A few years ago, this lady named Lila went to her bank to cash a check. All the tellers knew Lila and considered her a Good Customer. She knew all the tellers by name and took an interest in them, their lives, their families. Lila could have taught Dale Carnegie how to take an interest in people.
I have a different experience in banks. I walked in recently and there was suspicion in their eyes. I could just guess the teller’s finger was hovering over the panic button. Who is this guy we’ve never seen before? I was not considered a Good Customer.
However, the bank staff had good and bad completely reversed. Lila (my mother) kept a very low balance in her checking account. She never, ever had to pay a bounced check fee. She was very price conscious—her certificates of deposit were at a credit union that offered higher interest rates. And she made cashing a check a social experience. As a former bank economist, I knew her account was unprofitable. But all the bank staff loved her.
I, on the other hand, am a very profitable customer. I keep high balances in my account because I cannot be bothered to juggle money between accounts. I am not price sensitive. I conduct my banking without entering the branch as much as possible, which lowers the bank’s costs. In short I am a Good Customer, but my mother was not.
All companies need to figure out which customers are profitable and which are costing them money. That information used to be hard to come by, but it now is a snap. Well, maybe not a snap, but accessible. In this example, the bank can now combine information about accounts and transactions to create a complete profile of the customer. When that person’s account number is first seen, a computer can pop up a little “Good Customer” window to alert the teller that this client merits extraordinary treatment. On the spooky side, facial recognition software is available to help tellers identify good customers even before their account number is entered.
I have met with a number of companies in “job shop” industries. A customer has a design that the company will manufacture. An example would be a large corporation that needs 100,000 brackets made to a custom design. The fabricator will typically estimate the cost, bid the project, and if it wins the bid, manufacture the brackets. Casual conversation leads me to estimate that about half the companies doing this kind of work do not have a system in place to evaluate the accuracy of their cost estimates. Most commonly they don’t have a cost accounting system that can accurately determine how much it cost to make those brackets. Occasionally they have a decent cost accounting system, but not the discipline to say to the estimator, here what’s you estimated, here’s the actual. Learn. For an estimator to never get feedback on what a project actually cost is like an athlete shooting hoops in a pitch black gymnasium while wearing ear plugs: no idea whatsoever of whether the ball is going through the basket. Turn on the lights and guess whether that player’s percentage goes up.
Why is this an urgent challenge in 2011? Look at the relative cost trends of computers and people. It’s getting cheaper and cheaper to store and analyze data.
More importantly, your competitors are increasingly looking at their data. If you are not careful, they’ll entice the most profitable customers to their businesses, sending the unprofitable customers your way. Better for you to do that to your competitors than for them to do that to you.
If you are just getting started in business analytics, check out this business analytics book review and this summary of future trends in business analytics.
If you are well along on the process, this is a good time to snoop around the company asking if every employee has the information necessary to make great decisions. Check out Nenshad Bardoliwalla's "Top 10 Trends" in analytics. (It's a year old, but still up to date.)
Read All: 11 Business Challenges in 2011
After visiting 200 plus Job Shops to install and consult on closing the estimation loop via actual scheduling and costing. And then "100 MRP shops" to close the loop via planning and standard costing. Some conclusions...
Actual costing can illuminate huge variances, where as Standard costing hides variance.
Same lesson as your banking story. Get in touch with real customers to learn profitability. Run blind and expect limited profits.
Posted by: clive boulton | January 11, 2011 at 02:58 PM