Client
A National Chemical Distributor.
Challenge
Improve profitability of business with huge diversity of product-customer segments and many branch locations.
Background
The company had widely varying segment profitability by product, customer segment, and branch locations. Management could
reliably measure branch profitability, and they had some insight into product and customer profitability. However, the causes
of variability in profits tended to be particular to each product x customer x location segment, so it was hard to take
action.
The company had grown quite large over many years by a combination of organic growth and acquisitions. As it grew, branch
managers’ knowledge of detailed market conditions for each product-customer segment could not keep up with the complexity
of the business.
Solution
Estimate profitability of products, customers and product × customer segments. Use activity-based costing to allocate costs
of products, warehousing, delivery, selling, and administration to products and customers. Recommend price changes.
Client Impact
Developed methods to estimate profitability of customers and products. Applied the method at three locations and significantly
increased profitability. Improved retention of profitable customers, increased profitability of some customers, and ceded
some unprofitable customers to competitors.
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