Tough Call: What if it costs too much to serve your best customer?

tough call
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You were hired to perform a “cost to serve” analysis. Implementing your suggestions may just cost you your biggest customer.

After ten years learning the business while working for your family’s lumberyard, you decided it was time to go to work with another company to keep learning and building your career. Fortunately, you learned of a GM position at a well-respected, family-owned company a few states away that was looking to replace a longtime GM who was getting ready to retire.

Your meeting with members of the family and Gus, the outgoing GM, went exceptionally well. You were impressed by the strong, multi-location presence they’d built, and they were impressed with your energy and ideas. They were especially intrigued by the concept of “cost to serve,” which you’d just started experimenting with at your family’s yard. They struck you as a smart company that wasn’t married to “the way things have always been,” which made them a perfect fit for you—someone who understood and respected tradition, until it started costing your company money. Gus agreed to stay on for three months to transition you into the GM role.

The company’s single biggest customer by sales volume was also, by far, the biggest consumer of services. As it turned out, they purposely ordered exactly what they thought they needed—refusing to account for waste or bad boards. The way they figured it, they were your biggest customer, so if they needed fill-ins, it was your responsibility to drop every- thing and deliver whatever they need, when they need it. The result was endless trips to their jobsites with just a couple of boards or boxes of fasteners.

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When you asked Gus about this on his last day with the company, he shrugged his shoulders and said, “what are you gonna do? They’re our biggest customer, and we need to keep them happy.” After he left, you continued your analysis to determine just how much it cost to serve this customer. It turned out that they were, at best, a break-even account. Your company earned far more margin dollars from builders who bought far less.

Your store’s overall margins were acceptable, but if you could reduce the excess time spent servicing your biggest customer, you could add a couple of points to your bottom line, which you figured would make you a hero. But only if the big customer went along. And, to put it lightly, they didn’t like your plan.

“Look, we’ve been buying from this company since you were a little kid, and everything’s been just fine. If you’re going to come in here and slash our service levels, we’ll just take our orders to another lumberyard that has been after our business for years. Is that really what you want?”

You don’t want to lose their business, but the way you’re currently servicing their account is costing your company money—and your builder lost time on the jobsite. What would you do?

Stay the course. So what if they’re a break-even customer at best? The last thing you want to do as a new GM is to mess with your single biggest customer. Accept it and focus your energies elsewhere.

Just do it. Explain that you value their business, but the excessive deliveries eat up any profit. After all, he’s a businessman, and he’ll understand that you gotta do what you gotta do.

Baby steps. Don’t hit them over the head with drastic cutbacks to your service. Instead, work closely with the salesperson to implement small, gradual changes over time.

‘Help me help you.’ Explain that each time his crew has to stop work because they ran short on boards or fasteners costs him money. Show that you want to help him, and he’ll agree.

What would you do?

Something else? If you’d take a different plan of attack, email your suggested solution to James@LBMJournal.com. If we publish your reply, we’ll send you an LBM Journal mug.

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