Measuring Your Customer Profitability: Don t underestimate the cost of doing business NAMP 2009 Meat Industry Managemen

1. Measuring Your Customer Profitability:Don�t underestimate the cost of doing business NAMP 2009 Meat Industry Management Conference

2. Customer Profitability Why measure customer profitability Methods to measure customer profitability Indirect/overhead costs Evaluating new opportunities

3. Measuring customer profitability provides useful business insights A small percentage of customers might deliver the greatest amount of profit to the company 80/20 rule A change in business with these key customers might severely impact the viability of the business There may be customers who cost more to serve than they deliver to the company Caution: A customer�s profitability may be impacted by where it is in its life cycle with the company � beginning or mature

4. Measuring customer profitability provides useful business insights How many of you measure customer profitability? How often do you do it? Monthly Quarterly Annually For which customers do you calculate profitability? Pros and cons of measuring all customers Do you fire customers?

5. There are different methods to calculate customer profitability Gross profit Sales minus the product cost Net gross profit = gross profit less: Commission Brokerage Rebates Transportation Sales productivity Others?

6. Companies may calculate product costs differently At a minimum, product costs generally include: Material Direct Labor Not all companies include the following in product costs or customer profitability calculations: Indirect labor Overhead expenses

7. There are key reasons that companies include indirect labor and overhead expenses Cost of equipment or of running the equipment required for a product or customer Cost of R&D (test kitchen) for a product or customer High set-up or clean-up time on equipment for a product or customer Special storage arrangements required for a product or customer Amount of inventory required for a customer

8. There are key reasons that companies include indirect labor and overhead expenses (cont�d) Special inspection requirements for a customer Special packaging requirements for a customer Special testing required for a customer Dedicated sales resources for a customer, including travel and entertainment Time value of money tied up in AR and inventory

9. There are key reasons that companies do not include indirect labor and overhead expenses The cost of capturing the information outweighs the benefit of having it There is minimal relevance of the costs to specific products or customers The costs are below a materiality threshold for their impact on profitability Indirect labor and overhead expenses do not vary greatly across customers or products

10. How does your company handle indirect labor and overhead expenses? How does your company calculate customer profitability and product costs? Why does your company do it that way?

11. Companies evaluate the value of new opportunities with different methods. Return on Assets (ROA) Net gross income of opportunity/assets required for opportunity Assets include cash, inventory and equipment Net Present Value (NPV) Sum of the discounted net cash flow for the opportunity over the life of the opportunity minus the investment required for the opportunity Return on Investment (ROI) Net gross profit of opportunity/investment required for opportunity Payback period Cost of the opportunity/annual cash inflow from the opportunity

12. Questions?