“The Intimate Supply Chain”

August 18, 2006 by SwizStick  
Filed under Education, Supply Chain Management

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Once again Supply Chain Management Review has a must-read article on yet another level of supply chain management what the author, David Ross, dubs “The Intimate Supply Chain”:

Until now, companies have sought to compete by constructing supply chain models that leverage lean manufacturing and supply-side management. They have deployed agile and flexible assets and information technologies in the pursuit of supply-channel networks capable of supercharging everything from product development to fulfillment. And all the while they have searched relentlessly for cost reductions.

But while such initiatives have yielded sometimes dazzling advances in productivity and marketplace responsiveness, they are rapidly becoming insufficient in the face of globalization and the mass-consumption strategies of market leaders like Wal-Mart and Dell. In order to succeed against global competitors that can offer high-quality products at the lowest cost, companies must go beyond the traditional approaches to improving the business. But after they have removed the waste and streamlined the supply chains to minimize costs, what’s next?

We contend that supply chains must move to the next stage if they are to remain competitive: They must evolve into what we call intimate supply chains. The essence of this “intimacy” is to create value for each customer at every touch point in the supply chain. As we describe in detail below, this intimacy is gained through the following integrated actions: 1) developing a portfolio of customer segments, 2) understanding the needs and opportunities of each segment, 3) fashioning customized value propositions that deliver a complete buying solution, and 4) using technology, tools, and metrics to build and maintain a supply network focused on the customer. In combination, these activities lead to a customer-centered supply chain.

Focusing on the customer is nothing new, in fact it is the primitive basis for the existence of all companies: a customer has a demand, the company seeks to fulfill it. Those companies that can fulfill the customer’s needs the best at an attractive price will lead the market. This is all very basic common sense, as the article is quick to point out:

After all, who’s not in favor of operating the business with the customer’s best interests in mind? In reality, though, supply chains are all too often organized around internal financial objectives like resource allocation, product lines, and business-unit profitability. When problems arise, companies develop a generic response that is then applied to all customers in the supply chain—whether they are profitable or not.

In theory, a demand-driven network is supposed to be able to take real-time demand information, rapidly reassemble supply channels, and create individually targeted customer solutions. But in reality, it is impossible to respond to the needs of each and every customer. That would be corporate suicide.
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True customer-centered businesses are organized not around general performance targets but around a precise knowledge of each customer segment identified. An intimate supply chain determines performance on the value it can provide to the customer. It views all customer demand as unique and seeks to configure each solution to match the product/service features each customer values the most. In a customer-centered supply chain, someone is directly responsible for managing each customer segment. This means that managers have an intimate knowledge of what customers want and need. They are constantly driving new value propositions designed to attract and expand each segment’s profitability to the supply chain.

No one doubts that the customer is king, yet so few companies seem to keep this basic concept in mind. It is something that the small business owner will never forget and in fact forms the very basis of his business. How many of you purchase products or services from a smaller, more attentive business, even when the base cost of the product or service is slightly higher than that of a much larger competitor?

Different points brought out in this article resonated with me because they reflected many of my own ideas about “customer centricity” and the way we developed business at a previous company I worked for, lessons I have taken with me as I have moved on in my career, all of them customer focused:

1. The customer is king.
2. Each customer has unique needs that should be addressed uniquely.
3. Customers will first be grouped by their service needs/requirements and then by the various products/services and methods we can use to fulfill them.
4. Each customer will be provided a custom tailored solution to their needs. A point of contact will be assigned to the customer who has a unique knowledge of the customer’s needs and the solutions that can be utilized for the customer’s benefit.
5. We will find and develop mutually beneficial relationships with contractors and overseas partners to leverage the level of service and benefits to each customer.
6. The key to long term customer success – and profitability – is “problem solving”. By eliminating customer problems we create loyalty and profitability. Every day we should seek to optimize the customer experience so that they experience the smoothest and problem-free service at the best possible price.

These basic principles are all covered in one way or another in lengthy explanation within this article on Intimate Supply Chains. It is a long article, but well recommended, particularly for organizations looking to gain a competitive advantage with the larger players:

Many companies today are feeling squeezed domestically by price-centered “big box” marketers like Wal-Mart and globally by low-cost, scale- economy manufacturing and distribution. These forces have been accelerated by low-cost, mass-consumption strategies that break down customers according to specific demographic attributes and then construct product/service formats in which all customers are treated identically.

In most industries (department store retail and automotive to name just two), it is futile to go head-to-head against the giants pursuing this strategy. Yet there’s another way to compete—and the intimate supply chain shows the way. The customer-centric networks in the intimate supply chain are able to provide targeted customers with complete, bundled solutions that can be attained with as little cost, time, and effort as possible.

In other words, it really boils down to value, and how much value you offer to your customer. Price (i.e. cost) is not, and should not, be the ultimate end of optimization; it should be value. But as always, there are those that know the price of everything and the value of nothing.

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