Building a customer-centric supply chain
One of the bigger challenges I face in supply chain consulting is changing the attitude of decision-makers from being adversarial to collaborative in their relationships with trading partners and service providers. It's like swimming against the current of a river in which hard bargaining and squeezing is ingrained in Asian business DNA. This is fortunate in a way, because if business executives could figure out for themselves that collaboration can bring huge savings in total supply chain costs, I would be out of a job.
A useful article by Supply Chain Insights founder Lora Cecere describes customer segmentation and building a customer-centric supply chain, an approach I am now using with a Vietnamese state-owned enterprise that is in the process of privatising its business structure. I would like to share an extract with you.
Visibility is key: Channel visibility is not about taking orders or meeting month-end customer sales targets. An order comes in many forms: a rush order, a turn order, new product launch fulfilment, a special order or a sales order to stuff the channel to fulfil a sales bonus target. Each should have a different priority, but it is hard to have an operational discussion with a sales executive without understanding visibility and the link to improving reliability.
What matters to the customer: Responding to special requests while maintaining delivery reliability often causes tension in business. Sales teams' incentives are based on volume, but cost is what matters for the supply chain team. The two do not naturally align. One-off campaigns add to supply chain complexity -- the greater the complexity, the greater the challenge to deliver reliability. The dilemma is how to manage through the issue.
One retail customer I have been working with offers more than 300 one-off promotions every two weeks. There's no time to manage profitable items or control the capital investment in stock. Warehouses are jammed with unsold discounted products that lose value when prices return to normal. Bargain-hunting customers are not loyal to the retailer, and back rooms are full of stock that cannot be sold.
The focus should be on meeting different requirements and expectations. Examples are lead times, minimum order quantities, types of delivery service, return policies, and logistics and ordering documentation. One breakthrough approach is to offer incentives to the customer for good behaviour. Here are some examples from Supply Chain Insights:
Data sharing. A major food company gives discount pricing for data sharing by retailers. The greater the frequency and detail, the deeper the discount.
Forecast accuracy. A contract manufacturer shares discount pricing based on forecast accuracy of the customer. Forecast accuracy along with compliance with projected order pulls is the basis for pricing.
Shipping standards. A major consumer packaged-goods company gives discounts for full trucks, even layers, and preferential timing for dock-door acceptance. Others provide discounts for slip sheets to avoid the hassle of pallets.
Pay-on-performance promotions. Pay-for-performance promotions, or gain sharing, in the execution of trade promotions drives pricing.
Hands-free orders. A discount is given if the order can flow hands-free.
Using cross-functional scorecards: Scorecards are a valuable piece of customer information but often locked up with sales or commercial organisations and record only limited information such as on-time delivery and shipment conformity. Efficient supply chains should focus on resolving billings and deductions, offering improved assortments and reducing total supply chain costs.
Understanding cost-to-serve: Effective cost-to-serve analysis involves analysing supply chain cost drivers that can vary widely by customer. Carrying out the analysis improves sales and operational alignment and helps to balance one-off schemes with customer needs.
Available-to-promise (ATP): ATP is an important element in ensuring reliability in customer shipments. It sets the expectation for product arrival with the customer and measures the reliability of fulfilling an order against actual performance while tracking the reasons for deviations or service failures.
Business intelligence and market awareness: Effective feedback programmes to gather and use unstructured market data can assist greatly in understanding changes that can affect new products and channel programmes. This can include social data, product ratings and reviews, warranty data, customer comments and distributor demand.
Supply chain design: Within a company there are usually five to seven supply chains with distinctly different rhythms and cycles. Network modelling and simulation is a highly effective way to map these differences in order to develop effective strategies. This analysis uses the cost-to-serve data as an input and will evolve over time into customer-centric supply chain policies.
Building a customer-centric supply chain happens through hard work, understanding what matters by customer segment and building customer-centric policies. Are you ready?
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