Johnson Beverage Inc Essay

As president and master(a) owner of Johnson Beverage, Inc. (JBI), Jack Johnson was beginning to realize that retaining long-term nodes was becoming a ch all toldenge. During a delivery mold yester mean solar day, driver Joe Stevens had noticed a foes gross revenue handler public lecture with the general manager of recoverer Superstore, one of JBIs largest nodes. Then, that morning, Johnsons gross sales manager, Marsha Ketchum, had mentioned that, during her visit with the same general manager on Wednesday, he was starting to make any(prenominal) noises roughly wanting to negotiate a lower bell. This could bm a dilemma beca work this node had been one of the play alongs largest and most loyal customers for years.Johnson leaned back in his chair. These things always seemed to come up on Friday sound in eon to monopolize his thoughts over what opposite than would go been a restful weekend. Deciding to make come on the situation head on, he agendad a meeting with S tevens, Ketchum, and whatsoever(prenominal)(prenominal) former(a)s for later that afternoon.Comp whatsoever mountJBI distributed beverages to retail customers. The family had been in military control for cardinal decades and had become a preferred distributor among several retail outlets in the topical anesthetic atomic number 18a. JBI primarily distributed bottled sports drinks make 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 number $12 jillion. The order emolumentd about 20 customers whose beverage purchases totaled anywhere from about $100,000 to over $1 million one-yearly. The undiscounted list price on the sports drinks that JBI distributed was $15.20 per case of 24 bottles. The full cost (excluding customer ha buffalo chipuatefulness cost) of the bottled drinks was $13.10 per case. The fraternity offered discounts to just about of its custo mers, which varied by customer ground on a number of factors, including the volume of drinks the customer purchased, the future potential of the customer, and the negotiating success of the phoners sales representative, among separates.This case was prep ard by classify Professor Luann J. Lynch. It was written as a institution for class discussion rather than to illustrate useful or ineffective handling of an administrative situation. right of commencement exercise number 2009 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, invest an e-mail to salesdardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or communicate in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the authority of the Darden School Foundation. Rev. 6/09.This entry is veritable for use only by madelene manu at Doug las College. delight do not copy or redistribute. wrap up permissionsdardenbusinesspublishing.com for questions or additional permissions.The MeetingJohnson opened the meeting by summarizing what he had comprehend from Stevens and Ketchum over the past equate of days. It attend tos like weve got some competition for one of our trump customers recoverer Superstore. I guess Im not too surprised. Theyre a spectacular customer. This isnt the outset eon this has happened, added Ketchum. You big businessman repute that this same competitor has approached rescuer Superstore before. alone that period, we were open to keep the business by offering a bit more of a discount. I deem well have to do more of that this time, or Im afraid well lose the customer.Johnson responded quickly. We sesst sign into a price war on this. I fare this is a big customer, and a loyal one too, but its surely not one of our most profitable. I had Jim incline some verse to braceher on several o f our accounts. Saver Superstore is one of our lowest-margin customers. Take a look. Jim doubting doubting Thomas in account, who was also in the meeting, had prepared a report ( border 1), which Johnson laid on the table for the others to look at. Thomas explained how the accounting group compiled the numbers For distributively customer, we just pull the revenues right out of the accounting system. We k presently what they ordered and what we shipped, and we know what price we upsurge distributively customer, so that part is pretty simplified.And we know that the cost per case, excluding our customer utility 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 for for each one one customer and get a gross margin. Now, you may regain that weve talked about how hard it is to trace our customer service cost to any particular customer. Our customer service be run abo ut $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 play alongs total revenues. So if a customer accounts for 5% of our revenues, we allocate it 5% of our customer service cost. Then, we calculate a customer margin for each customer.Johnson looked at the numbers and verbalizeI fagt 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, accordingly 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 side by side(p)month 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 metricly. This was the first he had heard of the situation, but to a careful 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 symmetric basis and more or less never ask for anything special. I dont remember the last time we had to run around in the warehouse pulling 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 continueI think about some of our other customers. They seem to never be a ble to bid that theyll be out of stock. Then they direct 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 conceptualise 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 be are included in those customer service costs?Thomas replied, Well, that number includes several things. He go along It includes anything related to 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 lading them on the delivery truck. It includes any costs related to taking, coordinating, and administering the orders, like wh at we make 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, peculiar(a) scheduling, and impede like that. And it includes what we pay Marsha for what she does, like visit the customers to check in on them. So in that respects quite a bit of stuff in there.Johnson thought about this. So youre telling me that there are some customers that you are lapseing 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 permiss ions.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 cost the effort.Stevens, Ketchum, and Rodgers all agreed to spend some time with Thomas so he could summarize the measure 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 rattling was.Activity AnalysisBefore he remaining for the weekend, Tho mas 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 and through the accounting system and determined how much of the annual $1.2 million in customer service costs was associated with each of those categories (Table 1). Table 1. node service costs during the prior year by area of activity. landing field of activityTotal $Product handling victorious orders from customersDelivering the productExpediting deliveries (other than automobile) gross sales visits to customersTotal$ 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 by the piece 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 visits to customers tote up of cases sold number of purchase orders build of miles traveledNumber 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 preceding(prenominal) 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 record to determine she had made a total of 360 sales visits t o the companys customers. Thomass future(a) step was to determine how much of these cost drivers were imputable 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 presents this data for the quatern customers included in Thomass first report (Exhibit 1).Exhibit 1JOHNSON BEVERAGE, INC.Report of node Profitability during the Previous family for Four Customers wide-awake by Jim ThomasNet revenuesCost of goods earn 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%Exh ibit 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$14.6080,00016 cx51012Includes both expedited and unbendable deliveries.OscarsOddLots$14.9080,000404001925025MidwellenSupermarket$15.198,000202001113018DowntownRetail$15.1530,000302304909Total for JBI$15.00800,0005004,480102,500360