United Pipe Boasts Best Year Ever, Despite Slow Economy

SAS® Profitability Analysis Helps Generate Higher Returns

As the Pacific Northwest's leading wholesale pipe distributor, United Pipe delivers irrigation, pumping, waterworks and HVAC equipment to more than 5,000 customers throughout the region.

Thanks to SAS' activity-based management (ABM) solution, managers throughout the company receive monthly earnings reports that show profitability levels for every client. And the results can be surprising, explains Mike Green, United Pipe's chief information officer. In some cases, he says, SAS might even reveal that your very best customers are actually costing you money.

"When we first looked at the model to see where the least profitable customer was, lo and behold, we discovered it was one of our biggest and best customers," reveals Green. "The sales person was so engaged with the account so often that our best customer was truly our worst customer."

Using SAS, United Pipe's managers can recognize the company's most unprofitable customers instantly and then pinpoint the business activities that lead to unprofitable relationships. The new ABM solution allows managers to:

• See actual costs and profitability scores assigned to specific customers.
• Gain true insight into the cause-and-effect relationships that link internal resources to customer profitability.
• Detect potential problems, identify opportunities for improvement and turn those opportunities into action.

As a result, United Pipe has begun to steer even the most costly relationships towards higher profitability. "With SAS, we can determine what it is about a customer that's making him unprofitable," says Green, "Whether its frequent visits to the will-call counter, inordinate delivery costs or simply an overly aggressive discount in pricing, we can zero right in on the key factor. Then, it just takes a few changes in the way we engage with a customer to put them on the right side of profitability. Usually, something very simple can turn that customer profitable and, at the same time, improve our relationships with that customer."

A Companywide Success
The SAS solution models and explores operational activity from each of the company's 23 branches – including sales reports, delivery records and inventory data – to create a comprehensive view of the activities that drive customer profitability. Managers and executives at all levels of the company can view monthly reports that display customer profitability graphs along with associated process and activity costs. Additionally, users can enter parameters to create customized reports for specific regions, branches or departments and further explore the data to understand how operational activities at each branch affect overall profitability.

The solution's profitability model maps a complete business cycle at United Pipe, measuring costs for every activity along the way. "We're feeding in data from all areas of the company – from the upstream supply chain, right down to the selling effort and the downstream end of the supply chain," explains Green.

Based on the SAS ABM solution, Green has identified an optimal cost per unit of activity. "We've identified the key things that are triggers for consumption of cost – the activity drivers. So we measure those things, and we extract those measurements from our ERP system and pump those things into the model. So whether it's product delivery, sales calls or inventory levels, we can now identify that activity across our company and determine what cost zone we want to be in."

Using the solution, Green has determined, for example, that the average cost of delivery is $45 per order. With this number as a guide, managers can compare their delivery costs for each customer. If those costs are excessive, drill-down capabilities make it easy to explore the data further and determine why delivery costs may be too high, and, more importantly, what can be done to manage those costs.

Similar reports map inventory, administrative and sales activities back to customer profitability as well. "We do see the use of this solution pervading the organization," Green says. "Everyone from sales managers to procurement employees, administrators and warehouse employees are using this solution. So it is affecting every key area of the business."

In fact, Green says the ABM philosophy has become so integrated into the company's culture, that the SAS solution will soon be used to drive a new system of employee compensation at United Pipe. "Whether it's the administrative staff, the warehousing and logistic staff, or sales force, we're making it possible for managers to contrast and compare their performance with their peers and to equitably reward top performance."

Operational Changes Result in Better Customer Relations
While the SAS solution has prompted changes in delivery charges, inventory transfers and employee compensation, Green says the new policies often benefit United Pipe's customers as well. For example, when managers realized how much it was costing the company to pick up surplus products at customer sites, they implemented a plan to help ensure customers do not over order, especially at the end of the year.

"We use our SAS ABM solution to become better partners with our customers," says Green, "and to figure out how to build closer, tighter customer relationships that lead to greater profitability for both companies."

Green cites another example, in which the SAS solution helped managers identify and improve profitability for one particular customer whose employees were making frequent stops at one of United Pipe's warehouses to pick up supplies.

"They had five guys in a truck coming by twice a day for up to an hour," explains Green. When United Pipe's managers notified the company of the excessive down-time, Green says they were shocked. "We suggested they place an order once a week instead, and we'd deliver it to the job site. It's been a win-win for both companies. We're saving money on the transaction costs associated with so many small orders, and they're saving up to five hours of labor every day. That was all it took to turn that customer into a profitable customer."

Increased Profitability, Despite a Slow Economy
While Green hesitates to attribute recent earnings solely to ABM, he is eager to say the SAS solution has contributed to a highly profitable year in 2002. "We just celebrated one of our best years ever, and this is at a time when the rest of the economy is relatively under-performing."

In fact, Green says SAS was a solid contributor in delivering an annual profitability increase of nearly 1.5 percent. "In this business the average profit range is about 5 to 7 percent. If you add a full percentage point, you're talking about a 20 percent increase in profitability."

And as for the future? Green sees an ongoing relationship with SAS and activity-based management. He says: "We definitely see this as having an ongoing return on investment. I'm quite sure that the product paid for itself this year alone, and we anticipate it to continue to pay dividends for many, many years to come."

Copyright © SAS Institute Inc. All Rights Reserved.