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  • 1. Measuring Customer Value in the Supply Chain Jerry Banks
  • 2. “ What gets measured gets managed”
  • 3. What is value?
    • Fair return or equivalent in goods, services, or money for something exchanged
    • Monetary worth of something
    • Relative worth, utility, or importance
    • Degree of excellence
  • 4. Customer value
    • The firm’s contribution to its customer
    • Previously
      • Quality
      • Customer satisfaction
  • 5. Some questions
    • How is customers value measured?
    • How is IT used to enhance customer value in the supply chain?
    • How does supply chain management contribute to customer value?
    • How do the new forms of customer relationship in the supply chain affect customer value?
  • 6. Perceived value
    • It’s not the product or service received, but the perceived value
    • Quality assurance external customer satisfaction customer value
  • 7. Global logistics spending (1999)
    • $3.4 trillion or 11.7% of GDP
    • Inefficiencies
      • Spoilage and breakage
      • $580 billion or 2% of GDP
    • A lot of room for cost reduction
    • Ref: Delaney & Wilson (2000) 11th Annual State of Logistics Report (c) (Cass/ProLogis).
  • 8. Price Waterhouse Coopers Trendsetter Barometer
    • Next two slides...
    • PWC interviewed CEOs of 410 product and service companies identified in the media as the fastest growing US businesses over the last five years
    • The surveyed companies ranged in size from approximately US$1 million to US$50 million in revenue/sales.
  • 9. Sources very important to own company’s business growth over the next 12 months
  • 10. Trendsetter companies’ sources of most profitable return for each dollar invested
  • 11. Quality ratio
    • Ask customers and competitor’s customers to list important attributes in their buying decisions
    • Ask customers to distribute fractions of 1.00 among the attributes
    • Ask customers to rate on a scale of 1-10, your performance vs your average competitors
    • Multiply the performance by the weight and add the sum to get an overall score
    • Source: Managing Customer Value , Gale
  • 12. Quality ratio
  • 13. Quality effects profits!
  • 14. “ Baldrige Index”
    • A fictitious fund comprised of companies receiving the Malcolm Baldrige National Quality Award
    • Baldrige Index has outperformed the S&P 500 for 7 straight years
    • 2000 results
      • S&P 500 results 163%
      • “ Baldrige Index” ROI 685%
  • 15. Longevity
    • Who: 600 quality award winning companies
    • What: Studied results against a control group
    • When: 5-year period
    • Results: Significant improvements in stock value, operating income, ROI, employment and asset growth
    • Source: Study by V. Singhal of Georgia Tech and K. Dendricks of the College of Wm. & Mary
  • 16. Woe unto you!
    • “ Dissatisfied customers will tell 8 to 10 people about the bad service they received. One in 5 will tell 20 people.”
    • Source: Barlow and Moller: A Complaint is a Gift
  • 17. MSU study
  • 18. MSU study
    • Firms demonstrating high levels of supply chain competency report high-perceived performance levels on a number of different outcome measures
  • 19. Supply chain measurement model Customer Service Cost Management Quality Productivity Asset Management Supply Chain
  • 20. Performance metrics Delivery Flexibility Advanced Shipment Notification Order Flexibility Delivery Speed Return on Assets Order Fill Capacity Responsiveness Product Flexibility Inventory Turns Information System Support Delivery Dependability Logistics Cost Customer Satisfaction Asset Management Productivity Quality Cost Management Customer Service
  • 21. What is flexibility? Actually, it is not so much about avoiding commitment to an irreversible decision.  It involves development of operational resources that can quickly be redeployed in response to real time -- or at least very recent -- cues from the environment, be  it actual demand, a schedule built from a collaborative forecast with a very short time horizon (like a month or less), etc.  In production it generally means being able to quickly shift from building one SKU to another.  Delivery flexibility requires having different means of transportation based upon the cost/service requirements for the order, sometimes perhaps using package delivery, other times LTL, still other times consolidating with other orders to build a full TL.  In ordering, it is associated with the ability to quickly capture demand cues and assign products to orders in various ways based upon where product is available and what the replenishment requirement is.  Then, the previously defined operational assets might be used to create different ways to fill orders without having all product coming from stock.  The fast moving, smooth demand product might be from stock, but slow-moving items might be pulled from a centralized facility to reduce stock in the system.  In extreme situations where  product values justify it, slow-movers may be made to order in very short cycle times to fill an actual order. Ted Stank, MSU, private communication, 28 Jan 02.
  • 22. Correlation analysis
    • Measures the magnitude of the relationship between two variables
      • Firm´s score on the overall Supply Chain 2000 index
      • Firm´s perceived performance on the metrics
      • r indicates the magnitude of the relationship
      • r 2 indicates the fraction of total variation explained by the variable
  • 23. Customer service .094 .306 Delivery Speed .033 .181 Product Customization .155 .394 Customer Satisfaction Coefficient of Determination [r 2 ] Correlation Coefficient [r] Performance Variable
  • 24. Cost management .146 .382 Logistics Cost Coefficient of Determination [r 2 ] Correlation Coefficient [r] Performance Variable
  • 25. Quality .103 .321 Delivery Flexibility .047 .217 Order Flexibility .057 .239 Responsiveness .076 .276 Delivery Dependability Coefficient of Determination [r 2 ] Correlation Coefficient [r] Performance Variable
  • 26. Productivity .094 .307 Advanced Shipment Notification .100 .316 Order Fill Capacity .284 .533 Information System Support Coefficient of Determination [r 2 ] Correlation Coefficient [r] Performance Variable
  • 27. Asset management .055 .235 Return on Assets .081 .285 Inventory Turns Coefficient of Determination [r 2 ] Correlation Coefficient [r] Performance Variable
  • 28. Overall performance .275 .524 Coefficient of Determination [r 2 ] Correlation Coefficient [r]
  • 29. Insights
    • Supply chain competency explains 27.5% of the firm´s overall performance level
    • Information system support is extremely important
    • Customer satisfaction and logistics cost are also very important
  • 30. Wide range of issues
    • Why customers purchase?
    • Why do they continue to purchase?
    • Why do they defect?
    • What are their preferences and needs?
    • How can these be satisfied?
  • 31. Trade-offs
    • Low prices versus customer support
    • Low prices versus fast delivery
    • Specialty store that specializes in one product versus megastore for one-stop shopping
  • 32. Low prices vs fast delivery
    • Issue of supply chain reliability
      • On time delivery
    • Reliability is tied to the mode
    • The greater the expense
      • The greater the reliability
  • 33. Impact of on-time delivery
    • Costs when late
    • Costs when early
  • 34. What are costs of late delivery?
    • A.
      • How is it measured?
    • B.
      • How is it measured?
    • C.
      • How is it measured?
  • 35. What are costs of early delivery?
    • A.
      • How is it measured?
    • B.
      • How is it measured?
    • C.
      • How is it measured?
  • 36. Dimensions of customer value
    • Customer value is the way the customer perceives the entire firm’s offerings
    • Dimensions include:
      • 1. Conformance to requirements
      • 2. Product selection
      • 3. Price and brand
      • 4. Value-added services
      • 5. Relationships and experiences
  • 37. 1. Conformance to requirements
    • The ability to provide what the customer wants and needs
    • When supply exceeds demand, inventory holding cost
    • When demand exceeds supply, shortage cost
  • 38. By product type
    • Commodities
      • Demand is predictable
    • Non-commodities
      • Demand is not predictable
      • Can result in excess inventory or lost sales
      • Efficient supply chains can reduce inventory and transportation costs
  • 39. Example
    • Electronic components are manufactured in SE Asia
    • Very competitive industry
    • Customers can pick from many suppliers
    • Right product at the right time is a must
    • Forecasting is difficult as monthly demand is highly variable
  • 40. Example
    • To save money, the supplier ships by sea
    • By the time the product arrives, the demand has changed or competitors have developed a newer product
    • The manufacturer is considering shipment by air
  • 41. 2. Product selection
    • Consider an automobile
      • 5 styles x 10 exterior colors x 10 interior colors x 2 types of transmission = 1000 configurations
      • Retailers need to stock many of these as customer demand is hard to predict
  • 42. Strategies
    • Specialize in one type of product
      • Starbucks sells coffee
    • Megastores that sell large variety of products
      • Wal-Mart
    • Megastores that specialize in one product area
      • Home Depot
  • 43. PC Business
    • Mid 80s
      • Specialized stores such as Egghead
    • Early 90s
      • PCs were sold in department stores such as Sears
    • Late 90s
      • Direct business model, Gateway opens retail stores
  • 44. Ways to control the inventory problem
    • Build to order
      • Dell Computer
        • Configuration is determined when the order comes
  • 45. Ways to control the inventory problem
    • Another example
      • Amazon.com
        • When a customer orders a book
        • Amazon.com requests it from one of 12 wholesalers and 20,000 publishers
        • Amazon only inventories a few-hundred best-selling title
                                                                           
  • 46. Ways to control the inventory problem
    • Use distributors
      • GM is doing this with their Cadillac unit in Florida
        • Major issues
          • Who pays inventory holding cost?
          • If it’s GM, then auto dealers will reduce their inventory to the minimum
          • No differentiation in dealers
          • Small and large have access to the same inventory
  • 47. Ways to control the inventory problem
    • Minimize the options
      • Honda does this on its cars
      • Large varieties are not always needed
        • Grocery store
          • 150 varieties of dry cereal
          • 28 varieties of toothpaste
          • 40 varieties of prepared mustard
  • 48. 3. Price and brand
    • An essential component of customer value
    • When an item is a commodity, there is little flexibility in price
      • PCs are now commodities
        • But, Dell’s direct business model lets the customer configure the computer
        • Improves customer value
        • Reduces cost
  • 49. 3. Price and brand
    • Even in this era of supermarket style shopping, brand is important
      • Mercedes
      • Rolex
      • Coach
    • Branding commands higher prices
      • Even the price can be prestigious!
    • Promotes high quality
  • 50. 3. Price and brand
    • Example
      • Federal Express
        • A brand name
        • When it absolutely must be there ‘overnight’
        • Even though there are less expensive carriers
        • FedEx = Overnight
  • 51. www.fedex.com FedEx is the world's largest express transportation company, with 624 aircraft and service to over 211 countries. There are 46 call centers across the globe handling over 500,000 telephone calls daily. FedEx employs over 145,000 people, including 42,500 couriers who deliver more than 3.1 million packages every working day.
  • 52. “ The best global brands,” (BW, 8/5/02) Brands usually aren’t listed on corporate balance sheets, but they can go further in determining a company’s success than a new factory or technological breakthrough. That’s because nurturing a strong brand…can allow companies to premium prices…   A strong brand also can open the door when growth depends on breaking into new markets. Starbucks Corp., among the fastest-growing brands, recently set up shop in Vienna, one of Europe’s café capitals, and says 400 of its planned 1,200 new store openings this year will be overseas.
  • 53. “ The best global brands,” (BW, 8/5/02)   Data: Interbrand Corp. J.P. Morgan Chase & Co . 24.2 Marlboro 9 21.0 Mercedes 10 26.4 McDonald’s 8 29.3 Disney 7 30.0 Nokia 6 30.9 Intel 5 41.3 GE 4 51.2 IBM 3 64.1 Microsoft 2 69.6 Coca-Cola 1
    • BrandValue
    • (US$Billions)
    Brand Rank
  • 54. 4. Value added service
    • Price alone often is too difficult a playing field
    • Many companies provide value-added services such as support and maintenance
      • Particularly for technical products
  • 55. Why do this?
    • Many products are commodities, only the price matters
    • There is a need to get closer to the customer
    • Increasing IT makes this all possible
  • 56. Example
    • Goodyear delivers mounted tires to Navistar (a truck manufacturer)
    • Sequenced for JIT use
    • Goodyear has an IT group dedicated to Navistar’s materials management group
  • 57. Example
    • Under a joint venture called AOT, Goodyear and Accuride provide painted wheel assemblies for Mitsubishi and Ford
      • They will even mount tires from Goodyear’s competitors
                                   
  • 58. More examples
    • For many years, IBM did not charge for service
      • Now, it’s their biggest source of income
    • Otis sells elevators
      • But, their largest income is from servicing those elevators for 50 years
  • 59. 5. Relationships and experiences
    • A relationship makes it difficult for customers to switch to another provider
    • Also, learning relationship
      • USAA uses databases to offer customers products that might be of interest
        • More about USAA later
  • 60. Peapod
    • www.peapod.com
    • Six metropolitan markets
      • Chicago – Peapod
      • DC area – Giant
      • 4 areas – Stop&Shop
    • Shop by PC
  • 61. Peapod
    • At the end of the session
      • “How did we do on the last order?”
      • 35% response
      • Use feedback to make changes
  • 62. One-to-one enterprise
    • Peapod is an example of one-to-one enterprise
      • Firms learn about each customer through databases and interactive communications
      • Peapod uses its database to suggest new offerings to customers
  • 63. Other examples
    • www.amazon.com
      • Makes suggestions based on previous purchases and inquiries
    • www.dell.com
      • Tailors its website to different types of users
  • 64. Some companies are providing an experience
    • Disney theme parks
      • Lot more profit comes in selling toys, movies, and accessories
  • 65. Sizzle or the steak
    • Steak companies
      • Make products and move them to the market
    • Sizzle companies
      • Provide relationships and experiences for the end user, the customer
      • Nike provides sizzle
        • Just do it!
    • What is Intel?
              
  • 66. Measuring customer value
    • Since customer value is based on customer perceptions, it requires measures that start with the customer
    • Typical measures
      • Service level
      • Customer satisfaction
  • 67. Measuring customer value
    • Another measure
      • Supply chain performance
  • 68. Service level
    • The ability to satisfy a delivery date
      • % of orders received by the promised delivery date
      • Many companies invest heavily in systems that allow them to predict the delivery date with accuracy
      • Directly related to the supply chain
        • Inventory level
  • 69. Customer satisfaction
    • Customer surveys
      • Measure performance of sales department
      • Gain feedback on improvements
      • Not always reliable
      • Can be manipulated
      • Doesn’t measure customer retention
      • More important is customer loyalty
  • 70. Example
    • Lexus doesn’t measure customer satisfaction although they are the leader
    • The only important measure is repurchases by customers
  • 71. Supply chain performance measures
    • Supply Chain Operations Reference Model (SCOR)
    • Other measures
    • Comparisons to (i.e., benchmarking)
      • Averages
      • Best-in-class
  • 72. SCOR
    • Metrics and measures are shown for four perspectives of the SCOR Model
  • 73. Supply chain reliability
    • On-time delivery
    • Order fulfillment lead time
    • Fill rate
    • Perfect order fulfillment
    • %
    • Days
    • %
    • %
  • 74. Flexibility and responsiveness
    • Supply chain response time
    • Upside production flexibility
    • Days
    • Days
  • 75. Expenses
    • Supply chain management cost
    • Warranty cost as % of revenue
    • Value added/employee
    • %
    • %
    • $
  • 76. Assets/utilization
    • Total inventory days of supply
    • Cash-to-cash cycle time
    • net asset turns
    • Days
    • Days
    • Turns
  • 77. Comments on SCOR Model
    • It could become an industry standard
    • But, every company needs to understand its own unique environment and determine its own measures based on that insight
    • Example
      • Dell measures inventory velocity
      • Not inventory turns
  • 78. Measures of performance
    • Keebler and Manrodt (2000) classified some 37 measures as either effectiveness or efficiency
    • The % of firms capturing these measures is shown on the following pages
  • 79. Involve trading partner
  • 80. Inferences
    • 21% don’t capture a measure of on-time delivery
    • 38% don’t measure order cycle time
    • 48% don’t capture invoice accuracy
  • 81. Internal Focus
  • 82. Cost
  • 83. Productivity
  • 84. Utilization
  • 85. Lots of firms are not capturing important measures
    • If firms don’t measure, they probably don’t plan performance
    • If they don’t plan, they don’t take corrective action
    • They lack control
  • 86. Benchmarking
    • Comparison to best in class
      • Delivery performance
      • Production flexibility
      • Cash-to-cash time cycle
      • Total SCM costs
  • 87. Benchmarking
    • Industry sectors shown on following slides:
      • Computers & electronics
      • Consumer packaged goods
      • Defense & industry
      • Pharmaceutical & chemical
      • Telecommunications
  • 88. Impact of SCM on cash-to-cash cycle time
  • 89. Total supply chain management costs
  • 90. Impact of SCM on delivery performance
  • 91. Impact of SCM on production flexibility
  • 92. “ Measuring carrier performance” Article by Deborah C. Ruriani, Inbound Logistics , April, 2002
  • 93. 10 top metrics
    • Pickup performance
      • Pickups must be on time for the delivery to be on time
    • On-time delivery
    • Claims
      • How quickly are they settled?
  • 94. 10 top metrics
    • Invoicing accuracy
      • Carriers that have an imaging system that allows them to use information directly off a customer’s bill of lading can ensure accuracy
    • Interactive web site
      • Variety of tracking and tracing capabilities
    • Training
      • How well are the carrier’s workers trained
  • 95. 10 top metrics
    • Managing customer accounts
      • Every customer failure should be followed
    • Centralized customer service
      • Quick and readily available information resource
  • 96. 10 top metrics
    • Good communication
      • Customers should be involved in a carrier’s decision making
    • Responsiveness
      • Is the line of communication open and results-oriented?
  • 97. Scoring Model
    • Determine at least 5 criterion
    • Select the weight for each criterion
    • Determine measures for each criterion
      • 1, 2, 3, 4, 5
    • Determine raw scores
    • Determine weighted scores
    • Determine score
  • 98. Example
    • Criteria A, B, C, D, E
    • With weights .30, .18. 10, .24, .18
    • For Criterion A
      • 1 = Very poor
      • 2 = Poor
      • 3 = Middling
      • 4 = Good
      • 5 = Excellent
  • 99. Example, cont.
    • Contribution to total score
      • .30 x 4 = 1.20
  • 100. Exercise
    • In groups of 4, build a realistic scoring model for the SCM function of one of the group members
      • 30 minutes
    • Present this to the entire group
      • 10 minutes/group
  • 101. Definition of Measures
    • Respondents were asked how four important measures were defined
      • Jointly defined would be optimal
      • Customer defined and imposed on the supplier
      • Lastly, not currently defined
    • Manrodt (2000) “The State of Supply Chain Measurement” in Supply Chain Management Practice and Research : Status and Future Directions, April, 2001.
  • 102. How measures are defined
  • 103. Inferences
    • Lack of definition for measures that are critical to a firm’s overall performance
    • How can suppliers satisfy customer’s expectations if there is no agreement of the customer’s definition of performance?
    • How can processes be improved if they are not being measured?
  • 104. Information technology and customer value
    • Many valuable benefits for customers
      • Customer benefits
      • Business benefits
      • B2B benefits
  • 105. Customer benefits
    • Customer service has changed for many reasons
      • Opening of corporate, government and educational databases to the customer
        • Started with kiosks and voicemail
        • Accelerated with access tools of the Internet
        • Increased customer value while reducing costs
  • 106. Examples
    • ATMs
      • Access at any time to accounts and information
      • Reduction in workload for the bank
    • Voicemail
      • First derided as dehumanizing
      • Allows unmediated access to accounts at any time from anywhere
        • Example is Sprint PCS
  • 107. Internet
    • Users have access to their accounts at any time from any where
      • Example is Delta Airlines
  • 108. Internet - less obvious effects
    • Increased importance of intangibles
      • Customers are used to ordering even high-priced products from unseen sales people
      • Increases the importance of branding
  • 109. Internet - less obvious effects
    • Increased ability to connect and disconnect
      • Makes it easier to connect to new partners
        • Lots of information including performance measures are available
      • Reduces the need to develop long-term relationships
      • Frequent changes of partnerships are possible
  • 110. Internet - less obvious effects
    • Increased customer expectations
      • The ease with which transactions can be performed over the Internet raises expectations that every business will reach that standard
  • 111. Business benefits
    • The supply chain enables businesses to be proactive rather than reactive
    • The supply chain makes a pull-type system possible rather than a push-type system
    • Requires learning about customers
      • Sophisticated data mining is used
  • 112. Example
    • USAA
      • In the 30s it was difficult for military personnel to obtain reasonably priced insurance
      • A group of officers formed USAA
      • USAA provides insurance only by mail and phone
  • 113. Example
    • USAA, cont.
      • USAA has used its extensive databases to expand into financial and shopping services for its members
      • When a member calls USAA, everything about that member appears on a screen
      • Services can be offered
  • 114. Example
    • USAA, cont.
      • If a customer buys a boat with USAA financing, that customer will receive a packet about boat insurance
  • 115. B2B benefits
    • IT makes it possible to outsource parts of a firm’s business, yet maintain control
  • 116. Technology to the rescue!
    • PeopleSoft
    • I2
    • Siebel
  • 117. From peoplesoft.com Supply Chain Management: PeopleSoft 8 Supply Chain Management solutions are designed for the collaborative enterprise. With our fully integrated, end-to-end solutions, you get real-time information. From order capture, collaborative planning and fulfillment, to service and measurement, you can access the information anytime, anywhere through a web browser. At PeopleSoft, we realize that one size doesn't fit all, which is why our solutions are flexible. And we offer comprehensive solutions to suit any organization's supply chain needs, big and small. With PeopleSoft 8, you get the only pure internet supply chain management solution for the global enterprise. Check out our comprehensive solutions for Supplier Relationship Management (SRM), Distribution, and Manufacturing and Planning.
  • 118. From www.i2.com Companies have realized enormous benefits from supply chain management (SCM) over the past decade –reduction in inventories of 25–60%, delivery improvements, and improved capacity utilization of 10–20%, to name a few. In fact, as the leader in SCM, i2 has delivered over $29.94 billion in audited value as of October 2001. This is just the beginning. The next leap forward in productivity will occur when two things happen. First, when SCM is linked to two critical processes – customer relationship management and supplier relationship management. Second, when companies just don’t share information, but when workflows within a company and between companies are linked. When these two things happen, then companies can react with real-time intelligence to changes from product concept all the way to product delivery.
  • 119. From siebel.com Siebel Systems provides the industry's most comprehensive family of multichannel eBusiness applications and services. Siebel e Business Applications enable organizations to create a single source of customer information which facilitates selling to, marketing to, and servicing customers across multiple channels, including the Web, call centers, field, resellers, retail, and dealer networks. Siebel                    
  • 120. Process Redesign
    • Technology based on a new paradigm of business process, not automating the old business process
    • Back office is now integrated with front office
  • 121. www.tgw.com
    • Golf club configuration
      • Hand (Right or Left)
      • Model (275cc, 350cc. 400cc)
      • Loft (8.0, 9.5, 10.5, or 11.0)
      • Shaft (EI70, Preforce 65, Nike Graphite,…)
      • Flex (Regular, Stiff, X-stiff)
    • Some choices eliminate other choices
    • So, you can’t place the wrong order
  • 122. Old measures
    • Some old measures become obsolete due to process changes facilitated by technology
      • % perfect order fulfillment
  • 123. Information Gathering
    • Once new process is adopted, it enables the fulfillment of the process
    • Some old measures no longer needed since new process is proactive
      • Salesperson downloads inventory status before sales call
      • Customer orders from existing inventory
      • Not ordering then waiting to learn of backorder
  • 124. Enterprise Performance Mgmt
    • Data mining and analysis of information then allows enterprise to fulfill its quality objectives and increase profitability
    • Also allows enterprise to measure different consumer patterns
    • Better understanding of consumer behavior leads to better product development/ marketing
  • 125. Dynamic Process Shift
    • Changes in technology allow for changes and improvements in business processes
    • Better business processes improve efficiencies and enhance value
    • This is cyclical and continuous
    • Enterprises that adhere to this aggressive adoption of technology/process tend to be leaders in their respective domains.
  • 126. End