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Customer segmentation, profitability reap ROI for United Pipe

A Portland supply company found that its biggest customer was costing it money and now its sales force is focused on margins over revenue.

United Pipe and Supply Co. has done what some might consider nigh impossible -- it has trained its sales force to look beyond the revenue they're responsible for generating and to focus instead on corporate profitability.

Several years ago, the Portland, Ore.-based wholesale pipe distributor undertook a project to determine its best customers -- and not just those who spent the most. CEO Dave Ramsey, asked his new CIO, Mike Green, to shed some light on the company's internal operations and costs.

"He wanted to see how truly profitable his customers were," Green said. "He had an intuitive sense -- we've got all these great customers (we think) but we need to find what it's costing us to serve them. His intuition was correct."

United Pipe purchased an activity monitoring tool from the Cary, N.C.-based SAS Institute and began modeling each of its 23 branches across the Pacific Northwest, looking at how each manager allocated costs in their operation.

"We were able to see which managers were more aggressive in allocation of resources -- who ran a tighter ship," Green said. "It really highlighted differences in customer costs per invoice."

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For example, United Pipe found that it was sending deliveries to some customers several times a day, and some customers were making repeated trips to branch locations themselves, forcing employees to abandon projects so they could fill orders. With the modeling tool, United Pipe pulled information from its ERP systems (comprised of Germany's SAP AG and Mincron Software Systems, a Houston-based provider of warehouse software), as well as from its sales system. With a glance, users of the system could see information such as driver schedules that tracked the number of visits by a driver or a sales rep. The consolidated information provided United Pipe the gross margins to serve each customer.

"Once we had the gross margin, we could subtract the cost to serve based on specific behaviors," Green said. "We could ID those who were squeezing us on margin and understand if they were running us into the ground."

The results came as quite a surprise. On the day Green finally had all the data in hand, he called Ramsey into his office. Before showing the results, he asked Ramsey who he thought United Pipe's best customer was. Ramsey named the customer who brought in the most revenue. It just so happened, at that moment the account manager for that same customer was walking past and agreed. It was a logical conclusion -- their biggest customer was their best. It turned out to be exactly the opposite.

"The list was sorted from most profitable to least," Green said. "We scrolled down to our least, and the bottom customer was the customer he had named as our best. What it really showed in that moment of truth was that when you take into account the activity costs, they can easily run you into the ground."

The attention showered on this particular customer, who Green would not name, ranged from repeated site visits by sales reps to discounts to taking time to fill last-minute orders. It resulted in the customer actually costing United Pipe money. The company immediately initiated a set of best practices for customer service. Some practices were as basic as insisting on one delivery a week for certain customers or being firmer on price.

But there were also "win-win" measures. United Pipe sat down with some of its customers and showed them that bigger orders at the start of the week would not only save United Pipe from having to fill last minute requests, but it would save man hours for customers who continually had to send employees from job sites to collect supplies.

Additionally for its larger customers, United Pipe has implemented a system that keeps inventory at the customer warehouse. Once a week, United Pipe replenishes low inventory, thereby providing the customer with ready access to supplies without having to wait for deliveries. The reward for United Pipe? A significant measure of customer loyalty.

And now the sales and branch managers are paying closer attention to margins, not just revenue.

"As you can imagine, in sales they're incented by revenue," Green said. "We try to bring them around to 'you should be incented on gross profit.' A little bit of information in this case went a long way. When they talk about deliveries now, they talk about a smarter relationship that doesn't nickel and dime us to death. "

United Pipe is also revamping its compensation system. Sales reps are still compensated on revenue, but there is a significant bonus program based on corporate profitability, Green said.

United Pipe has not conducted a hard ROI measurement of the project but Green noted that income before taxes jumped from 1.3% in 2002 to 4.8% in 2005. The project required a considerable investment up front, particularly since the company had to designate a programmer to extract customer information for the system. United Pipe now uses an extract transform and load (ETL) tool SAS has since developed.

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