Pipemaker Learns a Hard Lesson in Customer Profitability
It was late fall of 2002 in Portland, Ore., and Dave Ramsey, owner of United Pipe & Supply Co., a $174 million supplier of plumbing and irrigation systems throughout the Pacific Northwest, couldn't believe his eyes. "You've got to be kidding me," he said, staring dumbly at cio Mike Green's computer screen. "That's our worst customer?"
It's not unusual for brand-new owners of business-intelligence software to experience an epiphany upon installing it. When the numbers start feeding into the system, companies learn things about their businesses they never dreamed.
We spent how much on travel? Our inventory is how many months behind? Can we switch to a cheaper brand of coffee? But when Ramsey and Green first saw United Pipe's numbers on customer profitability, they shared the shocking revelation that the company's biggest and most prized customer was also its least profitable. In fact, their so-called best customer was costing them $50,000 a year.
"Dave turned white and got real quiet after that," recalls Green.
Thus began the process of analyzing how, exactly, such a critical customer could have become so unprofitable over time. And in an effort to maximize profitability across the company, United Pipe launched a companywide examination of each of its customers. The problems the company uncovered ranged from unpredictable pickup and delivery schedules, to revenue-motivated salespeople who overserviced their biggest clients.
After United Pipe addressed some of the issues, profits before taxes increased from 1.5 percent in 2003, to 4.7 percent in 2005.
"Salespeople are hunter-gatherers, out there to bag the next customer. But volume doesn't necessarily yield bottom line," Green says. The difficult part is convincing them not to say yes, automatically, to every single customer demand. Green believes many salespeople are willing to agree to terms that make the customer unprofitable from the get-go, and any increase in service just makes things worse.
Since the revelations, United Pipe salespeople have begun to understand that there are times when, if a potential customer says it can get better terms from a competitor, it might make more business sense to wish them well. "Sometimes, with information in hand, we have more of a spine," Green says.
United Pipe is a family business that was founded by Taylor Ramsey, Dave Ramsey's father, in Portland in 1953. By 2000, it had 24 branches throughout Oregon, Washington and Idaho. When Green was hired, that same year, the IT systems were overwhelmed by the company's growth, almost to the point of breaking down. Customers often had to stand in line to get their supplies.
Overhauling those IT systems was Green's first order of business. But even in Green's job interview, he and Ramsey had talked about how to get a better sense of the firm's costs. Green's knowledge of business-intelligence tools was one of the things that got him hired, even though he had no previous experience as a CIO. (Prior to his employment at United Pipe, Green was vice president of technical services at Pacific Information Systems, an IT consultancy.)
Ramsey wanted better insight into how his branches were performing on things such as cost management, and he also wanted to get a sense of how individual branches compared to each other on a per-transaction basis.
The tricky bit was that, like many companies, United Pipe organizes its data not by branch but by geography and business unit. The company has six regions, and within each of those regions the business is split into five parts: waterworks, irrigation, pumps, HVAC and a general supplies category. But because those units share warehouse facilities, administrative personnel and delivery people, it's difficult to break out costs transaction by transaction.
Asking IT people to run repeated reports is no one's idea of a fun time, and punching all the numbers into a spreadsheet or database is an arduous task rife with potential for errors.
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