MAFDM - Study Unit 1 - DCPA & Pareto Analysis

What is a profitable customer?

'A person, household or company that, over time, yields a revenue stream that exceeds by an acceptable amount the company's cost stream of attracting, selling and servicing that customer.'

What is Direct Customer Profitability Analysis?

Analysis of the revenue streams and service costs associated with specific customers or customer groups.

What is the second of four steps to initialise Pareto's Analysis?

Find each figure as a percentage of the total.

How can Pareto's analysis be used in the context of overheads?

In conjunction with ABC Pareto could be used to analyse the drivers that cause the majority of overhead costs in an organisation. By ranking the drivers the company will have a clearer focus for any cost reduction schemes by prioritising the efforts towards the most significant ones.

What is the fourth of four steps to initialise Pareto's Analysis?

It is possible to draw a diagram to illustrate the principle. e.g. a component bar chart or a cumulative frequency graph.

What can be used for in a business context?

Pareto analysis can be used for a number of purposes within the business environment, to analyse revenue, costs, quality success rate etc.

What is Pareto's analysis?

Pareto analysis is a statistical technique in decision making that is used for selection of a limited number of tasks that produce significant overall effect.

How can Pareto's analysis be used in the context of inventory?

Pareto analysis might highlight which few product lines make up the largest proportion of cost or warehouse space. Cost control can be better targeted, JIT systems could be applied to those taking up a lot of space in order to try and reduce the need for as much space.

What is the first of four steps to initialise Pareto's Analysis?

Rank the data in descending order.

What is Pareto's principle?

The Pareto principle (also known as the 80:20 rule) states that, for many events, 80% of the effects comes from 20% of the causes.

What is the third of four steps to initialise Pareto's Analysis?

Turn this into a cumulative percentage.

What are the disadvantages of CPA?

• Companies may not have the data capture systems to produce an accurate estimation of customer segmental revenues and costs. • There may be practical difficulties in calculating costs attributable to each segment. Implementing ABC is often challenging for many companies. • CPA may overlook the combinations of products or services purchased by customers. Customer profitability depends on the mix of products or services bought. The danger is that the analysis will be used on specific underperforming products or services, and will overlook the impact of sales of other products to the customer. - Information needs to be collected carefully.

What are the advantages of CPA?

• Improved profitability by eliminating non-profitable customers and maximising sales or services to profitable customers. • An understanding of the true costs of each customer segment, including taking into account non-production costs when determining profitability. Non-production costs can sometimes be more significant than production costs. Customer profitability analysis Topic Gateway Series 7 • It provides a method of identifying customer groups who are of lifetime value to the company, and who are worth retaining or protecting. • Improved strategic decision making by providing useful information for customer related decisions, including pricing, discounting and marketing decisions.