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Learning Objectives

How information has empowered customers, raising thecompetitive bar for todays companies.

How customers define value and what a company must do todeliver value.

Understand the nature of customer service and satisfactionand how they differ from customer success.

Learn as why the end customer should be the focal point for

the entire supply chain.

Segment customers based on strategic importance.Understand the relationships, systems, and processes needed

to deliver desired levels of service to different customers.

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

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Information-Empowered Customer

Customers are empowered with a broad rangeof 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 distinctiveadvantage and differentiate themselves in themind 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

(MTBF) and its overall life expectancy. (Theta-)

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 qualityproblems.

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 achieve parts permillion(PPM) defective quality levels and seek

6level quality (Motorola 1981)

3.4 defects per million parts produced

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Competing the Cost

Four strategies are widely pursued:

1. Productivity enhancement

2. Adoption of advanced process technology3. Locating facilities in countries with low-

cost inputs

4. Sourcing from the worlds most efficientsuppliers

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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 customerrequests, and can adapt rapidly to unexpectedevents.

Flexibility requires investment in informationand automated production and logisticstechnologies.

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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 shareinformation

Build learning loops into every process throughout theorganization

Examples

Amazon.com; self personalizes customers buying habits

The Limited; Desired product from customers mind to rack in 1000hrs

Toyota; 5-day customized car

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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 of time in the order cycle. Incorrect order entry

A late supplier delivery

A machine breakdown

A transportation delay

A wrong routine

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Competing on Delivery

Delivery capability is cross functional by

nature, requiring coordinated efforts by:

Sourcing material

Operations

Logistics

Operations and logistics often represent 90%

of total order cycle time

Motorola reduced production time of pager

from 30 days to less than 30 minutes

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Competing on Innovation

Innovation creates new markets and changesindustry standards.

Early Supplier Involvement (ESI) is a key

element of innovation strategies (Apple Iphone inChina, Cannon-90 new models in 6 years vs Xerox, Yamaha-

37 models vs Hondas 113 in 18 months).

Products introduced on-time but 50% overbudget, 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 andcustomization are on

opposite ends of the

cost continuum

Rapid delivery reduces

flexibility

Cost Quality

Delivery

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 competitiveposition.

Innovation

Flexibility

QualityCost

Delivery

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Trade-off vs Synergy

Cost Quality

Delivery

Flexibility

Innovation

Flexibility

QualityCost

Delivery

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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

American Customer Satisfaction Index (1993 - 2002)

65

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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 Service Strategies

Traditional customer service focused on

internal service levels and goals:

Percent defective products

Percent on-time delivery

Fill rate ( percent of products ordered that are actually deliveredfrom distribution centers)

Without feedback it is easy to emphasizeactivities the customer does not value.

Service Gaps

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Customer Satisfaction Strategies

Customer satisfaction strategies require directinput from a customer. Questions to beaddressed 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 personalinterviews, and ethno-graphic studies.

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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 customers5. 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 in wrong areas

Measure performance inappropriately

Fail to deliver more than mediocre service

Operational emphasis leads to service gaps

CustomerSatisfaction

Meet customerdriven expectations

Ignore operating realities while overlooking operatinginnovations

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

Customer Success Help customers

meet their

customers needs

Limited resources require that customers of choice be

selected; that is, customer success is inherently a resource-

intensive strategy

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The End Customer

The end customer is the only one who puts

money into the supply chain and is therefore

the focus of all activities.

Successful companies share information thathelps the chain focus on the end customer.

Wal-Mart has establishedRetail Link,to provide

preferred suppliers up-to-date customer demand. Honda shares information and expertise with

suppliers to help them produce better parts and

components more efficiently

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Matching Fulfillment Strategies 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 Process

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1. Customer Analysis

Customer analysis identifies customer needs,helping management to segment customers.

Customer segmentationthe identification of

unique groups of customers who possesssimilar needsallowing the development of

products and systems necessary to fulfill the

needs of different customer groups. Marriott (Cruise ships - Titanic)

Business travelers

Luxury vacationers

Budget conscious travelers

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2. 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. Toyota concept to bring new cars in market in 15 months

At IBM, sales force focuses on understanding success factors inparticular industries

Aim is to understand customer success factors

(customers becoming more competitive)better than the

customers themselves

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3. Competency Analysis

A core competency is something that the companydoes so well as to provide it a competitiveadvantage.

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

These questions be directed to managers inengineering, production, logistics, marketing andcorporate strategy

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Customers-of-Choice Relationships

A select number of A customers whose needs the companyis 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 informationexchange on inventory levels, order status, and future demand.

Fulfillment processes are designed for flexibility to accommodatecustomers' special requests.

Policies and procedures support extraordinary efforts to meetunexpected needs or unusual requests.

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Highly Valued Relationships

Many A and most B customers are candidates

for highly value relationships.

Highly valued relationships characteristics:

Customer input is actively sought and utilized to meetexpressed expectations.

Dedicated customer account teams.

Information systems are a way to share information.

Policies and procedures acknowledged the importance ofthese customers.

Members of this group often become tomorrows

customers-of-choice.

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Evaluating the Profitability of 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. e.g. Platinum, Gold, Silver cards;frequent flyer programmes by various airlines

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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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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.

Transformation

ProcessInputs Outputs

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Example 1

hourlaborperpadsbrake5tyProductivi

hourslabor10

padsbrake50tyProductivi

InputTotal

OutputTotaltyProductivi

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Example 2

20tyProductiviinChangePercent

)100(5

5-6tyProductiviinChangePercent

)100(ChangePrior totyProductivi

tyProductiviinChangetyProductiviinChangePercent

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Skinner on Productivity

Experience regularly observes a "40, 40, 20"rule. Roughly 40% of any manufacturing-basedcompetitive advantage derives from long-term

changes in manufacturing structure. Another40% comes from major changes in equipmentand process technology. The final 20%nomorerests on conventional approaches to

productivity improvement.-Wickham Skinner

Harvard Business School

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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 (Control Charts) to remove

special cause variation from the process andthereby improve the quality of output

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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.

-pLimitControlLower

pLimitControlUpper

SizeSample)p-(1pDeviationStandard

SizeSampleXSamplesofNumber

DefectivesofNumberTotalpMeanProcess

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Attribute Control Chart - Example

0.0897(0.03929).961-0.1667LimitControlLower

0.2437(0.03929).9610.1667LimitControlUpper

0.03929

90

0.1667)-(10.1667DeviationStandard

0.1667p

90X20

300pMeanProcess

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Variable Control Chart - Example

23.62(0.7673).961-25.12LimitControlLower

26.62(0.7673).96125.12LimitControlUpper

0.7673ErrorStandard

3

329.1

ErrorStandard

25.12XMeanProcess

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Variable Control Chart - Example

22.00

22.50

23.00

23.50

24.00

24.50

25.00

25.50

26.00

26.50

27.00

1 2 3 4 5 6 7 8 9 10

X-bar X-bar-bar UCL-X LCL-X

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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 ofproducing a quality output.

Used to asses the stability of the process

Compares the process control limits to the productspecifications (USL & LSL).

Process Capability Index

3

LSL)-(C

3)-(USLC:where

},min{

pl

pu

plpupk CCC

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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 tospecifications

A negative Cpk indicates a process where the process mean is outside ofthe specifications

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Problem Solving

Cause and Effect Diagram (Fishbone

Diagram)helps to identify under cause for a

non-conforming outcome.

Pareto Diagraman application of the 80/20

Rule; helps to identify the vital few from the

trivial many (a small number of causes are

leading to a large majority of your problems)

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Fishbone Diagram

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Pareto Diagram

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Missing

Components

Wrong Material Sick Employee No One Home Broken Equipment Scheduling Conflicts

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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 customerfulfillment strategies?

2. What processes and systems are needed to achievehigh levels of customer satisfaction across a rangeof customer relationships and requirements?

3. What questions would you include on a customer

satisfaction checklist to make sure you had acomprehensive, well-thought-out customerfulfillment strategy in place?