Understanding the true cost-to-serve for a distributor of electrical products.
Collinson Grant was asked to support a distributor of security products in Benelux, Portugal and South Africa. Trading conditions in the construction sector were poor and the market was moving away from traditional CCTV products toward Internet Protocol (IP) technology. As a consequence, the business faced the prospect of competing with less profitable products and with an IT sector distributing at lower margins.
We classified customers according to their annual order value, undertook a thorough investigation of the costs of the business and apportioned them accurately to work out the true cost-to-serve, allowing managers to understand where profits were really being made. The potential to restructure the client base and product portfolio was then modelled with confidence. In Benelux, the Managing Director reported an opportunity to release capacity worth €400K to €500K per annum. And in each of the smaller businesses in Portugal and South Africa, savings of at least €100K per annum were pinpointed.
In addition, the senior teams chose to rationalise their operations to reflect changing trends in technology and customers, by:
- differentiating service according to the true value of a given customer. Not all customers had the same value to their business. Understanding precisely the amount of effort that was being put into each one, and factoring in all costs against transactions, allowed this distributor to develop a clear picture of real profitability per account and to discriminate service or charges accordingly
- defining the product portfolio available to each customer and varying lead-times. Some of this distributor’s product range and availability was dictated by contractual requirements with large customers. But limiting the range of products in stock and their relative availability for certain other customers allowed for a rationalisation of the offering and reduced the cost of inventory
- phasing products in or out aggressively to minimise obsolescence. With constant pressure from manufacturers and customers to hold specific references in inventory, the organisation was often left with slow-moving products which then had to be heavily discounted. By defining precise rules and accountabilities on product introduction and phasing out, the organisation was able to substantially reduce write-offs and inventory
- cutting costs to improve margins. Thanks to their improved understanding of costs and complexity, the managerial team were able to make informed decisions on where savings could be made without damaging the business. In our experience, an efficient organisation has 75% of the cost of its staff associated with activities which meet customers’ requirements. This business is now very close to achieving that.