Who Are Your Good Customers?

What makes a good or a bad customer? Are all customers equally important to your business? Without some measure of profit or lose facts by part number, by customer; the good customer claim is anecdotal and the business decisions surrounding that account are more emotional than fact based.

In a number of companies I have worked I raised this question early in my tenure there. The answers were always the same centering around the largest spend and longest duration clients who were knighted: "Our Best Customers". But, there were minimal mindful thoughts given to these declarations.

I like to break my analysis of a company's client based into green, yellow and red customers. Green - defend and grow. Yellow - move as many to green as possible. And red, well most of the time the circumstances that qualified the account of this rating are very hard if not impossible to fix, so plan on a fair and logical departure. A more finite analysis of each customer will break down each part number built and place them into similar color coded buckets of green, yellow and red.

So, what are some of the root causes for a "bad" customer? I have seen instances of quoting errors repeated over time, labor standards negatively drifting and not being addressed, raw material issues draining cash and limiting other resources, ECNs that were not costed or controlled properly, bad designs eating away profits through rework and building a part more then once, poor test plans or test verification that didn't pinpoint defects if the "functional test red light" is lit, very slow pay regardless of the negotiated terms, low inventory turns, bad go-no go decisions where no forethought to what is a good "fit" for your business and winning a client that never should have never even been bid, downward drift of lot sizes being run through very expensive capital equipment without cost adjustments, and one aspect that made me really nuts was the bidding of labor and overheads as if the USA models were actually in a low cost region instead of moving the business to that area of the world.

But, unless you do some in-depth analysis by part number of a large customer relationship, how do you really know when to address the yellow or red clients; unless they just don't pay. EMS companies are encouraged to devise a simple way to understand (at least directionally) what part numbers in a customer mix make you money and which ones don't.

In a green customer, it is always advisable to defend the green part numbers while attempting to take small steps to move red parts into the yellow zone and yellow into the green zone. Little bites taken over time seem to not cause much panic or disruption of the EMS relationship at the OEM. As not ever part in every client relationship will be a winner, minimizing the bleeding of the poorer performing parts is just good business. Sometimes it is as simple as increasing the minimum order size for a lot run, absorbing the very expensive SMT lines.

With a yellow customer, the actions are the same as the green customer but the sense of urgency moving the many yellow parts into a green zone and red to yellow, is critical. I usually get push-back that these clients are at least "absorbing fixed costs" so don't risk their ire but when we dig into the total cost to support a yellow client, especially when you consider today's labor shortages and time drain on the business office, capital equipment and manufacturing folks, rarely is that total cost considered in an absorption debate.

Red's are a sad story. It is very rare to turn a red account into a green one. There are many underlying issues that caused this red rating including numerous controllable decisions / events at the EMS (at some historical point in time) or just "bad fit" decisions that the EMS is now living with. Many of these issues were swept under the carpet (or ESD floors) for some time and have become institutionalized. Because of the numerous turn-arounds I have been involved in, I have spent a considerable amount of time visiting executives at our red accounts to discuss our pain points, with suggestions of how we can both correct them and almost never found a path to undo the underlying issues. If that is the case, the best course of action is often making sure all A/R, excess raw material and final build costs are paid for; and professionally relocating them to a new source.

Now, how do we run a green, yellow, red analysis by part number without renting the CIA or NASA computers? We played around with complex measurements like ROIC and EBIT and various other financial measures that work better from a macro perspective and they seem too cumbersome for part number analysis. We found that a rather simple method of determining relative profitability by part number / customer can be undertaken, but this method also requires you to make decisions on what works for you in your plant. This simple measure is effected by labor rates, overheads, raw material costs and variables more in the EMS control at the time of the bid. Of course there are additional factors such as the number of ECN changes to existing designs, high maintenance clients, are the terms and conditions fair, and if they view the relationship as strategic and invest in a win-win long term outcome; but these are easier to consider combined with a fact based P/L approach. If you want to learn more about the methods we used, let's talk.

Even if you build your own method to understand who your best customers are through some financial facts, I suspect you will be surprised that some of your anecdotal "best clients" may not be and some of the "worst" are actually good for the business. There has always been surprised executives when driving this type of analysis into the companies I have done these analysis with.