The Intimate Supply Chain - Part 3

In this concluding part of The Intimate Supply Chain - Part 3, I want to expand on the view that David Ross takes of the customer of the intimate supply chain. The two other parts of this series were: The Intimate Supply Chain - Part 1 and The Intimate Supply Chain - Part 2.
Many a business adage would read - "The customer is King" (Do you ever wonder why "The customer is Queen" doesn't seem to sound that familiar even though one is willing to bet that women account for a whole amount of the purchasing going on). David also expands on that same observation:

Without a doubt, the term “customer-centered” is one of the most overworked platitudes in modern management. After all, who's not in favor of operating the business with the customer's best interests in mind? In reality, though, supply chains are all too often organized around internal financial objectives like resource allocation, product lines, and business-unit profitability.

Also,

In theory, a demand-driven network is supposed to be able to take real-time demand information, rapidly reassemble supply channels, and create individually targeted customer solutions. But in reality, it is impossible to respond to the needs of each and every customer.

And so the very notion of a satisfied customer is an ideal but, in my opinion, it is falling short of this ideal that makes repeated business possible and it is the magnitude and content of this shortfall that forms the competitive space. Even if one were to take the tack of involving a sample of one's customer base in the very process of design of the product or service, there are going to be shortfalls that simply cannot be bridged.
David identifies a different way of addressing the customer - in segments rather than in aggregates. He notes,

...demand-driven networks have a strategy centered on standardized product lines, forecasted demand, and performance calculated by aggregate customer value. One of the major drawbacks of a demand-driven network is that all customer requirements are given the same weight.

He makes the following point about customer segmentation:

True customer-centered businesses are organized not around general performance targets but around a precise knowledge of each customer segment identified. An intimate supply chain determines performance on the value it can provide to the customer. It views all customer demand as unique and seeks to configure each solution to match the product/service features each customer values the most. In a customer-centered supply chain, someone is directly responsible for managing each customer segment.

Also,

Since not all customers are profitable, the first action in creating an intimate supply chain is to segment customers. Segmentation allows the supply chain to allocate scarce resources according to which customers should receive more product/service value and which less.
The question naturally arises, “How do you segment a supply chain's customers?” Traditional aggregation strategies, such as segmentation by territory, sales, costs, profits, and similar attributes, result in too broad a definition. Further, this approach does not tell us who exactly our customers are and what value they expect.
A far more effective approach is to segment customers according to the types of solutions they want.

I think that David Ross has developed a clear enough picture about what he thinks the notion of customer segmentation is in his opinion and how that goes a significant way into dovetailing into the concept of the Intimate Supply Chain. But its time to take a step back and see if there are contrary views about this observation. Well, it turns out that there is one that readily comes to mind - The Innovator's Dilemma. Professor Clayton Christensen describes a curious paradox about how outstanding firms can fail "by doing everything right" or how the very successes and capabilities that a company has invested an inordinate amount of time and effort developing becomes obstacles in the face of changing markets and technologies. (A more detailed look at the Innovator's Dilemma)

In appreciating the Innovator's Dilemma, it becomes clear that a firm's customers are often the ones who create an artificial cocoon of stability and customer satisfaction even while disruptive technologies and changing market situations warrant making changes. It seems to me that customer segmentation, (especially by profitability), would miss this critical situation that occurs quite frequently in one's competitive space - while profits should be one of the driving factors of continued business operations, it becomes a stumbling block when discontinuities in profitable opportunities present themselves.
Continuing with the article, David goes on to describe the stuff that Lean thinking is made of when applied to Supply Chain Management (SCM).

• Define value proposition. Key activities here include identifying the value profile for each customer segment in terms of the critical benchmarks of service (speed and reliable delivery), product/service wrap (desirability of products, service, and solutions), and customization (ability to provide configurable, unique solutions).


• Create value-proposition portfolio. This entails assembling the solutions most wanted by customers in terms of design (form, fit, function), cost (competition, time from conception to sales), services (availability, ease of use, information), and quality (conformance, reliability, durability).


• Determine scope of collaboration. At this step, determine how the competencies and resources of the supply network should be integrated to help in creating, sourcing, and delivering the value proposition portfolio.


• Ensure customer buy-in before rollout. Before widespread rollout of the value proposition, apprise customers of the initiative and ensure that they buy into it.


• Develop value-proposition metrics. Performance metrics need to be in place once the rollout has taken place. These measures will allow planners to gauge the effectiveness of the value-proposition portfolio and will provide the basis for the next round of improvements.

The latter half of the article deals with how to create the Intimate Supply Chain and its benefits. The two benefits that David Ross identifies for the Intimate Supply Chain are Financial performance (driven largely by customer segment focused profitability measures and initiatives) and Competitive Positioning (by targeting customer segments with customized solutions rather than a big box fit everyone the same way strategy).
In conclusion, I believe that the Intimate Supply Chain offers some really good perspective about the application and adaptation of Lean thinking into Supply Chain Management. The article identifies and delves into specific actions that in the author's opinion and experience would go a long way into creating and sustaining the Intimate Supply Chain. On a personal note, I have found it notoriously difficult to be as concise and clear about communicating information the way that the author David Ross has been able to do it - kudos to him for that!

Tags:Lean, Intimate Supply Chain, Supply Chain Management, Globalization, Mass manufacturing, Supply Chain, Customer Segmentation, Innovator's Dilemma, Clayton Christensen

posted by AJ @ 10:04 AM