Guide to Supply Chain Management
Page 16
Honda targets an average transit time of less than nine days from assignment to delivery of vehicles, compared with an industry standard of 24 days. It achieves this target by working closely with its transportation partners and placing vehicles in 35 strategic locations. The distribution network allows for high utilisation of rail and truck transport.
The parts division has ten strategically placed warehouses that supply the facing dealerships with replacement parts. The standard for parts supply is two days or less from receipt of order, and 95% of parts are delivered to dealers within 24 hours.
Performance advantages
Companies that follow a customisation supply chain strategy have higher margins than those that do not. McDonald’s, whose name may be prone to association with impersonal service more than the opposite, earned a gross margin of 36% in 2007. Starbucks, which prides itself on recognising its frequent patrons by name, earned a gross margin of 52% during the same period. In fact, a benchmark of personalising companies6 averages 34.6% gross margin compared with 31.8% for a broad cross-section of industries and companies (see Table 8.1). In addition, survey results show that customisation-focused companies earn net profit margins of 16%, compared with 14% in other companies. The higher profits come from price premiums, higher sales volumes, cross-selling, up-selling and referrals to other customers.
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Table 8.1 Benchmark gross margins of customisation-focused companies
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Industry
Benchmark gross margin of companies with customisation focus, %
Household & personal products
63.4
Diversified financials
62.2
Software & services
59.4
Telecommunications services
42.7
Utilities
37.8
Hotels, restaurants & leisure
37.3
Energy
35.3
Technology, hardware & equipment
34.6
Materials
31.1
Transportation
28.5
Capital goods
25.5
Food & drug retailing
18.8
Insurance
10.1
Average
34.6
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Source: Boston Strategies International, based on an analysis of data from Thomson Reuters and Boston Strategies International’s 2008 supply chain performance benchmark study
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They also have more satisfied customers than those that do not. In a 2008 survey, companies that followed a customisation strategy reported 79% overall customer satisfaction, compared with those that did not, which reported 75% overall customer satisfaction. Companies that pursue a customisation supply chain strategy get 15% more customer mindshare, which may be defined as the presence of the brand in the mind of the customer, than those that do not.
How do they do it? They are more focused on meeting the customer’s delivery schedule. They make the customer’s requested delivery date 84% of the time, compared with 81% for the companies that are not trying to personalise. They are much more flexible, able to increase output by 20% more than twice as fast as those that follow rationalisation or synchronisation strategies.
Elements of customisation strategy
Companies can use the supply chain to realise the major elements of customisation strategy:
Control of the customer relationship
Value analysis
Customer knowledge management
Linking the customer data to all interactions
Customer profitability management
Mass customisation
Available to promise/on-demand availability
Personal interactions
Design for configurability
Lifetime services
Control of the customer relationship
Control of the customer interface is critical to executing customisation-based supply chain strategies. Companies often choose to outsource customer call centres, which are one of the most frequently outsourced activities. However, many companies took them back in-house after offshore customer service representatives failed to deliver the expected levels of quality and service. Netflix, a US online movie distributor, runs a 24-hour, seven days a week customer call centre in Oregon rather than offshore, so that it can stay close to its customers. Road Runner Sports, a US distributor of running shoes, does not plan to shift its call centre to India for this reason. “[Customer service] needs to be so well-executed that you can’t get it overseas. You can’t fool Americans on this,” says Mike Gotfredson, president. Dreams, a UK mattress retailer, keeps control over its delivery personnel even though it would be less costly to outsource them, because it values the control over the customer interface that this provides. Customer “touch-points”, interfaces between company representatives and customers, are strategically valuable and needed to gain and maintain control of the customer relationship, which is in turn needed to execute a customisation strategy.
Whether to go through a value-added reseller (VAR) or a distributor – that is, which distribution channel to serve – is also an important decision that affects the ownership of the customer relationship. The company that serves the customer is the one to collect data on every transaction, and therefore has the ability to mine that data to better understand the customer and offer more relevant and higher-margin products and services. Dunhill, a luxury brand, is taking more ownership of its retail supply chain through both increased ownership of retail outlets and enhanced collaboration with the retailers to better monitor the moment of customer interaction.
For some companies, the channel decision will be a strategic one: all or nothing. Others may decide to split the business. Deciding how much revenue to put through distributors – in other words, how much value to sacrifice for what is usually easier revenue – can require analysis. Since the decision hinges on risk and return – the risk of not being able to sell direct as against the lower return from selling to an indirect partner – decision tools such as real options may be used to determine the optimum split.7
Value analysis
Some may describe value analysis in terms of the voice of the customer. Regardless of the name, understanding the customer’s underlying needs is central to avoiding commoditisation and moving up into premium segments of the market. Customisation-focused companies devote more than three times as many resources to value analysis as those that focus on other supply chain strategies.
Value analysis segments customers based on their preferences, sometimes at the broad level and often at the detailed (feature or attribute) level. It presupposes that the marketing department has segmented the customer base. It also assumes that there is a mechanism, usually through the sales force, to gather data on customer transactions and interactions, for which a direct relationship with the customer is often needed.
Quality function deployment
There are many tools for structuring value analysis, including segmentation tools such as cluster analysis and quantitative market research tools such as conjoint analysis. Quality function deployment and its hallmark diagram, “the house of quality” (see Figure 8.1), are useful because they are easy to understand and adaptable to most products and services. The product characteristics are listed across the top and the potential dimensions for improvement are listed down the side. The strength of the interrelationship between the two goes in the grid, and the strength of the relationship between the product characteristics and between the potential dimensions for improvement is marked in the diagonal grids. Sometimes space is left at the right and/or at the bottom for comments and action plans.
Figure 8.1 The house of quality
Source: Author’s adaptation of diagram from the University of Calgary, Software Engineering Department
The makers of the film Jurassic Park used a diagram of the house of qu
ality to help design a more lifelike model of a dinosaur than had never been used before. The dinosaur needed to breathe, make facial expressions and flare its nostrils, for example. Quality function deployment was used to get the dinosaur ready for prime time.
Customer knowledge management
Customer knowledge management, as used here, is the gathering and use of customer data to enrich and enhance the delivery of the product or service on a customer-specific basis. It is tightly related to customer relationship management (CRM), which is essentially about differentiating between customers and treating each one differently.
CRM’S objectives are to enable the customer management process. US companies lose half their customers every five years, according to Donald Peppers and Martha Rogers.8 The prescription is a customer relationship management process which, according to Roger Baran,9 a CRM expert, involves ten steps: identifying prospects, acquiring customers, developing customers, cross-selling, up-selling, managing migration, servicing, retaining, increasing loyalty and winning back defectors.
Gathering data on customers, their behaviour and their interactions with the company is the first step in CRM. To gather data, customers must first be identifiable and have a retrievable data record, which is not always the case. For example, if they have been inactive recently, their data record may be inaccurate or purged from the customer database.
A US drugstore, cvs/pharmacy, gathers information through its ExtraCare loyalty card as customers shop. The loyalty card is structured so the buyers benefit: they get a 2% rebate and $1 back for every two prescriptions filled when they spend a minimum quarterly amount. But CVS benefits as well by having access to customer-specific data, from which it can precisely – individually – target coupons, discounts and promotions.
A European department store, Galeries Lafayette, has a sister company that offers loyalty cards. Because it has proprietary access to the data, it can mine the data for customer-specific purchases and purchase patterns. By correlating the information across family members who have cards, it can even predict the buying habits of one family member (say, a daughter) based on the buying habits of another (say, her mother) and use that information to develop special promotions.10 Tesco, Sainsbury and Marks & Spencer are not blind to the potential and introduced loyalty cards; Tesco spent £1 billion in cash giveaways between 1995 and 2002 on the programme, and it claims to have increased profits by 100 times that.11
Netflix uses its online ordering system and back-end data mining to compile extremely detailed knowledge of individual customers’ preferences. It uses that information to determine customer priorities in fulfilment operations, so as to achieve a 95% fill rate on next-day deliveries and simultaneously make sure that customers who order different kinds of movies, from new releases to old classics, get equitable treatment despite variations in stock availability.
Customer data management in business-to-business environments is equally important. Sales force automation (SFA) software helps gather and analyse contact and correspondence history.
Privacy issues are a substantial concern in customer data-gathering. Permission-based marketing has gained popularity as a way of ensuring that customers feel they benefit from the process rather than are abused by it. By using opt-in and opt-out provisions, customers have a say in their own involvement.
Because the highest-quality customer data are often gathered through a company representative who delivers the last article of the supply chain to the customer (such as the airline ticket, the box of shoes at the store, the package with the purchase inside), the supply chain should play a critical role in value analysis. The individuals who touch the customer should be involved in the analysis of the data to improve the delivery mechanism, which inevitably involves stepping back in the supply chain to remedy problems.
Data mining
Fair Isaac is a US-based services firm that specialises in customer data enrichment and analysis for retailers. It gathers customer data from all the touch-points that its customer have with their customers, cleanses it, aggregates it and enriches it with data from third-party sources. The external data pick up information such as birth dates and addresses (the postal code says a lot about income and demographics). Then it mines the data for patterns and priorities. One of the biggest challenges is simply aggregating the data from the customer, since such data normally come from many different sources, such as point-of-sale data from the customers’ stores, call-centre calls and e-mails.
Linking the customer data to transactions
The information is good only if it enhances the customer’s experience and the customer increases his sales with the company. For that to happen, the company must link the customer-specific data to all transactions that the customer makes with the company.
Ahold, a Dutch supermarket chain, is experimenting with “smart carts” that have RFID chips and electronic displays. Based on the customer’s location in the aisle, the display can project personalised announcements (for example, “Are you aware this product has gluten in it?”). Although early stages have not been linked to actual customer purchase history and/or demographic data, this can be imagined as part of an ultimately very different shopping experience.
Depending on the data, the linkage may or may not be transparent to the customer. A guest staying at the Ritz Carlton who asks for a hypo-allergenic pillow will never have to ask for it again. The Ritz does not even tell the guest that it has memorised the preference; it gives the guest the same pillow next time he or she stays there.12
Linking customer data to transactions involves technology that collects data on events throughout the supply chain. RFID, for example, can be used to link customer-specific data to real-time transactions, inventory availability and order processing. The steel shopping cart of today will be dwarfed by the intelligence of the data system, just as the engines of most cars today have become more about electronics than about pistons.
Customer profitability management
Since a customisation supply chain strategy is about increasing margins, an important element is the ability to know the profitability of each customer. Companies that do this usually divide the customers into tiers – for example A, B and C customers, with A customers being the highly profitable ones. For example, Brown Shoe, maker of brands such as Buster Brown, Naturalizer and Dr Scholls, uses software called ProfitLogic to determine the profitability of various products to help it drive price decisions that lead to higher margins. Some companies go further and quantify customers’ lifetime value: the amount they will contribute if the company can retain them indefinitely.
Customer-specific costing
To ascertain customer profitability, customer cost and customer revenue are needed, but most companies’ cost accounting systems are not sophisticated enough to allow accurate cost accounting by customer.
For consumer goods, cost allocation is less of an issue since the fixed costs get spread across large quantities of items. However, in industrial environments and capital-intensive plant environments, the methods used to allocate fixed cost often determine whether customers are considered profitable or loss-making. A particular challenge is determining which customers should bear the burden of unutilised or under-utilised capacity. In a plant operating at 70% capacity utilisation, there is a lot of overhead allocation to be done, and the method of allocation can significantly affect customer profitability results.
Therefore, customer-specific or activity-based costing, a process of apportioning costs based on the frequency, volume or cost of usage, is usually the way the cost of the fixed assets is allocated. But the methodology is complex and the process can be challenging. The data are not always available and may be fragmented between multiple departments, and stakeholders may have conflicting interests in the outcome. For example, the sales department might want to shed a high-volume, low-margin customer that loses money to make room for a new sale if it is compensated on profit, but the plant management might want to keep the cust
omer if it is measured according to the volume produced. Therefore, a consultant is frequently involved in activity-based costing exercises.
Customer-specific pricing approaches
Differential classes of service
American Airlines created differential classes of seats for full-fare and for discount passengers and put People Express, a budget airline, out of business by offering a similarly priced alternative without sacrificing revenue – indeed, it actually increased it. One of the early concerns about the approach was that by creating two classes of seats, the full-fare customers would buy discount seats instead, thereby cannibalising the revenue. However, the airline limited this risk by making the full-fare seats available only during weekdays, when most business travel takes place. American Airlines’ Sabre business unit was so successful that Sabre sold its system to other airlines, and Sabre has flourished as a stand-alone company operating in other industries in addition to air travel. In recent years, differential classes of service have become an accepted pricing approach across many industries such as hotels and online media.13
Demand management
Demand management (also called yield pricing) is the process of adjusting pricing to influence demand and thereby increase sales and margins. In periods of excess demand, a high price encourages customers to seek non-peak periods. In periods of low demand, a low price encourages customers to book slots, typically anywhere above marginal cost. The combination of category profitability management, yield pricing and customer data can be used to offer timed and targeted promotions to individual customers.