Chapter 12

Customer Value

McGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

12.2 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?
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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 Dell, Wal-Mart

SCM also impact prices by reducing costs

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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. If customers value one-stop shopping => carry a large number of products and options Personal customization of products => flexible supply chain

Examples:

Supply chain needs to be considered in any product and sales strategy

SCM strategy could provide competitive advantages leading to increased customer value
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12.2 The Dimensions of Customer Value

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

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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. Nature of demand can create large costs due to lost sales or excess inventory. Requires responsive supply chains
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Fashion items or other high-variability items

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.

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Product Selection

Proliferation of product options Larger variety means greater problems with:

Managing supplies Predicting demand 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)
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Three successful trends:

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

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
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Long-Tail Phenomenon

Long-Tail Phenomena for Rhapsody

FIGURE 12-1: The Rhapsody data2004 versus 2005

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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

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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)
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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 Allowed reduction of inventory levels by 18%

Used software to forecast purchasing patterns

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 Increased sales during the holiday season by 38%. Gross margins about 85%
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Allowed other sellers to offer used books

Other Issues

2006: 24 fulfillment centers (FCs) worldwide Two types of FCs

Sortable => capable of combining items Non-sortable => for larger items shipped separately. Some fulfilled by Amazon and some by other merchants.

Increased offerings to 34 product categories

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
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Price and Brand

Price cannot be a differential in many industries

Companies like Dell and Wal-Mart use cost reduction strategies to improve profit
Premium brands can ask for premium prices Supply chain has to be more responsive

Brand names become a guarantee for quality

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
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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
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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.

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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

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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
Airline frequent flyer programs, theme parks, Lexus weekend brunch and car wash events.
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Examples:

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.
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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?

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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.

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

Customer Defections

Identifying such customers not an easy task

Dissatisfied customers seldom cancel an account completely Gradually shift their spending, making a partial defection.

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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.

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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

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SCOR Level 1 Metrics

Perspectives Supply chain reliability Metrics On-time delivery Order fulfillment lead time Fill rate Perfect order fulfillment Supply chain response time Upside production flexibility Supply chain management cost Warranty cost as percentage of revenue Value added per employee Measure Percentage Days Percentage Percentage Days Days Percentage Percentage Dollars

Flexibility and responsiveness

Expenses

Assets/utilization

Total inventory days of supply Cash-to-cash cycle time Net asset turns

Days Days Turns

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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.

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Overall Business Performance Metrics PRTM 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.

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Overall Business Performance Metrics PRTM 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.

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Overall Business Performance Metrics PRTM Survey

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%.

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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.

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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.

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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.

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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.

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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.
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