Companies can improve their profitability and customer-service levels by implementing a segmented approach to both areas, according to Juan Rubio, managing partner of Logistics Resources International Inc.

According to Rubio, the biggest impediment to achieving end-to-end supply chain control is often the lack of a program to segment customers based on their importance to the organization. The absence of a policy, or one that treats all products and customers alike, "means the customer is basically dictating terms." Rubio urges companies to develop a document that lays out terms, conditions, stipulations, price bracketing and discounting ratings, among other things. The customer needs to know from the start what kind of discounts to which it is entitled.

Most companies provide a level of customer service that is based on a standard inventory policy, largely driven by the cost of capital. Such an approach raises customer expectations unnecessarily. Instead, companies need to be segmenting their customer base according to the contribution each account makes to revenues and the bottom line.

Dividing lines can be borrowed from inventory-management techniques of "A, B and C" designations. The first group will comprise 80 percent of a company's revenue, the second 15 percent and the third 5 percent. In addition to top-line revenue, companies should factor in volume, cost to serve and overall profitability.

Rubio's innovation is to designate a fourth class of customer and product, called the "C-minus" group. Accounting for just 1 percent of revenue, these are often unprofitable to serve. Because the number is so small, companies shouldn't balk at restricting their access to discounts, or cutting them off altogether.

"In most cases you're probably a second, third or fourth supplier to them," Rubio says. "The cost of serving that [C-minus] segment is usually far more expensive than the other categories, and they don't have the revenue to offset it."

Despite the old adage that "the customer is king," companies need to be realistic about which ones are making the strongest contribution to the bottom line. Those attempting to treat everyone like an "A" customer end up treating all customers like "Bs," and degrading service across the board. "That's good news for 'B' and 'C' customers," Rubio says, "but bad news for 'A' customers."

To view video in its entirety, Click here