A TOOL FOR MAXIMIZING PROJECT AND CUSTOMER PROFITABILITY
Once a company becomes lean, the ongoing challenge is to stay lean as customer needs evolve. Company-wide operational measurements become an increasingly important addition to the financial picture. Using only financial measurements such as the Weighted Average Cost of Capital (WACC) does not give an operational overview, and traditional measures such as Activity Based Costing (ABC), in addition to being cumbersome and inaccurate, often focus only on variable costs. As the cost structure of a wholesale-distributor is primarily fixed cost, operational measurements need to recognize resource utilization: how effectively are the resources being applied? One such measurement is CPAC® (Customer Positioning and Control), a simple, reliable method for measuring the requirements in terms of both cost and effort, necessary to meet the demands of your customers.
In addition, CPAC® measures the impact of these customer demands on the company’s overall operational profitability. Branches, divisions, projects, or customers can be easily compared. Areas of strength and weakness become clearly visible. Services can be priced according to costs. As plans are implemented to address areas of insufficient profits or significant costs, CPAC® provides a method for monitoring the effect of those changes over time. CPAC® uses a four quadrant positioning method to evaluate a customer or project based on recognized profits and revenues.
The components of the operation are divided into cost codes according to the type of work. The cost codes are positioned according to their draw on the effort and cost needed to address each specific end user’s demands on the distributor’s resources. CPAC® will identify the cost drivers causing that customer to be positioned so poorly. Each customer (end user) is visibly and objectively positioned according to its impact on both time and cost. Reference points for the quadrant positioning can be realized in a number of ways, for example, referencing against break even points, minimum expectations, and stretch goals or even against the historical performance of the company, division or department. A customer, project, or division that falls into the first quadrant (upper right) generates high profits both with respect to the cost and effort investment of the allocated fixed costs. Those falling into the second and third quadrants are generating lower profits for comparable time or cost, due to high requirements to service. A customer or project that is positioned in the fourth quadrant is generating insufficient profits relative to the investment of resources.
CPAC®’s flexibility also allows a number of other applications that easily follow the basic CPAC® guidelines of positioning and trend monitoring. Among these:
1. Make relative comparisons
2. Compare a project or customer to a template or a “signature”
3. Grouping of work
4. Resource evaluation