Johnson Beverage Inc Essay

As president and primary owner of Johnson Beverage, Inc. (JBI), Jack Johnson was beginning to realize that retaining long-term guests was becoming a ch wholeenge. During a delivery actuate yesterday, device driver Joe Stevens had noticed a competitors gross revenue manager lecture with the general manager of recoverer Superstore, one of JBIs largest customers. Then, that morning, Johnsons gross revenue manager, Marsha Ketchum, had mentioned that, during her visit with the same general manager on Wednesday, he was starting to make near noises ab aside wanting to negotiate a lower price. This could make up a dilemma because this customer had been one of the companys largest and most loyal customers for years.Johnson leaned back in his chair. These things always seemed to come up on Friday scarcely in time to monopolize his thoughts over what former(a)wise would possess been a restful weekend. Deciding to address the situation head on, he scheduled a meeting with Stevens, Ketchu m, and several(prenominal) others for later that afternoon.Company BackgroundJBI distributed beverages to retail customers. The company had been in business for two decades and had become a preferred distributor among several retail outlets in the local bea. JBI primarily distributed bottled sports drinks made by small specialty beverage companies, and its business had grown steadily with the popularity of sports drinks over the past 10 to20 years. Last year, JBIs revenues totaled $12 gazillion. The company serviced about 20 customers whose beverage purchases totaled anywhere from about $100,000 to over $1 million yearbookly. The undiscounted list price on the sports drinks that JBI distributed was $15.20 per case of 24 bottles. The full cost (excluding customer service cost) of the bottled drinks was $13.10 per case. The company offered discounts to some of its customers, which varied by customer ground on a number of factors, including the volume of drinks the customer purchas ed, the future potential of the customer, and the negotiating success of the companys sales representative, among others.This case was prepared by coadjutor Professor Luann J. Lynch. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. copyright 2009 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to salesdardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a recovery system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the liberty of the Darden School Foundation. Rev. 6/09.This document is authorized for use only by madelene manu at Douglas College. enliven do not copy or redistribute. Contact permissionsdardenbusinesspublishing.com for questions or additional permissions.The MeetingJohnson opened the meeting by summarizing what he had heard from Stevens and Ketchum over the past couple of days. It looks like weve got some competition for one of our surpass customers Saver Superstore. I guess Im not too surprised. Theyre a big customer. This isnt the first gear time this has happened, added Ketchum. You might commend that this same competitor has approached Saver Superstore before. But that time, we were able to keep the business by offering a smudge more of a discount. I view well have to do more of that this time, or Im afraid well lose the customer.Johnson responded quickly. We undersidet get into a price war on this. I k instantly this is a big customer, and a loyal one too, but its certainly not one of our most profitable. I had Jim suck in some numbers together on several of our accounts. Saver Superstore is one of our lowest-margin customers. Take a look. Jim doubting Thomas in chronicle, who was also in the meeting, had prepared a report (Exhibit 1), wh ich Johnson laid on the table for the others to look at. Thomas explained how the accounting group compiled the numbers For each customer, we just pull the revenues right out of the accounting system. We know what they ordered and what we shipped, and we know what price we charge each customer, so that part is pretty easy.And we know that the cost per case, excluding our customer service be, is $13.10. So we can multiply $13.10 per case by the number of cases we shipped to get our cost of goods. Then, we subtract our cost of goods from revenues for each customer and get a gross margin. Now, you may call in that weve talked about how hard it is to trace our customer service cost to any particular customer. Our customer service cost run about $1.2 million a year, roughly 10% of revenues. To make things easy, we allocate those to each customer based on its share of the companys total revenues. So if a customer accounts for 5% of our revenues, we allocate it 5% of our customer service costs. Then, we calculate a customer margin for each customer.Johnson looked at the numbers and saidI go int think we can lower our price to Saver Superstore much more and make any money on this one. And just think, if we offer a larger discount to them, past well have our other customers wanting the same thingespecially the other big ones. I can see it now Marsha is going to walk in here nextmonth and tell us that Oscars OddLots has heard about the deal we struck with Saver Superstore, has been talking with that competitor, and they want the same thing.This document is authorized for use only by madelene manu at Douglas College. Please do not copy or redistribute. Contact permissionsdardenbusinesspublishing.com for questions or additional permissions.Oscars OddLots, a large local retailer on the edge of town, was another of JBIs large customers.Jason Rodgers, the operations manager for JBI, was listening carefully. This was the first he had heard of the situation, but to a caref ul observer, his nod would have revealed what he was thinking. He saidYou know, Im not a bit surprised to hear all this. Saver Superstore is a great customer. They buy lots of beverages, and theyre easy to deal with. They place their orders on a rhythmical basis and almost never ask for anything special. I dont remember the last time we had to run around in the warehouse draw together a rush order from them. Who wouldnt want that business?Stevens agreed, Youre right. I almost never have to change my delivery schedule because theyve asked for quick delivery. And theyre right around the corner, so theyre easy for us to get to.Rodgers continuedI think about some of our other customers. They seem to never be able toanticipate that theyll be out of stock. Then they call us and make it our problem to deal with. It seems like we have some customers that we work on all day every day. Why cant that competitor go after those customers? Its hard for me to intend that some of those customers are more profitable than Saver Superstore. Maybe we ought to add what we guys in the warehouse call a pain factor onto those other customers and then see who is most profitable for us. As Johnson listened, he realized Rodgers might be onto something. Jim, what types of costs are included in those customer service costs?Thomas replied, Well, that number includes several things. He continued It includes anything related to handling the beverages, like picking the beverages from the warehouse shelves according to the order instructions, moving the beverages over to the dock, and essence them on the delivery truck. It includes any costs related to taking, coordinating, and administering the orders, like what we pay the people in the sales office who take phone orders from customers, the supervisory costs to administer the order, and similar things.It includes anything related to delivering the beverages to the customers location, like the cost of the delivery trucks, truck maintenance , and what we pay Joe and people like him to drive the trucks. It includes anything related to all those rush orders youre talking about, like overtime, extra scheduling, and stuff like that. And it includes what we pay Marsha for what she does, like visiting the customers to check in on them. So on that points quite a bit of stuff in there.Johnson thought about this. So youre telling me that there are some customers that you are toping a lot more time on than others? And its not Saver Superstore?This document is authorized for use only by madelene manu at Douglas College. Please do not copy or redistribute. Contact permissionsdardenbusinesspublishing.com for questions or additional permissions.Thats right, Rodgers replied.Johnson continued, But since our accounting system is allocating these customer service costs based on revenues, and since Saver Superstore is one of our biggest customers, its allocating a large share of those costs to Saver Superstore. Exactly, Thomas said.Let me do this Let me spend a couple of days collecting some information. Ill need some help from each of you because I want to try to find out how much of your time you are spending on each of our customers. Maybe its time to get more sophisticated about how we look at these customer service costs. It may be worth the effort.Stevens, Ketchum, and Rodgers all agreed to spend some time with Thomas so he could summarize the summate of activity they devoted to each customer. They would meet again the following Friday. Thomas promised to compile an analysis that might help them determine how profitable each of their customers sincerely was.Activity AnalysisBefore he left for the weekend, Thomas decided to pull together some information about the customer service costs he had described in the meeting handling the product, taking the orders, delivering the product, expediting rush orders, and visiting the customer. He searched through the accounting system and determined how much of the an nual $1.2 million in customer service costs was associated with each of those categories (Table 1). Table 1. Customer service costs during the prior year by area of activity. sweep of activityTotal $Product handlingTaking orders from customersDelivering the productExpediting deliveries (other than automobile)Sales visits to customersTotal$ 672,000100,000140,000198,00090,000$ 1,200,000This document is authorized for use only by madelene manu at Douglas College. Please do not copy or redistribute. Contact permissionsdardenbusinesspublishing.com for questions or additional permissions.Then, on Monday, Thomas met individually with Stevens, Ketchum, and Rodgers. With their help, he determined what he thought to be the primary driver of the costs in each of those customer service categories (Table 2).Table 2. Cost drivers by area of activity.Area of activityCost driverProduct handlingTaking orders from customersDelivering the productExpediting deliveries (other than automobile)Sales visi ts to customers second of cases soldNumber of purchase ordersNumber of miles travelledNumber of expedited deliveriesNumber of sales visitsThomas determined from the companys accounting records that the company sold 800,000 cases of beverages and processed 500 purchase orders the previous year. Stevens checked the mileage records for the delivery vehicles and determined that the vehicles had traveled a total of 44,800 miles. Rodgers was able to determine that the company made 4,480 deliveries, 2,500 of which were expedited deliveries. And finally, Ketchum checked her daily travel log to determine she had made a total of 360 sales visits to the companys customers. Thomass next step was to determine how much of these cost drivers were attributable to each customer. Again, he was able to obtain some of that information (e.g., number of cases) relatively easily from the companys records. Then his colleagues helped him determine customer numbers for the rest of the activities. Exhibit 2 p resents this data for the quaternary customers included in Thomass first report (Exhibit 1).Exhibit 1JOHNSON BEVERAGE, INC.Report of Customer Profitability during the Previous Year for Four Customers disposed(p) by Jim ThomasNet revenuesCost of goodsGross marginCustomer service costsCustomer profitCustomer profit (% of net revenues)SaverSuperstore$ 1,168,0001,048,000$ 120,000116,800$3,2000.3%OscarsOddLots$ 1,192,0001,048,000$ 144,000119,200$ 24,8002.1%MidwellenSupermarket$ 121,520104,800$ 16,72012,152$ 4,5683.8%DowntownRetail$ 454,500393,000$ 61,50045,450$ 16,0503.5%Total for JBI$12,000,00010,480,000$ 1,520,0001,200,000$ 320,0002.7%Exhibit 2JOHNSON BEVERAGE, INC.Additional Information from Prior Year for Four CustomersPrice per caseNumber of casesNumber of ordersNumber of deliveries1Miles traveled per deliveryNumber of expedited deliveriesNumber of sales visits1SaverSuperstore$14.6080,0001611051012Includes both expedited and fixity deliveries.OscarsOddLots$14.9080,000404001925025M idwellenSupermarket$15.198,000202001113018DowntownRetail$15.1530,000302304909Total for JBI$15.00800,0005004,480102,500360