Egan & Sons is a UK-based interior fixtures manufacturer that has had a 63-year relationship with customer Westmid Builders. However, Westmid's sales have recently resulted in a 40% loss for Egan. Using activity-based costing, Egan discovered that its most profitable 1% of customers generated all profits, while its least profitable 1%, including Westmid, caused accumulated losses equaling 40% of profits. While dropping Westmid would be an option, the document recommends that Egan first focus on cost savings and profitable products, and try to restore Westmid to a profitable relationship as dropping the long-time customer should be a last resort.

2. Case Summary
Egan & Sons, an UK-based interior fixtures and manufacturer founded in Birmingham in 1908.
Tommy Bamford – Director of Egan & Sons
Potential Customer – Westmid Builders.
Relationship- 63 Years.
Problem – Westmid’s sales has resulted in 40% loss for Egan

3. Power of Customer Costing
The company could not accurately identify its costs for serving individual customers or for
designing and producing all the new goods it had recently brought to the marketplace.
Companies Costing Systems consist of -
• Factory overhead to product as a percentage mark up over direct labor cost.
• Corporate overhead as percentage of sales.
The lack of traceability and transparency extended to the costs for specialized equipment
that was used only for particular products or customers

4. Activity based Costing
6,000 SKUs and 2,500 customers.
The basic ABC process was straightforward : Calculate the hourly (capacity) cost of the resources
that performed each sales, production, administrative, storage, and distribution process and the
time that each order required at each stage.
The cost of every process performed for every customer and could trace revenue deductions —
discounts, allowances, promotions, and returns — back to individual customers.
These deductions, which totaled 12% of sales, had previously been collapsed into a single line item in
the P&L for each customer.

5. The Art & Science of
Rationalizing
The most profitable 20% generated more than double that
amount, but the extra gains were canceled out by the
company’s unprofitable products, which generated losses
equivalent to 120% of profits.
The customer story was similar: The most profitable 1% of
accounts generated 100% of profits, and the top 10%
accounted for nearly double that amount.
The remaining 90% of customers were either break-even or a
drag on the bottom line.

6. The Art & Science of Rationalizing (Contd…)
SKU Rationalization :
It’s money-losing SKUs into four action categories:
• Drop
• Re-price
• Redesign
• Take no action
Customer Rationalization :
Especially the least-profitable 1%, among them Westmid, whose accumulated losses had cost Egan 40%
of the company’s profits.

7. SWOT Analysis
Strength:
• Innovative manufacturer.
• Local business with community ties.
• 1% of products are highly profitable.
Weakness:
• Many unprofitable products.
• Many unprofitable customers.
• Customer incentives are too generous.
Opportunities:
• Leverage identified profitable SKU’s.
• Minimizing unprofitable SKU’s.
• Focus on higher end markets.
Threats:
• Chinese and other manufacturing
companies.
• Economic downturn.
• Sales associates over-incentivizing
products to generate sales.

8. Expert Recommendations
Gain insight from customer recommendations.
Implement higher pricing on select items.
Persuade customer to purchase higher margin items.
Convince the customer to align their business with your strategy.
Make the customer aware of what caused the diminished relationship.

9. Expert Recommendations
Reduce special pricing and extra services.
Enhance delivery options and reduce discounted pricing.
Make exclusive arrangements.
Push highly profitable SKUs over under performing SKUs.
Implement steep price increases.

10. What would you do?
Should Tommy Bamford recommend that
Egan drop the Westmid account?
What action can Egan & Sons take?

11. Conclusion
Dropping the unprofitable customer should not be Egan’s first step.
First focus on cost savings.
Begin to capitalize on profitable products.
Focus on restoring Westmid to a state of profitability,
and thus continuing the relationship.
Only drop as a last resort.

12. THANK YOU!