Auditing Customers Gets More
United Pipe is far from alone in using business-intelligence tools to shine the light on its costs and expose which of its customers are not profitable. The market for business analytics, broadly defined as both data-warehousing tools and the software used to ferret information out of such warehouses, made up $15 billion in sales in 2004, according to IDC. Dan Vesset, an IDC analyst, says he estimates that the market hit $16.5 billion in sales in 2005, an 11 percent jump. He expects 10 percent growth on average over the next five years, making business-analytics software one of the fastest-growing large software categories that IDC tracks.
For United Pipe, making its biggest customer profitable only whet the company's appetite for further improvements. Green set up a list of customers who, while profitable, made frequent trips to United Pipe branches for supplies, instead of keeping inventory.
One such customer was Don Farrelly, a partner in Portland's LBD Landscaping LLC, and a customer of United Pipe for more than 20 years.
Farrelly has always picked up his orders, even though United Pipe will deliver for free. In 2002, Farrelly's United Pipe sales representative started telling him in advance what supplies he was going to need, based on past buying behavior and open orders, and the representative also began walking Farrelly through the numbers of what it was costing him to send his crews out to pick up materials job by job.
The discussions convinced Farrelly to invest in storage space and inventory, and to let United Pipe deliver on a weekly basis. Though keeping inventory was an additional expense, it meant his crews could spend more time working.
"The biggest waste in a landscape company is time," Farrelly says. His firm employs between 25 and 35 people, depending on business demand, with two or three landscape construction crews typically out every day. If crews aren't working because they need parts, that costs him time. "Having stock and inventory, and having them deliver, that saves me time. It's been a huge factor in helping us get bigger," he says.
For United Pipe, of course, delivering on a regular schedule means lower costs. There's a corollary benefit as well: Customers who keep inventory are less likely to defect to competitors. In the last year, United Pipe has begun offering a "mobile warehouse" to customers such as municipal waterworks contractors. The trailer, branded with "This project supplied by United Pipe & Supply," is refilled at job sites. It also gives United Pipe more of a role in managing such large jobs, and makes it a full partner with its customers.
Green says that this approach of helping customers streamline operations in ways that save them money has helped turn a number of unprofitable customers into profitable ones. In his experience as a consultant, Green learned that most companies will find that a chart of customer profitability will look like a sperm whale (see "Whale Tale", page 52)a high flat head to represent the most profitable 10 or 20 percent of their customers, followed by a long gradual slope representing the 50 percent or so that are marginally profitable or unprofitable, and then a falloff to the bottom 10 or 20 percent that are significantly unprofitable.
"What we've done is elongate that whale," Green says. There have been some customers that United Pipe simply cannot service profitably. It evaluates them on a case-by-case basis, and it might, if it has to, "fire" a customerthough it wouldn't do it outright. Instead United Pipe begins to negotiate costs, maybe asking an unprofitable customer to start paying for delivery. Green says what's more important has been getting regional sales managers to coach their salespeople to think more about making sure their new customers start out as profitable ones.