Thursday 4 June 2009

Maintaining Customer Asset Value

Following this weeks write-down of its 50% stake in Alliance Boots by KKR, suppliers may be wondering how this impacts their business with Alliance Boots.
Realistically, the ultimate judge will be the stockmarket when the company is re-floated in 5 years time to provide KKR with a profitable exit route.
Successful re-flotation means achieving ROCE levels of 15%+, Net margins of 6%+, Capital rotation of 25+ times per annum, and gearing levels of less than 30%... all by the year 2012, allowing two years to 2014 to provide a good record at those levels to support a good price (market value) on re-flotation. KKR's write-down simply adds to the pressure to perform at these levels, in this timeframe. Alliance Boots need global scale, significant diversification, both wholesale and retail to achieve this, making them a major customer and potential trading partner for many suppliers, in the medium term.
Meanwhile, as manager of the long term health of the customer business unit, the KAM is in a unique position both to determine and help in the achievement of optimum value of Alliance Boots to the business. This has to be a priority for the supplier.
Treating Alliance Boots as a valuable asset will facilitate the process:

1 A first step is to ensure that the company assigns a realistic value for AB, based upon a determination of market potential for the company’s brands within each relevant category. This means taking into account the brand’s consumer profile penetration within the customer, relative competitive advantage of both brand and customer within the marketplace, all related to the company’s ability to maintain the necessary support package and service levels
2 Clarification of the strategic role of each relevant category within AB can help at this stage. Specifically, this means assessing the AB's ‘fair share’ of each relevant category, benchmarked against industry and channel averages, and then measuring specific brand performance against its ‘fair share’ within the customer. An objective assessment of the brand’s competitive position within the category, from the point of view of customer and consumer, can then be made. This analysis can help to validate the strategic classification of the customer as Invest/Maintain or Divest within the overall trade strategy .

3 Next must be assessed AB's actual performance in order to determine the scope for improvement as more of the potential is realised (see Z-Graph method to simplify the tracking and forecasting). Three-year forecasts of sales, gross margin and net profit before tax and resultant cash flows are then made, all discounted to present day values, using Discounted Cash Flow techniques. This will enable realistic comparisons to be made with alternative cash flow projections within the business.

4 Sensitivity Analysis can then be used to assess the extent to which the forecasts are certain, and their key dependencies can be explored. A Risk Analysis completes the forward view by systematically identifying all that could go wrong, the chance of occurring (High, Medium or Low), together with the likely impact of each event upon the business (High, Medium or Low). The combination of Chance and Impact will facilitate the application of a contingency plan where appropriate.

5 An additional way to reflect future uncertainties is to apply a realistic depreciation factor to future business with AB, and five years is recommended. This means writing down existing business by 20% per year, thereby forcing the company to aggressively apply new business development techniques in order to neutralise the effect on projections. Completion of a Customer Account Profitability Analysis, using ABC techniques, will help in calculating a realistic Return on Investment projection.

6 It is now possible to formulate a realistic customer strategy, within an agreed channel strategy incorporating the above elements. The approval of the strategy document provides the KAM with the authority necessary for implementation.

7 All promotional investments should be subjected to rigorous post-promotion evaluation in order to optimise learnings and maintain personal credibility within company and customer. Systematic maintenance of all data relating to the customer in a Customer Data-file will simplify the process of keeping comprehensive details up to date in the long term, and allow easier ongoing comparison between customers.

The main purpose of the above approach is to help the company identify and focus upon potential as a key driver within major customers, and AB in particular. For this reason the KAM should not regard Asset-based Account Management as an extension of the bureaucracy and, instead, view it as a systematic way of adding value and developing new business.

The alternative is to follow a history-based approach downwards, managing a rapidly depreciating asset and missing a real opportunity in the process………

See Kamcity Shop for all the necessary tools

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