1. Chapter 12
Customer Value

2. 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?

3. 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

4. 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

5. 12.2 The Dimensions of Customer Value
Conformance to requirements.
Product selection.
Price and brand.
Value-added services.
Relationships and experiences.

6. 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

7. 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.

8. 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.

9. 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)

10. 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

11. Long-Tail Phenomena for Rhapsody
FIGURE 12-1: The Rhapsody data—2004 versus 2005

12. 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

13. 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)

14. 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%

15. 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

16. 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

17. 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???

18. 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

19. 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

20. 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.

21. 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

22. 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.

23. 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.

24. 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.

25. 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?

26. 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.

27. 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.

28. Customer Defections Identifying such customers not an easy task
Dissatisfied customers seldom cancel an account completely
Gradually shift their spending, making a partial defection.

29. 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.

30. 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

31. SCOR Level 1 Metrics Perspectives Metrics Measure
Supply chain reliability
On-time delivery
Order fulfillment lead time
Fill rate
Perfect order fulfillment
Percentage
Days
Flexibility and responsiveness
Supply chain response time
Upside production flexibility
Expenses
Supply chain management cost
Warranty cost as percentage of revenue
Value added per employee
Dollars
Assets/utilization
Total inventory days of supply
Cash-to-cash cycle time
Net asset turns
Turns

32. 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.

33. 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.

34. 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.

35. 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%.

36. 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

37. 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.

38. 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.

39. 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.

40. 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.

41. 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.

42. 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.