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Jun 1, 2009 12:00 AM
When I begin a consulting assignment, I review every aspect of a client's operating and financial performance to educate myself about the company's history, reporting, and management systems, and status. Some of the figures are flat-out inaccurate in almost every case, especially in calculation of profitability by customer. That's usually the case at commercial printing companies, where the products, services, and acquisition costs vary the most from account to account.
This issue is a major industry challenge. Every few years, it receives a modicum of attention but it's not a sexy subject likely to attract a crowd at a conference and it is easily dismissed. The subject also can be a bit complicated. Let's try to simplify the discussion by starting with some basic concepts:
Let's look at the non-manufacturing expenses that are applied equally to all accounts:
By averaging non-manufacturing costs, the truly profitable customers are probably paying the freight for the unprofitable accounts, and the latter might be getting a free ride. Measurement of all these factors is known as ABC — Activity-Based Costing. It does not deal directly with pricing decisions but will provide accurate information about most or all costs on an account-specific basis.
Several of our clients have adopted Activity-Based Costing without the aid of a super-computer and a battery of PhDs. It can be done with a bit of patience and common sense. The time and effort to organize, gather, and analyze the additional information is worth it.
Many readers will have this reaction: “We already consider the non-manufacturing costs.” Perhaps an estimator makes an adjustment. Some would argue that a compensating adjustment occurs when a job is priced. I would argue that this tends to occur in only the most conspicuous cases.
My experience is that a formal measurement usually produces some surprises. A print company tends to define its “best customers” in terms of sales volume. However, Activity-Based Costing frequently reveals that extraordinary sales and service costs are greater than one realized. Conversely, figures frequently reveal a middle tier of repetitive accounts that receive little attention, demand little special handling, are “below the radar,” and incur lower costs than management realizes.
Detailed account-specific information is essential to understanding costs — all costs — and will become more important as non-manufacturing expenses increase. Averaging makes a company more competitive on work it doesn't want and less likely to win work it finds attractive. Don't wait for the Great American Software Program to implement this logic. It is better to be about right than precisely incorrect.
Dick Gorelick is president of Gorelick & Associates and the Graphic Arts Sales Foundation. He can be reached at email@example.com.