Meeting Customers' Real Needs: The Nature of Service System Design
- Feb 10, 2014
Opening Story: The High-Service Sponge
Diane Clair, director of logistics at Dynamic World Corp. (DWC), a leading consumer packaged goods (CPG) company, had been running nonstop all morning. Now, as she sat down to put the finishing touches on the logistics team’s five-year technology plan, she was running behind. Tomorrow morning, she would be arguing for some big-dollar investments in new demand management planning systems. No sooner had she clicked open her PowerPoint, than she heard an agitated knock at her door. Doug Hassle, DWC’s North America marketing VP, stood there—and he wasn’t smiling. Diane responded, “Good morning, Doug. Come in and sit down.” As Doug entered, he said, “Diane, the wheels just came off. Deb Gale, GMM over at Monster, Inc., just called. She was ticked. Your team missed a delivery window at their Denver cross-dock facility. Worse, this is twice in one week we have failed to deliver as promised. Monster is our largest, most demanding customer. Deb made sure I remembered that little detail. She didn’t hesitate to share her feelings about our recent fulfillment failures.”
“Sounds like you’ve had a tough morning, Doug. Sorry about that brutal call. Let’s find out what happened,” Diane said as she picked up her phone. She dialed David England, a senior transportation manager, to find out what happened. David responded quickly, “The shipment left our Distribution Center on time. Our tracking system says the truck should arrive in about an hour. I’ll make sure it does and shoot you a text when it is docked.” David hesitated, and then expressed disbelief at Deb Gale’s negative perceptions of DWC’s delivery record, noting, “I can’t imagine why Deb Gale is so upset. We’re an industry leader. Our on-time delivery and complete orders performance is outstanding. We’ve never performed better.”
Confident David would resolve the immediate crisis, Diane hung up. Doug, however, wasn’t placated, and said as much, “Diane, for someone who just dropped the ball with our most important account, David sounded a bit overconfident. He might not really grasp the situation.” Inwardly, Diane scowled. She trusted David. “Well, let’s double-check and see how we are really performing.” Diane picked up the phone again, this time calling Paul Osterhaus, vice president of information technology, to verify DWC’s delivery performance. With just a few clicks of the mouse, Paul pulled up the key stats, confirming that DWC had dramatically improved its on-time delivery over the past year. He said, “You guys have really done a nice job. You’ve bumped your performance from 95 percent to 98 percent on-time delivery over the past 12 months. And you’re shipping 97 percent complete orders. It seems you’re hitting on all cylinders and achieving best-in-class standards.” Paul added, “With service levels looking so good, you should be able to justify those new IT investments.”
Doug still wasn’t convinced, saying, “I’m sure you like what you’re hearing, but those stats don’t change the fact that Deb Gale just chewed me out. We’re clearly not delivering to Monster’s expectations. And though the chargebacks for late deliveries make these failures expensive, the real cost is relational. We can’t afford for Monster to drop us as a supplier or to reduce the number of facings they allot us. Deb drove this point home, saying, ‘You can’t afford not to meet our needs.’ She’s right! Our other key accounts are just as demanding. If we are dropping the ball with Monster, we are likely disappointing the others as well. Come January, Monster is tightening its delivery time windows and Deb has informed me that they will expect us to take on more value-added services.” As Doug stood up to leave, he added, “By the way, they are lengthening payment terms—effectively paying us less for what we do. I hope your team can raise the performance bar.” Diane acknowledged that DWC needed to step up service even higher, concluding, “You’re right, today’s market is a tough place to do business. Our best customers are more than happy to soak up every ounce of service we can provide—and then they squeeze us a little more.”
Still unsettled after Doug had left her office, Diane called David to begin a new conversation on DWC’s customer fulfillment capabilities. After her initial greeting, Diane said, “David, despite all the customer-oriented initiatives we have pursued over the past two years, we dropped the ball today—and not just any ball.” She smiled as she continued, “If we are going to drop a ball, let’s make sure it doesn’t belong to Monster. Today’s experience reiterates our need to rethink our service strategy. Not all customers are created equal; yet, we still measure and manage to averages. Across-the-board excellence is a great goal, but maybe our one-size-fits-all approach is outdated. We just don’t have the resources to be perfect all the time. So, what are we going to do about it? What service experience should we promise? What infrastructure do we need to put in place to deliver to promise? David, this is a big deal. I don’t want to have this same conversation with Doug again. I need you to put a team together and get this figured out.”
Consider as you read:
- Why should logistics managers worry about customer service?
- Keeping your answer from Question 1 in mind, what is the relationship between customer expectations, a firm’s service capabilities, and ultimate satisfaction?
- What questions would you include on a customer satisfaction checklist to make sure you had a comprehensive, well-thought-out customer fulfillment strategy in place?
Meeting Customers’ Real Needs
- “There is only one valid definition of business purpose: to create a customer. What the customer buys and considers value is never just a product. It is always a utility, that is, what a product or service does for him.”
- —Peter Drucker1
Why do companies exist? You might argue a variety of valid answers, but you can’t ignore Peter Drucker’s advice to focus on the customer. Without customers, your company cannot earn a profit, create jobs, or be a responsible corporate citizen. Creating customer value must be at the core of your business model design as well as your day-to-day decision making. Ultimately, if you want your company to survive in today’s tremendously competitive global marketplace, you must meet customers’ needs as well as or better than the competition.
Today’s Dual Customer Challenge
Your management team must therefore develop an intimate understanding of customer needs. This fact brings two vital questions to the forefront:
- Who are your customers?
- How well do you know your customers and their needs?
The answers might not be as obvious as you think. Recognizing that companies almost always serve a host of distinct customers, your initial response to these questions is likely, “We serve a variety of channels and a diverse set of customer segments. Our knowledge of their needs varies based on how important we have defined each customer, segment, or channel to be.” The result: You know some customers very well. Others leave you guessing.
As you think more deeply about the two questions above, you might consider the tiers of customers that compose your supply chain. Unless your company is a retailer, the goods and services you sell are used to help your customers deliver value to their customers. Depending on your supply chain positioning (you probably participate in multiple, distinct supply chains), you might have two, three, or more tiers of downstream customers. Undoubtedly, you spend most of your time and effort working to meet the needs of your company’s immediate, first-tier customers. Customers further downstream may only be an abstraction in your planning scenarios. This reality can be dangerous as your long-term success increasingly depends on how well you grasp the needs of these distant downstream customers.
Figure 1-1 portrays two approaches to understanding customer needs. Panel A depicts a traditional approach. Each company focuses on understanding customer expectations and market imperatives at the first-tier level. Consumer packaged goods companies are the exception. They have always paid attention to their retail customers as well as the end consumer who uses their products. Panel B depicts a more holistic approach that focuses members of each supply chain tier on the end customer. The logic is that supply chains compete against other supply chains in today’s global marketplace.2 In theory, to maximize value creation—and thus meet the needs of the end customer better than rival supply chains—every member of the supply chain team should understand the needs and wants of the end customer.
In practice, few supply chains achieve the holistic customer understanding shown in Panel B. However, some companies are working diligently toward this ideal. They proactively seek to help their suppliers learn more about downstream customers. Walmart, for instance, knows that if its suppliers don’t deliver, it won’t either. Walmart depends on suppliers to provide access to the hot products that customers desire—and it needs them to deliver on time. To help keep suppliers on the same page, Walmart employs a Web-based tool called Retail Link. Supplier account managers log in to find out how well their products are selling. They can see daily inventory levels and flow-through rates. They can also track margins. More impressively, they can do this at the individual store level or in different geographic regions. Suppliers can, thus, strive to match supply to demand—both in terms of the types of products to sell at individual stores and in terms of when and how much to ship to keep shelves stocked.
Walmart’s efforts to help suppliers understand customer needs do not end with Retail Link. Walmart uses its channel position and day-to-day interaction with customers to become a sensor for its entire supply chain. As Walmart entered the China retail market, store managers noticed that laundry detergent was not selling—at least not in the expected quantities. Upon investigation, Walmart discovered that few Chinese households owned washing machines. Walmart turned to Procter & Gamble (P&G), asking it to develop a new detergent specially designed for hand washing. Tide White’s launch was a huge hit, selling 35,000 units in 15 stores in two weeks. Acting as P&G’s eyes and ears, Walmart spotted an unmet need. Working together kept Walmart’s shelves stocked with the products its customers want while improving P&G’s research and development effectiveness.3 The two are partners in profit. Moreover, the entire supply chain wins when these collaborative efforts bring more customers to Walmart’s stores.
You should take the following three learning points away from this discussion:
- If your company does not meet the needs of your immediate customers, they will buy from someone else—a supplier that helps them succeed. If P&G had been unwilling or unable to develop a new laundry detergent, Walmart would have certainly turned to one of P&G’s rivals—perhaps Unilever. This process is called disintermediation.
- The end customer takes center stage in well-designed and well-managed supply chains. The end customer is the only customer who really puts money into the chain. Everyone else simply recycles it. Every organization in a supply chain should seek to improve its ability to contribute to satisfying the end customer’s needs and wants.
- Companies win when they participate as members of a winning supply chain team. If you don’t understand downstream competitive dynamics, including customer requirements, you will find it difficult to allocate the resources needed to be a supplier of choice in these winning supply chains.
Understanding Technology Empowerment
Even as you are gathering and analyzing data to better understand and meet customer needs, your customers are using modern technology systems to meet their own needs. They know that information is power and they use it to get a better deal on the things they are buying. Consider the following four Business to Consumer (B2C) examples to see how the Internet is a game changer:
- Information acquisition—Today’s savvy shopper compiles product specifications and compares prices without leaving the comfort of home. A car buyer, for example, can check out Car and Driver write-ups, consider Consumer Reports “Best Buy” evaluations, and look up JD Power quality and reliability statistics to help decide what car to buy. Once the choice is made, she can find factory invoice information on Edmunds.com. As she enters the showroom, she is an information-empowered consumer, ready and confident to engage in aggressive negotiations.
- The buying experience—Today’s smart shopper wants a real experience, but will go virtual to save money. Showrooming exemplifies this behavior. Showrooming is when a shopper physically visits a store to check out a product, but then purchases the product from a lower-priced online retailer. Best Buy, a leading—and, until recently, very profitable—bricks-and-mortar electronics retailer, has struggled to compete in today’s showrooming environment. By using their rivals’ physical stores as their showrooms, Amazon.com and other online retailers lower their own cost structure. To compete, Best Buy must improve its own Internet presence even as it lowers prices and creates value that cannot be matched by clicks-only retailers.
- Comparison shopping (on steroids)—Today’s sharp shopper employs mobile technology. By downloading “TheFind” (or a comparable app) to her iPhone, she can compare prices in real time—even for impulse buys in the middle of a shopping trip. TheFind advertises the following capability: “Find every product from every store, every coupon and every review. Everything you need when shopping to quickly decide what to buy and where to buy it.”5
- Postpurchase evaluation—Today’s shrewd shopper knows that technology empowerment extends beyond the purchase. At Amazon.com, shoppers can rate every product and every transaction. They can also turn to blogs and video-posting sites to voice their horror or delight to anyone, anywhere in the world who has access to a computer. For example, when United Airlines ramp workers broke Dave Carroll’s guitar, he spent a year—to no avail—trying to get United to pay for the repairs. Frustrated, he told Ms. Erlweg, United’s customer service representative, that he would post three videos to the Internet. To United’s dismay, his first video, “United Breaks Guitars,” attracted one million hits in three days (3.5 million hits in ten days). Modern customers can creatively share their complaints.
In the Business to Business (B2B) setting, sourcing professionals can use technology to do many of the same things. They can use ThomasNet (and other online registers) to identify potential suppliers, evaluate capabilities, and compare pricing.6 They can tap into data analytics to track and benchmark supplier performance. They can employ e-sourcing events (sometimes called reverse auctions) to place rival suppliers in a real-time competitive-bidding environment. Just like their consumer contemporaries, supply managers are leveraging technology to shift channel power in their favor.
To summarize, customer access to viable options through competing supply chains combined with technology empowerment have changed the competitive rules for most companies. Companies must relentlessly deliver higher levels of service at lower costs. Their best customers, who behave as “high-service sponges,” will no longer settle for average service. To fuel their own quest for market success, these high-service sponges seek and “soak up” their suppliers’ resources. What does this mean for you? You need to understand how your customers define value and determine satisfaction.