I recently spoke on ABC Analysis at:
1. Lehigh University, Bethlehem Pennsylvania to a group of CEOs' & CFO's
for the Federal National Insitute of Standards & Technology Program (NIST).
2. Mexico City, Mexico (2 day seminar) to executives in water,
transportation, oil & pharmaceuticals for various agencies & companies.
Whether it is ABC Costing, ABC Pricing, ABC Analysis...it is still ABC.
The ABC concept in terms of a customer base is simply this.
Your largest customer (s) is the "A" customer. Your medium sized customers
are your "B" customers. Your small sized customers are your "C" customers.
You can make any application of ABC from this analogy. Let's say that your
"A" customer represents 70% of your business. Obviously he is your
employer in this situation because without this customer you would be out
of business. Essentially this "A" customer holds the purse strings to your
business.
Many large companies have this "hold" on smaller companies.
When you first got the order from the "A" customer there was much
celebration. However, now the "A" customer is paying you in 90 - 120 days.
Your short and long term debt are increasing. The bank is looking at you
in disfavor. You are essentially an off balance sheet financing source for
the big company.
So - how can you correct this situation?
The answer - market for "B" companies while still servicing the "A"
company. Gradually increase your percentage share of "B" companies so that
it replaces the "A" company.
This is not an easy task because in order to accommodate the increase in
business you have to obtain more plant & equipment, employees, fixed
assets etc. These are not easy things to accomplish. You might be fixed in
a position that is not very healthy.
To go after "C" companies might not be worth it due to production line run
inadequacies & higher overhead.
The "A" company could very well be your ticket to insolvency & bankruptcy.
Once the golden egg - the "A" can be your demise.
U.S. companies tend to look at the profit & loss statement as their
guiding light. European companies look more at the Balance Sheet.
An "A" company can catapult you into "clawing your way to middle level
business" but be wary of the pitfalls.
You can apply the ABC concept to any number of business situations. It is
a good common sense business tool. |
