Chapter 12

1. Chapter 12 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. • 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

3. 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

4. 12.2 The Dimensions of Customer Value • Conformance to requirements. • Product selection. • Price and brand. • Value-added services. • Relationships and experiences.

5. 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. • 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

6. Conformance to Requirements Built on Three Principles • Closing the communication loop • Sticking to a rhythm across the supply chain • Leveraging capital assets to increase supply chain flexibility

7. 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)

8. 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

9. Build-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

10. Larger 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 • Equalizing small and large dealers

11. Fixed 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 such as grocery products

12. 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 • Pricing in services more difficult • Opportunities for companies that can offer new services • Not easily transformed to commodities

13. 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

14. 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

15. Customer Experiences • Beyond relationships • Designing, promoting, and selling unique experiences to customers • Offering distinct from customer service: • Examples: • Airline frequent flyer programs, theme parks, Saturn owner gatherings, Lexus weekend brunch and car wash events.

16. 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.

17. 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.

18. 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?

19. 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.

20. 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 • Measure customer loyalty • Easier to measure than customer satisfaction. • Analyze customer repurchase patterns based on internal databases.

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

22. 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.

23. SCC and SCOR Model • SCC organized in 1996 by Pittiglio Rabin Todd & McGrath (PRTM) and AMR Research • 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

24. Overall Business Performance MetricsPRTM Survey • Total supply chain management costs • Cash-to-cash cycle time • Upside production flexibility • Delivery performance to request

25. 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.

26. 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.

27. 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.

28. 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.

29. 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.