Home | Business News | Browse by Publication | M | Metal Center News

With activity-based costing software the price is right: the key to profitability is truly knowing your costs. (Cover Story).

Article Excerpt
Your biggest customer may not be your best customer. In fact, your biggest customer could be your biggest loser. One way to find out is through activity-based costing.

ABC is a method of allocating company resources such as people, equipment and capital to specific customers, products and orders. By utilizing ABC software, a service center can track how each function consumes resources and gather insight into who or what is generating costs, and profits or losses.

Bert Tenenbaum, president and chief operating officer of Chatham Steel Corp., Savannah, Ga., is a zealous advocate of ABC, which has become integral to his company's corporate culture.

"You get 150 percent of your profit from 50 percent of your customers. The other 50 percent of your customers lose you 50 percent of your profit. If you can figure out a way to identify the 50 percent that are taking money out of your pocket, you can focus on making them better customers, or divorcing from them," Tenenbaum says.

Chatham began developing its own internal costing system back in the late 1980s, attempting to apportion costs among customers based on their volume. "Logically it seemed like it should work, but it didn't," he recalls, because servicing smaller customers takes a disproportionate amount of time. "We found out that the fixed overhead, which has no relationship to volume, can't be apportioned the same way."

Chatham decided to focus primarily on the 70 percent of their cost that is variable, developing activity-based formulas to calculate the cost per ton for such functions as warehousing, inventory, delivery, inside and outside sales, billing, credit and metal processing expenses.

Originating a coding method it still uses today, Chatham generated a two-letter ranking for each customer, based on the standard 80-20 rule. The first letter indicates the volume of business from the customer, the second the profitability.

"The first letter tells us how much business...

View this article FREE - Now for a Limited Time, try Goliath Business News
Free for 3 Days!