Customer Value and Supply Chain Management Designing & Managing the Supply Chain Chapter 10 Shuzhu Zhang zhangshuzhu@pusan.ac.kr 1 Outline Case study Introduction The dimensions of customer value Strategic pricing Customer value measures Information technology and customer value Summary 2/ 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 3/ 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. 4/ 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 5/ 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 6/ 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 7/ 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… 8/ 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 9/ 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 10/ 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 11/ 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) 12/ 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 13/ 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. 14/ 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 15/ 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 16/ 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. 17/ 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 18/ 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 19/ 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 20/ 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. 21/ 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 22/ 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. 23/