Pipemaker Learns a Hard Lesson in Customer Profitability - ' First, Get the IT '

In 2002, Green bought a package of activity-based costing tools from ABC Technologies (a company that was later purchased by SAS), and the game was on. The software set up individual data models for each branch's inventory and transaction records. That allowed the company to determine its baseline costs and look for anomalies. It found some, such as a branch manager in the Portland area who had average per-delivery costs of $200, versus $40 for the typical branch.

That turned out to be, in part, because the manager was dedicating a delivery truck and crew to a customer doing work 70 miles away, on the Pacific Coast (a customer that was closer to another United Pipe branch, in fact).

As they dug deeper into the numbers, it started to become clear why the company's largest customer was also its worst. The customer had squeezed United Pipe to the bone on pricing, so it was barely making any money on its sales. And the customer sent crews to United Pipe branches to pick up supplies several times a week. Each time a United Pipe employee had to drop what they were doing to take an order and punch it in. Then the order had to be pulled.

That tied up United Pipe workers both at the front of a branch and in the supply area, and it did so in unpredictable ways. Then there was the kicker—the sales representative on the account had become a highly paid gopher, frequently running things the customer had forgotten over to its job sites.

Next came the hard part. United Pipe had to take steps to rein in its costs in servicing this customer, which Green declined to name for obvious reasons. The company knew this customer kept inventory in its own facility, so Green wondered why the customer's crews were coming in so frequently, sometimes several crews in a day, to pick up more supplies, in addition to the deliveries that United Pipe was making directly to the customer's work site. "It was wildly expensive, running out there so often," Green said. "We obviously had an inventory management problem."

United Pipe sales execs sat down and figured out how to consolidate those deliveries into one big weekly delivery—pulling a large set of supplies once a week was only marginally more expensive for United Pipe than the cost of pulling individual orders. It also began the delicate task of negotiating changes in delivery frequencies without making the customer feel like it was getting bad service, and in particular without harping on topics that might offend—like asking why a United Pipe salesperson was acting as a gopher.

United Pipe executives decided that the best way to handle the negotiation was not to discuss its own costs, but to focus on the number of times the customer sent crews to pick up supplies. "We went to them and said, 'Your guys are coming to our branch multiple times a day, with an entire crew in a truck each time. That's gotta be costing you a fortune,' " Green says. The logic worked.

Just as important was banning the salesperson from delivering items. "Having a sales guy do delivery is crazy," Green says. In fact, it turned out there were other salespeople who also doubled as delivery people. United Pipe has since mandated that they no longer deliver to customers.

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Pipemaker Learns a Hard Lesson in Customer Profitability

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