Cost Allocation Case Study: Globe Express
Achieving sustainable business growth remains a challenge for key industry players, given the highly competitive nature of the regional market. In this regard, logistics companies are taking advantage of various strategies and techniques to boost their business performance, and ultimately, drive the bottom line. In the UAE, Cost Allocation has been among the key methodologies applied to enhance the business performance of logistics companies.
Pearson’s “Cost Accounting” (14th edition), a book on cost accounting strategy development and execution authored by Stanford professors Charles T. Horngren and Madhav V. Rajan and Harvard professor Srikant M. Datar, provides a concrete example of the benefits of cost allocation within the UAE setting. The book has chosen to highlight the experience of Globe Express Services (GES), one of the world’s top 100 global logistics providers, in adopting Cost Allocation as a strategic business tool to drive the bottom line of the company’s Dubai operations. The book points out that GES was able to boost net profit by 35 percent in 2008 and, despite a drop in revenue as a consequence of the global economic downturn, by 16 percent in 2009, by simply applying the fundamental principles of Cost Allocation.
“Understanding the value of allocating cost has been a vital element in our company’s growth strategy,” says Mustapha Kawam, managing director, Gulf States for GES. “It gives us greater leverage to further enhance our margins during boom times, while serving an even more crucial purpose in keeping profits up during downturns. The Cost Allocation methodology is an important tool in generating information that is critical in decision-making. Indeed, Globe Express Services has made major business decisions that have created a positive impact on the company’s business performance and it is our profound understanding of Cost Allocation that has given us the confidence to make such firm decisions and take concrete action.
“Cost allocation has certainly been a key factor in driving the company’s profitability.”
In 2008, GES began implementing a Cost Allocation methodology for its Dubai operations to analyse customer profitability. The initiative ultimately aimed to increase the annual target profit of the firm’s operations, and likewise, to meet customer expectations, particularly with regard to on-time delivery of shipments. GES proceeded to classify customers into two main categories: “accounts,” or those who make recurring and regular transactions; and “walk-in customers,” or those who make rare and non-recurring transactions. It was subsequently learned that around 75 percent of the branch’s total revenues were generated from “accounts”, so it was decided to focus on meeting the expectations of customers within this group.
GES also restructured operations by grouping accounts into five main business lines: air freight, sea freight, land transportation, warehousing, and project cargo. A team of sales managers and operational executives were then assigned to handle the daily operations of the accounts in each business line and to monitor the level of customer satisfaction. Simultaneously, the company revised its offerings to “walk-in customers,” an important strategic move that aimed to add value to its services and drive the profit potential of each customer.