Connecting the
Supply Chain to the Demand Chain

New Research Shows
Benefits of Evaluating Customers

Jennifer Read

It is becoming increasingly important for companies to track not
only product profitability, but customer profitability as well, according
to information presented at Stanford University Graduate School of Business'
Global Supply Chain Management Forum seminar held earlier this fall. The
seminar, entitled, "Creating Digital Loyalty Networks," featured talks from
Deloitte Consulting, Harvard University professor V.G. Narayanan, and
vendors of IT solutions addressing the issue.

According to a study conducted by Deloitte Consulting, companies are
focusing on either supply chain collaboration, or customer loyalty, but
few are able to manage both well. Supply chain collaboration delivers
benefits that mainly affect the "back end" operations, the "buy" and
"make" functions of a company's business. Customer loyalty efforts
focus on the "front end" or customer facing part of the business, and
track such things as the cost to service particular customers, and demand
trends. These efforts have not produced the benefits manufacturers expected,
because of a phenomenon the Deloitte research team dubbed "the Customer
Paradox." While companies have reduced costs through increasing
supply-chain collaboration and the application of Internet technologies,
customer expectations continue to rise, masking the benefits.

A small group of the 450 companies studied (13%) have been able to
successfully manage both ends of their business. Those that are able to
integrate a collaborative supply chain with customer-centricity outperform
their peers on all key metrics: profitability, business performance, shareholder
value; customer relationship and satisfaction measures and manufacturing
quality. Companies that are successful in both dimensions were named
"loyalty networkers" by researchers. The chart (see end note) illustrates
how the researchers divided respondents into four quadrants according
to performance in the two dimensions of customer centricity and supply
chain collaboration.

Researchers concluded that the dramatic shift from product centric, to
customer centric marketing strategy must be managed in an integrated
manner. Further, while collaboration as a supply chain strategy has
driven efficiency, it must be integrated with customer relationship
management to provide sustainable competitive advantage. A third
conclusion of the study was that technology is the driver of everything
and is inseparable from both supply chain management and customer
relationship management.

"By understanding how customers impact the supply chain, companies
can identify where they use resources efficiently and where they waste
them on less valuable customers," said Deloitte analysts Jim Kilpatrick
and Steve Pratt at the Stanford conference. But, they warn, in shifting
organizational focus to customer loyalty, redefining company culture
will be critical. "In the past, most business processes, information systems,
performance measures, and organizational structures supported a
philosophy of treating every customer equally and doing whatever was
necessary to satisfy every customer. As companies differentiate customer
service, employees must be coached on how to give preferential treatment
to loyal and profitable customers. Employees must still be driven to go
the 'extra mile' for customers, but must make choices about when it is
most beneficial to do so."

Measuring customer profitability

Harvard Professor V.G. Narayanan described his research in using
data for customer profitability studies to re-engineer the supply chain.
"The value of customer information has increased, while the cost of
acquiring the data has decreased. This represents a tremendous opportunity
to companies able to take advantage of it." Customer acquisition costs and
churn rates are of increasing concern to many companies, especially where
there is a high service component to the product offering. Collecting
detailed information on how much it costs to service each customer
can allow companies to answer such questions as "How much should
I be willing to pay to acquire a new customer; what type of customers
are a good fit; what type of customers should I be acquiring?"

Companies may have multiple relationships with customers, including
some interactions that are loss leaders. Tracking profitability on a
customer-by-customer basis will reveal whether some customers are just
too demanding —and too expensive—to service. Those customers
should be gifted to competitors.

What type of information is collected to assess customer profitability?
It is important to accurately assess the total cost of customers, rather
than just tracking the cost of goods sold. Sales general and
administrative costs (S G & A) are committed in advance and are not
variable costs, according to Narayanan. So, on a contributed margin
basis, all customers look profitable. Other accounting measurements
can drill down deeper to determine exactly what costs can be assigned
to each customer. For example, companies are using activity-based
costing (ABC) to determine customer costs. "In the past, this data
was very difficult to collect; employees resisted keeping track of
their activities. But now it can be collected automatically and on
an on-going basis."

Taming the Bull-whip Effect

The Internet technology to track demand information in real-time
and communicate it to the supply chain is being developed by vendors.
Information about demand can allow the supply chain to react quickly
to signals of a downward trend in the product's life cycle; allowing better
inventory management. Presently, one of the biggest problems facing
collaborative supply chain efforts is poor forecasting. When demand
fluctuates, as it has recently in certain industries like wireless and
telecommunications, inventory tends to build as companies stockpile
components to avoid shortages. This has been called the Bullwhip
effect by Stanford professor Hau Lee, among others.

Accurate, real-time demand information is believed to be the cure
for this condition. Companies like i2 Technologies and CommerceOne
are developing software solutions that can relay what the end customer
has actually ordered from one end of the supply chain to the other. One
barrier they face is the lack of standards governing communications
between supply chain partners. The industry is addressing the problem
through efforts like RosettaNet and the recent National Electronics
Manufacturing Initiative (NEMI), "Virtual Factory Information
Interchange Project." These pan-industry standard setting efforts are
intended to facilitate the exchange of technical data among OEMs,
EMS providers, and their suppliers.

Keeping careful track of customers and managing inventory effectively
are skills that have always been key to success in any business. In some
senses, these studies reveal nothing new. However, the new Internet
technology tools available, as well as an increasing willingness on the
part of companies to share data between partners may give companies
able to take advantage of these trends an important competitive edge.

For a full reprint of this article, contact marilyn@wiringharnessnews.com