Welcome,

I have decided to get away from all this technology discussion and dust off the archives from 11 years ago in the interest of getting back to basics. My longtime readers remember about blocking and tackling, Vince Lomabardi taught us what that meant. Making more bottom line profit is about the basics.

Increasing Customer Profitability

Let's start by looking at the cost of delivery using our 2007 costs that haven't been updated. Using our ABC (Activity Based Costing) method.

 

  • Truck = $1,500.00/month = $50.00/day
    • Pricing is based on 11 ft. truck with reefer.
  • Driver = $16.00/hour for 10 hours + 20% = $192/day
    • this price would include the duty of delivery and require that the driver came with a license
  • Insurance/Registration = $8.93 + $0.05 = $8.98/day
    • Insurance = $268/month = $8.93/day
    • Registration = $20/year = $0.05/day
  • Gas = $2.44/gallon for 25 gallons = $61.00
    • This cost is based on 150 miles at 6 mpg.
    • Refrigeration would be included in this cost as the reefer runs off the same diesel as the truck
  • Communication = $99.00/month = $3.30/day
    • This is a Nextel Plan with 2000 minutes and included walkie-talkie.

Total cost per day $315.28

By calculating these by activity we can see where some cuts need to be made in costs and what the breakdown of the total cost it takes to run a truck looks like. It’s simple really; if you don’t see the cost you can’t cut the cost. Based on 10 stops a day the truck cost alone is $31.50 per delivery.

Customer profitability is one of the most important pieces of information for a business. However, its true value is often overlooked. In order to maximize your profitability you have to look below the surface to understand that some customers “cost” more than others. Really when you think about it, this is a simple fact. There will be customers who return more, have more stops, higher demands, etc. Therefore, knowing exactly how much your activities cost will help you identify which customers are profitable and which are not. 

For this example, we are going to use a theoretical fish distributor. This fish distributor has an average gross profit of 18%. Now say they take an order for $200.00:

Order Amount  = $200.00

Gross Profit  =     18%

Total  =               $36.00

As you can see you are left with $36.00. Now, looking at the ABC costing sample above we can see that it will cost you $31.50 per one customer delivery, and please remember this cost per stop did not take into account where this account was distance wise which could make that delivery cost even more.

Total  =              $36.00

Delivery  =         $31.50

Balance  =         $  4.50

Now, by just doing simple math, you can see that you are only left with $4.50 and you have only taken out one expense! You still have to think about order taking, order picking, warehouse expenses, etc.

This analysis is what makes most companies turn to a minimum order charge. A minimum order charge is a value you can apply to any order less than your minimum order total that prevents customers from placing orders that are not profitable. Customers are familiar with minimum order charges and they can help offset your costs.

Knowing the true cost of your customers will increase your profitability.

 

 

 

Issue 646 - Checking those Resolutions.

Last year we were early to declare our New Years Resolutions 2018. A lot has changed over in 2018, but I believe it's not quite too late to make sure we have addressed some of those resolutions.

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