As president and primary proprietor of Johnson Beverage. Inc. ( JBI ) . Jack Johnson was get downing to recognize that retaining long-run clients was going a challenge. During a bringing tally yesterday. driver Joe Stevens had noticed a competitor’s gross revenues director speaking with the general director of Saver Superstore. one of JBI’s largest clients. Then. that forenoon. Johnson’s gross revenues director. Marsha Ketchum. had mentioned that. during her visit with the same general director on Wednesday. he was get downing to do some noises about desiring to negociate a lower monetary value. This could do a quandary because this client had been one of the company’s largest and most loyal clients for old ages.
Johnson leaned back in his chair. These things ever seemed to come up on Friday— merely in clip to monopolise his ideas over what otherwise would hold been a reposeful weekend. Deciding to turn to the state of affairs caput on. he scheduled a meeting with Stevens. Ketchum. and several others for subsequently that afternoon.
Company Background
JBI distributed drinks to retail clients. The company had been in concern for two decennaries and had become a preferable distributer among several retail mercantile establishments in the local country. JBI chiefly distributed bottled athleticss drinks made by little forte drink companies. and its concern had grown steadily with the popularity of athleticss drinks over the past 10 to 20 old ages. Last twelvemonth. JBI’s grosss totaled $ 12 million. The company serviced about 20 clients whose drink purchases totaled anyplace from about $ 100. 000 to over $ 1 million yearly. The undiscounted list monetary value on the athleticss drinks that JBI distributed was $ 15. 20 per instance of 24 bottles. The full cost ( excepting client service costs ) of the bottled drinks was $ 13. 10 per instance. The company offered price reductions to some of its clients. which varied by client based on a figure of factors. including the volume of drinks the client purchased. the future potency of the client. and the negociating success of the company’s gross revenues representative. among others.
This instance was prepared by Associate Professor Luann J. Lynch. It was written as a footing for category treatment instead than to exemplify effectual or uneffective handling of an administrative state of affairs. Copyright ? 2009 by the University of Virginia Darden School Foundation. Charlottesville. VA. All rights reserved. No portion of this publication may be reproduced. stored in a retrieval system. used in a spreadsheet. or transmitted in any signifier or by any means—electronic. mechanical. run offing. entering. or otherwise—without the permission of the Darden School Foundation. Rev. 6/09. This papers is authorized for usage merely by madelene manu at Douglas College. Please do non copy or redistribute.
The Meeting
Johnson opened the meeting by sum uping what he had heard from Stevens and Ketchum over the past twosome of yearss. “It expressions like we’ve got some competition for one of our best clients: Saver Superstore. I guess I’m non excessively surprised. They’re a large client. ” “This isn’t the first clip this has happened. ” added Ketchum. “You might retrieve that this same rival has approached Saver Superstore before. But that clip. we were able to maintain the concern by offering a spot more of a price reduction. I think we’ll have to make more of that this clip. or I’m afraid we’ll lose the client. ”
Johnson responded rapidly. “We can’t acquire into a monetary value war on this. I know this is a large client. and a loyal one excessively. but it’s surely non one of our most profitable. I had Jim draw some Numberss together on several of our histories. Saver Superstore is one of our lowest-margin clients. Take a expression. ” Jim Thomas in accounting. who was besides in the meeting. had prepared a study ( Exhibit 1 ) . which Johnson laid on the tabular array for the others to look at. Thomas explained how the accounting group compiled the Numberss: For each client. we merely draw the grosss right out of the accounting system. We know what they ordered and what we shipped. and we know what monetary value we charge each client. so that portion is pretty easy.
And we know that the cost per instance. excepting our client service costs. is $ 13. 10. So we can multiply $ 13. 10 per instance by the figure of instances we shipped to acquire our cost of goods. Then. we subtract our cost of goods from grosss for each client and acquire a gross border. Now. you may retrieve that we’ve talked about how difficult it is to follow our client service costs to any peculiar client. Our client service costs run about $ 1. 2 million a twelvemonth. approximately 10 % of grosss. To do things easy. we allocate those to each client based on its portion of the company’s entire grosss. So if a client histories for 5 % of our grosss. we allocate it 5 % of our client service costs. Then. we calculate a client border for each client.
Johnson looked at the Numberss and said:I don’t think we can take down our monetary value to Saver Superstore much more and do any money on this 1. And merely believe. if we offer a larger price reduction to them. so we’ll have our other clients desiring the same thing—especially the other large 1s. I can see it now: Marsha is traveling to walk in here following month and state us that Oscar’s OddLots has heard about the trade we struck with Saver Superstore. has been speaking with that rival. and they want the same thing.
Oscar’s OddLots. a big local retail merchant on the border of town. was another of JBI’s big clients.Jason Rodgers. the operations director for JBI. was listening carefully. This was the first he had heard of the state of affairs. but to a careful perceiver. his nod would hold revealed what he was believing. He said:
You know. I’m non a spot surprised to hear all this. Saver Superstore is a great client. They buy tonss of drinks. and they’re easy to cover with. They place their orders on a regular footing and about ne’er inquire for anything particular. I don’t retrieve the last clip we had to run around in the warehouse drawing together a haste order from them. Who wouldn’t want that concern?
Stevens agreed. “You’re right. I about ne’er have to alter my bringing agenda because they’ve asked for speedy bringing. And they’re right around the corner. so they’re easy for us to acquire to. ”
Rodgers continued: I think about some of our other clients. They seem to ne’er be able to expect that they’ll be out of stock. Then they call us and do it our job to cover with. It seems like we have some clients that we work on all twenty-four hours every twenty-four hours. Why can’t that rival go after those clients? It’s hard for me to believe that some of those clients are more profitable than Saver Superstore. Possibly we ought to add what we guys in the warehouse call a “pain factor” onto those other clients and so see who is most profitable for us. As Johnson listened. he realized Rodgers might be onto something. “Jim. what types of costs are included in those client service costs? ”
Thomas replied. “Well. that figure includes several things. ” He continued: It includes anything related to managing the drinks. like picking the drinks from the warehouse shelves harmonizing to the order instructions. traveling the drinks over to the dock. and lading them on the bringing truck. It includes any costs related to taking. coordinating. and administrating the orders. like what we pay the people in the gross revenues office who take phone orders from clients. the supervisory costs to administrate the order. and similar things.
It includes anything related to presenting the drinks to the customer’s location. like the cost of the bringing trucks. truck care. and what we pay Joe and people like him to drive the trucks. It includes anything related to all those first-come-first-serve orders you’re speaking about. like overtime. excess programming. and material like that. And it includes what we pay Marsha for what she does. like sing the clients to look into in on them. So there’s rather a spot of material in at that place.
Johnson thought about this. “So you’re stating me that there are some clients that you are passing a batch more clip on than others? And it’s non Saver Superstore? ”
“That’s right. ” Rodgers replied. Johnson continued. “But since our accounting system is apportioning these client service costs based on grosss. and since Saver Superstore is one of our biggest clients. it’s apportioning a big portion of those costs to Saver Superstore. ” “Exactly. ” Thomas said.
Let me make this: Let me pass a twosome of yearss roll uping some information. I’ll need some aid from each of you because I want to seek to happen out how much of your clip you are passing on each of our clients. Possibly it’s clip to acquire more sophisticated about how we look at these client service costs. It may be worth the attempt.
Stevens. Ketchum. and Rodgers all agreed to pass some clip with Thomas so he could sum up the sum of activity they devoted to each client. They would run into once more the undermentioned Friday. Thomas promised to roll up an analysis that might assist them find how profitable each of their clients truly was.
Activity Analysis
Before he left for the weekend. Thomas decided to draw together some information about the client service costs he had described in the meeting: managing the merchandise. taking the orders. presenting the merchandise. hastening first-come-first-serve orders. and sing the client. He searched through the accounting system and determined how much of the one-year $ 1. 2 million in client service costs was associated with each of those classs ( Table 1 ) . Table 1. Customer service costs during the anterior twelvemonth by country of activity.
Merchandise handlingTaking orders from clientsDelivering the merchandiseExpediting bringings ( other than car )Gross saless visits to clients.
Number of instances soldNumber of purchase ordersNumber of stat mis traveledNumber of expedited bringingsNumber of gross revenues visits
Thomas determined from the company’s accounting records that the company sold 800. 000 instances of drinks and processed 500 purchase orders the old twelvemonth. Stevens checked the milage records for the bringing vehicles and determined that the vehicles had traveled a sum of 44. 800 stat mis. Rodgers was able to find that the company made 4. 480 bringings. 2. 500 of which were expedited bringings. And eventually. Ketchum checked her day-to-day travel log to find she had made a sum of 360 gross revenues visits to the company’s clients. Thomas’s following measure was to find how much of these cost drivers were attributable to each client. Again. he was able to obtain some of that information ( e. g. . figure of instances ) comparatively easy from the company’s records. Then his co-workers helped him find client Numberss for the remainder of the activities. Exhibit 2 nowadayss this information for the four clients included in Thomas’s first study.
