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

Chapter 12
Customer Value
12-2
12.2 Introduction
Evolution of quality definition from internal measures to
customer value
Promotes a broader look at a companys offerings and
its customers.
Questions/Issues:
Why customers purchase?
Why customers continue to purchase?
Why customers defect from a company?
What are their preferences and needs and how can they be
satisfied?
Which customers are profitable?
Does the customer value low prices more than superior
customer support services?
Does the customer prefer next day delivery or lower prices?
Does the customer prefer to purchase the item in a store that
specializes in this type of item or from a large mega-store that
provides one-stop shopping opportunities?
12-3
Role of SCM
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
12-4
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.
Examples:
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
12-5
12.2 The Dimensions of Customer
Value
Conformance to requirements.
Product selection.
Price and brand.
Value-added services.
Relationships and experiences.
12-6
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.
Supply>demand => inventory costs throughout the
supply chain
Demand>Supply=> lost sales and possibly market
share.
Functional Items
Product demand is predictable
Market mediation not a major issue.
Fashion items or other high-variability items
Nature of demand can create large costs due to lost
sales or excess inventory.
Requires responsive supply chains
12-7
Zaras SCM Strategy
It keeps half of its production in house instead of
outsourcing as is common
It intentionally leaves extra capacity in its warehouses
It manufactures and produces in small batches rather
than try to achieve economies of scale
It manages all design, warehousing, distribution and
logistics itself instead of using third parties
It holds its retail stores to a rigid timetable for placing
orders and receiving stock.
It puts price tags on items before they are shipped rather
than at each store.
It leaves large empty areas in the stores and tolerates,
even encourages stock-outs.
12-8
Conformance to Requirements
Built on Three Principles
Closing the communication loop
Supply chain is organized so it can track material and
product in real time but also close the information
loop both for hard data and anecdotal.
Sticking to a rhythm across the supply chain
Company is willing to spend money on anything that
will make its supply chain fast and responsive.
Leveraging capital assets to increase supply
chain flexibility
Company uses the investment in production and
distribution facilities to make the supply chain
responsive to new and changing demand patterns.
12-9
Product Selection
Proliferation of product options
Larger variety means greater problems with:
Managing supplies
Predicting demand
Three successful trends:
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)
12-10
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
Long-Tail Phenomenon
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
12-11
Long-Tail Phenomena for
Rhapsody
FIGURE 12-1: The Rhapsody data2004 versus 2005
12-12
Strategies to Cope with Large
Variety
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
Amazon.com
Moving from a push to a push-pull strategy

12-13
Amazon.com Strategy
Initial Years: Used Ingram Books.
1999:Established its own seven fulfillment
centers
Today, there are 16 fulfillment centers in the
US.
2001: Focus on improving distribution
operations in a push towards profit.
Improved its fulfillment costs to 9.8% in 2001
(Q4) down from 13.5% in 2000 (Q4)
12-14
Several Initiatives Adopted in 2001
Improved sorting order and utilization of sophisticated
packing machines
Allowed shipping of 35% more units with same number of
workers
Used software to forecast purchasing patterns
Allowed reduction of inventory levels by 18%
Consolidated shipping of 40% goods into full trucks
Driven directly into major cities
Bypassing regional postal sorting facilities
Partnered to sell goods for other companies such as
Toys R Us and Target
Additional $225 million in revenue
Allowed other sellers to offer used books
Increased sales during the holiday season by 38%.
Gross margins about 85%

12-15
Other Issues
2006: 24 fulfillment centers (FCs) worldwide
Two types of FCs
Sortable => capable of combining items
Non-sortable => for larger items shipped separately.
Increased offerings to 34 product categories
Some fulfilled by Amazon and some by other merchants.
Challenges on the pricing front
Discounts nearly all books over $20 by 30%.
Had much higher discounts before even on bestsellers
2001: started to raise book prices
5 - 10%
Reverse the increases as sales fell.
Keeps just one or two copies in its warehouse
Make the title available to the whole country
Restock as quickly as customers buy books

12-16
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
Is the manufacturer going to pay for the inventory
Equalizing small and large dealers
No difference between different dealers
Difficult to see why large dealers would be interested in
participating in such an arrangement
Strategies to Cope with Large
Variety
Larger Inventories at Major DCs
12-17
Strategies to Cope with Large Variety
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
Many grocery products
28 varieties of toothpaste???
12-18
Price and Brand
Price cannot be a differential in many industries
Companies like Dell and Wal-Mart use cost reduction
strategies to improve profit
Brand names become a guarantee for quality
Premium brands can ask for premium prices
Supply chain has to be more responsive
May increase costs which may be offset by higher prices
Pricing in services more difficult
Opportunities for companies that can offer new
services
Not easily transformed to commodities
12-19
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.
Examples:
B2B services offer additional services to increase
revenue
Most of IBMs income today is from services
12-20
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
Manages the entire PC purchase
Includes special custom features
Becomes more difficult for the customer to switch
to another vendor.
12-21
One-to-One Enterprise with
Peapod
Online grocery
Personalized interface while shopping
Can create own virtual supermarket
Save shopping lists and retrieve lists
Opportunity to learn about its service:
Asks: How did we do on the last order?
Uses the relatively high response rate of 35%
Institutes requested changes to its services
12-22
Customer Experiences
Beyond relationships
Designing, promoting, and selling unique
experiences to customers
Offering distinct from customer service:
An experience occurs when a company intentionally
uses services as the stage, and goods as props, to
engage individual customers in a way that creates
memorable events
Examples:
Airline frequent flyer programs, theme parks, Saturn
owner gatherings, Lexus weekend brunch and car
wash events.
12-23
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.
12-24
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.
Examples:
Wal-Mart stands out on price and secondarily in large brand
selection.
Target competes by emphasizing brand selection before price.
Nike Stores emphasize experience first and product second.
McDonalds provides access first and service second.
American Express emphasizes service first and access as a
second attribute.
12-25
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?
12-26
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.
Demand variability and manufacturing and
information lead times determine the amount of
inventory that needs to be kept in the supply chain.
12-27
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
Surveys are easy to manipulate
Typically measured at the selling point
Nothing is said about retaining the customer.
Measure customer loyalty
Easier to measure than customer satisfaction.
Analyze customer repurchase patterns based on
internal databases.
12-28
Customer Defections
Identifying such customers not an easy
task
Dissatisfied customers seldom cancel an
account completely
Gradually shift their spending, making a
partial defection.
12-29
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.
12-30
SCC and SCOR Model
SCC organized in 1996 by Pittiglio Rabin Todd &
McGrath (PRTM) and AMR Research
Initially included 69 voluntary member companies.
About 1,000 corporate members world-wide and has
established numerous international chapters.
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
Members are in the process of forming industry groups
to collect best-practice information
12-31
SCOR Level 1 Metrics
Perspectives Metrics Measure
Supply chain reliability On-time delivery
Order fulfillment lead time
Fill rate
Perfect order fulfillment
Percentage
Days
Percentage
Percentage
Flexibility and responsiveness Supply chain response time
Upside production flexibility
Days
Days
Expenses Supply chain management cost
Warranty cost as percentage of revenue
Value added per employee
Percentage
Percentage
Dollars
Assets/utilization Total inventory days of supply
Cash-to-cash cycle time
Net asset turns
Days
Days
Turns
12-32
Overall Business Performance Metrics
PRTM Survey
Total supply chain management costs
Total cost to manage order processing,
acquire materials, manage inventory, and
manage supply chain finance and information
systems.
Leading companies have total costs between
4 and 5% of sales.
Median performers spend 5 to 6% more.
12-33
Cash-to-cash cycle time
Number of days between paying for raw
materials and getting paid for product
Calculated by inventory days of supply plus
days of sales outstanding minus average
payment period for material.
Best in class have less than 30-days cycle
time,
Median performers can be up to 100 days.
Overall Business Performance Metrics
PRTM Survey
12-34
Upside production flexibility
Number of days required to achieve an
unplanned, sustainable, 20 percent increase
in production.
Under two weeks for best in class
Less than a week for some industries.
Overall Business Performance Metrics
PRTM Survey
12-35
Delivery performance to request
Percentage of orders fulfilled on or before the
customers requested date.
Best-of-class performance is at least 94%
Some industries approach 100%.
Median performance ranges from 69% to
81%.

Overall Business Performance Metrics
PRTM Survey
12-36
Design Chain Operations
Reference (DCOR) Model
Framework that links business process, metrics, best
practices and technology features into a unified structure
to support communication among design chain partners
and to improve the effectiveness of the extended supply
chain.
DCOR developed by the Business Process Management
organization of Hewlett-Packard and conveyed to the
Supply-Chain Council in 2004.
Organized around the processes of Plan, Research,
Design, Integrate and Amend.
Spans product development, research and development
Does not attempt to describe every business process or
activity.
Focused on Product Refresh, New Product and New
Technology
12-37
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.
12-38
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.
12-39
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.
12-40
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.
12-41
Business-to-Business Benefits
e-marketplaces
Using the Internet to improve supply chain
collaboration by providing demand information and
production data to its suppliers.
Outsource but maintain control too
Various arrangements between manufacturers
and distributors for sharing information on
inventory that results in cost reduction
Motivated by the risk-pooling concept
Allow manufacturers and distributors to reduce overall
inventory by:
sharing information about inventory in all locations
allowing any member of the channel to share the
inventory.
12-42
SUMMARY
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.