When to Drop an Unprofitable Customer

As Tommy Bamford and Jane Oldenburg drove into the visitor section of Westmid Builders’ car park, Jane pointed out the man they had come to see: Steve Houghton, Westmid’s purchasing executive. He was in front of the headquarters building, waving a greeting. Jane waved back to her friend, whom she had known for decades, but Tommy scowled. He wasn’t looking forward to this visit. “Oh, come on,” Jane said, nudging him. “Look how friendly he is.”

Tommy was a director and Jane was the Midlands regional sales manager for Egan & Sons, a supplier of doors and staircases to Westmid for 63 years. The two executives had to pause before crossing the gravel road that ran through Westmid’s grounds, because of the steady stream of trucks traveling to and from construction sites around Birmingham and all the way to London. Tommy knew that despite the heavy traffic that April morning, Westmid was hurting from the economic downturn in the UK. The company was building only half as many housing units this year as it had during recent boom times. With the steep falloff, Westmid was no longer Egan’s biggest customer, but it still retained considerable clout. Too much clout.

“I’m flattered by such an august delegation,” Steve said. “Shall we start with a tour?” Jane, a tiny and exuberant blonde with a boy’s haircut, happily agreed. She had been here many times, of course, but Tommy was not a regular. Steve chatted away as he shuttled them in a little electric vehicle past warehouses and outbuildings.

Jane had promised Tommy that a visit to Westmid would change his view of the company. But he could not shake his newfound awareness of how much money Egan was losing with Westmid—the account’s ratio of operating income to sales was a negative 28%. The two companies had enjoyed a smooth relationship for decades, but Tommy strongly believed the time had come to terminate it.

Steve kept glancing at Tommy during the tour. “You look pale,” Steve said at one point. “I hope my driving isn’t making you queasy.”

“That’s quite all right,” Tommy said. “I’ve got a strong stomach.”

The Power of Customer Costing

Egan & Sons, founded in Birmingham in 1908, was hardly a sleepy company. With three efficient plants staffed by 3,000 employees, it had reinvented itself to become an innovative manufacturer of modular steel staircases and fiberglass doors. Its accounting system, however, remained simple and traditional. The weaknesses became apparent only in the mid-2000s, when Chinese companies began to encroach on Egan’s low end, severely undermining profitability.

With careful study, Tommy had figured out that the company’s costing system had made it blind to its own operations: It allocated factory overhead to products as a percentage markup over direct labor costs, and corporate overhead as a percentage of sales. Thus, the company could not accurately identify its costs for serving individual customers or for designing and producing all the new goods it had recently brought to the marketplace. The lack of traceability and transparency extended to the costs for specialized equipment that was used only for particular products or customers