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

Chapter 12

Customer Value

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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?

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Role of SCMAbility to respond to customer

requirements one of the basic premises for SCMRelates to customer specific aspects such as

delivery status or production statusSCM also impact prices by reducing costs

Dell, Wal-Mart

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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. 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

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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.

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

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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.

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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)

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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

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Long-Tail Phenomena for Rhapsody

FIGURE 12-1: The Rhapsody data—2004 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 push–pull strategy by employing the concept of postponement

Amazon.comMoving 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 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%

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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

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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 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

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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 IBM’s income today is from services

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Relationships and ExperiencesBuild 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 featuresBecomes more difficult for the customer to switch

to another vendor.

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One-to-One Enterprise with Peapod

Online groceryPersonalized interface while shoppingCan create own virtual supermarketSave shopping lists and retrieve listsOpportunity 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

Examples: Airline frequent flyer programs, theme parks, Lexus

weekend brunch and car wash events.

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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.

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12.3 Customer Value MeasuresMeasures 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 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.

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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.

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

internal databases.

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Customer Defections Identifying such customers not an easy

task Dissatisfied customers seldom cancel an

account completelyGradually shift their spending, making a

partial defection.

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SC Performance MeasuresSC performance affects the ability to

provide customer valueNeed 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.

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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 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

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SCOR Level 1 MetricsPerspectives Metrics Measure

Supply chain reliability On-time deliveryOrder fulfillment lead timeFill ratePerfect order fulfillment

PercentageDaysPercentage Percentage

Flexibility and responsiveness Supply chain response timeUpside production flexibility

DaysDays

Expenses Supply chain management costWarranty cost as percentage of revenueValue added per employee

PercentagePercentageDollars

Assets/utilization Total inventory days of supplyCash-to-cash cycle timeNet asset turns

DaysDaysTurns

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Overall Business Performance MetricsPRTM Survey

Total supply chain management costsTotal 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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Cash-to-cash cycle timeNumber of days between paying for raw

materials and getting paid for productCalculated 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 MetricsPRTM Survey

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Upside production flexibilityNumber 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 MetricsPRTM Survey

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Delivery performance to requestPercentage 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%.

Overall Business Performance MetricsPRTM Survey

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12.4 IT and Customer ValueMany 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 locationsallowing any member of the channel to share the

inventory.

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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.