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Chapter 12

Customer Value


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

12.2 Introduction
Evolution of quality definition from internal measures to customer value Promotes a broader look at a companys offerings and its customers. 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


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. 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

12.2 The Dimensions of Customer Value

Conformance to requirements. Product selection. Price and brand. Value-added services. Relationships and experiences.


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. Product demand is predictable Market mediation not a major issue. Nature of demand can create large costs due to lost sales or excess inventory. Requires responsive supply chains

Functional Items

Fashion items or other high-variability items

Conformance to Requirements Built on Three Principles

Closing the communication loop Sticking to a rhythm across the supply chain Leveraging capital assets to increase supply chain flexibility


Product Selection

Proliferation of product options Larger variety means greater problems with:

Managing supplies Predicting demand 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)

Three successful trends:

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

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

Long-Tail Phenomenon

Build-to-order model
Configuration is determined only when the order comes in. Effective way to implement the pushpull strategy by employing the concept of postponement

Moving from a push to a push-pull strategy


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 Equalizing small and large dealers


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 such as grocery products


Price and Brand

Price cannot be a differential in many industries

Companies like Dell and Wal-Mart use cost reduction strategies to improve profit Premium brands can ask for premium prices Supply chain has to be more responsive Opportunities for companies that can offer new services Not easily transformed to commodities

Brand names become a guarantee for quality

Pricing in services more difficult

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.


B2B services offer additional services to increase revenue Most of IBMs income today is from services

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


Customer Experiences

Beyond relationships Designing, promoting, and selling unique experiences to customers Offering distinct from customer service: Examples:

Airline frequent flyer programs, theme parks, Saturn owner gatherings, Lexus weekend brunch and car wash events.


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 customers information requirements and needs at the core. Design to morph i.e. the ability to change practices based on customer requirements.

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.


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?


Service Level

Typical measure used to quantify a companys market conformance. Usually related to the ability to satisfy a customers delivery date Direct relationship between the ability to achieve a certain level of service and supply chain cost and performance.


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 Measure customer loyalty

Easier to measure than customer satisfaction. Analyze customer repurchase patterns based on internal databases.


Customer Defections

Identifying such customers not an easy task

Dissatisfied customers seldom cancel an account completely Gradually shift their spending, making a partial defection.


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 Councils reference models.


SCC and SCOR Model

SCC organized in 1996 by Pittiglio Rabin Todd & McGrath (PRTM) and AMR Research

Supply Chain Operations Reference-Model (SCOR)

Process reference model Analyzes the current state of a companys processes and its goals, Quantifies operational performance Compares it to benchmark data.

Developed a set of metrics for supply chain performance


Overall Business Performance Metrics PRTM Survey

Total supply chain management costs Cash-to-cash cycle time Upside production flexibility Delivery performance to request


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.


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.


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.


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.



Creating customer value is the driving force behind a companys 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.