1. Customer Relationship Management:
The Emperor Has No Clothes
BY STEVE BANKER DECEMBER 12, 2001 ARC INSIGHTS 2001-053E
Keywords
Profitable-To-Promise, Customer Relationship Management, Supply Chain
Management
Summary
The holy grail of order promising is Profitable-To-Promise (PTP). The ques-
tion should not be “can we meet the customer’s requirements?” But rather,
“should we?” Because PTP involves a customer touch point surrounding
the sales process, it is a Customer Relationship Management (CRM) appli-
cation. Traditional CRM solutions cannot tell you how profitable your
customers are. Profitability, however, should be the central focus of man-
aging customer relationships.
Analysis
First came Available-To-Promise (ATP), which allows product to be prom-
ised if there are sufficient quantities in the warehouse. Then came Capable-
To-Promise (CTP), which allows the Make-To-Order (MTO) manufacturer
to check production capacity and see if the customer order date can be met.
But the holy grail of order promising is Profitable-To-Promise.
The time cost of each process
The question should not be “can we meet the customer’s re-
step required to sell and deliver
an item must be accounted for.
quirements?” But rather, “should we?” How profitable is this
customer? How profitable will this order be?
The new generation of CRM has evolved from a set of largely unconnected
internal tools to a more integrated suite with a workflow infrastructure.
The new CRM is designed and personalized for a wide range of networked
constituents - from channel partners out to end customers, and from inter-
nal customer care personnel to field service reps.
However, the new generation of CRM solutions suffers from a key draw-
back of the older generation. CRM did not, and does not, tell you how
profitable your customers are. But this should be the central focus of man-
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2. ARC Insights, Page 2
aging customers. CRM Sales and Marketing applications can help you gain
new customers and sell more goods and services to existing customers.
Call Center, Field Center, and Web Center applications can aid in retaining
existing customers. But what good are those applications if the resulting
business is unprofitable?
Customer Costs
Traditional CRM solutions cannot tell you how profitable your customers
are because they are not based on Activity Based Costing (ABC). Activity-
Based Costing is at the core of profitable order promising. Customers do
not behave the same way. Some place simple orders with long lead times.
Others place complex multi-product and multi-ship orders, call back to
change the quantities, call back again to change the delivery time, and then
all too often call to cancel the order. A customer’s profitability is based
largely on what they order (order mix) and how they order (order behav-
ior). Order profitability has three main pillars: customer behaviors,
product costs, and the price charged. The only way to know whether a cus-
tomer is profitable is to engage in an Activity-Based Costing analysis.
More Profitable Customers Less Profitable Customers
Order large quantities Order small quantities
Order high margin products Order low margin products
Order standard products Order special products
Pay standard prices Require discounts
Pay on time Pay late
Cancel orders rarely Cancel orders frequently
Use standard packaging, cases & Require special fulfillment services
pallets
Use standard deliveries Require special deliveries
Rarely return goods Often return goods
Do not use charge backs Frequently use charge backs
Require low technical support Require high technical support
Profitable and Unprofitable Customers Can Be Distinguished
by Their Behavior
Product Costs
In addition to customer behavior and fulfillment costs, order profitability
depends upon product costs and the price charged. In manufacturing-
© 2001 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com
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3. ARC Insights, Page 3
centric supply chains, product costs are, of course, a critical part of the PTP
equation. If companies are not granularly capturing activity-based product
costs (and far too few are), they cannot do true PTP.
Capturing granular product costs is where CRM and Supply Chain Man-
agement (SCM) begin to merge. As companies adapt MTO SCM strategies,
they use Capable-To-Promise engines to understand their production ca-
pacity constraints in making promises to customers. Basically, orders are
slotted into the production plan in places where there is sufficient capacity
to produce an order of the required size by the required due date. To do
this, the CTP engine may need to route the order through the factory – if
one work center is occupied the order is routed through another. But not
all work centers will have the same costs associated with them. The routing
of orders through different factory paths should, therefore, have different
associated product costs.
Baan and Pavilion are among the few software companies ARC has talked
to that understand the importance of granular activity-based product costs.
Baan’s iBaan for CRM suite has a discrete industry
Profitable-to-Promise is a strategy, not focus. Pavilion is creating a platform that uses dy-
a technology. Multiple solutions may
namic activity-based costing models to determine
need to be implemented to accomplish
product costs for the process industries. While Pa-
PTP. Business processes and
compensation schemes will also need vilion is more focused on using the real-time
to be changed. productions costs to facilitate production decisions,
the applicability to PTP strategies is clear.
The Price Charged
The price charged for product obviously impacts profitability. Manugistics
offers a dynamic pricing solution called PRO (Pricing and Revenue Optimi-
zation) and is increasingly focused on helping manufacturers deploy these
solutions. PRO forecasts the response of different customer segments to
prices of products throughout the product lifecycle. PRO provides analysis
on what a customer segment is willing to pay and then generates specific
pricing recommendations by time frame. This solution depends upon
strong customer data, and a large part of the implementation can involve
data cleansing. If the initial data is not strong, the ongoing collection of
customer responses to prices will allow the optimization model to improve
with time.
© 2001 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com
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4. ARC Insights, Page 4
PTP and Customer Service
Among the most important issues in implementing PTP will be cultural
issues. Companies know they would not exist without customers, and it is
natural to want to keep those customers happy. It is also widely argued
that superior customer service leads to happy customers who will not de-
fect to competitors. Furthermore, it is also understood that it is far more
costly to gain new customers than to retain existing ones. It is natural for
many people in a company to resist the move to PTP because it just feels
wrong.
These are valid feelings, and they need to be directly addressed before a
company can hope to succeed in a PTP project. There are some companies
that do compete on superior customer service, and upscale customers are
willing to pay a premium for their services. But only a relatively small
number of companies compete solely on the basis of superior service. The
three main ways companies compete are product (technically advanced or
superior product quality), price, and service. In many instances, some com-
bination of the three provides a niche in which a company can profitably
compete.
Furthermore, PTP will enhance service for the majority of customers. One
measure of service is the Perfect Order Metric. A Perfect Order is an order
where undamaged products are delivered on time, in the proper quantities
with no unauthorized substitutions, with both the correct Value Added
Services performed and the correct billing. Most companies perform mis-
erably around this ultimate service metric, with many companies having
well under 60 percent of orders being perfect. Complex customer ordering
behavior is a major reason for poor performance on this Key Performance
Indicator. The most unprofitable customers will often be the customers that
are adding the most complexity to a company’s processes. Serving these
customers’ needs harms the service level for core customers.
A company’s assets, processes, and people skills determine what types of
complexity a company can profitably handle. If companies decide to add
assets and improve processes to handle greater complexity, that is a strate-
gic decision. The payoff to such a decision will depend upon the volume of
the resulting business, the actual costs of doing the business in a more
complex fashion, and the margin generated. Very often, however, the most
complex service requirements are best handled by Third Party Logistics
© 2001 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com
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5. ARC Insights, Page 5
providers, and they will charge a set fee for the product but variable fees
based on the particular services.
Recommendations:
• Beware of the over blown promises of large CRM firms. CRM solutions
don’t help you maximize profitability. Managing customers for profit-
ability should be at the heart of CRM.
• Begin a PTP project! Few investments have greater potential for robust
Return on Investment than these projects. In one small sample, ARC
found that 80 percent of companies that initiated PTP projects achieved
payback in less than a year.
• Many people in a company have a vested interest not to move to PTP.
Moving forward clearly requires support from top management.
• Multiple solutions may need to be implemented to accomplish PTP.
Business processes and compensation schemes will also need to be
changed.
For further information, contact your account manager or the author at
sbanker@arcweb.com. Recommended circulation: All EAS clients.
© 2001 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com
USA • UK • Germany • Japan • India