360º The Ashridge Journal Customer satisfaction strategy Autumn 2006

Gary Luck is a Business Director at Ashridge Consulting.

He specialises in strategic change, with a particular interest
in the link between the intent and reality of strategic

Customer
outcomes. He consults with a wide range of private and
public sector organisations in the areas of strategy
development, implementation and organisational
development.

Email: gary.luck@ashridge.org.uk satisfaction

strategy
In this article, Gary Luck challenges any producer
of goods to know the size of the market for their
product. He illustrates how this knowledge will remain
elusive unless customer satisfaction, in its original
sense, is allowed to drive organisational strategy.

Forecasting – the science The accuracy of the resulting forecasts is

of imprecision
How big is the market for your product?
Every year, thousands of organisations run
endless spreadsheets and engage
multi-billion pound computer systems to
produce forecasts that will determine the
amount and specification of individual
items that the company will manufacture.
This forecast determines the raw materials
purchased, production schedules and
sales targets: all aimed at achieving the
highest level of customer satisfaction –
providing customers with exactly what
they want, whenever they want it.
easily measured by a trip to the High
Street. Your sought after item is not
available in your size or colour. Whilst
making this discovery, you have had to
weave through hundreds of unsuitable
items of which the sales price is often less
than the cost price: so desperate are the
manufacturers to recoup some cash to
offset the financial calamity arising from
their ill-founded forecast.
If you are further up the supply chain and
do not have access to the end customer
then take a trip to any of your warehouses.

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You can once again identify the level of
inaccuracy of your forecast by examining
the length of time the stock has been in the
warehouse and the number of stock-outs in
a given period. As the warehouse manager
you will be screamed at to produce some
stock units and yet you have enough of
others to supply the next generation!
Military supplies, fast moving consumer
goods, building supplies and household
furniture experience exactly the same
issues as the retail clothing trade.
For example, a small NHS Trust recently
had to write off £4m of out-of-date drugs.
On the other hand, the pharmaceutical
companies are frequently unable to meet
the full demand across all required drug
lines. If only the future could be predicted!
Of course it can’t be. It is acknowledged
that in any forecast there will be a margin of
inaccuracy, but only at the point of sale will
the extent of the inaccuracy be illustrated.
Customer satisfaction strategy...
This article proposes a way for organisations
to be successful even when the demand for
their product range is full of uncertainty. The
key lies in the roots of the very word
satisfaction. It is derived from two Latin
words, satis – meaning enough, and facio –
to make. In other words, customer
satisfaction is not simply dependent on the
marketeers, sales or point of sales personnel
or the customer experience. It’s more
fundamental, requiring an organisation to
make enough to meet customer needs.
Successful organisations are those that can
base their strategy on meeting not the
forecasted needs but the instant demands of
their customers, providing them with 100%
availability of the product they want whilst
keeping their costs under control through low
inventory. Customer satisfaction, rather than
forecasts, is allowed to drive organisational
strategy. In order for this to happen, a number
of principles must be followed:
Autumn 2006 Customer satisfaction strategy The Ashridge Journal 360º
1. Consumption should drive production
scheduling
2. Production scheduling should drive the
supply of raw material
3. Order lead time, production lead time and
distribution/transport lead times should
be reduced to an absolute minimum
wherever possible.
If such a strategy is adopted, there are
profound implications not just for the way a
business is run, but also for the people
within the different departments of the
organisation. Senior executives need to
understand all of the strategic inputs from
operations, distribution, sales and planning
functions and the way they must change
not only their methods and measures, but
also their thinking.
“It is important to stress that top
management needs to pay a great deal
more than lip service to the task of
ensuring that manufacturing’s input into
the strategic debate is comprehensive and
that the agreed corporate decisions fully
1
reflect the complex issues involved.”
...with new behaviours
In each of these areas, leadership and
human behaviour are critical to achieving a
paradigm shift from traditional ways of
thinking and working. We are all too familiar
with silo-driven mentality in organisations
where decisions are made based upon the
perspective of a single department and not
on the need of the end customer. With the
continued use of cost/profit centres and
internal transfer pricing, managers
in organisations often make win/lose
decisions between internal departments
that impact badly on the bottom line
of the company. To implement customer
satisfaction driven strategy, the balance of
power should be roughly equal, with
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360º The Ashridge Journal Customer satisfaction strategy Autumn 2006
everyone subordinating to the very precise
individual needs of the end customer.
There is no place for political and
power games, which have long been
acknowledged as restrictive to total system
effectiveness. As Rosabeth Kanter wrote:
“…a monopoly on power means that only
very few have this capacity, and they
prevent the majority of others being able
to act effectively. Thus the total amount of
power – and total system effectiveness –
2
is restricted.”
It is critical that people across supply chains
understand that they are in business to
deliver a service to the end user, not
to meet measures relating to the parts of
the supply chain. With modern technology
enabling unprecedented levels of
information and communication from point
of sale throughout the entire supply chain, it
is easier than ever to take a whole system
view rather than become preoccupied with
local, departmental measures. However,
individual needs for recognition, reward and
security may lead to reluctance to adopt
customer satisfaction strategy. It is vital for
everyone to understand and be rewarded
for what really matters to the business
as a whole. It is usually necessary
to change the existing measure and reward
system away from departmental based
measures to accurate customer fulfilment
based measures to achieve a sustainable
breakthrough in performance.
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A successful furniture manufacturer
that increased bottom line profit by
meeting customer demand has been
able to share a significant proportion
of the extra profit with all staff
members. Daily, weekly and monthly
reviews of performance to the end-
user are what staff are now focused
on, rather than measures of local
efficiency, productivity or sales. This is
fostering a pan-departmental culture
of supportive relationships, replacing
the previous ‘them and us’ adversarial
relationships.
When manufacturer Remploy needed
to meet a sharp increase in demand
for military uniforms at the start of
the Gulf War, in addition to
implementing Theory of Constraints
approaches in new processes, new
methods of performance assessment
were introduced. These focused on
the finished product rather than on
individual parts of the process,
enhancing team spirit and sense of
3
collaborative working.
Perhaps the biggest barrier to successful
implementation of customer satisfaction
strategy is the anxiety leaders experience
when facing such a radical paradigm shift
across operations, financial measures,
sales and marketing. In a sophisticated
business environment our bodies react in
the same way as they did in our distant
past. Automatic reactions – such as the
flow of blood to our hands ready for
defence or attack, and to our legs ready
for flight – were indelibly etched onto
humans hundreds of thousands of years
ago when man was a hunter, as explained
4
in The Imperial Animal .

During the implementation of this customer
satisfaction strategy your conventional
wisdom and current paradigm will be
challenged. It is therefore important to be
aware of your own automatic reactions.
William Isaacs describes this well:
“I get defensive or competitive, at times
aggressive – and I see others as the
source of this behaviour!…They may have
gotten under my skin, but it was my skin
5
that had something under it.”
A self awareness of physical bodily
reactions can be very helpful in dealing with
stressful situations, coupled with an ability
to create environments for true dialogue.
6
Unless we create an inquiring environment ,
thinking together with colleagues across
different functions where each participant
holds their hypothesis lightly enough
to really hear each other, customer
satisfaction strategy will only ever be
a dream.
Let us look at the three key areas where
the combination of customer satisfaction
driven strategy with new behaviour can
deliver remarkable results:
1. Consumption driven scheduling
Let’s take a simplified example of a multiple
outlet High Street fashion store. Many retail
chains might proudly claim that if they sell
100 garments a day, they will restock with
100 garments for the next. However, only if
the replenished stock is identical to the
unpredictable size, shape, style and colour
preference of each of the next day’s
customers, will the retailer be able to
provide 100% availability. With customer
satisfaction driven strategy, when a
particular item is sold, it should be
replenished from back room stock within
the store. If information about the exact
colour, size and item of each sale is relayed
to the manufacturer on a daily (or even
hourly!) basis, the back room stock should
Autumn 2006 Customer satisfaction strategy The Ashridge Journal 360º
be replenished from the manufacturer. impractical. However, with use of a system
Sometimes this will be from the to replenish finished goods stock,
manufacturer’s small finished goods stock, combined with good supplier relationships
and sometimes it will be made to order – and creative transport solutions, remarkable
depending on delivery times. results can be achieved. Innovative thinking
will be and has been developed for
This requires a considerable shift from suppliers who insist on supplying large
departmental based decision making to batches of, for example, dyed material.
customer demand based decision making. Large batch delivery would impede this
Subordinating to a masterschedule based type of, solution as it prevents the
only on daily sales overrides the common necessary flexibility. Paying attention to
power struggles between, for example, buffer management and accurate
sales and production (“We can sell more composition of each customer delivery
but they can’t make it” or “We could reduces the need to hold high stock
produce much more but they can’t sell it.”) levels to compensate for uncertainty.
If your part of the supply chain is not Consequently, inventory levels can be much
involved in manufacturing the product, you reduced, as can warehouse and floor
may have to address the need to improve space. This has immediate impact on
relationships, communications and enabling cashflow and ROI.
technology with other parts of the supply
chain. Have you ever considered that no
US textiles and apparel company
part of the supply chain has sold until the
Warren Featherbone improved margins
end user buys? Of course suppliers of raw
by nearly 20%, while improving turns
material can offer bulk discounts within
from 2.5 to 4.5.
a particular month and force product onto
the next part of the supply chain but have
Mercantile's retail store experienced
they really sold? It is likely the next month
gross margin increase of 135% and
will be a lean one for the supplier.
store space decreased by 50%.
This approach can be effectively extrapolated
Oregon Freeze Dry implemented this
throughout the organisational entities in the
approach and reduced inventory by
entire supply chain.
60% and increased sales by 20% within
six months.
2. Production driven supply
Immediate replenishment at point of sale
Walmart, the world’s largest retailer with
has obvious implications not just for the
sales approaching $300bn, focuses on
manufacturing operations but for
low inventory and high availability of
the purchase of raw material. Traditional
product on the shelf.
raw material purchase is often determined
by a combination of forecast, usage and
availability of bulk discounts. Production
driven supply is dependent on accurate
data being sent to the supplier, according
to customer demand. This enables
continuous production that never has to be
interrupted due to lack of materials.
Particularly where delivery can take several
weeks or even months, this may seem
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360º The Ashridge Journal Customer satisfaction strategy Autumn 2006

3. Short lead times In Figure 1, a common stock measurement

Order lead time
We often consider lead times as production
and transport lead times. Of course these
elements are important but there is another
amount of time that is often ignored: order
lead time.
In Figure 1 you will see that order lead time
is by far the longest time relative to
production and transport lead time. If this
time can be eliminated then stock levels
can be reduced allowing cash to be
released for the company.
system is depicted illustrating minimum and
maximum inventory. Organisations pay
attention to stock levels as real money is
tied up with too much stock. This money
could be spent on other activities to
generate more return on investment. The
key is to provide 100% availability with low
inventory levels. In the graph, orders for an
individual stock unit are placed, the
individual stock unit is delivered, the
individual stock unit is consumed, another
order is placed, the individual stock unit is
delivered, and the individual stock unit is
consumed. The average individual stock
unit level is between the minimum and
maximum levels.

Figure 1.
Devastating effects of order lead time
X – Order Lead Time
Y – Production Lead Time
Z – Transport Lead Time
Stock Levels per SKU

Max Stock Level

Stock consumption Stock consumption

Min Stock Level

X Y Z
Order placed Order delivered

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It is clear that when order lead time is
eliminated (Figure 2), the average individual
stock unit level is reduced. If order lead time
is eliminated across all stock units, the result
will be reduced inventory. The benefits of
reduced inventory are:
Autumn 2006 Customer satisfaction strategy The Ashridge Journal 360º
If accurate and frequent information of
customer demand is provided as in Figure
2, then stock will be reduced by at least one
third whilst nearly 100% customer needs
are met.

• To the product: improved quality and

engineering as defects will be identified
and rectified earlier; new products
introduced faster

• To the price: higher margins and lower

investment per unit increasing ROI

• To meet customer satisfaction by 100%

availability of product and shorter
quoted lead times.

Figure 2. Y – Production lead time

Elimination of order lead time
Z – Transport lead time
Stock levels per SKU

Stock consumption

Max stock level

Min stock level

Y Z
Order delivered

Information of end customer demand

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360º The Ashridge Journal Customer satisfaction strategy Autumn 2006
Production lead time
Lead times are often crucial in calculating
how much stock is required to ensure
demand is met. For example: if you have a
three week lead time for product delivery,
then, as a retail outlet, you would probably
try to hold four weeks’ worth of stock to
reduce your risk of ‘stock-outs’. If the lead-
time was two days then one week’s worth
of stock would be sufficient. Whilst this
example is simplistic (it depends upon the
product and demand), it illustrates the
point that longer lead times result in
higher stock and higher stock levels result
in more cash being tied up.
There is also an important theoretical reason
for reducing lead time. There is a one to one
relationship between the amount of inventory
in a system and the time that it takes to go
through the system. Simply, this means that if
one unit takes one hour to go through a
system with 100 units of work in progress
then if that work in progress was reduced to
50, the unit would take 30 minutes to go
through the system. Reduced production lead
times are particularly valuable where
products become obsolete very quickly. They
are vital, for example, for toy producers who
produce film associated merchandise or have
to meet the pre-Christmas sales boom. They
are also vital for high technology industries.
Motorola’s Advanced Product Research
and Development Laboratory increased
throughput by 150% and reduced
cycle times by 20%. Benefits to the
Fab plant came in terms of added
capacity allowing the addition of more
technologies to the line. Due to
reduction in cycle time, new technology
introduction occurred faster.
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Competitive advantage through the
strategic sale
If a manufacturing company adopts the
strategy described above, what are the
implications for the company, its customers
and its market?
It gives the supplying company the
confidence to make a remarkable offer to
the customer. Knowing that it can deliver
the right product to the right place at the
right time, every time, with lower overall
cost, the company can offer:
a. To take full responsibility and
accountability (including financial) for the
stock held at the customers’ premises
b. To pay penalties if a product is not
available to the customer on demand.
Potentially this gives the company a
competitive edge in the market place as it
increases the customer’s return on
investment by increasing their inventory
turns and ensuring that every sale is met.
This becomes an extremely enticing offer to
the customer, who could well accept higher
7
prices for the improved service .
Dr Goldratt based his best selling book
8
It’s Not Luck on a real packaging company
that dramatically reduced lead time, reduced
stock levels, and increased due date
performance to near 100%. They made an
unrefusable offer to the market and
increased sales and margin dramatically.

Successful implementation
Key steps to successful implementation
of customer satisfaction strategy are:
1. Obtaining fast sales information:
Autumn 2006 Customer satisfaction strategy The Ashridge Journal 360º
However, with customer satisfaction
strategy meeting 100% of customer
demand, you will be able to answer – for
References
today – “How big is the market for your 1. Hill, Terry, (1993) Manufacturing Strategy,
product?” The MacMillan Press.

making decisions based on today’s
sales to the customer
2. Implementing 'world class' production
and distribution processes and
creating the environment for
9
behavioural changes
3. Only when confidence to deliver to
the customer demand is at almost
100% with reduced inventory can
the strategic sale be made that will
provide a win/win solution, increasing
margin for you and your customer
Note: Personal conversations with Dr E Goldratt and
Mickey Granot (Director of Goldratt Group) have
informed my thoughts.
2. Kanter, Rosabeth, (1977) Men and Women
of the Corporation, Basic Books, New York.
3. Luck, Gary, (2004) New Market Innovation
through Supply Chain Management, CriticalEYE
REVIEW: Journal of Europe's Centre for Business
Leaders, March-May.
4. Tiger, Lionel and Fox, Robin, (1997) The Imperial
Animal, Transaction Publishers.
5. Isaacs, William, (1999) Dialogue and the
Art of Thinking Together, Doubleday.
6. Block, Peter, (1993) Stewardship, Berrett Koehler.
7. Cram, Tony, (2006) Smarter Pricing, 360°
– The Ashridge Journal, Spring.
8. Goldratt, Eli, (1994) It’s Not Luck, Gower.

4. Sales focus on improving ROI for 9. Shragenheim, Eli and Dettmer, H. William, (2001)
customers rather than offering Manufacturing at Warp Speed: Optimizing Supply
discounts Chain Financial Performance, St Lucie Press, 2001.

5. Ensuring motivated and proactive

staff: using incentives based on whole
organisation measures, reflecting the
extent to which customer demand
is met

6. Addressing individual anxieties of

senior managers and staff and meeting
their development needs around the
paradigm shifts described above.

Returning to the original question posed at

the beginning of the article: how big is the
market for your product? Unless your
company is providing 100% availability of
your products it is impossible to know. It is
almost impossible to measure sales that
are lost – or worse, diverted to your
competitors. Your lost sales are probably
higher than you have ever imagined: based
on studies of many industries, your figure
can be as high as 150% – dependent on
your degree of seasonality.

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