Customer-centric Supply Chains

Stephen DeAngelis

June 02, 2010

Companies need customers. I realize that is not a shocking revelation. Karl Albrecht once said, “If you’re not serving the customer, you’d better be serving someone who is.” For individuals involved in the supply chain business, making the customer the focus of the supply chain is not as easy as it may sound. Steve Banker recommends that you ask: “What Key Performance Indicators (KPIs) should your company use to benchmark its supply chain capabilities? Another way to think about this question is to ask: What do our customers want? What will cause them to buy more goods from us? What will they pay more for?” [“What Customers Truly Value vs. What They Say They Want,” Logistics Viewpoints, 12 May 2010]. He offers some further suggestions as well:

“Your customers should be grouped into cohesive channels with similar buying behaviors. So, for a consumer goods company, one channel might be its largest and most demanding retail customers. Another channel might be smaller retail partners and a third group might be the wholesale channel. The next step is to assign supply chain metrics to these different channels. For example, a key ‘want’ for large retailers is to ensure that when customers come into their stores, goods are on the shelf for them to buy. For this channel, one core metric could be on-shelf availability. For wholesalers, price might be the overriding factor. They want promotions that allow them to buy goods in bulk more cheaply. For this channel, KPIs related to achieving price efficiencies are the ones that matter the most. You might ask, for example, what is our cost per case pick? How does that compare to our competitors? This is a fairly simple idea, but it is not easy to execute.”

Banker goes on to note that “there are several hurdles” to developing a customer-centric supply chain. He continues:

“If you ask customers what they want, they will say ‘We want lower prices, cooler products, and better service.’ But what really matters to them? What will cause them to buy more goods from you? What will they pay extra for? A rigorous approach to answering these questions is to do conjoint analysis. Here is how Wikipedia defines conjoint analysis: ‘Conjoint analysis requires research participants to make a series of trade-offs. Analysis of these trade-offs will reveal the relative importance of component attributes.’ For example, let’s say you are a hotel manager and you are trying to figure out what kind of offers to send to different groups of customers. You might survey a group of customers and give them a choice of paying $200, $250 or $300 for a hotel room that could have a view of the ocean or of the parking lot, and it could have a King-size bed or two double beds. Almost everyone will pick $200 / ocean view / King-size bed as their first choice. But things get interesting from there. For their second choice, what will the customers give up to keep something they want? Will they give up price to keep the ocean view? Give up the King-size bed to keep the low price? And so on. The trade-offs your customer makes provides you with insights into what they truly value. Ask your customer directly what they want and you are already negotiating. Have them do a conjoint analysis and you get to the core of what they define as value! Conjoint analysis can help you answer questions like how much more a customer will pay for 2% stock outs vs. 5% stock outs, or how much more they value a branded product vs. a private label one? It’s never just about price – it’s about selling value, which is always a tradeoff between price and some quality of goods or services received. Conjoint analysis helps you better understand the tradeoff your customer is making so you can focus on the things that bring them value!”

Banker then describes a discussion he had with Cameron Tipping at IIBD, a boutique consulting firm that specializes in conjoint analysis.

“I asked Cameron how his firm would approach a small channel that only had a few customers (e.g., a channel composed of just Walmart and Target). He said that he would try to get everyone at the chain that influences the buying decision to answer the questionnaire. For a Walmart, it might be just three or four key people for a particular category. Their answers might not all agree. One executive might put higher value on the brand, while another might value on-shelf availability more. But armed with this information, you can tailor your pitch appropriately to each buyer. In channels where a few people move major amounts of money to a few suppliers in a category, knowing the tradeoff they are making when they define value can give the supplier a big competitive advantage.”

Conducting conjoint analysis is relatively inexpensive (typically around $50K Banker reports). But he believes the ROI of the analysis is worth it. He concludes:

“For many companies, benchmarking themselves on a set of one-size-fits-all supply chain KPIs does not make sense. KPI’s are channel specific. Sometimes they should be customer specific. Cameron put it simply this way: ‘Assuming you know your customer is dangerous. Understanding them is imperative!'”

Another analyst who believes that achieving a customer-centric supply chain is not easy is Lora Cecere [“Put your Money where your Mouth is…,” Supply Chain Shaman, 12 May 2010]. Lora writes:

“No matter how far you’ve gone on a wrong road, turn back. — Turkish Proverb

Eight out of ten [companies] aspire to build a customer-centric supply chain. Companies really want to be customer-centric, but they are on the WRONG path. Like the Turkish proverb, it is time to turn back. Today’s supply chain is blind to the customer. The technologies being installed – APS, BI, CRM, ERP, SRM – do not help. … Applications are strewn across the enterprise with no clear plan on how to listen, test, serve, and deliver a customer-centric response. So, take the challenge. Put your money where your mouth is. Design and deliver a TRUE customer-centric supply chain.”

Cecere then proceeds to “share insights based on discussions with over 100 companies.” She notes that different industries require different answers; but there are some commonalities — like the need to completely “revamp of the front office, and … redesign of the supply chain.” Since different industries require different solutions, Cecere begins with “the redesign of consumer products value chain.” She continues:

“The biggest barrier to a customer-centric strategy is organizational alignment. As long as sales incentives are tied to volume, marketing is rewarded on market share, and operations on cost, companies will never achieve a customer-centric response. However, for two out of five US consumer companies, there is a new sheriff in town. This new role – Chief Customer Officer – must tackle this obstacle as JOB #1. In this shift, companies must not confuse customer-centric with a customer-first strategy. In a customer-first strategy, companies respond to whatever a customer requests. In a customer-centric strategy, the value chain makes choices on how to serve and respond to the customer based on cost-to-serve, channel and value chain strategies. This organization has BIG ears with active listening, and strong horizontal processes to shape and orchestrate demand. The key is to orchestrate cross-functional alignment with an outside-in focus.”

If I understand Cecere correctly, she agrees with Banker that you need to determine the difference between what customers truly value and what they say they want. She writes, “Being customer-centric is dependent on the organization’s ability to listen, test, design and respond based on shopper insights.” Sounds a lot like the conjoint analysis discussed by Banker above. Cecere explains her take on customer insights:

“Shopper Insights: The goal is to effectively influence the shopper throughout the lifecycle: before they buy, product on the shelf to enable the purchase and delighting the consumer in usage. Traditionally, consumer products companies focused on consumer insights (product usage feedback and panel preferences) versus shopper insights (focus on the consumer through the purchase process: before, during and after consumption). This is a major change. And, shopper and customer insights need to be used cross-functionally. Most are locked behind the walls of the marketing organization. Companies used to have the luxury to broad brush the market response. The broad-brush approach meant having all products on all shelves, offering the same trade promotion program for all retailers, and a zealous focus on lift. This luxury is over. Today, there is a shift to micro-segmentation focused on retailer buying personas, category management differing by store cluster, a focus on market basket behavior and personalization of the shopping experience through mobility in the store. It is about choice. It may mean less. Target is testing stores with 50% fewer items. At a recent IRI conference, Grant LaMontagne, Chief Customer Officer of Clorox presented that they found that they increased volume by 8% by selling fewer items. Sara Lee reported that they grew the category through careful selection of the number of servings/package. Based on IRI data, today, 55% of shoppers shop 10 or more stores, and 60% will go elsewhere for a better price. This is a sharp difference from two years ago when 35% of shoppers cross-shopped 10 or more formats. Bricks are merging with clicks as shoppers focus on lists, routes and trips. Social commerce is helping to streamline this process for Millennials representing a 50 billion dollar market opportunity. e-Commerce grows in importance to fill the gaps between bricks and clicks. 90% of Best Buy shoppers start on-line before they go to the store. There is now a marketplace at Sears where suppliers can directly market an on-line presence. Alice.com–offering direct links to consumers with free shipping – predicts that it will ship nearly one million boxes in 2010. The endless aisles of e-commerce enables commerce options for tier 2 and 3 brands that are being squeezed from the shelf.”

Strengthening Cecere’s points about “less is more” and “better prices,” are recent decisions by Walmart to start experimenting with smaller stores [“Walmart thinks small for future,” by Jonathan Birchall, Financial Times, 7 May 2010] and to continue to reduce prices [“Wal-Mart Bets on Reduction in Prices,” by Miguel Bustillo and Timothy W. Martin, Wall Street Journal, 9 April 2010]. She is also right on point with her comments about e-commerce (see my post entitled Walmart, MasterCard, and Visa Ramp Up e-Commerce). Cecere next discusses the importance of listening, testing, designing, and responding.

“Listen: Last week, I was talking to a company actively monitoring the voices of the customer at 143 listening posts. What is a listening post? It is a point in the value chain of customer communication. They take different forms. It includes unstructured text comments in order management, distributor survey form feedback in Direct Store Delivery (DSD), consumer complaints to the call center, blog reviews and comments on the Internet, return and damage information, etc. The list goes on and on and on. How well do you listen? Most of this data is unstructured text. The good news is that the technologies to help you listen – sentiment analysis from providers like Clarabridge, Lexalytics and SAS Institute – has come along way in the past five years. Sentiment analysis, and the design of listening posts, is a consideration in any customer-centric design. Companies with a focus on listening posts understand that the most powerful force in demand shaping is word of mouth.”

Test. With the evolution of micro-segmentation, store clusters, and specialized offers, market testing with active test and learn strategies grows in importance. The secret is the design of the test, access to clean data, and discovery tools for analysis. To help, Applied Predictive Analytics (APT) continues to make progress to systematize test and learn processes.

Design. We speak to the shopper in many different ways. With the rise of social commerce – the use of social technologies to drive commerce–power in the value chain is shifting from the retail to the shopper. The choices and inter-relationships between tactics are more complex. Retailers are trying to shift spending to increase trade, media proliferation is changing the nature of advertising, category management is becoming more targeted and social commerce is a new frontier. Companies struggle with how to make the right choices. The good news is that there are now ‘hooks’ to use shopper insights in solutions from Demandtec, M-Factor, Nielsen, and Symphony/IRI. These solutions are on a fast track to change. Shopper insights need to be central to cross-functional response.

Respond. Demand sensing and active/aligned processes for demand shaping (price, trade promotion, new product launch, and incentives) are core to the customer-centric response. We got our R’s all wrong. Supply chains, as currently designed, cannot sense. They have a blind response. For the past decade, supply chain leaders have pushed a vision of RFID – but, to no avail – to improve sensing. The tags are still too expensive for most use cases. QR codes – a two-dimensional tag– was invented in Japan in 1994 to enable high-speed scanning. Today, these codes are read by cameras in mobile phones and off of mobile phones to scanners in the store. These codes are PACKED with information about the shopper. This could be a game changer. For decades, consumers have used coupons. Now the supply chain has the ability to use the data about the consumer that uses coupons. For example, a retailer, like Best Buy, can make a personal connection to its Facebook fans or to their loyal shoppers through their loyalty program on-line. A unique customer ID is embedded in the QR tag. When it is used, Best Buy can track the usage back to either the customer’s behavior on-line (what they searched versus what they bought) and offer new coupons to shape demand. These programs are evolving, but new forms of predictive analytics are right around the corner. QR tags also enable direct communication to the consumer on the safe and secure supply chain. It can answer questions like:

  • Is this product safe to eat?
  • What is the carbon footprint of this product?
  • Where was this product produced?

The problem is that the back office processes are not able to provide information to communicate this type of direct information to the consumer. This is changing. The bar is rising. Will your processes be able to keep up?”

For more on the current state of RFID tags, read my post entitled Traceability in Global Food Supply Chains. Although customers sometimes feel more like victims of abuse than valued assets, good companies know that treating customers right is by far the best policy. Robert Half asserts, “When the customer comes first, the customer will last.” Customer-centric supply chains will help gain loyal and lasting customers.