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Supply Chain Customer Focus – New Year Recommendation – Part Three

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Supply Chain Customer Focus“Do what you do so well that your friends will want to see it again and bring their friends.”  -Walt Disney

This is the last in a three-part series on supply chain recommendations for the new year. To recap, I started this series by reviewing the ‘best of the best’ trend predictions from the last 5 years, and then making recommendations for supply chain modifications to match those trends. I looked at output from 4 different groups: Gartner Analysts, IDC, Ferrari Group, and SupplyChainBrain. I saw prediction patterns emerging that led to my own recommendations for the year ahead.

The first two blogs in the series presented profitable proximity and risk management, both trending supply chain topic predictions for the coming year. As promised in the last blog, though, I feel that this third and final topic for the supply chain is the ‘best’, or what I feel offers the most promise for your investment: customer focus.

Prediction #3: Supply chain customer focus will continue as a strategic priority.

Supply Chain Customer Focus

Customers have been in the forefront of supply chain predictions for the last 4 or more years:

  • 2009 IDC Prediction #6: Customer Relationship Management (CRM) and consumer-centricity efforts continue to grow across the modern supply chain as manufacturers attempt to improve innovation efforts. The sale is just the start as services become an increasingly important part of the ‘product experience’.
  • 2013 IDC Prediction #3 – On the demand side of the supply chain, recognizing the need for better service levels and mass customization, manufacturers look again to postponement techniques and data analytics to drive more effective customer insights and ‘smarter’ fulfillment.
  • 2013 IDC Prediction #5 – Service excellence becomes a strategic priority.

Leading consultants like Forrester have defined the “Age of the Customer” as a 20-year cycle wherein CIOs and CMOs will reinvent themselves to win in this age. Forrester points to a transition from focus on manufacturing, to distribution, to information management, to lead up to today’s more towering power of the customer. They say that the leaders in use of technology within this customer obsession hold the key to winning that customer race.

This seems obvious, doesn’t it? But the technology push to deliver a smarter, more innovative product, at a quicker pace, for less cost, and with more satisfaction, is accelerating. Customers expect it, and pay back with their loyalty, and the company stock prices reflect it time and time again. Think about companies like Starbucks, Amazon, and Apple: all at the top of their game, with soaring customer ratings. Amazon has mastered the customer relationship model with customized suggestions based on your purchases. Starbucks is well-loved because of the customer experience as much as the product. Apple, with innovations and scheduled announcements of new products to meet continual customer demand for a product more powerful than the last, came in at the top of the PC ratings for the 10th year running, and in 2012 took over as the world’s most valuable company, with a 4% piece of the S&P 500 pie.

Supply Chain Customer Focus

So with those companies on the pinnacle, they stay ahead if they prioritize supply chain customer focus.  Mostly, it’s about competition: besides being more cost-effective, those companies know that they simply have to have the best customer satisfaction.

  • Customers increasingly want their orders faster. This allows the companies who offer rapid delivery to force out those who don’t keep finished goods inventories. In this environment, good demand forecasting is a must for companies to level out production quantities, build the most competitive transportation and warehousing structures, compete the best supplier contracts, and maintain the most efficient operations.
  • Internal organization can improve customer experience. Collaboration is being encouraged within companies to give the customer the experience from purchase through customer service. Our best relationship with one of our most recent vendors underwent seamless transitions from sales to implementation to customer advocates: we’re hooked!
  • External factors give breadth beyond historical and seasonal forecasts.  Traditional forecasting methods were based on historical and seasonal data, and do not reflect the impact of the economic market’s volatility and resulting customer shifts. For example, consumer attitude, even after financial situations are taken into account, is a leading  indicator to durable goods spending every year. Tracking of indices like fuel costs, unemployment rates, and weather patterns are more examples of leading indicators to consumer demand. One of our customers, a manufacturer of snow-clearing products, faced a winter drought that severely decreased demand for their product. That year they admitted that this volatility wreaked havoc on their profits!  Their reliance on external indicators of weather patterns, as fed into our forecasting platform, is now allowing them to predict and adjust their manufacturing and inventory levels to those conditions in real-time, drastically reducing required inventory, and leveling out production and logistics costs.
  • Providing the latest and greatest products can draw customer loyalty. Customers depend on innovation, and will offer their loyalty to those with the newest, biggest ideas. But studies show that more R&D spending does not equate to more revenue. Only a small percentage of product ideas make it to launch. Less money is lost on a ‘kill’ of a product release pre-launch than a ‘fail’ post-launch! Demand forecasting plays a large part in segmenting what products are worthy of adding to the supply chain. Also, even improvements to old products can alter demand, so demand needs to be analyzed BEFORE any resulting disruptions in production, finance, and logistics are made.
  • The closer you are to the customer, the better your service. Sales and marketing research keeps a hand on the customer behavior dynamics through reward-based questionnaires, online forums, blogs, and interviews, and retargeting. Direct feed of information through technology by way of Point-of-Sale or Point-of-Use gives priceless real-time feedback. Evolving from this is the cycle of sensing consumer behavior, measuring marketing effectiveness, adjusting the marketing for optimal impact, all leading to demand-driven forecasting.
  • Design your supply chain to meet customer predictability. A key to supply chain optimization is to know your customer and your products in terms of predictability, and adjust accordingly. Employ more lean supply chain tactics in more predictable markets, and more agile supply chain tactics in less predictable markets. Toyota, for example, evolved its lean philosophies under periods of predictably high demand. Agility, though born out of necessity to disruptors to the supply chain such as demand volatility and new product introductions, leads to high customer satisfaction: items always on the shelf, no back-orders, no waiting for special orders.
  • Given the above, find the best and broadest talent possible to optimize your supply chain for the Age of the Customer.

If you compare the list above to my recommendations in the prior blogs about profitable proximity and risk management, it is clear that the supply chain customer focus goals are more numerous, and more impactful to business survival. Demand forecasting is the common thread above, and the window to the customer’s behavior. Speaking of forecasting, Gartner expects 10.6 percent growth in 2014 investment in these B2B analytics, particularly in the SCM space. (5) Best-of-breed providers know that providing differentiators like personalization, ease-of-use, learning engines are a few of the ways to help their clients stay focused on the customer at all times.

Recommendations for Supply Chain Customer Focus

PadlockThere are many roads to great customer focus. Based on my research and experience with our clients, here are my top recommendations for supply chain customer focus:

  1. Build a talented supply chain team that will innovate for the customer’s needs and collaborate internally to build brand loyalty, and design your supply chain with demand volatility and customer satisfaction in mind. See if supply chain segmentation can turn your customer focus into supply chain success.
  2. Keep your finger on the pulse of the customer, and your competitors, and listen for cues to market demands, delivery competition, and customer satisfaction ratings. Using a demand-driven strategy in your supply chain helps you focus simultaneously on profitability and the customer.
  3. Forecast demand to achieve optimal inventory in existing and new products, with priority toward maintaining and growing customer satisfaction. Use all methods available to increase your forecast accuracy, including external indicators.

I recently read an article on sales with the message that if we could just maintain our current customers, and limit expenses to that revenue, that all new customer revenue would be just ‘gravy’. How easy that would be with great customer focus!  After all my recommendations, I believe that if you can only do one of the recommendations above, choosing one from the Customer Focus category should come first. Both B2B and B2C customers will remember your successes and especially failures.  Years ago, after a full day on Colorado mountain trails, energized but hungry, my group went to a popular eating spot best-known for their chicken dishes. That day, they were out of … chicken. It was a long time until we returned there for a meal!

Next time, I will compile the full list of my supply chain recommendations from all three categories predicted by experts, under the categories of profitable proximity, risk management, and customer focus.

How did customer focus play a part in your supply chain up until now? Did it make a negative, neutral, or positive impact to your business?

 

References

http://www.gartner.com/newsroom/id/2643919
http://www.scdigest.com/assets/newsViews/09-02-12-1.php?cid=2256&ctype=content
http://www.idc.com/getdoc.jsp?containerId=prUS23876412
http://www.theferrarigroup.com/supply-chain-matters/2013/12/17/supply-chain-matters-2014-predictions-for-global-supply-chains-part-seven/
http://solutions.forrester.com/age-of-the-customer-hp/landing-324FC-2795CK.html
Dilbert, United Feature Syndicate, February 2, 2001.
Journal of the American Statistical Association, Volume 58, Issue 304, 1963,pp. 899-917, Ten Years of Consumer Attitude Surveys: Their Forecasting Record
Industrial Marketing Management, Vol 29., No. 1., 2000, “The Agile Supply Chain : Competing in Volatile Markets”, Martin Christopher
http://www.ers.usda.gov/topics/food-markets-prices/processing-marketing/new-products.aspx#.UurtNyqWHU8
http://dspace.mit.edu/bitstream/handle/1721.1/39816/ESD-260JFall2003/NR/rdonlyres/Engineering-Systems-Division/ESD-260JFall2003/08F26A35-E698-4FC6-8AC6-1B7445F1CE04/0/l2_3demfcastpmas.pdf

Best Practices to ensure investments in S&OP software and Forecasting deliver measurable benefits – Number One

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Gartner Research just completed its annual supply chain conference during which they were sharing a lot of their research and one of their findings is really just mindboggling: after initial investment in S&OP software (and forecasting and Demand Driven Value Networks (DDVN)), fully two thirds of companies have failed to mature their processes or continue to drive investment in order to obtain measurable benefits to their bottom line. In fact, most of the companies did not focus on ROI at all.

That’s somewhat reprehensible, not to mention disheartening in a business world that is growing more competitive and difficult.  We have spoken at length about the fiduciary responsibility of executives and officers to drive the performance of their companies and to be able to measure and confirm those impacts for the good of their stakeholders, their shareholders, and their own careers.  There has also been ample information posted here and elsewhere about what those benefits would add up to in terms of shareholder value and cash flow.

But for some reason, obtaining and documenting a minimum 5% improvement in company earnings (measured by EBITDA and as used as a proxy average for ROI measured in a bunch of different ways) has not proven to be a big enough incentive to focus companies on wholeheartedly pursuing improved forecasting.

Maybe companies really don’t know how.  Perhaps enterprises are struggling to figure out how to move forward once the original work (process design?  System implementation?) is done.  Or, perhaps the fundamentals of the business are changing (acquisitions, competition, etc.) such that the original work is no longer relevant and no one has the time or the focus to make sure that the S&OP and forecasting components stay up to date and relevant to the business.

Given all of that, we would like to share what we have learned from our clients regarding best practices to ensure relevant S&OP software and forecasting and, more importantly, measurable bottom line results and continuous improvements to those results.

The number one most important best practice for any company wanting to be best in class for S&OP and to ensure continuous improvement within this strategic capability is:

A member of the C-suite executive group owns the forecast, its accuracy and the S&OP process.

And by own it, I mean

  1. It is part of their job description
  2. It is publically acknowledged as a critical strategic capability for the company that will improve
  3. The remaining C-suite executives publically commit to support the executive in achieving the stated goals
  4. Most importantly, it is a large part on the compensation profile for the executive who owns it as well as a portion of the compensation for the remainder of the c-suite. By large I mean somewhere between 20 and 40% of their total compensation (for the specific c-suite executive and 5 to 15% each for the remaining C-suite team) is determined by the companies’ S&OP performance anchored most visibly by the forecast error measurements.

We are not going to go so far as to say which C-Suite member should own it, as different industries and different organizational structures and cultures will lead to different answers that work best for each company, but someone in the C-suite has to own it.

It is not possible to overstate the importance of this best practice.  If Gartner were to go back and apply this additional criteria piece to their research, I would bet body parts, (yes even my own), that they would find that the vast majority of the companies in their research data base do not follow this best practice.

Why is it so important?  What does it add?  Because once this fundamental best practice is fused into the DNA of the company (i.e. the C-suite putting compensation at risk), it ensures that the next set of best practices can and will be set in place and that addresses the problem highlighted in the Gartner research cited at the start of this note.  We will cover these in upcoming blogs, but an example of additional best practices include (not in any particular order)

  1. Measurement
  2. Corporate alignment – not just who does what but also what does each group gain from their involvement
  3. Appropriate resources and measurement
  4. Appropriate and flexible process
  5. Appropriate technology.

No one is suggesting this is easy; we are here to say that the payoff is more than worth it and that is supported today by a large and growing quantifiable pool of research from many different communities.

If you are wondering, there is a first, pretty good step you can take to start this journey – get the group (C-suite, perhaps direct reports) together and answer the question –  If we could improve forecast error by 5% what would that be worth to our bottom line (EBITDA, Cash flow?)? What would 10% be worth?  What would 25% be worth?

Once that question is answered, the basis for this best practice is patently obvious.  And the exercise will also open up all the supporting areas that will contribute to and benefit from the elevation of S&OP to a strategic capability – competitive advantage, improved customer service, reduced working capital requirements etc.

This is just the start.  But always best to start a journey that is worth it.  And getting S&OP and forecasting right is absolutely worth it.

This is a part 1 of a series, followed by part 2, Best practices to ensure investments in S&OP software and Demand Forecasting deliver measurable benefits – Number Two: Measurement