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Module 3 Case - Telco1

Telco Corporation is a global manufacturer comprised of six divisions that each operate as separate profit centers. While revenues are growing, profits are falling due to high logistics costs to meet excellent customer service standards. The CFO notes some customers that generate little revenue receive expedited delivery and special runs. The VP of Supply Chain cites a customer that costs 25% of revenue to service despite spending only $1 million. However, the Generator President disagrees, saying that customer provides 15% of revenue at an 8% cost. The new Telco President observes some customers account for most profits while others lose money, and recommends segmenting customers to offer tailored service levels based on willingness to pay. The Corporate Sales VP worries cutting services will upset

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40 views2 pages

Module 3 Case - Telco1

Telco Corporation is a global manufacturer comprised of six divisions that each operate as separate profit centers. While revenues are growing, profits are falling due to high logistics costs to meet excellent customer service standards. The CFO notes some customers that generate little revenue receive expedited delivery and special runs. The VP of Supply Chain cites a customer that costs 25% of revenue to service despite spending only $1 million. However, the Generator President disagrees, saying that customer provides 15% of revenue at an 8% cost. The new Telco President observes some customers account for most profits while others lose money, and recommends segmenting customers to offer tailored service levels based on willingness to pay. The Corporate Sales VP worries cutting services will upset

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Telco Corporation

Telco Corporation (Telco) is a $25 billion global manufacturer of industrial products,


with its global headquarters located in Bloomington, Indiana. Telco is comprised of six
major divisions: (1) electrical generators, (2) turbines, (3) industrial air conditioners,
(4) machine tools (e.g., drill presses and lathes), (S) fork trucks and skid loaders, and
(6) air compressors. Each division is managed as a eparate profit center, and each has
its own sales force, manufacturing facilities, and logistics network. Telco has approxi­
mately 15,000 customers worldwide, with 40 percent buying from more than one Telco
division.
At a recent operating council meeting, Jean Beierlein, CFO, was lamenting to the
other council members the fact that pretax profits were falling even though revenues
were growing. "We're in a perplexing situation. The stock market likes us because reven­
ues are growing. However, I don't see how we are going to make our dividend objectives
this year because our operating profits are decreasing from last quarter. Our service
levels to customers are at an all-time high and our sales forces are consistently meeting
their revenue objectives."
Troy Landry, vice president of supply chain for the compressor division, added his
observation on this dilemma. 'Tl! tell you what the problem is. We are constantly
exceeding our logistics budget to provide this outstanding service for customers who
shouldn't be getting it. Sales is constantly promising expedited clelivery or special
1>ro<ludion runs tor customers who generate very little revenue for us. One of these
customers, Byline Industries, only spends $1 million per year with us and yet our
logistics costs as a percent of revenue for them is 25 percent. Compare this with our
average logistics costs as a percent of revenue across our customer base of 11 percent
and you can see where the problem lies." Tom Novack, president of the generator divi­
sion, disagreed with Troy's observation of Byline. "Wait a minute, Troy. Byline is one of
my best customers. They buy 15 percent of my revenue at a logistics cost of 8 percent.
We need to make sure they are happy."
Listening to this exchange was the new Telco president, Nick Martin, who recently
joined Telco after spending 15 years as COO of a global agricultural products manufac­
turer. This problem was nol new to Nick. His former employer was also structured
across business lines with common customers across the globe and found that a similar
service strategy for all customers was not a viable alternative. Nick added, ''I've seen this
before. The problem is that we are treating all customers alike and we are not taking into
consideration those customers who buy from more than one division. Before the meet­
ing, I asked Jean to run some profitability numbers across our customer base. The results
are amazing. Thirty-three percent of all of our customers account for 71 percent of our
Operating profits. Another 27 percent account for approximately $100 million in losses.
Obviously, we have some customers who are more profitable than others. We need to
develop a strategy to segment our customers and offer each segment the suite of services
they are willing to pay for." •
"Wait a minute," exclaimed Chris Sills, vice president of corporate sales. "You're ask­
-ing us-to-take-some-serviees -away-from-our-rnstomers. Who - -is-going_ to_break the__ newsL
What about the sales commissions for my reps? This is not going to be received well by
the customer base."
You have been hired as an expert on customer relationship management. Telco's
current service offerings to its entire customer base i1:clude product quality, order fill
rates, lead time, delivery time, payment terms, and customer service. support. You have
been asked to prepare a report outlining how Telco could adopt the CRM approach to its
customers. Specifically, this report should address the following:

CASE QUESTIONS
1. How should Telco approach segmenting its customers? That is, on what basis (cost to
service, profitability, etc.) should the customers be segmented?
2. How should Telco tailor its service offerings to each customer segment?
3. Should certain customers be asked to take their business elsewhere?
4. How should the revised service packages to each segment be introduced to that
segment? By the sales force? Should all segments be done at the same time?
5. Each division has its own sales force, manufacturing facilities, and logistics network.
As such, common customers (those who buy from more than one division) place
separate orders with each division, receive multiple shipments, and receive multiple
invoices. Would it make sense for Telco to organize around customer rather than
around product? If so, how would this be done? What would the new organizational
metrics look like?

Source: Robert A. Novack, Ph.D. Used with permission.

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