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Customer Profitability: The Why and How of SG&A Costs

Although a majority of the work performed by manufacturers involves producing products for customers, a significant amount of work is also performed after their products are produced and before they are shipped to the customer. Understanding the impact of “fulfillment costs” is critical to a company trying to understand customer profitability. However, these two cost categories—manufacturing and fulfillment—do not represent all of the costs that must be understood to accurately measure the profitability of customers. Many costs that separate desirable customers—those whose behavior keeps support costs to a minimum and enhances company profitability—from the less-desirable ones—those whose behavior increases costs and decreases profit—lie hidden in that great “blob” of costs christened by most organizations as “selling, general and administration” or simply SG&A.

Let us consider the case of one manufacturer/distributor that has carefully measured its manufacturing and fulfillment costs and arrived at the customer profitability analysis shown in Exhibit 1.

Exhibit 1: Profitability by Customer

Profitability Exhibit-1_WEB

Based on the cost of both manufacturing their products and fulfilling their customers’ orders, all five customers appear to generate the same level of profitability.

There remains, however, that $3 million “blob” of SG&A costs that are spread evenly among the five customers as a flat 20 percent of product and fulfillment costs. Does this flat rate provide for a fair assignment of these costs based on the amount of work required by each customer of the activities included in SG&A? Is the work performed by sales and marketing the same for each customer? How about the amount of customer service or cost estimating and quoting? Perhaps a closer look at the various activities incorporated into SG&A—activities usually considered “just the cost of doing business”—is warranted.

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