Global Logistics & Supply Chain Strategies

— March, 2001

Moving the Focus From Customers To Relationships

By Jean V. Murphy

The loyalty and lifetime value of a customer should influence decisions about the price and service he receives. It can when companies integrate customer-relationship management and supply-chain management tools.

Being customer-focused no longer is enough, say some industry leaders. To excel at both service and profitability, companies must become relationship-focused. They must understand not only how to meet accelerating customer requirements, but when to do so and at what price.

“No company has the massive resources needed to do everything for everyone,” says a recent study from Deloitte Research. “Manufacturers have to learn to dynamically balance customer value and supply-chain costs to build loyalty where it counts the most, while appropriately satisfying less valuable customers.” The study, Digital Loyalty Networks, concludes that manufacturers need to integrate supply-chain management (SCM) and customer relationship management (CRM) capabilities so they can differentiate the way they treat each and every customer, based on loyalty, lifetime profit potential, requirements and cost to serve.

This trend already is apparent as traditional SCM companies like i2 Technologies and Manugistics expand into the customer-facing area, while vendors like Industri-Matematik International (IMI), PeopleSoft and QAD enhance and integrate their CRM and SCM functions.

“We don’t think it is possible to fully own the order if you don’t have an integrated SCM, CRM and SRM [supplier relationship management] solution,” says Bob Davidek, senior director of fulfillment sales consulting at i2 Technologies, Dallas. “Our clients want to have total ownership of the customer order experience for the complete lifecycle of the order.”

The result of this integration is what many are calling ERM, enterprise relationship management. “We will probably see this trend mature toward the end of 2002,” says Karen Peterson, director of supply-chain research at Gartner Group, Stamford, Conn.

“The ERM message is about tailoring your company’s capabilities and resources to each individual customer’s requirements, but balancing that with an understanding of who your customers are and what their value is,” says Joe Shobe, director of manufacturing and advanced planning-supply chain products at PeopleSoft, Pleasanton, Calif. “You can’t afford to provide customized service to every customer so you must have an understanding of your most profitable customers and your most profitable products, and what the intersection is.”

Shobe says the key measurement is one of disruption. “What is the cost of disruption when you alter the schedule or reduce your inventory of finished goods?” he asks. “Everything is a trade-off. You have to understand the cost of disruption and the value of your customer and know when you are willing to make that trade-off. ERM is not about return on investments, but return on relationships.”

Network Metrics for the Extended Enterprise

As customer requirements drive supply-chain partners toward multi-enterprise networks, new metrics are needed to measure how well the network as a whole is performing. In this environment traditional, functional measurements are inadequate.

“Companies need to be more collaborative about performance measures,” says Bob Ferrari of AMR Research, Boston. “Each party needs to have a sense of what they want to measure and what they need to get out of the metrics. So, for example, If you are measuring on-time performance it should be from two perspectives: were you on time giving me the order and was I on time “delivering it?”

Real-time execution networks will help, says Beth &Mac254;nslow, vice president of strategic initiatives at Descartes Systems group, Waterloo, Ontario. Companies will be able to monitor what is actually happening and to see where standards are not being met, she says. “This is a bit shocking at first because you find that your providers are not performing at the levels you thought, but having this information allows you to go to your trading partners with real objective data. You are using the same system to monitor results and you both are seeing the same numbers. So now you can actually have a grown-up discussion instead of simply saying, ‘I don’t believe your reports. Instead you can say, ‘This is what is happening. Let’s figure out how we can work together to improve it.’

“To create a situation where the whole supply chain is focused on customer satisfaction, companies need to make sure that all their supporting metrics “cascade and support each other,” all the way down to the picker in the warehouse, says Ed Marien, professor and director of the executive supply-chain management program at the University of Wisconsin, Madison. “If a customer is shorted an item he probably will not come back the next time, so even the metric for picking needs to tie into total logistics efficiency,” says Marien. “And all of these things support one another. It doesn’t do any good to have the shelves stocked if a customer has to wait 30 minutes to check out.”

Cap Gemini Ernst & Young has developed a way to help companies measure how well they are balancing supply-chain efficiency (cost) with effectiveness (service.) it is called e-squared and soon will be available on a website, according to Rich Thompson, vice president of global supply-chain consulting. After answering a questionnaire companies will be plotted on in efficiency/effectiveness matrix, giving them a way to benchmark themselves against others in the same or other industries. “The idea is to find the optimal balance of service and cost,” says Thompson. “And it still is definitely true that you can bring costs down and improve service at the same time.”

Manugistics, Rockville, Md., is aggressively targeting this area with its new focus on Revenue and Profit Optimization. “This is a strategic move for us to become more customer facing as opposed to supply-chain facing,” says Chris Verheuvel, director of retail solutions. “It is about bringing together the optimization of customer needs not only around right product, right place, right time, but going a step further and also making sure it is the right price, both for the company and the customer.”

The Manugistics solution, which incorporates technology gained through its acquisition of CRM vendor Talus, supports standard and dynamic pricing. “We use very sophisticated analysis models to look at price elasticity and consumer demand and all of the various influences on purchasing patterns to recommend what retail prices should be — whether dynamically deploying those prices over the internet or trying to determine what a promotional price should be — or what a standard lift price on the shelf should be,” says Verheuvel. “Those are all decisions that used to go by gut. Then we went to a little bit of analysis, now we are moving to the optimization stage.”

When you marry cost optimization on the supply-chain side with revenue optimization on the customer side, you are really able to impact profits, he says. The idea is to decide on the profit objective of the company and then use both sides of the equation to support that. “It is a business-objective based solution,” he says. “You allow the revenue-optimization component to optimize the maximum amount of revenue you can get, then allow the supply-chain piece to give you the projected costs, and the margin is what falls out of the middle. If you don’t like the margin, you can change the business objectives and rerun the scenario.”

AMR Research, Boston, says a “revolution” already is under way in the retail industry to capture high- and mid-value customers and push away low-value ones. Preferred customers are identified with CRM technology that combines views of customers across all touch points and uses analytical tools to describe and predict their present and future value to the retailer. Higher value companies receive what AMR calls “personalized fulfillment,” the customization of the entire experience of doing business with the retailer, from customer profiles and order generation to fulfillment, logistics and product returns. Lower value customers, it says, will increasingly be charged fees for every service, including shipping, returns, recalls and warranty claims.

“Personalized fulfillment is a revenue and profit generation engine because revenue and cost are mapped to the value of the customer to the retailer,” according to an AMR report on the subject. “It also provides the retailer with additional revenue generation opportunities throughout the product lifecycle and the retailer’s relationship with the customer.”

Customer Design
Personalized fulfillment doesn’t mean putting a company’s name on the box, though it could include this. Rather, it is about allowing the customer to design all aspects of his service, from how the order is taken to how it is packed and delivered.

“It used to be that any customer-specific services, such as different kitting, was done on a manual basis,” says Dan Gilmore, vice president of marketing at McHugh Software, Waukesha, Wis. “Those orders had to be flagged and treated separately. Now all kinds of personalization functionality can be captured within the warehouse management system. And with our tools you can know whether this particular service that I am being asked to provide is profitable for me or not on a customer-specific level.”

Every retailer would like to have greater variety of case quantity, as an example, says Rich Sherman, vice president of EXE Technologies, Dallas. “Some stores want a case pack of six, others want a case pack of 12, others 24,” he says. Manufacturers can’t afford to pack in that many different sizes, so Sherman predicts that third-party logistics providers, using advanced warehouse management systems, will take over such tasks.

The delivery also is more and more becoming part of personalization, says John Pulling, vice president and chief operating officer at Provia, Grand Rapids, Mich. “A customer will want one order delivered to a distribution center, the next order he will want delivered to one of his stores, and next week he will want a whole milk-run to service eight stores because of a promotion,” he says.

Progressive companies, says Pulling, will be saying when they take orders, ‘OK, I have six delivery windows here where I can deliver it at this price, and outside of that window I can deliver it at a different price.’ So the whole idea is really understanding how the cost of transportation affects the overall cost of the product and rationalizing it out right when the order is taken. That is where this whole personalization thing is going to go.”



	The core issue is about managing and deriving value from all the relationships of the company.” — Paul Bender of Bender Consulting

Most companies go through the struggle of deciding how to handle the “bottom feeders — the 20 percent of customers that really are costing the company money,” says Richard Cardozo, director, retail industry solutions at IMI, Tarrytown, N.Y. Tying CRM into the supply chain gives them a way to more effectively manage that problem, he says. “So in the past if I was treating everyone the same way, giving them all overnight shipments, now I can identify these companies and say, ‘I’m not going to do that for the bottom feeders. I am going to ship their orders by U.S. mail.’”

Personalized fulfillment is another area that can automatically be managed with customer-specific rules, notes Jim Markell, new product director at QAD. At a company level, for example, the universal rule for credit management might be 30 days net. “But I have negotiated a contract with a specific customer that says he gets 90 days, so I need a different rule for that customer,” says Markell. “With our eQ system, we can define the customer in a hierarchical way, so that if I have that arrangement with a parent company, all its subsidiaries also get the same credit treatment.”

These are decisions that customer service representatives typically have made, he says. “When taking an order, a customer service rep would know that this customer ships to a certain location, and that we normally fill his orders out of this warehouse, but if two of the five products he wants are only available from a different warehouse, then we ship those direct; and in addition the rep might note that there is a special pricing required for this customer, which is not on the price list but which the salesman has offered — that’s kind of what goes on in the process of taking a sales order manually.”

When customers are self-servicing, all these personalized requirements need to be enforced consistently and automatically across all channels, he says. “So we need some kind of rules-based approach that says this is what a customer service rep would decide to do if they were making the decision.”

QAD calls its approach “commerce relationship management,” because it can be configured for buyers or sellers. Either way, the application is tightly integrated into fulfillment and execution activities.

Once customer profiles and requirements have been captured, the cost of fulfillment analyzed and an order taken, information needs to be communicated back to suppliers. While large manufacturers already have created EDI links with key suppliers, new tools are being developed to simplify this process using the internet. Eventra, Milford, Conn., is one vendor developing Supplier Relationship Management software to communicate demand for direct materials all the way back to tier two and three suppliers.

At the same time, suppliers need assistance to understand which orders to accept and how to prioritize them to meet their profit and customer relationship objectives. This is particularly important in e-marketplace environments where many orders are coming in from companies the supplier doesn’t know.

Metreo, Redwood City, Calif., recently introduced a “supplier response software” designed specifically for this situation. The software aggregates orders from all channels, evaluates them against the supplier’s business objectives and then recommends a response, all in real time, says Daphne Carmeli, co-founder and president. Each order gets ranked or scored based on its value to the company, she says, since “not all orders are created equal.”

Often orders come in so rapidly, particularly at the end of a quarter, that a company can’t evaluate them, so they end up fulfilling on a first-come, first-served basis, says Carmeli. “This is not good business practice because the last order may actually be the most profitable or the most valuable deal,” she says. “Our system sits on the pricing manager’s desk and in real time it ranks and scores each order based on metrics that the company has said is important.”

For example, a company might set a threshold score of 85 for all orders. If an incoming order scores 67, the pricing manager instantaneously sees that. “Then he has choices,” says Carmeli. “He can accept it because it’s from an A customer, and he will know how much he needs to make up on the next order. Or he may decide to try and bring the margin up and the system will recommend some ways to do that - by substituting a product or adjusting the ship date or adjusting the volume. Or he can refuse the order. So what we are doing for the supplier is giving them lots of power to make a deal make sense for them.”
“Managing customer relationships is critical, but almost as important is managing supplier relationships and managing partner relationships,” says Paul Bender, president of Bender Consulting, a SynQuest company. “The core issue really is something bigger and more strategic — it’s about managing and deriving value from all the relationships of the company.”