CUSTOMER PROFITABILITY – A CASE STUDY ON MEASUREMENT METHODS WITHIN A MANUFACTURING COMPANY

Undergraduate

Abstract

The aim of this paper is to examine how customer profitability is measured within a manufacturing company and analyze whether the measurement method is institutionalized or not. A case study has been conducted on a Swedish manufacturing company that has applied different measurement methods throughout the years. The paper presents a theoretical approach of customer profitability and management accounting change, and this approach is contrasted with the empirical study. The main finding of the study is that customer profitability is only partly being measured within Kanthal, even though the company has a well developed measurement tool kit. The reasons for this are that customer profitability has different meanings within the organization, old routines are preferred over new routines, and that the task of measuring and managing customer profitability has been assigned to the sales team. The demands on the sales team are too high and due to the lack of support from the rest of the organization, it becomes clear that the measurement of customer profitability is not fully institutionalized.


 Introduction

Customer profitability has been ranked as one of the most prominent features within current general management and has become increasingly important for companies today (Bates and Whittington, 2005). To be successful, a company needs to formulate and implement a strategy that reveals the truth about its customers, i.e. highlight the activities that add value and those that do not (Balachandran, 2005). When that is done, value added activities can be maximized and non-value added activities minimized.

 

However, most companies today fail to measure customer profitability and therefore they are not as competitive as they could be (Kotler, 2002). The reason behind the failure is that there is usually very little information about profitability of customers when the accounting management systems are designed in order to analyze product profitability. Today’s business is not only about executives managing a portfolio of products, there is a clear need for managing a portfolio of customers (Schoeniger, 2003). When the management is able to identify revenues, costs and profit by individual customer or customer group, better decisions are to be made in the long term (Noone and Griffin, 1997). 

 

An insightful analysis of customer profitability will also serve to support and strengthen financial measures and deliver positive return on investment. In addition, understanding the underlying components of costs and addressing specific root causes of poor profitability will result in a significant improved bottom-line performance (Reid and Detiveaux, 2004).

 

The environment which affects management accounting practices has changed dramatically since the late 1980s when the company in our study, became a well-known textbook example. Today’s information technology is more advanced, the competition is more intense, the organizational structure of the market has been developed, and improved management accounting practices have been implemented (Ezzamel et al, 1993 and 1996).

 

With this observation of the changed circumstances, we found it interesting to study how customer profitability is measured today within organisation's. When the empirical research was collected, we found that organisation's had changed their approach regarding customer profitability, due to the changed environment. New business systems and projects have been implemented in order to meet today’s challenges in the market. However, the organization has not succeeded in creating a unified measurement system, which has led to the fact that customer profitability has an ambiguous meaning within organisation's. In addition, the lack of clear linkages between business systems and projects affect the ambiguity of the definition of customer profitability and full institutionalization of the different tools and projects is hindered.