Chapter 12 CUSTOMER VALUE

Introduction
Evolution of quality definition from internal measures to customer value
Promotes a broader look at a companys 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

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.
i) Supply>demand => inventory costs throughout the supply chain
ii) 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
Zaras 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 Requirement 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

Strategies to Cope With Large Variety Build to Order Model
Configuration is determined only when the order comes in.
Effective way to implement the pushpull strategy by employing the concept of
postponement
Amazon.com
- Moving from a push to a push-pull strategy

Amazon Strategy
Initial Years: Used Ingram Books.
1999:Established its own seven fulfilment centres
- Today, there are 16 fulfilment centres in the US.
-
2001: Focus on improving distribution operations in a push towards profit.
- Improved its fulfilment 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
i) 5 - 10%
ii) 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 Variety 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
- 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 Variety 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
- 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 IBMs 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 customers 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.
- McDonalds 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 companys market conformance.
Usually related to the ability to satisfy a customers 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 Councils 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 companys 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 metrics

Perspectives Metrics Measure
Supply chain On-time delivery Percentage
reliability Order fulfillment lead time Days
Fill rate Percentage
Perfect order fulfillment Percentage
Flexibility and Supply chain response time Days
responsiveness Upside production flexibility Days
Expenses Supply chain management cost Percentage
Warranty cost as percentage of revenue Percentage
Value added per employee Dollars
Assets/utilization Total inventory days of supply Days
Cash-to-cash cycle time Days
Net asset turns Turns

Overall Business Performance Metrics PRTM 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.

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.

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.

Delivery performance to request

- Percentage of orders fulfilled on or before the customers 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 companys 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.