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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?

12-2

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

12-3

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
12-4

12.2 The Dimensions of Customer


Value
Conformance

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

12-5

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.
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
12-6

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.
12-7

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.

12-8

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)
12-9

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
12-10

Long-Tail Phenomena for


Rhapsody

FIGURE 12-1: The Rhapsody data2004 versus 2005


12-11

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


12-12

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)
12-13

Several Initiatives Adopted in


Improved sorting order2001
and utilization of sophisticated
packing machines

Used software to forecast purchasing patterns

Driven directly into major cities


Bypassing regional postal sorting facilities

Partnered to sell goods for other companies such as


Toys R Us and Target

Allowed reduction of inventory levels by 18%

Consolidated shipping of 40% goods into full trucks

Allowed shipping of 35% more units with same number of


workers

Additional $225 million in revenue

Allowed other sellers to offer used books

Increased sales during the holiday season by 38%.


Gross margins about 85%
12-14

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

- 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

12-15

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
Is

costs of cars at the DC

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
12-16

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
28

grocery products

varieties of toothpaste???
12-17

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

Pricing

increase costs which may be offset by higher prices

in services more difficult

Opportunities

for companies that can offer new

services
Not easily transformed to commodities

12-18

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
12-19

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.

12-20

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

12-21

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.
12-22

Create

8 Steps to Customer
Experience

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.
12-23

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.

12-24

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?

12-25

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.

12-26

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.
12-27

Customer Defections
Identifying

such customers not an easy

task
Dissatisfied

customers seldom cancel an


account completely
Gradually shift their spending, making a
partial defection.

12-28

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.
12-29

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

12-30

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

12-31

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.

12-32

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.
12-33

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.

12-34

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%.

12-35

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

12-36

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.

12-37

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.

12-38

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.

12-39

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.

12-40

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.
12-41

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.
12-42