A little over four years ago, like other companies connected to the building industry, Lennox International was feeling the effects of the recession. Sales were down, and a growing number of customers who bought heating, ventilation, air conditioning and refrigeration equipment from the Richardson, Tex.-based company were having trouble paying their bills. “Each one of the business-unit presidents and general managers was well aware that past due and bad debt had become an issue for us,” recalls Peter Jackson, vice president of finance for business development, planning and analysis at the $2.9 billion (2012 net sales) HVAC and refrigeration firm.
At the time, Jackson was finance chief of Lennox’s residential segment, while Joseph Reitmeier (now executive vice president and CFO of Lennox International) ran finance for the commercial division. “All of our customers were challenged,” says Reitmeier. “Commercial HVAC and refrigeration markets have a tendency to trail residential markets by 12 to 18 months, but during the recession it was more like six months, if not sooner.”
It was then that Reitmeier and Jackson decided that a complete overhaul of credit and collections was necessary. “We had made some progress in reducing bad debt and delinquencies, but we hadn’t gotten anywhere near where we wanted to be,” says Jackson.
They asked REL Consultancy, a working capital advisory firm, to do a pilot analysis of the function and processes. Using REL’s blueprint, Lennox set out to reengineer credit and collections for its residential and commercial divisions. “We wanted to make sure that the way we manage credit risk wasn’t one-sided—that it was a win-win situation both for the company and for our customers,” says Reitmeier. “We viewed it as a way to further solidify our relationship with our customers, improve our processes, better utilize our internal resources and enhance our cash flow.
“We accomplished all of those.”
Segmenting the Customer Base
The project began with an analysis of the customer base and accounts-receivable portfolio. Lennox’s customers are for the most part small HVAC dealers and distributors, often just one person with a truck, working out of home. On the residential side, a typical order comes to about $1,200, says Jackson, while orders for the commercial division are substantially higher. In all, the project covered about 25,000 customers who had purchased from Lennox within the previous 12 months, says Jackson.
Using custom algorithms that Lennox tweaked, REL segmented customers based on historical sales and risk, says Randy Dacus, who joined the company as director of customer financial services at the beginning of 2010. “Sales was straightforward,” he says. “If a customer was in a high segment of sales, it would be coded A. The code for a medium segment of sales was B, and C was smaller-dollar sales.”
Developing a risk profile for each customer “was more complex, because we used internal and external information [from credit agencies] to compute risk,” says Dacus. The numbers 1, 2 and 3 indicated low, medium and high risk respectively. “So A1 would be high sales, low risk, and A3 would be high sales, high risk.”