer net margin must find its way into every supplier’s monthly reporting pack.
Net margin is more difficult to measure than gross margin, because the calculation is not linear nor can it be readily extracted from an enterprise resource planning system like SAP. It requires individual business functions to record and apportion costs and time directly to identified customers.
Traditionally, finance staff report on company net margin and overall profitability, sales staff talk about customer revenue and volume, and operations staff share information on total yield and unit costs. All the other functions in your business report on their unified targets.
Cross-functional supplier KPIs are rarely tied to the well-being and commercial health of individual customers.
The effect of this must be obvious. The real ‘score’ of a customer’s worth to a
accurately measure and report the net
margin for their three biggest customers.
supplier gets obscured behind a cloud of consolidated numbers. The discretionary resources applied to servicing specific customers do not get recorded and, as a result, are not managed.
You can ignore it on the basis that your consolidated performance is doing just fine. Many do, but ultimately a supplier’s business depends on the individual performance of many customers, particularly the large ones.
If the customer base changes, so will the consolidated numbers. It’s preferable to know how they’re likely to change before they do.
Pitfall: Value propositions are not valued
A value proposition is generally considered to be the means by which a business explains to customers why they should buy their product or service. The statement should compel a customer to agree that one product or service will add more value or better solve a problem than alternative offerings. Companies often use multiple value propositions to target different customers across a range of segments.
Fast food restaurants place a big emphasis on value propositions. They offer a
considering how fast food chains
provide choice and value – on their
terms, not their customers’
Take McDonald’s, for example. If you are after a genuinely low-cost meal, you could cobble together your own meal combo from a limited range of ‘loose change’ items for as little as $6. If you are after a big feed, dial it up to a ‘meal deal’ and you can have the signature burger, fries and large fizzy drink all for under $12. If a more gourmet experience is desired, you can design your own tailored burger, chips and drink package for anything up to $23.
These are three very distinct value propositions and they simply illustrate the ‘good, better and best’ model. At the checkout, customers are nearly always offered an up-sell option, in an attempt to increase the per-customer average spend. The choice is always up to the customer, but the more the customer tailors the order, the more net margin they are contributing to the restaurant.
The B2B Challenge
B2B suppliers traditionally struggle to separate the value of what is and what isn’t included in their offer to their customers. In the process of negotiating, there are often many ‘menu’ variables put on the table.
How often does the customer-specific ‘menu’ gets accurately reflected in the contract? How often, subsequently, do the negotiated variables and the contract terms get clearly passed on to all who participate in the delivery of the overall service to the customer? Beyond those who sat at the negotiating table, who else knows whether a customer, no matter how large, has opted to purchase the bargainpriced supply offering?
Unlike the fast-food staff who ask, ‘Do you want fries with that?’ and charge the customer for any extras, supplier staff often aren’t even aware that their business is offering a selection of ‘good, better and best’ service packages. Cross-functional responsibilities are often blurred and interest in detail can be low.
Functional staff just tend to get on with the job at hand and do whatever it takes to
satisfy the customer, as they have always done. If they send out extra pallets or deliver a day early, they don’t say, “We did all this extra work, now please, customer, pay this surcharge.” They’re more likely to say to their peers and managers, “We’re just doing our job, aren’t we?”
The shift in thinking that needs to happen is that customers are given the choice of matching service levels with corresponding prices. Like airlines and fast food outlets, the right to change your preferences or tailor a single order should always be available, but it must come with a clearly understood surcharge. It’s good to give customers what they want, but on the supplier’s terms.
The value of respect
Suppliers accept changes from their large customers repeatedly and readily. They regularly go above and beyond what was contracted without charging for the additional value provided.
If a beverage customer calls from the factory floor and asks his counterpart at
generous offer to make a change
to an order can often turn into an
ongoing customer expectation.
can be higher than the financial cost
and needs to be addressed.
Your staff, unaware of the true value of the rescheduling to your customer, agrees to do it. But in reality, your customer was about to be fined a fortune by one of their retail outlets for being out-of-stock.
You, as the supplier, get nothing for going the extra yard. You also get nothing for disruption and additional cost to your business as a result of the work changes – for example, additional transportation cost by the contractor working on a premium rate while the truck is being loaded and unloaded and travelling with extra delivery.
Pitfall: Supplier staff are mistreated by customers
The subject of workplace mistreatment, or bullying, has well and truly found its way into mainstream consciousness over the past decade.
- A supplier’s customer service team, comprised of seven women who managed the inbound ordering for a large supplier, were subject to routine verbal abuse from a large customer over many years. The situation was only discovered when, due to an office refurbishment, I happened to spend a day working within earshot. On one occasion, I watched and listened as one of the women became visibly upset while talking to a customer on the phone for some 60 minutes. She became so upset that, once the call ended, her colleagues comforted her and encouraged her to go outside for a walk. This was the team’s routine approach for dealing with this customer’s unacceptable behaviour.
- During a review, a logistics manager was asked how many ‘good’ days he averaged at work each month. He replied that most days were good, but that his wife would disagree and say he only had two or three good days per month. This was because he only made it home for dinner with the family a few nights a month. Most other nights he was at work until 8 pm, dealing with the same customer, who routinely made ongoing delivery changes late into the afternoon. When asked why he allowed this to happen, the logistics manager said he feared the customer would make a complaint against him if he did otherwise.
When the issues described above were uncovered, senior managers made swift changes to rectify the situation. In the first case, the supplier’s sales director raised the issue with the customer’s business owner, who investigated the matter diligently and was shocked to have confirmed his staff member’s behaviour. He then had the staff member personally apologise to the supplier’s entire customer service staff.
address mistreatment in the workplace,
even if it comes from outside the company.
It was revealed that the customer’s staff member making the late order changes had already received two performance warnings for related issues. After an investigation, a third and final warning was issued, and the matter was resolved permanently.
It is worth contemplating what your own staff may be putting up with and the possible effects on their engagement, enjoyment, productivity and, ultimately, their health.