Maf free essay sample

First, customer profitability analysis assigns the costs to individual customers rather than products, services or departments. It allows management to determine which of the customer is profitable or if the company should charge a higher price. Second, customer profitability analysis can be used at aggregate level or disaggregated level. It allows the management to analyze a particular customer or a large group of customer at one time. Third, customer profitability analysis change from product focus to a customer focus which focus on multiple products sold to a single customer rather than a single product sold to many customers. It will allow management to identify the downstream costs of the customer and thus make a strategic decision on which customer that company want to target. DIFFERENCES OF CUSTOMERS. All the customers are different and this can be due to differences in revenue charged to the customers and the differences in costs used to service the customers. We will write a custom essay sample on Maf or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Differences in revenue can be arise because customers are charged different prices when the company operates in the different markets, customers are given different discounts, sales volume are different or different products purchased by the customers. Differences in customer costs arise from the way customers use company’s resources by using the downstream activities which can be divided into four customer groups. First, the customers are different because of customization of products. Some customers may require additional features to be added to the products. For example, some customers at Pizza Hut might request additional item to be added into their pizza such as adding more cheese or extra sauce. Second, marketing and selling activities. Some customer may prefer to purchase products through online and some of them may prefer to purchase from sales gent through direct calls. Customer who makes frequent order will use more resources than those who make infrequent order. Third, products can be offered through many distribution channels. Some customer may purchase products directly from the company, some of them may purchase from warehouse, agents or internet. For example, in Malaysia there are a lot of company that provide courier services such as Pos Malaysia to deliver the products to customers. Lastly, there are differences in customer support activities that are offered to the customers such as technical support, training, on-site visits and help lines. It is not depend on the products sold but it depends on particular customers. For example, if there is a problem incurred on the product, the company will send their staff to provide with repairing and maintenance services. CUSTOMER DRIVEN ACTIVITIES Before management can calculate the customer cost, management need to recognize first the hierarchy of customer driven activities so that it can help management assign the cost to each of the customer group more accurately. Customer activities are the activities that facilitate the customer from taking customer order until delivered the product to the customer. There are three levels of customer driven activities i. e. order level activities, customer level activities and market level activities. The first level is order level activities, it is triggered each time an order placed by the customer. These activities are driven directly by selling and delivered the product to the customer. It means that this activities starts from when company taking the order from the customer, selling process until deliver the product to the customer. For example, taking an order from the customer, processing an invoice, packaging the product and lastly deliver the product to the customer. For the second level is customer level activity. It relates on how company managing the customer in terms of acquiring the new customer and maintaining the existing customer or customer group. In this stage, company should know are the element that emphasize by the customer. Customer usually wants higher quality of product at a lower price. Then, they also demand a good service from the company not only during buying the product, but also after sales. To attract the new customer, company can attract by making an initial call nd advertise about the new products and what is the special feature. Furthermore, company can make certain promotion to attract the new customer because majority of the customer love to buy the product at lower price. To maintain the customer, company can give samples to the customer so that they can update themselves with the new product. By giving technical support to the product that have been bought by the customer as well as handling the complaint also can r etain the customer from moving to the competitors or switching to the other products. For the third level is market level activities, it relates with the particular markets or class of the customers. This stage is very important as company need to know what their customer wants the most so that they can satisfy their needs. However, before company can know about it, company need to analyse them and making some observation through research or questionnaire. Company also can satisfy their need by developing the new technology after they know the customer needs. Thus, it can maintain the presence of the company in the particular market attract more new customer. CALCULATING CUSTOMER PROFITABILITY ANALYSIS After company knows about these levels of activities, company can apply the Activity Based Management Costing (ABC) system method in customer profitability analysis. This is because, the techniques are just the same except that customer profitability analysis is emphasize more on customer cost whereas ABC system emphasize on the overhead cost. For customer profitability analysis, the cost that incurred to facilitate the customer will be spread over each of the customer group. However, for ABC system the overhead cost that incurred to manufacture the product will be spread over the products. There are five (5) steps that should be taken by management to carry out customer profitability analysis. First step is company need to identify customer driven activities which are the order level activities, customer level activities and market level activities. After that, management need determine the total cost of these activities. Next, company needs to identify the activity driver. It is very important to identify the activity driver because it helps the company to assign the cost more accurately as we know what the activities that drive the costs are. After company knows the total cost, the cost need to be allocate according to each of the customer group so that company can determine the profitability of each customer group. The aim of company carry out the customer profitability analysis is to determine the profits that have been brought by each of company customer group i. e. direct customers, large retailers and small retailers. If one of the customer group contribute to negative percentage, company need to analyse and respond the reason behind it. After knows the reason, company may influence their buying behaviour or preference so that the cost that incurred by that customer group can be reduce (positive contribution) and lastly increase the profit of the company. CUSTOMER PREFERANCE MEASURES For company, customer is very important because it can increase the profitability of the company. Thus, company need to satisfy the customer and maintain their relationship so that they can bring last longer profit to the company. In order to know whether customer is satisfied or not, company need to have customer performance measurements to define and measure the customer performance. There are five (5) cores of customer measures that apply to all forms of organization i. e. customer satisfaction, customer acquisition, customer retention, customer profitability and market share. For customer satisfaction, company can measure in terms of specific aspect of value such as quality of product or services. This can be achieve by making a survey through mails, telephone and ask the degree of their satisfaction in terms of product, service or quality. By measuring the customer acquisition, company can know the rate of organization in terms of attracting and win the new customers. This can be measured by calculating the number of new customers and what are the total sales that have been contributed by them. After we attract the new customer, of course the company wants to retain the customer loyalty towards the organization itself (customer retention). At this level company needs to maintain ongoing relationship with the customers so that customer will not switching to the other products or moving to the competitors. This can be measure through the percentage of business growth that has been contributed by the exiting customers. By measuring the customer profitability, company can know the net profit attributable to a customer or customer group. This can be measured through change in customer profitability per quarter or proportion of loss customers compared to the profitable customers. In simple way, company can apply customer profitability analysis in this level. Lastly is market share which customer wants to measure the proportion of sales in the given market. This can be measure through the proportion of the customers’ revenue or sales volume based on proportion of the market size. In conclusion, satisfaction contributes to the acquisition of the customer and it makes the customer to retain their loyalty to the products. Thus, it contributes to the customer profitability which lastly increases the market share of company. ADVANTAGES AND DISADVANTAGES OF CUSTOMER PROFITABILITY ANALYSIS Information on the customer profitability can be used in the strategic decision of the management. From the customer profitability analysis, management can identify which of the customers generate the highest profit and how can the company do to retain those customers, which of the customers generate lowest profit and what can the company to make those customers profitable and what types of customers should the company focus on to maximize profitability. These will help the management to make strategic decisions on which customers or distribution channels that need to be focus on and help to identify the areas for cost control and cost reduction. In addition to that, the company can protect their existing highly profitable customers. It means that, from the analysis, the management can identify which of their customers are profitable and which are not profitable to the company. They will focus more on the highly profitable customers and thus secure these customers from buying the products from the competitors by maximizing the sales or services to profitable customers. Besides that, the analysis will improved the strategic decisions of the management by providing useful information for customer related decisions including pricing, discounting and marketing decisions to increase the profit. The disadvantages of customer profitability analysis are the management may not have the required resources and data capture systems including the information technology, equipment and staff for the analysis and preparation of the customer profitability to produce accurate estimation of customer segmental revenues and costs. Besides that, as the customer profitability analysis depends on the mix of products or services that the customers bought however, the analysis might be used on specific underperforming products or services and will overlook the impact of sales of other products to the customers. TRADITIONAL VERSUS CUSTOMER PROFITABILITY ANALYSIS APPROACH Before customer profitability analysis develops, all customers are treated equally regardless of their contribution. But since the customer profitability analysis develop, the service is driven by customer contribution to maximized value and ensure the customer relationship is profitable. It means that company will maintains the relationship with the customers that bring profit only and they will give good services to them because they contribute high profit to the company. In traditional, company has minimum understanding on how to increase the customer profitability. However, in customer profitability analysis, company has deeper understanding of customer profitability and knows how it can benefit the company. If one of the customer groups always brought negative contribution, company who has deeper understanding will make an analysis and respond to it by influence their buying behavior of preference so that the profitability of that customer group can be increase and thus increase the company profit. Lastly, in traditional approach, company has little or no awareness on how individual customer affects the profit. However, in customer profitability analysis, company has designed clear action for each of the customer. For example, company will only targeting high performing customer and mediate the unprofitable customer. ACTIVITY BASED MANAGEMENT ANALYSIS Activity based management (ABM) is a method used in order to seek out areas in company, where company losing money, so they can eliminate those activity or improve it in order to increase company profit. ABM analyse cost of employees, equipment, facilities, distribution and overhead cost. The result of ABM enables company to produce more accurate budget and financial forecasts. Activity based management can be applied to government agencies, manufacturers, service providers, schools and non-profit organization. The objective of ABM is to improve the effectiveness and efficiencies of organization in securing its markets. When management want to perform activity based management analysis, they must first obtain information from activity based costing system (ABC). After that, management will do analysis on activities involved in production process, cost driven and its performance. However, simple activity analysis in is not very useful when it comes to cost management, thus ABM analysis need more comprehensive analysis that cover matters in details. ABM analysis should cover all activities that incurred at greater level of detail which will reflect individual tasks or step in a process. It also should include the total cost of these activities, for example direct labour cost and manufacturing overhead cost. The analysis also need to include all cost of non-manufacturing activities, as ABM assume the process to produce a product always extend to non-manufacturing areas. PROCESS TO REDUCE COST ON ABM Basically in order to achieve purposes of ABM which are to create customers value and to increase profitability of the company, manager of the company firstly need to reduce the cost of production. So from that, company will produce products that have high quality then it will indirectly increase profit of the company. There are four steps to reduce the cost of company. The first step is identify major opportunities, follow by determine the real root cause, develop a new program and introduce and monitor the performance of the program. The first step is identifying the major opportunities for cost reduction. At this stage, company must identify each activity and its cost incurred in organization. After that, they may perform value analysis, where this analysis can be used to classified activities into two categories, either value added activities or non-value added activities. Value added activities is the activities that provided essential value to the customers or to functioning of businesses while non-value added activities is the product that did not add value of products from customer’s or business’s perspective. Therefore, non-value added activities can be eliminated by the company. Second step is determining the real root cause. At this stage, company focus more on eliminating non-value added activities, so from there they need to find the real root cause of non-value added cost. There are two ways that occurred in order to eliminated non-value added cost, first by transform activities into process and second by performing cost drivers analysis. By transforming activities into process, company can get better understanding on all process of production involved, start from input into output. After that, they can start to identify the root cause cost drivers of major non value added activities using cost driver analysis, a method that identifies root cause cost drivers of activities. For example, if in the production have four processes of non-value added activities. First, company need to identify which one out of four processes of non-value added activities incur more cost. Let see, if process number one incurred more cost, thus company need to focus more on that process in order to eliminate the cost. After main root of the cause was found in the previous step, then company need to develop new program that can overcome the root cause. Developing new program is a complex task as there is a need on the involvement of all managers across organization, its may tackling individual activities or requires fundamental restructure of production process. For example, based on previous situation, after the company knew that process number one incurred more non-value added cost, so in order to eliminate this cost, company need to restructure back its production process, where in the new production process, there is no non-value added activity incurred. The last step is to measure company performance. After completing the implementation of new program in company, they need to measure their performances by using activity based performance measures. This method is used to monitor the effectiveness of cost reduction effort and customer value. In order to measure company performances, management need to identify major or important aspect of performance that they believe critical in achieving strategy objective. By continuously monitoring company performance, managers could obtain feedback on their performance, set target that they want to achieve in future and take corrective actions when required. IMPACT OF ACTIVITY BASED MANAGEMENT. According using ABM application, it will have some impact that incurred. Impacts of using ABM are real cost had been identified, cost saving can be achieved, improved profitability and also increase customers’ satisfaction. Based on real cost drivers had been identified, it will refer on the step to reduce cost which is on step two, determined the real cause. Through this step, manager of the company will eliminated the non-value added activities so in order to eliminate the company will find the real root cause of non-value added activities. So those through using ABM it involve process to identify real cost drivers when making cost reduction. After know what type of non-value added cost was incurred, the company will minimize as well the cost that only incurred value added and few cost of non-value added so that cost saving of the company can be achieved since the production does not incurred with non-value added cost. Next impact is improving profitability of the company. Since the purpose of using ABM is to reduce cost and improve profitability, company will take action in the production, in order to minimize the costs and improve the high quality of the product. ABM provide reliable basis for strategic decision making so that the company know more accurate about the product cost. Moreover, part of the improvement was due to increase customer satisfaction. In addition to tracking cost drivers, activity-based performances enable the company to monitor and improve quality and delivery. Due to the high quality of product, it indirectly will improve customers satisfaction because of the product was fulfilled their need. MANAGING SPARE CAPACITY TO ACHIEVE COST REDUCTION. The outcome of undertaking ABM, result in creation of spare capacity. Management cannot reduce their cost if the spare capacity is not reduced. Spare capacity that is created through reduction in root cause cost drivers need to eliminate or used for other value added activities. For example, when company eliminate non added activity like move material, they need to reorganize the position of machinery in company’s factory to shorten the time taken by employees to move material from one machine to another machine. Thus, it will lead to creation of spare capacity in terms of idle time for employees to move materials and free space on factory floor. Those spare capacities must be eliminated or used for other value added activities in order for company to achieve their objective. For employees involved in moving material activity, they are paid wages by company so in order to reduce the cost, company can terminate some of the employees or transfer them to other value added activities. For free space on factory floor, since company cannot eliminate these free space as they still need incurred cost on that particular area such as factory lease, factory insurance and maintenance cost of factory, company can used it for other profitable activities that will help company to improve their performance and thus increase company profit.