International Journal of Logistics: Research and Applications Vol. 9, No. 1, March 2006, 47–56 Customer responsive supply chain strategy: An unnatural act? JANET GODSELL*†, ALAN HARRISON†, CAROLINE EMBERSON‡ and JOHN STOREY‡ †Centre for Logistics and Supply Chain Management, Cranfield School of Management, Cranfield, Bedford MK43 0AL, UK ‡Open University Business School, Walton Hall, Milton Keynes MK7 6AA, UK There has been a shift in the last few years from prescriptive models of supply chain strategy to more embracing frameworks that accommodate a range of different approaches. However, there has been a tendency for these models to differentiate by product type. In order to achieve alignment between demand creation and fulfilment this basis for differentiation should, we conclude, change to buying behaviour. We have explored the opportunities for increasing customer responsiveness through the alignment of demand creation and fulfilment by means of empirical studies of six supply chains in three sectors (electronics, process industries and third-party logistics). Our study found that there is currently little evidence of such alignment in practice. There was a marked absence of proactive “management” of the supply chain, and a lack of alignment within the demand fulfilment process itself, and between the demand fulfilment and creation process (including new product introduction). Performance measures were used to optimise functional performance at operational levels within a supply chain rather than the performance of the supply chain as a whole. Keywords: Supply chain management; Strategy formulation; Customer responsiveness 1. Introduction Whether we are in the age of the “new consumer”, the experience economy (Pine and Gilmore 1999) or the era of post-modernism, it is clear that there has been a significant shift in most market-places. Fuelled by increasing market fragmentation, the desire to consume “experiences” and increased market literacy (Baker 2003), consumers are becoming increasingly discerning. It would be convenient to dismiss this as a “marketing problem” and to ignore the logistics implications; but such fundamental shifts in consumer behaviour and the demand creation patterns they cause must be addressed by equally fundamental shifts in the way that demand is fulfilled. This has significant implications for supply chain management (SCM). Prescriptive models that seek to be panaceas are never likely to have long-term benefit (Hill 2000). While more complex in scope and more challenging to implement, supply chain strategies that seek to link demand creation with demand fulfilment can no longer be subjected to simplistic “solutions”. Such strategies need to be both context specific and, at the same time, to develop the optimum solution for a given competitive environment. It is time to understand the *Corresponding author. Email: Janet.Godsell@cranfield.ac.uk International Journal of Logistics: Research and Applications ISSN 1367-5567 print/ISSN 1469-848X online © 2006 Taylor & Francis http://www.tandf.co.uk/journals DOI: 10.1080/13675560500534664 48 J. Godsell et al. needs of the end-customer and to align supply chain strategy behind end-customer needs in the market-place. Call it market orientation (Dawes 2000), demand chain management (Heikkila 2002), marketing logistics (Christopher and Peck 2003) or customer responsiveness (Godsell and Harrison 2002), the key issue is to align demand creation and demand fulfilment. The aim of this paper is to explore such alignment in practice. We set about this by studying six supply chains in three sectors: electronics; process industries; and third-party logistics. The paper begins with an overview of relevant literature, before expanding on the methodology used for the empirical study. The results section provides empirical evidence of the current state of alignment and the identification of enablers and inhibitors to the process of alignment; these issues are developed further in the discussion and conclusions in section 5. 2. Buying behaviour as a driver of supply chain strategy The late 1990s saw apparently conflicting views arise between “lean” (Womack and Jones 1996) and “agile” (Goldman et al. 1995, Preiss et al. 1996, Harrison et al. 1999) paradigms for supply chain strategy.Advent of the Fisher (1997) matrix suggested that the two strategies could each be viable in different market environments—contingent on particular characteristics of product demand. Subsequently, a more inclusive approach to supply chain strategy developed (Aitken et al. 2002, Godsell and Harrison 2002, Hines et al. 2002). But what fuelled this change in thinking? While theory suggested that supply chains should be demand led—encapsulated by the term “demand chain management” (e.g. Vollman and Cordon 1998, Heikkila 2002)—it has proved difficult to find empirical data in support of such an approach. A key starting point for understanding the demand-led approach is segmentation: as Piercy (2002) put it, “the only real logic for how we organize the whole company is our understanding of the structure of the market (i.e. market segmentation)”. A problem for researchers is that—in integrating customer requirements into operations strategy—“the actual practice of segmentation is comparatively neglected”, and that “much segmentation analysis is not only poorly directed but actually of rather limited value” (Dibb and Wensley 2002). Childerhouse et al. (2002) provided a rare practical example of how product supply chains can be classified operationally and matched to target market segments. Attempts to match supply chain design with product type, such as Fisher’s (1997) matrix of efficient/responsive supply chains, have failed to provide empirical evidence to support the claims (Seldin and Olhager 2002, Olhager and Selldin 2004). Concerns that the link between segmentation and supply strategy is problematic do not imply that the reasoning is inherently flawed. They do, however, imply that a fresh look needs to be taken at the meta-level process—the formulation and execution of supply chain strategy. It is proposed here that the focus on “product” needs to be replaced by a focus on “end-customer”—more specifically, by the end-customer’s buying behaviour. Indeed, use of product-related rather than needs-based segmentation has been identified as one of the reasons for the gap between segmentation theory and practice (Dibb and Wensley 2002). By understanding why groups of end-customers buy a product, it is possible to develop an appropriate supply chain strategy to meet the needs of the segment concerned (Gattorna 1998). The link between demand creation and fulfilment is thereby created. This is the essence of customer responsive supply chain strategy, which we have defined as “the identification and delivery of an appropriate supply chain strategy to meet the needs of the market that it serves. This is driven not by products, channels or markets, but by behavioural market segments and is achieved by matching the desired strategy with the capabilities of the supply chain to deliver” (Godsell and Harrison 2002). Buying behaviour provides further benefits, because Customer responsive supply chain strategy Figure 1. 49 Buying behaviour: a strategic link between marketing and SC strategy (Godsell). it can provide a marketing bridge not only with supply chain strategy but also with needs based segmentation—a driver of marketing strategy. An example of this bridge for a range of battery-powered torches is illustrated in figure 1. Demand flows in the market-place (base, wave and surge) follow Gattorna (1998). Whilst the academic community may be converging on the principles of customer responsiveness or contingent supply chain theory, what about practitioners? What evidence is there to support a market-driven approach to supply chain strategy in practice? 3. Methodology Yin (2003) defined case study research as “an empirical inquiry of a contemporary phenomenon in a real life context, especially when the boundaries between the phenomenon and context are not clearly evident”. The empirical study of the contemporary phenomenon of customer responsive supply chain supply strategy formulation, a phenomenon that is difficult to define and distinguish from its organisational context—the supply chain—is therefore a good fit with a case study methodology. Even within the bounds of case study research, there are a number of different types of case study design. The favoured approach for this study was a multiple case study approach. The advantage with this approach is that evidence from multiple case studies “can both augment external validity, and help guard against observer bias” (Voss et al. 2002). Yin (2003) stated that the “The decision to undertake multiple case study research cannot be taken lightly . . . each case must be carefully selected so that it (a) predicts similar results (a literal replication) or (b) produces contrasting results but for predictable reasons (a theoretical replication)”. The research was part of an EPSRC-funded project (GR/N34406/01). The study comprised six case studies across three industrial sectors: electronics; process industries; and third-party logistics. We sought the opportunity for literal replication within sectors, and for literal and replication logic across sectors. Each case study was structured around a focal firm that provided the starting point for a supply chain study that transcended the boundaries of both its supply and customer base. For this reason a processorientated unit of analysis was used based on the Supply Chain Operations Reference (SCOR) model version 4.0 (Lockamy and McCormack 2004), which considers the conversion of demand into supply across the supply chain. The model was extended to reflect the alignment of the demand fulfilment process (plan–source–make and deliver) that is represented by 50 J. Godsell et al. Table 1. Company DrugsCo CleanCo Sector Summary of the six case environments. Product Process Process Well-being products Washing and bathing products ElectronicsCo Electronics Networks TelCo Electronics Electronic components 4PLCoDrinks Transport Supply chain (SC) /logistics management 4PLCoElectronics Transport SC/logistics management Total Sales Location Companies Interviews £4.3 bn UK £115 m UK 4 6 29 48 $2.4 bn Europe $4.1 bn Europe and Asia $30 m UK 8 2 6 27 40 31 6 32 19 194 $1.7 bn Europe the SCOR model with market segmentation aspects of the demand creation process. The unit of analysis was used to explore four research questions: (1) (2) (3) (4) What approach to market segmentation is currently adopted? What supply chain strategies are currently employed? Does market knowledge drive supply chain strategy to deliver customer responsiveness? What enables/inhibits the alignment of marketing and supply chain strategy? As is common with case study research, “there can be many more variables of interest than data points, and a result relies on multiple sources of evidence, with data needing to converge in a triangulating fashion” (Yin 2003). This led us to develop a research design that included both quantitative and qualitative methods. Our primary research instrument was semi-structured interviews with senior managers and directors, lasting, on average, 60 minutes. Over a period of 3 years (2001–03), 194 interviews were carried out across the six different supply chains involving 32 different organisations—predominantly in Europe, but with some in Asia. The six case environments are summarised in table 1. The interviews were recorded, and detailed notes were also taken and key themes identified. The data were analysed using content analysis (Easterby-Smith et al. 1991) based around the research questions. 4. Results The results from the study fall into two categories: market-led supply chain strategy and enablers/inhibitors. Each category is discussed in more detail. 4.1 Market-led supply chain strategy When the approach to market segmentation was considered for each of the focal firms it was found that—rather than segmenting the market by buying behaviour as theory would suggest—without exception a sales turnover-based measure was used whereby the greater the sales turnover the greater the importance of the “customer”. The view of what “the customer” represented varied considerably, depending on the scope of the supply chain being studied—as illustrated in table 2. This has an effect on secondary factors used for segmentation. For instance, DrugsCo had quite a vertically integrated supply chain and the “customer” was the store, which was segmented firstly by turnover and then by store type. In contrast, 4PLCoDrinks and 4PLCoElectronics were both providing fourth-party logistics (4PL) services to specific customer accounts. In the case of 4PLCoElectronics, this was a Customer responsive supply chain strategy Table 2. Summary of market segmentation and SC strategies. Market segmentation strategy Company The customer By turn over Other DrugsCo Own retail stores Y Store type CleanCo Retail stores Y Channel type ElectronicsCo Distributors and end consumers Internal and external manufacturers Y Channel type Channel type TelCo 4PLCoDrinks A consortium of drinks suppliers 4PLCoElectronics An electronics company 51 Y Y Y Strategic accounts SC strategy SC segmentation Scope of SC Category Procurement, warehousing, outbound logistics Lead time— Outbound same day, or logistics, to customer warehousrequirement ing and planning Lead time Outbound logistics Lead time Warehousing and outbound logistics Customised Shelf to specific replenishcustomer ment Lead time—1 day or 3 days Regional logistics Link between market segmentation and SC strategy? N N N N Y (planned link with large strategic accounts) N (exception high-profile accounts) Y, yes; N, no. specific electronics company, and they had a dedicated facility and management team for the account. For 4PLCoDrinks, they were trying to develop replenishment and merchandising service for a range of drinks suppliers supplying supermarkets. Approaches to supply chain strategy were more varied, in terms of both scope and approach to segmentation. Common elements included within the scope of the supply chain were warehousing and outbound logistics. With the exception of the logistics service providers whose “make” activity could be considered as warehousing, manufacturing was not within the scope of the supply chain. Furthermore—again with the exception of the logistics service providers— the “sourcing” of product was also beyond the scope of the supply chain function, though DrugsCo did include the procurement element. Supply chain segmentation appeared to be driven by differentiation of outbound logistics delivery time, and varied in the main between same day (express) and 3-day (standard) delivery options. Initially, DrugsCo appeared to be an exception, as it had adopted a strategy whereby different categories of products had different warehousing arrangements. However, on closer inspection, whilst the mechanisms for replenishment did vary by category, the main driver of the replenishment system was still lead time. Theory suggests that the key building blocks to customer responsiveness are: (1) market segmentation strategy based on behavioural segmentation; and (2) a differentiated supply chain strategy that spans the full range of SCOR activities. However, we did not find this in practice in any of the cases. The one small exception was 4PLCoElectronics. The electronics company for which the 4PLCoElectronics provided a logistics service had a very small number of customers to whom it was willing to offer a highly customised delivery service. For these high-profile accounts, there was a link between the high-profile status and the customised 52 J. Godsell et al. nature of the service offered to them. This is very much the exception rather than the rule, though there was a marked tendency for customised solutions to be developed for “strategic”, high turnover accounts. 4PLCoDrinks were developing a merchandising service on behalf of a consortium of drinks suppliers. The customers targeted by the consortium were the top retailers by turnover and these accounts were deemed to be “strategic” accounts and hence merchandising options were to be developed to suit the needs of each individual retailer. The irony is that the margin on these “strategic” accounts was generally lower than for other accounts as the costs of the additional “management” required to meet the specific customer requirements were borne by the service provider. 4.2 Enablers/inhibitors So why—if theory suggests that market understanding should drive supply chain strategy— did we not find this to be the case? Our research identified three key enablers/inhibitors to this process: “management” of the supply chain; alignment; and performance measurement (illustrated in table 2). These three factors act as enablers or inhibitors, depending on the way in which they are employed. 4.2.1 “Management” of the supply chain. Whilst the term SCM suggests a proactive management of the supply chain, reality could not be further from the truth. Our research found that focal firms often struggle to find an appropriate mechanism to “manage” their supply chains. Internally, SCM is complicated by functional divides, for example, the divide between manufacturing and logistics. This was reflected in the functional organisational structure of CleanCo, and even within the functional aspects of the matrix structures employed by DrugsCo, TelCo and ElectronicsCo. This divide is exacerbated in organisations that do not have a broad spanning supply chain role at director level. Our research found that the norm is still to have functional logistical representation at board level (as illustrated in table 3). Exceptions to this rule were DrugsCo and TelCo, which have undergone recent organisational restructuring and which have broad spanning supply chain directorships. Interestingly, of the six cases studied, these were the two most vertically integrated focal firms. The other mechanism that we found to define “management” of the supply chain was to assign responsibility to an external party. In three of the six cases studied, 4PL was being used to co-ordinate supply chain activities, and with some degree of success. 4.2.2 Alignment. The concept of customer responsiveness suggests three types of process alignment that impact on the supply chain. Firstly, there is alignment of SCOR activities within a supply chain’s demand fulfilment process. Secondly, there is alignment between the demand fulfilment process and the market-facing demand creation process, of which a natural extension is the alignment with the new product introduction (NPI) process—the third type. In practice, issues with internal SCM—particularly the functional dimension of organisational structures—can make it difficult to align the main SCOR processes (plan, make, source, deliver) across the supply chain. However, this alignment does seem to be improved in the cases of the more vertically integrated organisations, DrugsCo and TelCo, which both underwent supply chain restructuring programmes aimed at improving alignment. There was still the potential for some misalignment within the DrugsCo supply chain, because parallel import trading opportunities for pharmaceutical products could have a disruptive influence on supply. The planning function by its nature can be a boundary-spanning process, and was Customer responsive supply chain strategy Table 3. 53 Summary of approaches to “managing” the supply chain. Company SC director Logistics director Shared understanding of who manages the SC? DrugsCo Y Y (reports to SC director) Depends on category CleanCo N Y N TelCo Y Y Y ElectronicsCo N Y Y 4PLCoDrinks Clients 1 of 4 Clients 3 of 4 Y 4PLCoElectronics Client N Client Y Y Mechanisms for managing the SC Category specific supply chains managed by a category team and a supply team supported by the logistics function Cross-functional teams highly effective at “managing” the seasonal supply chain Split between logistics and manufacturing Matrix organisation. Processorientated, hierarchical SCM structures supported by functional infrastructure Project managers—act as a link between the customer and the supply chain Use a 4PL to manage outbound supply chain and they were seen to have clear accountability The 4PL has offered its services to the drinks consortium partners to “manage” merchandising/shelfreplenishment activities on their behalf The 4PL had clear accountability for managing the SC. This has been assigned by the customer actively used by CleanCo as part of a sophisticated sales and operations planning process to align supply and demand and encompass NPI. Another enabler of alignment is the make-toorder environment that is dictated by bespoke customised products. ElectronicsCo displayed positive characteristics of all three types of alignment for their customised products that is lacking in the “make to stock–fulfil from stock” environment of their merchandised products. A key inhibitor to supply chain alignment—particularly from the perspective of 4PLs—was the limited range of supply chain activities that the 4PL was permitted to manage. This was driven by the desire by client firms to retain control. It meant that the scope of 4PL activities tended to be limited to outbound or regional logistics, whereas the potential for improving alignment and synchronicity would be improved by extending the scope to include inbound logistics as well. A summary of these approaches to alignment is shown in table 4. 4.2.3 Performance measurement. The predominant method of performance measurement was the use of world class measures (WCMs) that cascaded down the organisation from top-level business objectives and measures into a series of functional measures (see table 5). The alternative method found in just two cases was the use of a Balanced Score Card (BSC), which in the case of 4PLCoElectronics was quite sophisticated. Even the BSC, however, cascaded down from business objectives to functional objectives rather than following the strategic intent of linking measures to key business goals. Whilst the strategic intent of the BSC is virtuous, in reality the functional divides within the focal firms studied drove a hybrid approach whereby the BSC was used at the more senior levels, and WCMs were used within functions at an operational level. We found this distinction in both DrugsCo and 4PLElectronicsCo, which were the only two focal firms we studied that employed 54 J. Godsell et al. Table 4. Summary of approaches to alignment. Type of alignment Within demand fulfilment process (SCOR activities) Between demand creation and demand fulfilment processes DrugsCo Yes—but disconnect with purchasing policy CleanCo No TelCo Yes—undergone specific performance improvement project improve alignment ElectronicsCo Yes—customised No—merchandised Dispensing supply chain responds to real demand on a daily replenishment basis. New products are added in response to consumer demand. Seasonal supply chain uses category team to select range that is then “pushed” out to stores Using an approach to sales and operations planning to align demand and supply, which includes NPI Internally integrated, market-orientated supply teams that planned and co-ordinated demand fulfilment operations Collaborative planning and loyalty improvement programmes with key customers Customised products made, shipped and installed to customer order. Merchandised product made to stock and called off Yes. On shelf replenishment driven by real consumer demand Company 4PLCoDrinks Scope limited to outbound logistics and replenishment. 4PLCoElectronics Scope limited to regional logistics No. React to demand that is placed on the network With NPI process N/A From a process improvement perspective N/A, not available. the BSC approach. A further pitfall of the use of WCMs at an operational level is that they drive the optimisation of individual functions rather than the supply chain as a whole, as found in 4PLCoElectronics. The performance measurement system employed in this supply chain was, in many respects, exemplary. Metrics were collected at all stages in the supply chain—daily, weekly, monthly and quarterly—and were actively reviewed through telephone calls, face-toface meetings and business review meetings. The format and content were identical across the supply chain and the measures were used to drive performance improvement and reward; and with reward lies the danger. There has been a shift over the last 10 years or so towards metrics that are specific, measurable, achievable, realistic and timely (SMART). This has led Table 5. Performance measurement characteristics. Company Type of metric system Consistent application across the SC Review period DrugsCo Internal echelons Monthly CleanCo TelCo BSC with localised adoption of WCMs WCMs WCMs No Yes, for certain key measures ElectronicsCo WCMs Yes, for measures co-ordinated by 4PL 4PLCoDrinks 4PLCoElectronics N/A Customers developed their own metric system that was a combination of the BSC and WCM N/A Yes, highly co-ordinated by 4PL Monthly Weekly, monthly, quarterly Weekly, monthly, quarterly N/A Daily, weekly, monthly, quarterly Customer responsive supply chain strategy 55 managers (particularly middle managers) to expect targets that are wholly within their span of control. This in turn leads to functionally driven targets. 4PLCoElectronics used measures that showed that it consistently achieved its 3-day delivery target. However, for the sample studied, 99.7% of orders were delivered after the date the customer requested the goods, and were on average 16 days late. 4PLCoElectronics was measured only on the part of the supply chain where it was in control, not on what the customer actually wanted. 5. Discussion and conclusions Whilst academics in SCM have begun to develop the view that supply chain strategy is about a context-specific, contingent approach that begins with the customer, the reality for many organisations is very different. The array of terminology and approaches advocated to practitioners by consultants and academics does not help the cause, and has resulted in confusion as to how SCM should be implemented in practice. Perhaps the biggest misnomer of all is the impression of proactive “management” that SCM portrays. Functional divides permeate even matrix organisations, and encourage optimisation of parts of the supply chain rather than the supply chain as a whole. This is reinforced by the use of performance metrics. Even where BSC has been employed—with its objective of linking measures to key strategic goals—we found that WCMs are employed that drive functional behaviour at operational levels. It is ironic to think that some of the best examples of customer responsiveness existed within two extreme types of organisational structure. The vertically integrated organisations of TelCo and DrugsCo were the most organisationally advanced in their attempts to achieve alignment, both within the demand fulfilment process and between the demand fulfilment and creation processes. This was achieved through focused improvement programmes that used both organisational redesign and the co-ordinating effect of the planning process. The supply chain directors of these organisations were symbolic of a proactive attitude to alignment, while the lack of equivalent roles in the other cases studied stood out. In horizontally integrated supply chains, the trend towards using 4PL to manage virtual supply chains provided a very clear focus in terms of delegated management responsibility. Unfortunately, the 4PL vision was constrained by clients who limited their visibility of the supply chain, so it was impossible for a 4PL to leverage the alignment responsibility with which it had been charged. Whilst buying behaviour no doubt has the ability to provide a language that is understandable by both the marketing and supply chain parts of an organisation, this language is currently not spoken. Customers are segmented by turnover, which prevents an effective operational link between supply chain strategy and marketing considerations. However, there are pockets of good practice that give hope for the future. Strategically important accounts could be considered as micro-segments whereby supply chain strategy is developed to meet the needs of the micro-segment. If the buying behaviours of these accounts were identified and considered in relation to the rest of the customer base, an opportunity might exist to offer these services to a far broader range of customers. This could have significant benefits as the bespoke supply chain arrangements for strategic accounts often deliver the lowest margins due to the disproportionate amount of management resource they consume. With a broader customer base over which to spread the management resource, there is potential for margin improvement. Similar learning can be gained from the make-to-order environment of customised products. The make-toorder environment has an aligning effect on the demand fulfilment and creation processes from which there is much to learn. To conclude: the philosophy of customer responsiveness is gaining momentum in academic communities, and practitioners are setting out to adopt its principles. However, it is a struggle to align demand creation and fulfilment when the functional nature of many organisations at 56 J. Godsell et al. an operational level acts as a barrier to aligning supply chains effectively with the markets they serve. Evidence of supply chain directors with a broad remit for SCOR processes and a voice at the highest level of the organisation are good indicators of organisations that are making progress towards this goal. Our research found evidence of this progress only in vertically integrated organisations. Paradoxically, the 4PL used to “manage” the supply chain in virtual organisations has great alignment potential, but this is currently constrained by client organisations that limit the scope of their activities in an attempt to constrain their powers. 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