Product and Customer Driven Cost

Costing in a sales, product handling, and distribution environment may be viewed from 2 primary dimensions, namely Product-driven costs and Customer-driven cost. Product-driven cost are primarily all the product management activities that relate to the Receiving, Storage, and Further Handling that is performed irrespective of whom the customer or end-delivery entity is. Customer-driven costs relate to those activities necessary to facilitate the ordering and sales process and completing the delivery along a given route. Essentially product and customer driven costs exist quite separate from one another. In a multi-dimensional environment the link between the two is simply the purchasing of specific products by individual customers. By ranking products from most profitable to least profitable as per the ranking report below, there really is no link to the customer if only product-driven costs are considered. We do however know which customers bought which products. The contribution matrix described below illustrates how product and customer driven cost is combined for a total profitability solution.

Product Profitability Ranking Report with Categorizations

Once the individual product profitability ranking is completed we can segment the profitability into certain bands or categorizations. These categorizations are user-defined and help illustrate classes of desirability between groups of products.

The same profitability ranking may be performed on the customers to break them up in customer profitability categorizations.

Customer Profitability Ranking Report with Categorizations

To produce a profitability matrix as below, product specific cost must be taken to the customers and customer-driven cost to the products. This can be done with an allocation methodology with a basis such as sales value or sales quantity or some other user-defined basis. Using an OLAP product like TM1 it is easy to represent the matrix and slice and dice the information to produce the desired the reports. The report below is an example report. The particular report however is unique in that it allows users to select a product and customer profitability categorization intersection and the report dynamically produces those product-customer combinations.

Product & Customer Profitability Contribution Matrix