Boise Office Solutions (BOS), headquartered in Itasca, Illinois, is a controlled subsidiary of Boise Cascade Corporation. In 2001, BOS generated national account sales of $1.6 billion in office supplies, copy paper, computer products, furniture, and advertising specialty items. This is a very impressive number, even allowing for BOS's revenue growth by acquisition. BOS's goal is to provide next-day delivery of its entire range of products in its full-line catalog—at consistent prices and service levels to customers throughout the United States. As national suppliers know, this is not an easy goal to achieve. But BOS has achieved it—for some of its largest domestic customers. Of BOS's 1000+ national accounts, a great many are in the Fortune 500. BOS believes it still has tremendous opportunities for continued growth in the Fortune 500 and just below.
BOS's selection criteria for national accounts are those potential customers who:
spend at least $250,000 per year on office products (BOS' average national account spends $1 million annually);
have at least three BOS locations (distribution centers) serving them;
have a centralized initiative to negotiate a nationwide agreement; and
have some internal team that will organize the interface with BOS.
Once BOS selected and served multiple national accounts, though, the multiple distribution centers for multiple national account divisions made it very difficult to determine these customers' profitability. As a distributor, BOS is traditionally concerned with the cost of goods in relation to sales and with big buckets of administrative costs. But BOS's parent company, Boise Cascade Corp., is primarily a manufacturing company, paying close attention to cost accounting. As BOS grew dramatically in the early 1990s, Boise Cascade Corp.'s culture influenced BOS to better understand its own costs and to tell if a given national account was profitable or not. The profitability model was also driven by the frustration of BOS's executives, who did not know the true profitability of their national accounts.
As an initial step in understanding its costs, BOS decided to define and study its business processes. BOS identified 78 processes involved in conducting its business at the distribution centers. These include such activities as bin-order pulling, bulk-order pulling, order entry, collection activities, receiving at the distribution centers, shipping from the distribution centers, sales calls, and pricing. Once BOS defined and studied these processes, it used activity-based costing (ABC) methods to compute BOS's overall cost/process.
BOS dispatched ABC teams to its distribution centers to review the frequency of these processes and determine what each one cost. The ABC teams even included in their analyses costs such as forklift depreciation for each process in a distribution center. The activity-based costing team provided BOS with a cost per process per distribution center. BOS could then compute the average cost per process across the whole company—and could standardize the most cost-efficient processes. Once standardized, the distribution centers' processes were easily costed. For example, BOS now (January 2003) knows that it costs $1.06 to enter one stock-keeping unit (SKU) while taking a telephone order and that it costs only 36 per SKU if the order arrives via electronic data interchange (EDI). BOS completed this costing analysis for all 78 identified processes.
From this point, it was possible to take the same approach at the customer level. For instance, BOS's mainframe can tell whether a particular order came in through a customer-service telephone call or through EDI. BOS just had to identify which processes it used to serve the national account and then calculate how many times each process was performed on its behalf. The firm also accounted for all overhead costs. Because BOS already had an excellent handle on product gross margin per customer, it just needed to determine a pretax profit figure for each national customer by subtracting the costs to serve it. In the case of a multidivision national account, BOS just rolls up all of the product gross margins, the different locations' process costs to serve, and other overhead figures to calculate the profitability for that customer. As a value-add for strategic accounts, BOS will also generate reports that compare a strategic account's buying habits in New York to its buying habits in Chicago. BOS can also compare the purchasing patterns of different account divisions within a single location.
While BOS was solving its challenge, its national account managers were explaining to national accounts the basis for its process costing. The customers frequently asked, "What's in it for us to change our buying processes?" Thinking that its customers could gain efficiencies similar to those it had achieved, BOS chose to take the skill "to the customer's side." Introducing this analysis to each customer using BOS's ABC teams was, however, not practical (although BOS briefly considered going into the activities-based consulting business). As an alternative, BOS decided to create ABC software so its national accounts could duplicate the process it had gone through.
BOS asked a senior marketing analyst to create the software. Using the assistance of an outside software firm, he was able to document and automate the steps BOS had been taking internally. The end result was a program called "SAVE." BOS developed marketing materials to support the software before the company offered the program to national accounts. BOS also had to train its people how to use the program—sales reps could not rely on the ABC teams when they were working with their customers. In addition, BOS had to teach them basic accounting and activity-based costing concepts. BOS designed a training curriculum with disks, PowerPoint presentations, and hard copies of worksheets for the BOS sales managers. After the sales managers went to Chicago for training, they returned to their offices to train the national account managers and the sales reps.
The "SAVE" program requires the national account to input some basic information concerning its purchasing processes: the number of minutes the particular process takes, the average compensation of people doing the process (including average benefit costs), and some additional variables such as whether they are buying from a catalog or online. This time the program multiplies those factors by the resource costs to get a total cost per process. The software then multiplies the resulting cost per process by the number of times BOS performs the process for them—a figure BOS can access from its mainframe—to provide them with the total costs they pay for using that process over time.
"SAVE" helps BOS national accounts get a clear picture of many processes, including:
Requisitioning—when an associate requests replacement office products.
Order placing—when the purchasing department places an order for the office products.
Receiving and distributing—when the office products arrive at the customer's site.
Accounts payable—when the customer's accounting department pays the office-products supplier.
Once a BOS customer has learned its total cost for these processes, the BOS SAM offers to do some "what-if" modeling to explore ways to reduce costs. Suggestions may include using EDI instead of the fax machine, managing the billing process electronically, or placing batch orders on certain days of the week. The SAM, at this point in a consultative role, gives the customer a series of options. For each option, he/she can identify an expected savings to the customer.
Purchasing people typically don't get that excited about these soft-dollar cost savings, because their company usually measures their performance based on the price they pay. Finance people, however, have been very impressed with SAVE. The CFOs of some of BOS's national accounts have asked why their other suppliers are not providing the same data to them (always a good sign).
BOS can point to many benefits of the "SAVE" program both for itself and its national accounts. BOS can help the customer save money at the interface between the two firms. Just as valuable, though, is the benefit that "SAVE" can offer the customers of BOS's national accounts.
Medicon, a BOS national account, offers an excellent example of how to achieve these benefits. Medicon, a large hospital buying group, is an umbrella organization that contracts with medical-supply providers such as Allegiance Healthcare, which cover many hospitals' needs. The Medicon salespeople call on the hospitals' chief administrators, as opposed to their purchasing departments. Medicon suspected that it could use "SAVE" for products it sells, such as surgical supplies and gowns. The firm has, in fact, used the "SAVE" software to help lower its customers' costs. BOS has elevated the value it brings to its national accounts and, in this case particularly, the value its national accounts bring to their customers. It's a natural win-win solution.
And there are other wins. In many cases, actions that national accounts take to save money also save money for BOS. For example, when a customer implements EDI to save money, BOS also saves money in areas such as forms, reduced mistakes resulting from human error, number of days sales are outstanding, and on collection activities.
Helping its national accounts win, both by lowering their purchasing costs and providing value to the national accounts' customers, puts BOS in a position to gain additional share of the national accounts' business. BOS's national accounts now view them not as an office-products company that provides commodities, but also as a provider of business and organizational solutions. Admittedly, this case is based on BOS taking advantage of a relatively unique situation where its own processes involved at the customer interface are generic and reversible with the purchasing processes of its national accounts. At the same time, however, we know of very few suppliers that have captured the costs of their 20/80 processes—the 20 percent of its processes that generate 80 percent of its costs to serve. Determining the costs of those processes and using them to determine customer profitability would in most cases be a major improvement. And activities-based costing, the discipline required to do such accounting, has been around for decades.