Supply Chain Management:

From Vision to Implementation

Chapter 2: Customer Fulfillment Strategies

Chapter 2: Learning Objectives

1. Discuss how information has empowered customers, raising the competitive bar for todays companies.

2. Explain how customers define value and what a company must do to deliver value. Describe the competitive contributions of cost, quality, flexibility, delivery, and innovation capabilities.
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Chapter 2: Learning Objectives

3. Explain the nature of customer service and satisfaction and how they differ from customer success. 4. Explain why the end customer should be the focal point for the entire supply chain.

Chapter 2: Learning Objectives

5. Segment customers based on strategic importance. Describe the relationships, systems, and processes needed to deliver desired levels of service to different customers. 6. Discuss the role of operational excellence in assuring profitable customer relationships.
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If we arent customer-driven, our cars wont be, either.

Donald E. Petersen, Ford

Information-Empowered Customer
Customers are empowered with a broad range of product and pricing information Channel power is shifting down the supply chain toward the end consumer Combined these phenomena have created customers that use market leverage to demand higher levels of service at lower cost:
High-Service Sponge Customers Toyota, Intel, Wal-Mart, etc.
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Creating Value
Companies seek to develop a distinctive advantage and differentiate themselves in the mind of consumer. Customers seek value in terms of:
Quality Cost Flexibility Delivery Innovation
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Competing on Quality
Quality includes both design and manufacturing elements. The product must be designed to live up to or exceed customer expectations. Manufacturing must then conform to the design specifications during production. Quality must be designed and built into the companys products and processes.
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Eight Dimensions of Quality

1. Performance - the primary operating characteristics of the product. 2. Features - the bells and whistles or extras that distinguish a product from competitors offerings. 3. Reliability - the notion that a product can be counted on not to fail. 4. Conformance - measures how well a product matches established specifications. 5. Durability - refers to the products mean time between failures and its overall life expectancy. 6. Serviceability - the speed of repair when quality problems arise. 7. Aesthetics - perception of fit and finish or artistic value. 8. Perceived quality - overall perceptions of a product or brands quality reputation
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Quality Management
Management controls over 80% of quality problems. Up to 25% of the cost of goods sold can be traced to finding and fixing quality problems. Quality drives consumer behavior, thus it may be the most important competitive factor. Best-in-class companies seek 6 level quality
3.4 defects per million opportunities
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Competing the Cost

Four strategies are widely pursued: 1. Productivity enhancement 2. Adoption of advanced process technology 3. Locating facilities in countries with lowcost inputs 4. Sourcing from the worlds most efficient suppliers

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Cost Issues
Performance measured by total landed cost Cost drives strategic decisions such as:
Global manufacturing rationalization Outsourcing Downsizing

When cost performance improves, companies:

Increase market share Increase scale economies Improve profitability Invest in future capabilities
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Competing on Flexibility
Flexibility is the capability to adapt to new, different, or changing requirements. Flexible organizations operate with short lead times, are responsive to special customer requests, and can adapt rapidly to unexpected events. Flexibility requires investment in information and automated production and logistics technologies.
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Requirements for a Flexible Culture

Make cycle time a priority throughout the organization Map processes to make them visible Identify key time-related activities/decisions Benchmark against customer requirements and competitors capabilities Cross-train workers and organize work in multifunctional teams Design performance measures to value fast-cycle capabilities Develop information systems to track activities and share information Build learning loops into every process throughout the organization
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Competing on Delivery
Competing on delivery means consistently delivering on-time and in the correct quantity. Fast, reliable delivery requires the reduction of order cycle time and the elimination of variability.

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Computing on Delivery
Delivery capability is cross functional by nature, requiring coordinated efforts by:
Sourcing Operations Logistics

Operations and logistics often represent 90% of total order cycle time

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Competing on Innovation
Innovation creates new markets and changes industry standards. Early Supplier Involvement (ESI) is a key element of innovation strategies. Products introduced on-time but 50% over budget, realized only a 4% reduction in profit. Products introduced on budget but six months late experienced a 33% decrease in profits.
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Trade-off vs Synergy: Traditional

Managers believed: High quality was inherently expensive Standardization and customization are on opposite ends of the cost continuum Rapid delivery reduces flexibility
Delivery

Cost

Quality

Flexibility

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Trade-off vs Synergy: Contemporary

Managers now seek synergy along all dimensions of customer value. Systematically addressing each results in a stronger more sustainable competitive position.
Innovation

Delivery

Flexibility

Cost

Quality

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Trade-off vs Synergy
Delivery
Innovation

Delivery

Flexibility

Cost

Quality

Flexibility

Cost

Quality

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Customer Satisfaction
Customer satisfaction is based on whether a good or service meets or exceeds the customers a priori expectations. The key to satisfying customers is to understand their needs so that unique products and services can be developed. Creating satisfaction should be the goal of the companys culture and structure.
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Expectations and Satisfaction

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Customer Satisfaction Index

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Importance Complete Satisfaction

Xerox found that customers who rated their service experience as largely satisfied were six times more likely to defect to a competitor than those who were completely satisfied. Repeat business occurs when service experience is comparable to competitors. Loyalty is achieved when customers perceive truly distinctive service.
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Customer Satisfaction and Loyalty

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Customer Service Strategies

Traditional customer service focused on internal service levels and goals:
Percent defective products Percent on-time delivery Fill rate

Without feedback it is easy to emphasize activities the customer does not value.
Service Gaps
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Customer Satisfaction Strategies

Customer satisfaction strategies require direct input from a customer. Questions to be addressed should include:
How do important customers define quality, on-time delivery, responsiveness and other key value areas? Are our internal measures consistent with customers measures? Does our current performance meet our customers requirements? Would an improvement in our performance be valued by our customers?

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Customer Satisfaction Strategies

Customer input allows managers to:
align measures to customer expectations allocate resources and reevaluate priorities adopt new policies or practices

Information typically gathered from surveys, focus groups, in-depth personal interviews, and ethno-graphic studies.
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Customer Success Strategies

We turn our customers into winners. Their success is cash in our bank. Our customer is our most important partner in cooperation his customer benefits from this as well.
- CEO of Tampella, Ltd.

Customer success strategies use supply chain knowledge to help customers become more competitive.
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Customer Success Strategies

Success strategies consist of:
1. A clearly communicated goal to help customers succeed 2. A clear understanding of downstream requirements 3. Investment in customer-valued capabilities 4. Training provided to customers 5. Resources shared with customers

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Limitations of Some Strategies

Strategy Focus Limitations

Customer Service

Meet internally set expectations

Fail to understand what customers value Expend resources and wrong areas Measure performance inappropriately Fail to deliver more than mediocre service Operational emphasis leads to service gaps

Customer Satisfaction

Meet customer driven expectations

Ignore operating realities while overlooking operating innovations Constant competitor benchmarking leads to product/service proliferation and inefficiency Maintain unprofitable relationship vulnerable to new products and processes Focus on historical needs of customers does not help customers meet new market expectations Limited resources require that customers of choice be selected; that is, customer success is inherently a resourceintensive strategy
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Customer Success

Help customers meet their customers needs

The End Customer

The end customer is the only one who puts money into the supply chain and is therefore the focuse of all activities. Successful companies share information that helps the chain focus on the end customer.

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Customer Fulfillment Strategy

Customer fulfillment strategies seek to address:
What are the real needs of our immediate customers? What are the real needs of our customers customers? What are the real needs of our supply chains end customers? What information must be shared up and down the supply chain to meet these customer needs? What capabilities must be developed up and down the supply chain to meet these customer needs? How can we help other supply chain members improve the overall chains customer fulfillment capabilities?

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Customer-Centric Fulfillment Strategy

Managers should consider two facts when developing processes to match the right kinds and levels of service to specific customers: Not all customers are equal and they do not all deserve the same high level of service. Not all customers require the same service.

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Matching Strategy to Customer Needs

Three types of analysis are needed to effectively tailor supply-chain service levels to specific customers: 1. Customer Analysis 2. Supply Chain Analysis 3. Competency Analysis

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Customer-Centric Supply Chain

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Customer Analysis
Customer analysis identifies customer needs, helping management to segment customers. Customer segmentation the identification of unique groups of customers who possess similar needs allowing the development of products and systems necessary to fulfill the needs of different customer groups.

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Supply Chain Analysis

Supply chain analysis identifies the end customer needs and the capabilities that must exist in the chain to meet those needs. Customer success factors are the capabilities that first-tier customers need to satisfy their downstream customers.

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Competency Analysis
A core competency is something that the company does so well as to provide it a competitive advantage. Two questions can help to identify a core competence:
1. What are we known for that makes us uniquely good? 2. What do we do better than anyone else?

Almost always cross functional

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Customer Segmentation with Pareto

Relationship intensity can be categorized as follows:
A customers are valued and received the highest service. B customers should be managed carefully. C customers should be managed fairly and efficiently.
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Competency-Success Factor Matrix

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Customers-of-Choice Relationships
A select number of A customers whose needs the company is well-positioned to fulfill. Customer-of-choice relationships are characterized by:
Frequent communication at many levels between the firms, including marketing, engineering, logistics, and senior management. Inter-organizational teams are formed to solve problems or to work on SC initiatives such as new product development. Information systems are linked to enable real-time information exchange on inventory levels, order status, and future demand. Fulfillment processes are designed for flexibility to accommodate customers' special requests. Policies and procedures support extraordinary efforts to meet unexpected needs or unusual requests.

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Highly Valued Relationships

Many A and most B customers. Highly valued relationships characteristics:
Customer input is actively sought and utilized to meet expressed expectations. Dedicated customer account teams. Information systems are a way to share information. Policies and procedures acknowledged the importance of these customers.

Members of this group often become tomorrows customers-of-choice.

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Transaction Relationships
Comprised of C customers Receive little personal attention, leading companies strive for high levels of standardized service excellence. Service recovery is used to regain confidence of customers when service failures occur. As data-capturing technology becomes better, C customers will become candidates for more tailored services.
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Evaluating Customer Relationships

Activity-Based Costing, which ties specific costs directly to the customers that create them, can be used to identify the profitability of a business relationship. Customer Relationship Management (CRM) software can be used to create customer profiles that capture buying habits and determine customer profitability.
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Barriers to Customer Fulfillment

Companies may seek to improve service levels, but direct their efforts toward the wrong activities. Companies may fail to deliver on their promises to be customer-service oriented. Access to information has lead some companies to provide low service levels to less valuable customers.
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Barriers to Customer Fulfillment

Customers identify the following as the cause of dissatisfaction in almost 80% of horror stories:
Training - employees do not know how their behavior and performance affects customer perceptions. Measurement - measures do not reinforce appropriate attitudes and behavior toward customers. Empowerment - employees do not have authority to solve problems and respond to customer needs. Policies - policies and procedures are inflexible and often run counter to real service and satisfaction.

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A Return to the Opening Story

Based on what you have now read and discussed: 1. What advice might you give Doug regarding customer segmentation and differentiated customer fulfillment strategies? 2. What processes and systems are needed to achieve high levels of customer satisfaction across a range of customer relationships and requirements? 3. What questions would you include on a customer satisfaction checklist to make sure you had a comprehensive, well-thought-out customer fulfillment strategy in place?

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Supply Chain Management:

From Vision to Implementation
Supplement B: Productivity and Quality Management

Productivity
Productivity is the ratio that measures the ability of the process to efficiently turn input into output.
Labor Productivity considers the amount of output created by a standard measure of labor input. Multifactor Productivity considers the amount of output created based on all inputs to the transformation process.

Inputs

Transformation Process

Outputs

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Example 1
Total Output Productivity Total Input 50 brake pads Productivity 10 labor hours Productivity 5 brake pads per labor hour
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Example 2
Change in Productivity Percent Change in Productivity (100) Productivity Prior to Change 6-5 Percent Change in Productivity (100) 5 Percent Change in Productivity 20

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Skinner on Productivity
Experience regularly observes a "40, 40, 20" rule. Roughly 40% of any manufacturing-based competitive advantage derives from long-term changes in manufacturing structure. Another 40% comes from major changes in equipment and process technology. The final 20%no morerests on conventional approaches to productivity improvement. - Wickham Skinner
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Quality Management
Quality problems typically stem from variation in the manufacturing process. There are two types of variation:
Common Special

We can use statistics to remove special cause variation from the process and thereby improve the quality of output.
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Standard Control Chart

Control charts are created by finding a centerline for the variable under study and then calculating control limits ensuring that the statistical probability of a value being above the upper control limit or below the lower control limit is very small.
Control Limit Where : mean or target the number of standard deviations from the mean

processstandard deviation
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Standard Control Chart

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Attribute Control Chart

P-charts are used to determine whether the process is producing an acceptable percent of non-conforming items. Items are counted, not measured.
ProcessMean p Total Number of Defectives Number of Samples X Sample Size p (1- p) Sample Size

Standard Deviation

Upper Control Limit p Lower Control Limit p -

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Attribute Control Chart - Example

ProcessMean p 300 20 X 90

p 0.1667 0.1667 (1- 0.1667) 90

Standard Deviation

0.03929
Upper Control Limit 0.1667 1.96 (0.03929) 0.2437 Lower Control Limit 0.1667 - 1.96 (0.03929) 0.0897

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Variable Control Chart

X-bar charts are used to determine whether the process is producing along a critical product dimension. Items are measured.
ProcessMean X Sum of the Sample Means Number of Samples

Standard Error

Sample Size

Upper Control Limit X (Standard Error) Lower Control Limit X - (Standard Error)
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Variable Control Chart - Example

Sample 1 Batch 1 Diameter (cm) 25.25 Batch 2 Diameter (cm) 27.20 Batch 3 Diameter (cm) 25.00

2
3 4 5 6 7 8 9 10

24.40
26.95 24.15 24.20 25.10 23.00 27.65 25.70 24.30

25.80
23.45 25.15 25.90 25.00 24.05 24.80 26.65 22.25

24.05
24.80 26.65 25.25 24.40 26.95 24.15 24.20 27.20
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Variable Control Chart - Example

ProcessMean X 25.12 1.329 Standard Error 3 Standard Error 0.7673 Upper Control Limit 25.12 1.96 (0.7673) 26.62 Lower Control Limit 25.12 - 1.96 (0.7673) 23.62
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Variable Control Chart - Example

27.00 26.50 26.00 25.50 25.00 24.50 24.00 23.50 23.00 22.50 22.00 1 2 3 4 X-bar 5 X-bar-bar 6 UCL-X 7 LCL-X 8 9 10

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Process Control
Charts are generally in control if no point exceeds the control limits. Charts may be out of control if there is (1) a downward or upward sloping trend, (2) widening gaps between observed values, (3) several values in a row above or below the mean.

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Process Capability
Used to determine whether a process is capable of producing a quality output. Compares the process control limits to the product specifications.

Cpk min{Cpu , Cpl} (USL - ) where: Cpu 3 ( - LSL) Cpl 3

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Interpreting Process Capability

Cpk = 1 indicates a process that will produce conforming output 99.73% of the time Cpk > 1 indicates a process that will produce according to specifications Cpk < 1 indicates a process that will not produce according to specifications A negative Cpk indicates a process where the process mean is outside of the specifications

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Problem Solving
Cause Effect Diagram (Fishbone Diagram) helps to identify under cause for a nonconforming outcome. Pareto Diagram an application of the 80/20 Rule; helps to identify the vital few from the trivial many

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Fishbone Diagram

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Pareto Diagram
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Missing Components Wrong Material Sick Employee No One Home Broken Equipment Scheduling Conflicts

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