When the Customer is King

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Customer relationship management (CRM) helps companies maximize the value of every customer interaction and drive superior corporate performance. And the value of CRM grows considerably when it is tightly integrated with supply chain functionality. A "customer is king" approach is replacing the factory-based push supply chains of the 20th century.

Traditional supply chain management—built around having assets in the pipeline and trying to match those assets to customer requirements—can be a costly gamble.

"These assets are the chips we play in a very expensive game of roulette—one that nobody wins," says Gregg Macaluso, a vice president with UPS Consulting. "It is the 'guess, make, store, and sell at a discount' model of supply chain management." Certainly not the best path to profitability.

Today, a small but growing number of companies are successfully challenging this traditional "push" paradigm. They link the front end of their business—customer management and demand—with the back end—supply chain management.

As forward-thinking companies learn to operate customer-centered businesses, these demand-driven supply networks (DDSNs) are replacing the factory-based push supply chains of the 20th century. This is the essence of customer relationship management (CRM).

Businesses successfully linking CRM with supply chain management (SCM) achieve remarkable results. Indeed, they are twice as profitable as their competitors that do not link CRM to SCM, according to a recent Deloitte Research study. They are also two to five times more likely to achieve superior performance in sales, market share, and customer service.

The Price of Supply

The latest thinking about the CRM-SCM connection starts with turning the supply chain on its head. "Traditional supply chains are based on the factory, not the consumer," say Kevin O'Marah and Joe Souza, AMR Research, Boston.

In their report, Demand-Driven Supply Networks: 21st Century Supply on Demand, O'Marah and Souza argue that this factory-centered supply chain is ineffective for managing consumer demand.

These traditional supply chains exhibit poor performance in a number of ways, according to the Deloitte report:

  • Median time to market for a new product in consumer packaged goods is 27.5 months.
  • Median days of supply on hand for semi­conductor manufacturers is 190.
  • Median order error rate for industrial electronic equipment suppliers is 26 percent.

Because of their internal, production-oriented focus, traditional companies continue to suffer from inventory amplification syndrome across the supply chain.

Affectionately called the 'bullwhip effect,' this amplification phenomenon "causes disruptions downstream to ripple back up the supply chain, creating tremendous demand uncertainty," say O'Marah and Souza.

As of June 2004, this uncertainty translated into $3 trillion of inventory locked in the U.S. and European supply chain, the analysts note.

Businesses can address the inventory glut by becoming more educated about, and collaborating with, their customers.

"CRM is an integrated approach to identifying, acquiring, and retaining customers," says Steve Fioretti, general manager, Siebel High Technology, Siebel Systems Inc., a developer of CRM software solutions. "By enabling organizations to manage and coordinate customer interactions across multiple channels, departments, lines of business, and geographies, CRM helps maximize the value of every customer interaction, and drives superior corporate performance."

Since the 1990s, companies around the world have invested heavily in CRM software solutions designed to solve these issues. Worldwide spending on CRM solutions is expected to increase from $13.7 billion in 2002 to $17.7 billion by 2006, according to Aberdeen Group.

Companies with a high degree of integration between their supply chain and customer management operations create what Deloitte calls a digital loyalty network (DLN).

Participants in DLNs—called "loyalty networkers"—emphasize customer loyalty and have high levels of total supply chain integration within their organization as well as with suppliers, wholesalers, and retailers. These companies also coordinate their SCM and CRM activities. But they are uncommon—only 17 percent of the global companies surveyed in the Deloitte study were granted the loyalty networker title.

Loyalty Pays Off

Loyalty networkers were 100 percent more profitable than those companies with the lowest levels of focus on customer loyalty and supply chain integration, the Deloitte research shows. They significantly outperform all other groups in sales growth, market share, customer service, return on assets, and shareholder returns.

How do loyalty networkers link their CRM and SCM activities to improve profitability?

"They identify their most valuable customers and adjust their service levels based on customer requirements, lifetime potential, and an intimate understanding of total supply chain cost on a customer-by-customer basis," the Deloitte report explains. "This enables supply chain managers to know which orders should get preferential treatment based on real-time knowledge about customers."

Having only one supply chain for your customers is not an appropriate strategy, says UPS' Macaluso, because needs vary greatly from customer to customer. A telephone company, for example, may have customers—such as hospitals and stock exchanges—for whom they are required by regulators to restore service within several hours or risk being fined. Responding to this requirement, the phone company creates a supply chain geared to reacting within a two-hour time frame.

"A closer study of the phone company's customers, however, reveals only 13 percent of customers require that kind of premium response," says Macaluso. "Operating under the premise that it was required to do so, the utility forward-positioned inventory, contracted for emergency air service, and established other supply chain attributes to respond to a majority of customers that didn't need these measures. The cost was astronomical."

Companies need to determine how to respond directly to customers' configured or specific orders in a reasonable time frame, at a price that provides value and profit for the business. The solution lies in creating multiple supply chains that respond to various groupings of customer requirements.

"Customers do not always need everything immediately," Macaluso explains. "They will wait for what they want when they perceive value in doing so."

A customer who goes to an appliance store to look at a new washer/dryer set, for instance, may not plan to purchase one that day. "Most likely, their old machines are not broken," Macaluso says. "They might be preparing to move to a new house; or perhaps their old washer is lacking some desired bells and whistles." The focus in this case should be finding out exactly what the customer wants, not on garnering an immediate sale.

"The paradigm needs to change from telling the customer, 'We can ship a machine in 24 hours, but it may not be exactly what you want,' to asking the customer, 'Is it acceptable to deliver the exact machine you want, set up and installed in three or four days, possibly at a lower cost?'" says Macaluso.

Executing this customer-expected lead time (CELT) is crucial. CELT is calculated as: customer order time + raw material pull order and receipt time + value-added manufacturing time + appropriately speedy outbound logistics.

"If the actual customer expects a certain lead time, and CELT is less than or equal to that lead time, a ready-made case exists for responding to that demand," Macaluso explains. The current fractured supply chain model, however, doesn't support the idea of the three-day washer.

"The main components of a company's value chain—design, procurement, production, and fulfillment—have been sourced to the four corners of the world," Macaluso notes. "Sending these key organizational functions all over the world in order to save money on those functions individually often ends up being more costly."

Instead, companies should create "global-focused factories," says Macaluso. These factories are designed locally with the cooperation of regional production, supported by a circle of co-developed suppliers in a tiered base, and advanced by a nimble logistics service provider. This hub of expertise should be located in the region of the world where a specific product is most frequently sold.

Tailored Supply Chains

Creating and serving customers out of these production/distribution hubs has a great impact on the five areas where supply chain improvements affect a company's value most: sales, cost-of-goods profile, tax base, working capital deployed base, and fixed capital deployed base. Companies adopting a demand-centric approach watch these five factors become shorter, simpler, and cheaper, says Macaluso.

"It allows companies to make a very tailored, very functional product that is configured to a specific order or customer," he notes.

Many companies today look askance at Macaluso's global-focused factory concept because they have invested so heavily in the opposite philosophy.

"Today we have highly disaggregated value chains," notes Ralph Drayer, former chief logistics officer for Procter & Gamble, and chairman of Supply Chain Insights LLC, a strategy consultancy based in Cincinnati, Ohio.

"The only way to manage these disaggregated value chains effectively is through greater visibility, integration, and synchronization among companies in the value network. Businesses have to get away from optimizing their own part of the value chain."

In the 1980s, Procter & Gamble pioneered collaborative value chain efforts with its major retail customers. By offering to manage its own inventory at customer locations, P&G promised retailers improved customer service and return on assets, as well as reduced handling costs.

P&G doubled inventory turns while improving retail in-stock service levels on its first implementation of continuous replenishment with a major customer.

"We reduced inventory by 20 percent to 25 percent," Drayer says. "At the same time, we reduced the number of SKUs."

Many in the consumer product goods industry believe that collaborative planning, forecasting, and replenishment (CPFR)—which brings demand and supply planning into one process—has the ability to help reduce inventory levels an additional 50 percent.

"If large retailers represent 40 percent of our volume, and we have visibility into their sales forecasts, then we have a better picture of demand in advance, and we can change how we manufacture product," explains Drayer. "That visibility means we don't have to rely as heavily on built inventory or on long-range forecasts, which always have a high margin of error."

The ultimate result is happier retailers and satisfied customers. A company's organizational philosophy and structure is a main factor in how effective it is at serving customers and migrating toward a demand-driven supply chain model.

"Every company can be broken down to four basic tiers: strategy, organization, operations, and execution," explains Gene Tyndall, a partner with Miami-based Supply Chain Executive Advisors LLC. "In theory, every company should be organized around how best to execute a strategy for delivering improved customer service to increase customer loyalty."

But companies often fail at this task because they continue to operate in silos, says Tyndall.

"People argue over who has that customer-facing role," he explains. "Typically, sales promotes sales, and customer service is there to answer the phone for unhappy customers. Supply chain is housed in the operations department, and is tasked with responding to what sales and customer service need. Sales and customer service typically toss problems to logistics, saying, 'Our customers need this; figure out how to give it to them.'"

Why does this hand-off behavior prevail, instead of a collaborative effort?

"The simple answer is corporate culture," says Tyndall. "Some companies have a team culture and collaborate very well. Others continue to operate in silos because employees are measured on how well they do their specific jobs. This focus produces less-than-satisfactory results enterprise-wide."

To make collaboration work, companies need to change the way employees are rewarded, suggests Drayer.

"People should be rewarded not based on inside margin or sales commissions, but rather on market-share gains, in-stock levels, and consumer loyalty," he says. "At P&G, for example, the manufacturing department is no longer rewarded on how much it produces, but rather on whether it produced the right product needed by the customer.

"Essentially, through CRM practices, employees become consultants working through multifunctional teams to help the retailer improve market share, profitability, and consumer loyalty," Drayer explains.

This powerful combination could spell the end to the "guess, make, store, and sell at a discount" model of supply chain management.

A Way of Doing Business

With a $1 billion logistics spend Companies seeking to integrate CRM and supply chain management activities often face significant challenges. The following strategies from Aberdeen Group help businesses move toward that goal:

  • Accelerate investments in initiatives that accommodate immediate, consistently delivered access to product information, inventory availability, and order tracking.
  • Integrate customer information—including purchase histories, preferences, and transactional data—across all channels.
  • Build a uniform customer data repository for integrated marketing campaign planning, execution, and effectiveness analysis.
  • Extend multi-channel sales and service to delivery. Multi-channel customers do not see themselves doing business with a variety of channels, but rather a single company. Today's multi-channel customers want to make purchases, arrange delivery, and obtain customer service where, when, and how they choose.

"We are seeing a bridge between sales, service, and marketing in the demand/supply chain," says Steve Fioretti, general manager, Siebel High Technology, Siebel Systems Inc.

"Cisco, for example, uses a CRM system to track billings and bookings in a 15-minute time window, allowing it to avoid having too little or too much inventory. Cisco can use the information to optimize operations throughout the company."

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