Lesson 6

1. Lesson 6 Customer Value

2. 12.2 Introduction • Evolution of quality definition from internal measures to customer value • Promotes a broader look at a company’s offerings and its customers. • Questions/Issues: • Why customers purchase? • Why customers continue to purchase? • Why customers defect from a company? • What are their preferences and needs and how can they be satisfied? • Which customers are profitable? • Does the customer value low prices more than superior customer support services? • Does the customer prefer next day delivery or lower prices? • Does the customer prefer to purchase the item in a store that specializes in this type of item or from a large mega-store that provides one-stop shopping opportunities?

3. Role of SCM • Ability to respond to customer requirements one of the basic premises for SCM • Relates to customer specific aspects such as delivery status or production status • SCM also impact prices by reducing costs • Dell, Wal-Mart • EDLP strategies

4. Customer Value Defines the SCM • SCM strategy determined by: • type of products or services it offers • value of various elements of this offering to the customer. • Examples: • If customers value one-stop shopping => carry a large number of products and options • Personal customization of products => flexible supply chain • Supply chain needs to be considered in any product and sales strategy • SCM strategy could provide competitive advantages leading to increased customer value

5. 12.2 The Dimensions of Customer Value • Conformance to requirements. • Product selection. • Price and brand. • Value-added services. • Relationships and experiences.

6. Conformance to Requirements • Market Mediation: • Ability to offer what the customer wants and needs • Costs associated with the market mediation occur when there are differences between supply and demand. • Supply>demand => inventory costs throughout the supply chain • Demand>Supply=> lost sales and possibly market share. • Functional Items • Product demand is predictable • Market mediation not a major issue. • Fashion items or other high-variability items • Nature of demand can create large costs due to lost sales or excess inventory. • Requires responsive supply chains

7. Zara’s SCM Strategy • It keeps half of its production in house instead of outsourcing as is common • It intentionally leaves extra capacity in its warehouses • It manufactures and produces in small batches rather than try to achieve economies of scale • It manages all design, warehousing, distribution and logistics itself instead of using third parties • It holds its retail stores to a rigid timetable for placing orders and receiving stock. • It puts price tags on items before they are shipped rather than at each store. • It leaves large empty areas in the stores and tolerates, even encourages stock-outs.

8. Conformance to Requirements Built on Three Principles • Closing the communication loop • Supply chain is organized so it can track material and product in real time but also close the information loop both for hard data and anecdotal. • Sticking to a rhythm across the supply chain • Company is willing to spend money on anything that will make its supply chain fast and responsive. • Leveraging capital assets to increase supply chain flexibility • Company uses the investment in production and distribution facilities to make the supply chain responsive to new and changing demand patterns.

9. Product Selection • Proliferation of product options • Larger variety means greater problems with: • Managing supplies • Predicting demand • Three successful trends: • Specializing in offering one type of product (Starbucks/Subway) • Mega-stores that allow one-stop shopping for a large variety of products (Wal-Mart/Target) • Mega-stores that specialize in one product area (Home Depot/Office Max/Staples)

10. Similar Trends on the Internet • Some sites offer a variety of products • Others specialize only in a specific line of products • Combine virtual with physical stores • Dell with its physical stores to compete with Apple • Long-Tail Phenomenon • Lack of physical or local restrictions allows retailers to focus and make revenue on the less popular items in their catalogues • Online sites offer titles/items not carried by traditional retailers

11. Long-Tail Phenomena for Rhapsody FIGURE 12-1: The Rhapsody data—2004 versus 2005

12. Strategies to Cope with Large VarietyBuild-to-order model • Configuration is determined only when the order comes in. • Effective way to implement the push–pull strategy by employing the concept of postponement • Amazon.com • Moving from a push to a push-pull strategy

13. Amazon.com Strategy • Initial Years: Used Ingram Books. • 1999:Established its own seven fulfillment centers • Today, there are 16 fulfillment centers in the US. • 2001: Focus on improving distribution operations in a push towards profit. • Improved its fulfillment costs to 9.8% in 2001 (Q4) down from 13.5% in 2000 (Q4)

14. Several Initiatives Adopted in 2001 • Improved sorting order and utilization of sophisticated packing machines • Allowed shipping of 35% more units with same number of workers • Used software to forecast purchasing patterns • Allowed reduction of inventory levels by 18% • Consolidated shipping of 40% goods into full trucks • Driven directly into major cities • Bypassing regional postal sorting facilities • Partnered to sell goods for other companies such as Toys ‘R’ Us and Target • Additional $225 million in revenue • Allowed other sellers to offer used books • Increased sales during the holiday season by 38%. • Gross margins about 85%

15. Other Issues • 2006: 24 fulfillment centers (FCs) worldwide • Two types of FCs • Sortable => capable of combining items • Non-sortable => for larger items shipped separately. • Increased offerings to 34 product categories • Some fulfilled by Amazon and some by other merchants. • Challenges on the pricing front • Discounts nearly all books over $20 by 30%. • Had much higher discounts before even on bestsellers • 2001: started to raise book prices • 5 - 10% • Reverse the increases as sales fell. • Keeps just one or two copies in its warehouse • Make the title available to the whole country • Restock as quickly as customers buy books

16. Strategies to Cope with Large VarietyLarger Inventories at Major DCs • Suitable for products with long manufacturing lead times, such as vehicles • DCs allow manufacturer to reduce inventory levels by taking advantage of risk pooling • Factors to consider: • Inventory costs of cars at the DC • Is the manufacturer going to pay for the inventory • Equalizing small and large dealers • No difference between different dealers • Difficult to see why large dealers would be interested in participating in such an arrangement

17. Strategies to Cope with Large VarietyFixed Options Cover Most Requirements • Honda offers a limited number of options on its cars. • Dell offers few options for modems or software that can be installed on its machines • Large product variety is not required in all cases • Many grocery products • 28 varieties of toothpaste???

18. Price and Brand • Price cannot be a differential in many industries • Companies like Dell and Wal-Mart use cost reduction strategies to improve profit • Brand names become a guarantee for quality • Premium brands can ask for premium prices • Supply chain has to be more responsive • May increase costs which may be offset by higher prices • Pricing in services more difficult • Opportunities for companies that can offer new services • Not easily transformed to commodities

19. Value-Added Services • Additional services to improve profits • Differentiate from competition • More important now than before because: • Increased commoditization of products • Need to get closer to the customer. • Increase in information technology capabilities that make this offering possible. • Examples: • B2B services offer additional services to increase revenue • Most of IBM’s income today is from services

20. Relationships and Experiences • Build a relationship with the customers • makes it more difficult for customers to switch to another provider • Dell configures PCs and supports them for large customers • Manages the entire PC purchase • Includes special custom features • Becomes more difficult for the customer to switch to another vendor.

21. One-to-One Enterprise with Peapod • Online grocery • Personalized interface while shopping • Can create own virtual supermarket • Save shopping lists and retrieve lists • Opportunity to learn about its service: • Asks: “How did we do on the last order?” • Uses the relatively high response rate of 35% • Institutes requested changes to its services

22. Customer Experiences • Beyond relationships • Designing, promoting, and selling unique experiences to customers • Offering distinct from customer service: • An experience occurs when a company intentionally uses services as the stage, and goods as props, to engage individual customers in a way that creates memorable events • Examples: • Airline frequent flyer programs, theme parks, Saturn owner gatherings, Lexus weekend brunch and car wash events.

23. 8 Steps to Customer Experience • Create a compelling brand/distinct offering that customers can identify with. • Deliver a seamless experience across channels and touch points. • Care about customers and their outcomes. • Measure what matters most to customers • Hone operational excellence. • Value customers’ time. • Place customer’s information requirements and needs at the core. • Design to morph i.e. the ability to change practices based on customer requirements.

24. Dimensions and Achieving Excellence • Companies need to select their customer value goals • Supply chain, market segmentation, and skill sets required to succeed depend on this choice. • Companies cannot excel along all these dimensions • A company needs to be dominating in one attribute, differentiate itself on another, and be adequate in all the rest. • Examples: • Wal-Mart stands out on price and secondarily in large brand selection. • Target competes by emphasizing brand selection before price. • Nike Stores emphasize experience first and product second. • McDonald’s provides access first and service second. • American Express emphasizes service first and access as a second attribute.

25. 12.3 Customer Value Measures • Measures that start with the customer. • Typical measures include service level and customer satisfaction. • What are the basic measures of customer value? • What are the supply chain performance measures?

26. Service Level • Typical measure used to quantify a company’s market conformance. • Usually related to the ability to satisfy a customer’s delivery date • Direct relationship between the ability to achieve a certain level of service and supply chain cost and performance. • Demand variability and manufacturing and information lead times determine the amount of inventory that needs to be kept in the supply chain.

27. Customer Satisfaction • Customer satisfaction surveys used to measure sales department and personnel performance • Also provides feedback for necessary improvements in products and services. • However, reliance on customer satisfaction surveys can often be misleading • Surveys are easy to manipulate • Typically measured at the selling point • Nothing is said about retaining the customer. • Measure customer loyalty • Easier to measure than customer satisfaction. • Analyze customer repurchase patterns based on internal databases.

28. Customer Defections • Identifying such customers not an easy task • Dissatisfied customers seldom cancel an account completely • Gradually shift their spending, making a partial defection.

29. SC Performance Measures • SC performance affects the ability to provide customer value • Need to develop independent criteria to measure supply chain performance. • Presence of many partners in the process/requirement of a common language. • Standardization initiatives such as the Supply Chain Council’s reference models.

30. SCC and SCOR Model • SCC organized in 1996 by Pittiglio Rabin Todd & McGrath (PRTM) and AMR Research • Initially included 69 voluntary member companies. • About 1,000 corporate members world-wide and has established numerous international chapters. • Supply Chain Operations Reference-Model (SCOR) • Process reference model • Analyzes the current state of a company’s processes and its goals, • Quantifies operational performance • Compares it to benchmark data. • Developed a set of metrics for supply chain performance • Members are in the process of forming industry groups to collect best-practice information

31. Overall Business Performance MetricsPRTM Survey • Total supply chain management costs • Total cost to manage order processing, acquire materials, manage inventory, and manage supply chain finance and information systems. • Leading companies have total costs between 4 and 5% of sales. • Median performers spend 5 to 6% more.

32. Overall Business Performance MetricsPRTM Survey • Cash-to-cash cycle time • Number of days between paying for raw materials and getting paid for product • Calculated by inventory days of supply plus days of sales outstanding minus average payment period for material. • Best in class have less than 30-days’ cycle time, • Median performers can be up to 100 days.

33. Overall Business Performance MetricsPRTM Survey • Upside production flexibility • Number of days required to achieve an unplanned, sustainable, 20 percent increase in production. • Under two weeks for best in class • Less than a week for some industries.

34. Overall Business Performance MetricsPRTM Survey • Delivery performance to request • Percentage of orders fulfilled on or before the customer’s requested date. • Best-of-class performance is at least 94% • Some industries approach 100%. • Median performance ranges from 69% to 81%.

35. Design Chain Operations Reference (DCOR) Model • Framework that links business process, metrics, best practices and technology features into a unified structure to support communication among design chain partners and to improve the effectiveness of the extended supply chain. • DCOR developed by the Business Process Management organization of Hewlett-Packard and conveyed to the Supply-Chain Council in 2004. • Organized around the processes of Plan, Research, Design, Integrate and Amend. • Spans product development, research and development • Does not attempt to describe every business process or activity. • Focused on Product Refresh, New Product and New Technology

36. 12.4 IT and Customer Value • Many valuable benefits for customers and businesses. • Three aspects: • exchange of information between customers and businesses • use of information by companies to learn more about their customers so that they can better tailor their services • enhanced business-to-business capabilities.

37. Customer Benefits • Opening of corporate, government, and educational databases to the customer. • Availability of uniform data access tools of the Internet. • Innovations have had the effect of increasing customer value while reducing costs for the supplier of the information. • Automated teller machines (ATMs) • Voice mail • Internet • Opening of the information boundaries between customer and company • Part of the new customer value equation • Information is part of the product.

38. Effects of the Internet • Increased importance of intangibles • Importance of brand names and other intangibles • Service capabilities or community experience in purchasing decisions. • Increased ability to connect and disconnect • Increased customer expectations • Greater ability to compare and the ease of performing various transactions • Tailored experience • Ability to provide each customer an individual experience is an important part of the Internet.

39. Business Benefits • Use information captured in the supply chain to create new offerings for customers. • “Sense and respond” to customers’ desires rather than simply make and sell products and services. • Many forms of analyses: • Sophisticated data mining methods • Correlate purchasing patterns • Learn about each individual customer by keeping detailed data of preferences and purchases. • Method applied depends on the industry and business model.

40. Business-to-Business Benefits • e-marketplaces • Using the Internet to improve supply chain collaboration by providing demand information and production data to its suppliers. • Outsource but maintain control too • Various arrangements between manufacturers and distributors for sharing information on inventory that results in cost reduction • Motivated by the risk-pooling concept • Allow manufacturers and distributors to reduce overall inventory by: • sharing information about inventory in all locations • allowing any member of the channel to share the inventory.

41. SUMMARY • Creating customer value is the driving force behind a company’s goals • Supply chain management is one of the important means. • Customer access to information about the availability of products and the status of orders and deliveries is becoming an essential capability. • Adding services, relationships, and experiences differentiates company offerings in the market • Identifying the appropriate customer value measure not an easy task. • Ability to provide sophisticated customer interactions very different from the ability to manufacture and distribute products. • No real customer value without a close relationship with customers.