Transcript Chapter 12. Customer Value - University of Central Oklahoma

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