Strategic moves for troubled times: Firing unprofitable customers

Firing customers can be a difficult—but often necessary—task. With all the effort it takes to get customers, particularly in a down economy, knowing who to fire and why is critical. First, look at your customer P&L to determine which customers are profitable and which ones are perennial money losers.

Determining that might involve several criteria. With resin prices on the rise, are there certain customers that just won’t budge on price to accommodate your increased fixed costs? How much margin do you have to play with before you’re shipping a dollar with each part you send?

Quality is a big one. Look at customers who continually change their quality requirements. How does this impact the bottom line? Which customers have the highest reject rate and what is the reason for the rejections? Is it really a quality issue or is the customer trying to buy time for its payables?

When asked at a recent Plastics News Executive Forum panel discussion, “How do you walk away from business?,” Key Plastics president Daniel Ajamian replied that Key is very focused on managing its costs, so occasionally the company has to be aggressive with a customer and take a hard line with them.

“We had one customer that was regularly late in paying our invoices. This was a customer in which we made a marginal profit on anyway, but we debated putting them on COD,” Ajamian explained. “We finally did it because being late was their MO. Not all customers deserve to be customers. They can’t force you to do anything that’s bad for your company.”

Still, noted Ajamian, “You have to be sure you’re on the right track when you take a hard-line stance. You have to be sure your customer is bluffing [if they say they’ll pull the business if you take this stance]. You have to weigh your risks.”

Molders might think that given the downturn in business over the past couple of years, now is not the time to be firing customers. Yet, it might be the ideal time in which to make this move. Patrick McNally, a partner in charge, Operations Management Consulting with Blackman Kallick Bartelstein LLP (Chicago, IL), believes that one way a company can take advantage of troubled times is to fire those customers who cost a lot to keep.

“Especially if your cash is tight, you need to take a hard look at your customers and make sure you’re making money,” says McNally. “Consider raising prices and reducing terms on your marginal customers. If your customers are in trouble and can’t go anywhere else, they’re going to have to meet your prices and terms. And if they can’t, let your competition have them.”Good idea! Let unprofitable customers put your competitor out of business, not you. Still, cautions Bruce Larsen, VP/GM, Food & Beverage Products, Plastics Group at Owens-Illinois (Toledo, OH), there are pitfalls to doing this.

“You’re only as smart as your dumbest competitor. You might win the battle and lose the war,” stated Larsen, who was also on the panel at Plastics News’ Executive Forum in January. “Your competition may be doing something not sustainable [i.e., lowballing prices just to get the business in the door]. Long term, we’ll be here—if we do what’s good for our business—but our competition won’t.”