Telco Corporation (Telco) is a $25 billion global manufacturer of industrial products, with its global headquarters located in Bloomington, Indiana. Telco is comprised of six major divisions: (1) electrical generators, (2) turbines, (3) industrial air conditioners, (4) machine tools (e.g., drill presses and lathes), (5) fork trucks and skid loaders, and (6) air compressors. Each division is managed as a separate profit center, and each has its own sales force, manufacturing facilities, and logistics network. Telco has approximately 15,000 customers worldwide, with 40 percent buying from more than one Telco division. At a recent operating council meeting, Jean Beierlein, CFO, was lamenting to the other council members the fact that pretax profits were falling even though revenues were growing. “We ’re in a perplexing situation. The stock market likes us because revenues are growing. However, I don’t see how we are going to make our dividend objectives this year because our operating profits are decreasing from last quarter. Our service levels to customers are at an all-time high and our sales forces are consistently meeting their revenue objectives.” Troy Landry, vice president of supply chain for the compressor division, added his observation on this dilemma. “I ’ll tell you what the problem is. We are constantly exceeding our logistics budget to provide this outstanding service for customers who shouldn’t be getting it. Sales is constantly promising expedited delivery or special production runs for customers who generate very little revenue for us.
One of these customers, Byline Industries, only spends $1 million per year with us and yet our logistics costs as a percent of revenue for them is 25 percent. Compare this with our average logistics costs as a percent of revenue across our customer base of 11 percent and you can see where the problem lies.” Tom Novack, president of the generator division, disagreed with Troy’s observation of Byline. “Wait a minute, Troy. Byline is one of my best customers. They buy 15 percent of my revenue at a logistics cost of 8 percent. We need to make sure they are happy.” Listening to this exchange was the new Telco president, Nick Martin, who recently joined Telco after spending 15 years as COO of a global agricultural products manufacturer. This problem was not new to Nick. His former employer was also structured across business lines with common customers across the globe and found that a similar service strategy for all customers was not a viable alternative. Nick added, “I ’ve seen this before.
The problem is that we are treating all customers alike and we are not taking into consideration those customers who buy from more than one division. Before the meeting, I asked Jean to run some profitability numbers across our customer base. The results are amazing. Thirty-three percent of all of our customers account for 71 percent of our operating profits. Another 27 percent account for approximately $100 million in losses. Obviously, we have some customers who are more profitable than others. We need to develop a strategy to segment our customers and offer each segment the suite of services they are willing to pay for.” “Wait a minute,” exclaimed Chris Sills, vice president of corporate sales. “You ’re asking us to take some services away from our customers. Who is going to break the news? What about the sales commissions for my reps? This is not going to be received well by the customer base.”
CHAPTER CASE 8-1 QUESTIONS & NOTES: Telco Corporation Case Notes:
You have been hired as an expert on customer relationship management. Telco’s current service offerings to its entire customer base include product quality, order fill rates, lead time, delivery time, payment terms, and customer service support. You have been asked to prepare a report outlining how Telco could adopt the CRM approach to its customers. Specifically, this report should address the following:
1. How should Telco approach segmenting its customers? That is, on what basis (cost to service, profitability, etc.) should the customers be segmented?
Students should understand and define the four steps to segmenting customers. The first step is to segment customers by profitability. This can be done by traditional accounting or ABC (activity based costing). The next step is to identify the product/service package for each customer segment. Next, Telco should develop and execute the best processes. Lastly, a performance metric should be implemented and evaluated on a regular basis.
2. How should Telco tailor its service offerings to each customer segment?
Students should understand the following service components should be considered when determining future offering to the different customer segments:
Product Quality (% defects)
Order fill rate
Customer service support
3. Should certain customers be asked to take their business elsewhere?
Students should understand that all customers are not good (profitable) customers. If a customer will not accept terms to make their business (purchases) profitable and there is not future growth potential, then it is acceptable to terminate the relationship.
4. How should the revised service packages to each segment be introduced to that segment? By the sales force? Should all segments be done at the same time?
These questions will be answered in many different ways. The following is a strong answer that takes the Telco situation into account. Management needs to provide standardized literature to explain the segments. Then each salesperson will have the same information to distribute and from which to speak. The relationship between the buyer and salesperson is typically the strongest, so the salesperson should deliver the message. A date for all revised service package should be set and all customers should be given ample time to determine if they want to continue using Telco. Two months is ample time to deliver all current orders and for the customer to find another vendor if necessary.
5. Each division has its own sales force, manufacturing facilities, and logistics network. As such, common customers (those who buy from more than one division) place separate orders with each division, receive multiple shipments, and receive multiple invoices. Would it make sense for Telco to organize around customer rather than by product? If so, how would this be done? What would the new organizational metrics look like?
Students will provide various answers for this question. No, there is no need to reorganize the organizational structure. A few reasons why not; customers come and go and you can’t expect one group of employees to be masters of each product line. However, if the customer is large and profitable, there should be a dedicated customer service representative that is the touch point for all product/profit centers. This CSR could contact each division for customer concerns (i.e., product quality, billing issues, etc) and be responsible that the issues are resolved and communicated back to the customer in a timely manner.