Lowry Locomotion’s Chicago facility has several thousand customers, most of which are retail stores and distributors. The company experiences a wide range of customer support issues with each customer, with some demanding rapid restocking intervals, cooperative marketing reimbursements, and early payment discounts. After conducting an ABC analysis that is focused on the cost of customers, Lowry arrives at the following results:
|
Customer Levels |
Number of Customers |
Profits Earned |
Cumulative Profits |
Revenue Earned |
Cumulative Revenue |
|
Top 10% |
197 |
$800,000 |
$800,000 |
$3,200,000 |
$3,200,000 |
|
Next 40% |
507 |
400,000 |
1,200,000 |
2,600,000 |
5,800,000 |
|
Next 40% |
483 |
200,000 |
1,400,000 |
4,000,000 |
9,800,000 |
|
Low 10% |
204 |
150,000 |
1,250,000 |
1,500,000 |
11,300,000 |
The analysis shows that Lowry should drop the 204 customers in its lowest 10th percentile, since it is losing money on them, even though it will give up $1,500,000 of revenues by doing so. This will also allow Lowry to spend more time focusing on the customers in its highest percentile, who are generating one half of the company’s profits. Also, eliminating the bottom percentile of customers will create additional production capacity, which Lowry may be able to use to bring in more profitable business.