Customer Value and Supply
Chain Management
Designing & Managing the Supply Chain
Chapter 10
Shuzhu Zhang
zhangshuzhu@pusan.ac.kr
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Outline
 Case study
 Introduction
 The dimensions of customer value
 Strategic pricing
 Customer value measures
 Information technology and customer value
 Summary
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CASE: Dell’s Direct Business Model
 Direct business model:
 bypass the dealer channel and sell directly to customers and buil
der their personal computers to order
 eliminate the cost of inventory and the reselling expenses
 Virtual integration VS vertically integrated
 Inventory velocity
 8 days inventory VS 4 weeks inventory
 Dell has segmented its customer base so that it can
offer value-added services to different customers
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Introduction
 The way of measure of product and service
 Internal quality assurance  external customer satisfaction 
customer value
 SCM is naturally an important component in fulfilling
customer needs and providing value.
 SCM can also impact the important customer value
of price by significantly reducing costs.
 Customer value drives changes and improvements i
n the supply chain.
 Customer value is also important for determining the
type of supply chain.
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The dimensions of customer value
 Customer value  the way the customer perceives t
he entire company’s offerings (products, services…)
 Customer perception can be broken into several dim
ensions:





Conformance to requirements
Product selection
Price and brand
Value-added services
Relationships and experiences
 How each dimension is affected by SCM
 How SCM needs to take into account the customer values inhere
nt in each dimension
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The dimensions of customer value
 conformance to requirements
 The ability to offer what the customer wants and nee
ds is a basic requirement to which SCM contributes
by creating availability and selection
 market mediation function
 the differences between supply and demand will lead to the cost
s associated with the market mediation
• Supply > demand  inventory cost
• Demand > supply  lost sales and possibly market share
 Customer access
 the ability to easily find and purchase a product
 In all, the company provides
 Products, services for customers
 The way for customers to know its products, services
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The dimensions of customer value
 product selection
 The contribution of product proliferation to customer value is di
fficult to analyze and understand.
 The proliferation of products and difficulty in predicting demand for a sp
ecific model force retailers and distributors to hold large inventories.
 Sometimes there is no need to provide too many selections for one item
 Three successful business trends
 Specializing in offering one type of product : Starbucks, Subway
 Megastores that allow one-stop shopping for a large variety of products :
Wal-Mart
 Megastores that specialize in one product area : Home Depot, Office M
ax, Sportmart
 Several ways to control the inventory problem of a large variety
of configuration or products
 Build-to-order model : Dell
 Larger inventories at major distribution centers: vehicles
 A fixed set of options that cover most customer requirements
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The dimensions of customer value
 price and brand
 Price of products and the level of service are essenti
al parts of customer value
 The price may not be the only factor a customer considers, there
may be a narrow price range that is acceptable for certain produ
cts.
 Brand – an important factor affecting the price
 The internet and its impact on consumer behavior have increase
d the importance of brand names, because a brand name is guar
antee of quality in the buyer’s mind.
 Mecedes cars, Rolex watches, Coach purses…
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The dimensions of customer value
 value-added services
 Value-added offering can differentiate some compan
ies from their competitors and provide them with mo
re profitable pricing structures
 Especially technical products : after sales services
 Other reasons why many companies are adding mor
e services around their products:
 The commoditization of products
 The need to get closer to the customer
 The increase in information technology capabilities
 Value-added services
 Support, maintenance
 Information access
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The dimensions of customer value
 relationships and experiences
 An increased connection between the firm and its cu
stomers makes it more difficult for customers to swit
ch to another provider
 The learning relationship
 Companies build specific user profiles and utilize this information
to enhance sales as well as retain customers
 Beyond relationship, some companies are also desig
ning, promoting, and selling unique experiences to t
heir customers.
 An experience occurs when a company intentionally uses servic
es as the stage, and goods as props, to engage individual custo
mers in a way that creates memorable events
 Disney’s theme parks
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Strategic pricing
 Revenue management
 “selling the right inventory unit to the right type of customer, at the right time, and for the right price”
 Smart pricing
 Use price as a tool to influence customer demand
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Strategic pricing
 revenue management
 Revenue management, which integrate pricing and i
nventory strategies to influence market demand, pro
vide controls for companies to improve the bottom li
ne.
 Example
 One hotel has 400 identical rooms, the relationship between de
mand (D) and price (P) : D=1,000 – 0.5P
 The manager will try three different price-demand strategy
• One-price strategy (D,P)=(400,1200)
• Two-price strategy (D1,P1)=(200,1600) and (D2,P2)=(400,1200)
• Three-price strategy (D1,P1)=(100,1800) and (D2,P2)=(200,1600) an
d (D3,P3)=(400,1200)
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Strategic pricing
 revenue management (2)
price
price
Money on the table
P2=1600
P=1200
P1=1200
D=400
Number
of rooms
D2=200
D1=400
Number
of rooms
This example illustrates the opportunities and
challenges of revenue management. And by in
creasing the number of price fares, the firm ca
n increase total revenue.
price
P3=1800
P2=1600
P1=1200
D3=100 D2=200
D1=400
Number
of rooms
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Strategic pricing
 smart pricing
 Many companies use price as a tool to influence cust
omer demand and apply the principles of revenue m
anagement techniques to their respective industries.
 Customized pricing
 The objective is to distinguish between customers according to t
heir price sensitivity
 Dynamic pricing
 Dynamic pricing, or changing price over time without necessarily
distinguish between different types of customers has traditionally
been used only for sales or promotions
 Example : fashion clothing retailers offer discounts later in the se
ason to reduce inventory, and this discount is the same for all cu
stomers at a given time.
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Strategic pricing
 smart pricing (2)
 The key challenge when considering dynamic pricin
g strategies is to identify conditions under which thi
s strategy provides significant profit over fixed-price
strategy




Available capacity
Demand variability
Seasonality in demand pattern
Length of the planning horizon
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Customer value measures
 The objective in this section is to introduce various
measures of customer value as well as supply chain
performance measures
 Service level
 Customer satisfaction
 Supply chain performance measures
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Customer value measures
 service level
 Service level is the typical measure used to quantify
a company’s market conformance.
 Service level is usually related to the ability to satisfy
a customer’s delivery date.
 There is a direct relationship between the ability to a
chieve a certain level of service and supply chain co
st and performance.
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Customer value measures
 customer satisfaction
 Customer satisfaction surveys are used to measure
sales department and personnel performance as well
as to provide feedback for necessary improvements
in products and services.
 Customer satisfaction
 Customer loyalty
 Customer defections
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Customer value measures
 supply chain performance measures
 An independent criteria to measure supply chain per
formance
 Supply chain operations reference model (SCOR)
 Analyzing the current state of a company’s processes and its go
als
 Quantifying operational performance
 Comparing it to benchmark data
 For this purpose, SCOR has developed a set of metri
cs for supply chain performance
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Customer value measures
 supply chain performance measures (2)
SCOR level 1 metrics
Perspectives
Metrics
Measure
Supply chain
On-time delivery
Percentage
Order fulfillment lead time
Days
Fill rate
Percentage
Perfect order fulfillment
Percentage
Flexibility and
Supply chain response time
Days
responsiveness
Upside production flexibility
Days
Supply chain management cost
Percentage
Warranty cost as percentage of revenue
Percentage
Value added per employee
Dollars
Total inventory days of supply
Days
Cash-to-cash cycle time
Days
Net asset turns
Turns
reliability
Expenses
Assets/utilization
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Customer value measures
 supply chain performance measures (3)
 The former metrics are used to evaluate supply chai
n performance in SCOR
 Once a specific company’s metrics are calculated, th
ey are compared to those of industry benchmarks su
ch as average and best-in-class.
 This enables identifying the company’s advantages
as well as opportunities for supply chain improveme
nt.
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Information technology and customer values
 Information technology has produced many valuable
benefits for customers and businesses.
 Customer benefits
 Exchange of information between customers and business
 Business benefits
 The use of information by companies to learn more about their c
ustomers
 Business-to-business benefits
 Enhance business-to-business capacities
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Summary
 Creating customer value is the driving force behind a
company’s goals, and supply chain management is o
ne of the means of achieving customer value.
 Companies need to select their customer value goal
s since the supply chain, market segmentation, and
skill sets required to succeed depends on this choic
e.
 There is no real customer value without a close relati
onship with customers.
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