‘ACF 3200 Management Accounting
Tutorial Solutions Week 8
15.2 A supply chain is the interlinked network of customers and suppliers that contribute to the conversion,
distribution and selling of goods and services. For example, Woolworths Limited, an ASX listed grocery
retailing company, has an extensive supply chain that includes more than 3000 suppliers and millions of
customers.
15.13 Successful organisations recognise the importance of managing the supply chain from suppliers through to
‘customers. Customers are the ultimate source of demand, and their buying decisions and habits flow back
through the supply chain to constitute a major determinant of an organisation's profit. Customer
relationship management (CRM) involves collecting and analysing data to better understand customers’
behaviour patterns and needs, This can lead to the building of stronger relationships with customers and
‘more responsiveness to customer needs. An effective CRM system can lead to improved customer service,
retention of existing customers, the acquisition of new customers, more effective and efficient marketing
and sales activities and increased sales revenue and customer profitability.
15.14 Customers can be grouped according to size, industry, market or distribution channel. The type of group
used will depend on the type of organisation and its customers, For example, a bank could group customers
by size of accountbusiness and a confectionary manufacturer could group customers by distribution
channel.
18.17 The level of sales, and hence market share and profitability, is impacted by a company’s ability to retain
‘customers. Customer measures that apply to all forms of organisations are marketshare, customer retention,
‘customer acquisition, customer satisfaction and customer profitability.
‘Some organisations measure the level of customer retention, asa drop in this measure may indicate that a
product or customer service no longer meets the needs or desires of some customers. Also, itis important
to retain customers, as itis much more costly to engage new customers.
A hiigh level of customer satisfaction may indicate that customer expectations are met
‘Customers encouraging others to purchase the company’s products may also reflect a strong reputation, in
the market, for quality products or customer service.
EXERCISE 15.27 (20 minutes) Customer relationship management: manufacturer
1 Customer relationship management (CRM) refers to the collection and analysis of data aimed at
understanding individual customers’ behaviour patterns and needs in order to develop strong relationships
‘with them. Much of the data relating to customers may already exist within the organisation, but may not
have been centralised on a single database that is readily available to sales and marketing staff.
2 Joe Jackson is already partly along the track of CRM in that he visits potential and new customers to try to
understand their needs. He is aware that existing customers complain about certain aspects of the products
and services, although itis questionable how well he understands the exact nature of their complaints. It
appears that Jackson Sausage’s competitors are further advanced than Jackson Sausages in their customer
intelligence, as they seem to be able to predict shifts in customer preferences, If Jackson Sausages is to
retain of increase its market share, the firm will have to improve its CRM system to capture data related to
customer complaints, customer preferences and likely future trends in customer preferences.
3 E-commerce allows existing and potential customers access to interactive websites, enabling transactions
between the firm and customers to be initiated and processed over the internet. Among other things, access
to the website could incorporate a facility for customers to express their needs and preferences and their
‘buying patterns could be analysed to inform the company’s future decisions.
EXERCISE 15.30 (20 minutes) Customer performance measures: manufacturing
‘Some important measures to monitor customers are market share, customer acquisition, customer retention,
customer satisfaction and customer profitability.‘Customer measure and defi
n Suggested indi
ators
Market share—the proportion of sales ina
sven market
Sales volume as a percentage of total market sales
Individual customer's percentage of the firm's sales volume
‘Customer acquisition —the number of new
customers attracted to the organisation
‘Number off new customers attracted in current year
Value of sales made to new customers
Percentage of annual sales attributable to new customers
| Customer retention—the rate at which the
organisation retains or maintains ongoing | Length of customer relationship
customer relationships
‘Customer satisfaction—the extent to which
‘customers value the product or service
Growth in sales per customer group per year
Percentage of annual sales attributable to existing customers
‘Customer surveys relating to various features of the product that
represent value to the customer
‘Customer profitability—the net profit
attributable to any single customer or
customer category
Sales per customer
[Net profit per customer
Contribution margin attributable to each customer
Customer-related costs traceable to each customer
Percentage inctease/decrease in profitability for each customer
EXERCISE 15.31 (20 minutes) Customer response time
1
Days
Date Action taken
March 10. LO’s onder received by sales department °
14 Order forwarded to manufacturing department 4
28 Fabric received fom supplier 4
April —'S_- Manufacturing commenced 8
16 Manufacturing completed and order sent to warehouse u
30 Order delivered to customer 4
Total customer response time
(Order receipt time (days) 4
Waiting time 2
Production time vs
Production eycle time 33
Delivery time “4
Total customer response time (days) st
‘ST's customer response time can be improved by the following:
Sales orders should be forwarded to the manufacturing department immediately they are received.
Manufacturing should order supplies (if required) immediately.
Cumulative
days
°
4
18
26
37
si
st
Manufacturing should only source suppliers who can supply materials with minimum delay.
‘Manufacturing needs to assess production capacity constraints and identify if outsourcing needs to
bbe used in times of full capacity and/or if eapacity needs to be increased,+ Completed orders need to be delivered immediately to customers and not stockpiled in the
warehouse.
‘+ Theuse of subcontractors for deliveries could be investigated.
PROBLEM 15.42 (4 minutes) Customer profitability; product profitability; competitive
strategy: service firm
1 Profitability of services:
‘Same-day, ‘Overnight International
delivery delivery _ delivery Total
Sales revenue ‘$1 800 000 $5 400 000 $4600 000 $11 800 000
Direct costs 1.000 000 3.800 000 3.200 000 8.000 000
Contribution to $800 000 $1600 000 $1400 000 53 800 000
profits
CM/Sales revenue 44.44% 29.63% 30.44%
2 Caleulation of customer costs:
‘Activity Small eustomers Corporate customers
cost per
Activity anitof No. of s No. of s
activity activities activities
driver
Process invoice 200 8.000 1.600 000 500 100 000
Receive cheque 50 8.000 400 000 600 30 000
Handle dispute 300 200 60 000 100, 30000
Follow up account 400 300 120 000 50 20000
Customer complaint 160 120 19 200 70 11.200
Investigate delivery 400 90 36 000 3714800
Initial sales call 900 0 0 70 63 000
‘Credit check 700 oO 0 40 28.000
Promotions 100 000
Advertising _ 0 500 000
Total Customer costs $2335 200 $797 000
Calculation of sales revenue and direct cost by customer group
Small Corporate Total
customers, customers
Sales revenue
‘Same day delivery (40:60) 720 000 1.080 000, 1 800 000
‘Overnight delivery (15:85) 810 000 4590 000 5 400 000
International delivery 2.300 000 2 300 000 4 600 000
(50:50)
Total sales revenue $3.830 000 $7,970 000 $11.800 000
Direct costs
‘Same day delivery (40:60) 400 000 600 000 1.000 000
Overnight delivery (15:85) 570.000 3 230 000 3.800 000
International delivery 1.600 000 1 600 000 3.200 000
(50:50)
Total direct costs $2570.00 $5430.00 $8.000 000Customer profitability:
Small customers Corporate Total
customers
Sales revenue $83 830 000 $7970 000 $11 800 000
Direct costs 2.570.000 5.430.000 8.000 000
Product contribution $1 260 000 $2 540 000 '83 800 000
margin
(CM/sale revenue 32.90% 38.17%
Customer costs 2.335.200 797.000 3.132200
Profit $(1.075 200) $1743 000 $667 800
Corporate customers are by far the most profitable group, whereas the company is making loss on smal
customers. The product contribution margins of these two customer groups also favour the corporate
customers, with small customers having a contribution margin of 32.90 per cent and corporate customers,
38.17 per cent. The principal reason for the loss relates to customer costs. While revenue from corporate
customers exceeds or equates to that from smal customers in each category of service, there are 16 times
tore invoices and 13.33 times more cheques processed for small customers, compared to corporate
customers. Also, there are nearly twice as many complaints and disputed invoices relating to small
customers. The high number of activities for small customers may not be a surprise, given the number of
small customers that the firm deals with. However, these increased activity costs are not matched by
increased revenue.
‘The same-day delivery makes the highest CM on sales of 44.44 per cent, followed by international delivery
at 30.44 per cent and overnight delivery at 29.63 per cent. However, same-day delivery has the lowest total
sales revenue and profits, with international delivery contributing the largest sales revenue and profits.
jcut to evaluate whether the overnight delivery manager is correct in stating that overnight delivery
is the area of future growth. However, this service did account for 42.1 per cent of contribution
‘margin, and 45.1 per cent of sales revenue, but its ratio of CM on sales revenue is the lowest of the three
product groups at only 29.63 per cent. It may not be a good idea to drop the other two types of delivery
services as some customers may prefer to use the company for all oftheir delivery needs. If only two types
of service are provided, customers may take their entire business to another delivery firm. Note that we
‘cannot calculate the percentage of profit attributable to overnight deliveries as we do not know how many
of the activites such as complaints, delivery investigations, overdue accounts and so on relate to this
service. However corporate customers, who have a very low level of activity demand on Speedy Delivery,
‘consume 85% of this service. This suggests that a high proportion of the product-related activity costs are
attributable to the other two services.
‘The managing director has suggested that all three types of services should continue to be offered, and that
‘small customers should be dropped. This appears to be a better suggestion, Small customers are not
profitable and it is unlikely that dropping these customers would impact adversely on the volume of
‘business made to corporate customers.