Chapter 12

Customer Value

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?

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

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

12.2 The Dimensions of Customer Value

• Conformance to requirements.• Product selection.• Price and brand.• Value-added services.• Relationships and experiences.

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

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.

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.

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)

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

Long-Tail Phenomena for Rhapsody

FIGURE 12-1: The Rhapsody data—2004 versus 2005

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

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)

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%

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

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

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???

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

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

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.

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

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.

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.

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.

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?

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.

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.

Customer Defections• Identifying such customers not an easy task

– Dissatisfied customers seldom cancel an account completely

– Gradually shift their spending, making a partial defection.

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.

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

SCOR Level 1 MetricsPerspectives Metrics Measure

Supply chain reliability On-time deliveryOrder fulfillment lead timeFill ratePerfect order fulfillment

PercentageDaysPercentage Percentage

Flexibility and responsiveness

Supply chain response timeUpside production flexibility

DaysDays

Expenses Supply chain management costWarranty cost as percentage of revenueValue added per employee

PercentagePercentageDollars

Assets/utilization Total inventory days of supplyCash-to-cash cycle timeNet asset turns

DaysDaysTurns

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.

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.

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.

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%.

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

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.

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.

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.

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.

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.

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.