In this paper I will discuss
how standard accounting practice does not account for the cost of customer service. How a new model is required to show the true
cost of customer service, and how Superior Customer Service can add to revenue
and improve the bottom line.
Accounting systems, by design,
track product costs not customer costs or customer value. Expenses are assigned to various cost
centers within the corporation according to the various accounts set up by the
accounting group. Costs are tracked as
the product moves through the manufacturing cycle and as value is added to the
raw material, through goods in process and to the warehouse. Certain overhead costs are allocated based on
some history or averages and are measured based on that history. Are we over or under budget?
Each customer and each order
has a different cost. Each customer will
order a different mix of products each with a different margin. Each customer will require a different amount
of effort from sales, from order entry, credit check, pick pack and ship and
collection effort. Different sales
channels have different cost associated.
All of these costs are allocated to different departments and profit,
loss, margin, cost of goods sold, G&A, etc are calculated on the
accumulation of these costs. This does
not yield a true cost, nor does it yield a true profit for that customer, for
that channel, for that market, for that promotion. Think about the variables in
each order… cost of the product, commissions, cost of the sales call,
management time, bonuses, and discounts to the customer, order processing cost,
promotional costs, merchandising costs, non-standard packing, inventory holding
costs, warehouse space, returns and refusals, cost of credit.
Traditional cost accounting
and budgeting puts expense in accounts. Budgeting for these costs is a guess at best,
historical data plus or minus. So
various aspects of superior customers are rolled into other departments and
accounts. Allocating these costs by department
can have cross purpose for serving the customer.
Logistics and customer
service add costs, but they also add revenue and market appeal. Return on investment is more than:
So in order to improve margin
companies either improve sales or cut costs.
In today’s economy, it is cut costs!
But return on investment there is also based on capital efficiency
So, increased sales with the
same capital expenditure or investment also improve the ROI!
Changes in logistics, and
customer delivery processes are slow to be implemented because they defy common
cost accounting processes. Logistics is
flow oriented and so difficult to allocate cost. If a logistics program increases total cost
yet provides greater service to the customer and as a result increases revenue.
How can this be measured? If the increase
in revenue is greater than increase in cost it can lead to greater cost
effectiveness, and greater return on investment, ROI.
A new accounting process
needs to be established that accounts for the cost of each customer, for each
market and for each channel. Costs
should allocated based on the cost to do business with a particular customer. Let’s call each customer or channel a mission
and see the grid below
It is only when all the
costs, sales, marketing, transportation, warehousing , etc are analyzed for each mission can the true
cost and the effectiveness be discerned.
Only after all the associated costs are captured can the true cost per
unit be determined. The attributed cost
for each program is the cost per unit
that could be avoided if the function were discontinued without any other
change to the organization. At this
point we can analyze the effectiveness of the customer. We can compare of cost of the mission to the
revenue loss for abandoning the customer.
What costs would I avoid and what revenue would be missed if I lost this
mission, customer or channel. If the
revenue generated is greater than the cost, than we have an effective
mission.
In my next entry I will
discuss how eliminating fixed cost and overhead can improve the cost structure
for the supplier and the customer.
