Driving a Customer-Centric Supply Chain

Insights on Defining and Implementing

a Customer-Centric Supply Chain

11/7/2016 By Lora Cecere

Founder and CEO Supply Chain Insights LLC

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Contents

Research Methodology

Disclosure

Executive Summary

State of the Industry

How Does Customer-Centric Fit into a Demand-Driven Strategy?

Three Pitfalls

Implementation Strategies

Recommendations

Summary

Appendix

Additional Reports of Interest

About Supply Chain Insights LLC

About Lora Cecere

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Research Methodology We are committed to delivering thought-leading content for the supply chain leader. Our goal is to be

the first place that visionaries turn to in order to gain unique insights to drive supply chain excellence.

This report is based on quantitative research completed during August through October 2016. The

findings are based on the quantitative data derived from the study outlined in Figure 1 and insights

gained through sharing the data with supply chain leaders. Additional details on the demographics of

the population from this study are shared in the appendix of this report.

Figure 1. Overview of the Quantitative Study on Customer-Centric Supply Chain Management

Disclosure Your trust is important to us. In our business we are open and transparent about our financial

relationships. In this research process we never share the names of respondents and/or give

attribution to open-ended comments collected in the research.

Our philosophy is “You give to us, and we give to you.” We collect data from a private network of

qualified participants and openly share the results. The participants of our research always receive

the final reports; and, if interested, we share insights from the studies with the respondents in a

roundtable discussion with their peers.

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This report is written and shared using the principles of Open Content research. It is intended for you

to read and share freely with your colleagues and through social channels like LinkedIn, Facebook

and Twitter. When you use the report all we ask for in return is attribution. We publish under the

Creative Commons License Attribution-Noncommercial-Share Alike 3.0 United States and our citation

policy is outlined on the Supply Chain Insights Website.

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Executive Summary As growth slows, manufacturing companies struggle with rising complexity and increasing levels of

demand error. The question is “Could companies decrease complexity and improve growth by

building outside-in processes that are customer-centric?” We believe the answer to this question is a

resounding “YES!” However, there is a problem. Across the industry there is no common definition of

customer-centric supply chains. There is no clear and accepted methodology to build this core

competency. As a result, most companies have forged their own paths. In this study, 80% of those

surveyed have a customer-centric strategy; yet over half (54%) state that there is room for

improvement to drive performance changes in their supply chain. Companies struggle to drive

alignment and build constancy of purpose. The goal of this report is to fill this gap.

State of the Industry Today 46% of respondents rate their supply chain as performing well on the delivery of a customer-

centric supply chain strategy. The definition of a customer-centric supply chain used for this research

is: one that is aligned with order management, product strategies and distribution processes to

deliver/adapt to against customer segmentation strategies.

Figure 2. Customer-Centric Supply Chain Definition and State of the Industry

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Delivering on the promise of a customer-centric supply chain is not easy. One of the largest issues is

understanding what customers really value. Some of the issues include:

Table 1. Verbatim Responses to Why Supply Chain Is or Is Not “Customer-Centric”

Gaining alignment to serve the customer is the goal. When companies look at what is important

versus current performance, the gaps become clear as shown in Figure 3. The reason why? Most of

the historic focus was on distribution-centric processes—examples include scorecards, vendor

managed inventory, and collaborative planning. Companies do these well, but they do not drive the

required change. The tougher and more important tactics include the implementation of meaningful

cost-to-serve policies, management of complexity, and driving customer segmentation into Available

to Promise (ATP) and order policies. Closing these gaps requires strong cross-functional alignment

with sales and a clear understanding of what the customer values. Both are an issue in most

organizations.

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Figure 3. Customer-Centric Policies: Performance versus Importance

How Does Customer-Centric Fit into a Demand-Driven Strategy? Many companies bandy about words like customer-centric in strategy discussions, but fail to define

the term to make it actionable. Many confuse demand-driven, customer-centric, and outside-in

processes; these are three separate, but intersecting, strategies. In Figure 4, we share the overlaps.

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Figure 4. Customer-Centric Supply Chain Definition

Three Pitfalls The average respondent in this study had a customer-centric supply chain strategy for their primary

customer over five years; yet, 54% report their supply chain is not working well. Our takeaway?

Should they feel so good about their progress? We think not. Success is easier said than done.

There are many pitfalls. Here we discuss three:

Pitfall #1: Being Customer-Centric Does Not Mean Doing Whatever the Customer Wants. Let’s

consider the story of two clients in Houston. The companies were fierce competitors. Each distributor

delivered oil and gas products to refineries. The companies were commodity-based businesses and

operated on razor-thin margins. One company defined the customer-centric strategy as, "Do

whatever the customer wants." Their costs were higher and their reliability to the customer was

lower. The organization was always jumping through hoops. The second organization had a very

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different definition of customer-centric. Their vision was to manage distribution policies based on

customer segmentation with a focus on reliability. At the second company, policies were clear and the

focus was on reliable delivery. At the end of the year we watched both companies gather in a room

for the most valued supplier award. The company that constantly jumped through hoops did not win

the award, while the second company won the Supplier of the Year. What can we learn? When it

comes to customer-centric supply chain strategies, reliability matters. Failed promises, no matter how

well-intended, have long-term consequences.

Pitfall #2: Getting Clear on the Customer. Most companies have multiple customers. In this study,

the average manufacturer served three customer types. These relationships form a value network

within the channel. The key is to identify the primary customer and gain clarity on what is valued, and

then align the organization against what is important. For example, while the healthcare industry has

historically seen the doctor as their primary customer, the power is shifting to health and wellness.

This does not mean the doctor is unimportant. Instead, it is about managing multiple parties in the

value chain, including the patient.

Figure 5. Healthcare Value Chain

Pitfall #3: Segmentation and the Management of Complexity. In Figure 6 we show the gaps in

the execution of customer-centric policies and strategies. The top three gaps are: visibility of channel

inventories and orders; management of complexity; and the alignment between commercial and

operations teams. These three characteristics often go hand-in-hand. When there is close alignment

there is usually better management of complexity and the sharing of channel data.

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Figure 6. Gaps in Customer-Centric Strategies

The average company uses five practices to execute a customer-centric supply chain. The details are

shared in Figure 7.

Figure 7. Customer-Centric Policies Deployed

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The issue is that the strategies deployed do not resolve the gaps. While there is a focus on

scorecards and distribution strategies, companies struggle to align on customer-centric policies. To

drive true value, sales and operations must align and manage customer and product complexity.

There are many gaps in the execution of customer-centric strategies. The implementation of channel

visibility solutions is very low (16%). The lack of use of channel data and customer sentiment data is

one of the reasons why most companies feel their supply chains are underperforming despite the

availability of data.

Implementation Strategies To implement a customer-centric strategy, companies need to make a conscious choice on which

strategies to pursue. Let’s start with a clear definition of the terms for building outside-in and

customer-centric processes. The consideration of these techniques can deliver more value than only

thinking of distribution and order fulfillment:

Demand Networks. A demand network translates demand across multiple parties. The focus is on

channel data: price, inventory positions, and policies. The use of advanced analytics enables the

sensing of out-of-stocks. As markets shift, a demand network enables a clear understanding of market

positions with minimal latency. It is about much, much more than Vendor Managed Inventory (VMI) or

Collaborative Forecasting and Replenishment. An example of a global demand network is IBM

iBAT. We know of ten demand networks using this definition. They are the most prevalent in the

consumer electronics industry.

Social Listening. Social listening is the use of unstructured text mining and sentiment analysis to

understand and listen to customers’ responses to products and services in near real-time. Advanced

companies are building cross-functional teams to use unstructured data to analyze warranty, quality,

and service failures. An example of social listening is the Lenovo Case Study presented at the 2015

Supply Chain Insights Global Summit. We only know of five case studies of cross-functional listening.

Market Drivers. To become outside-in, the primary signal for demand becomes a market signal. The

value network is triggering off of market signals which represent independent demand. In contrast, the

traditional supply chain forecasts using historical orders, and adjusts based on sales forecasting. This

introduces demand latency into the supply chain. (The order translation from the channel based on

replenishment points is order latency. For most companies it is weeks and months, but can be multiple

quarters.)

Channel Sensing. Channel sensing enables the use of channel consumption, and the modeling of

inventory across channels, to understand global and regional trends in order to maximize opportunity

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and mitigate risk. Channel sensing combines VMWE, CPFR, and the use of channel signals into a

holistic demand signal.

Cross-Channel Management. Cross-channel management is the corporate ability to understand the

customer across channels. An example is understanding the shopper across the moments of truth in

omnichannel strategies.

Customer Segmentation. This is the rationalization of customers and the translation into priorities for

orders, Available-to-Promise (ATP), production scheduling, and inventory allocation.

Order Policy. This includes the use of customer segmentation strategies to define order policies for

lead times, discounts, allocation, and shipping priorities.

Cost-To-Serve. This involves the analysis of the relative costs to serve customers, and a data-driven

process to reduce and manage costs at specific customers. L'Oreal is one of the few companies we

have interviewed that has been able to sustain cost-to-serve.

Customer-Driven Available-To-Promise. This is the use of customer segmentation to determine

priority in matching inventory with orders during the order cycle.

Use of Channel Data. This is the harmonization and synchronization of channel data to be used in

forecasting, replenishment, and inventory planning.

Demand Sensing. Demand sensing is the use of pattern recognition and advanced analytics to

analyze order patterns in order to translate tactical demand planning (forecast) into a short-term, and

more accurate, demand signal for replenishment.

Demand Shaping. Demand shaping is the use of price, promotion, sales/distributor incentives, new

product launch, marketing campaigns, or positioning to elevate and improve baseline demand.

Demand Translation. This is the translation of independent demand into cycle stock reduction in

production planning and material buying in demand-driven MRP.

Attribute-Based Planning. This is modeling based on attributes (abstraction from item/location logic

termed SKUs) to better see patterns in demand and supply planning.

Push/Pull Decoupling Points. This involves choices on when to push, and when to pull, with

translation into inventory policy and decoupling points. This requires modeling and continued

refinement. An example of the use of customer segmentation into push/pull decoupling points is

the SanDisk case study from the 2015 Supply Chain Insights Global Summit.

Supply Chain Visibility and Supplier Connectivity. The sharing of forecasts in supplier relationships

is of little value. Instead, companies link suppliers to multiple signals: manufacturing production plans,

distribution requirements, and current inventory positions to help suppliers better plan for supply.

These Supply Chain Operating Network Strategies enable multi-tier many-to-many enablement of first

and second/third tiers of suppliers of services, materials and transportation.

Buffer Design. The design of buffer strategies—capacity, inventory, and supplier relationships—is

designed to absorb demand and supply variability.

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Network Design to Reduce the Bullwhip Effect. This involves designing the network to reduce nodes

and improve B2B connectivity to align the network and maximize agility.

So, while many companies toss these concepts around in discussions on supply chain strategies,

most are stuck because they are not clear on the definition to make them actionable.

Recommendations The starting place for a customer-centric strategy is to understand what matters to the primary

customer and then aligning the supply chain organization around the policies to make the strategy

successful.

Get Clear on What Each Node of the Channel Values. Each organization has cultural nuances,

and each customer segment has differing needs. The important step is gaining the understanding of

what is valuable in an independent format. While many companies have Net Promoter data, this type

of analysis does not distill what is important for the supply chain to do in order to improve customer

satisfaction. Start by brainstorming the needs of the customer touchpoints in the value chain. In

Figure 8 we share the old and new views of customer centricity using an example from one of our

clients. In this case, the traditional supply chain process only looked at the relationship of the

customer to the order; but as the view expanded to evaluate the multiple touchpoints, the supply

chain team was better able to align with the commercial teams of marketing and sales.

Figure 8. Customer-Centric Supply Chain Definition

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Test What Matters to Customers and Drive Alignment Across the Organization. Each function

will often feel that they understand the customer best; and as a result, it is important to take a data-

driven approach to understand what the customer values. In one of our recent studies we evaluated

the impact of price and customer service on the supply chain. While the sales department felt that

price and one-off special requests were the important factors to drive a customer-centric strategy,

what was found in the research was that short lead times, delivery reliability, and manufacturing

quality were also increasing in importance, and that to serve the primary customer segment, the

company needed to focus on all of these elements.

Figure 9. Results of a Customer Survey for a Client

Use Channel and Customer Data. One of the biggest “Ah ha!” moments for us in doing the Supply

Chains to Admire analysis in parallel with this work is how few companies use customer data well.

The supply chain today, despite the wealth of customer data, is still using the customer order as the

proxy for demand. To improve lead times and reliability, the use of customer data is critical.

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Summary While companies talk about the need to be customer-centric and strive to deliver, the gaps are large.

To date, the largest success is in the management of the customer order, the use of customer

scorecards, and the implementation of vendor-managed inventory systems. The ability to align sales

and operations to meet customer needs, and drive success through customer segmentation and cost-

to-serve strategies, remains elusive. It is a goal which appears beyond the supply chain’s reach;

however, this does not have to be the case.

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Appendix In this section we share the demographic information of survey respondents, along with relevant

research findings to support the key insights shared in this report.

Our philosophy is that “respondents give to us and we give to them.” All respondents participating in

this survey were given the results of this study and invited to share in a roundtable with other survey

participants to gain additional insights.

In our research, the names, both of individual respondents and companies participating, are held in

confidence. The demographics and additional charts are found in Figures A–H. At the bottom of each

image are the specific questions asked in the survey along with the survey details.

For the full set of charts from the Customer-Centric Supply Chain survey, click here.

Figure A. Overview of Respondent Characteristics

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Figure B. Industry Segments Surveyed for This Report

Figure C. Supply Chain Definition

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Figure D. Role and Region

Figure E. Supply Chain Descriptors

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Figure F. Primary Customer Definition

Figure G. Presence of a Customer-Centric Supply Chain Strategy

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Figure H. Years and Performance of Customer-Centric Strategy for Primary Customer

Additional Reports of Interest To gain additional insights on the topic of customer-centric supply chains consider these additional

reports:

Inventory Optimization in a Market-Driven World

Maximizing the ROI in Supply Chain Planning

Sales and Operations Planning: State of the Union

What Value of the Retail Scorecard?

What is the Value of Vendor Managed Inventory?

Why Is Sales and Operations Planning So Hard?

Why Is Supply Chain Planning So Hard?

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About Supply Chain Insights LLC Founded in February, 2012 by Lora Cecere, Supply Chain Insights LLC is beginning its fifth year of

operation. The Company’s mission is to deliver independent, actionable, and objective advice for

supply chain leaders. If you need to know which practices and technologies make the biggest

difference to corporate performance, we want you to turn to us. We are a company dedicated to this

research. Our goal is to help leaders understand supply chain trends, evolving technologies and

which metrics matter.

About Lora Cecere Lora Cecere (twitter ID @lcecere) is the Founder of Supply Chain Insights LLC and

the author of popular enterprise software blog Supply Chain Shaman currently read

by 5,000 supply chawen professionals. She also writes as a LInkedin Influencer

and is a a contributor for Forbes. She has written five books. The first book, Bricks

Matter, (co-authored with Charlie Chase) was published in 2012. The second book,

The Shaman’s Journal 2014, published in September 2014; the third book, Supply

Chain Metrics That Matter, published in December 2014; the fourth book, The

Shaman’s Journal 2015, published in September 2015 while the fifth book, The Shaman’s Journal

2016, published in July 2016.

Wweth over 12 years as a research analyst with AMR Research, Altimeter Group, and Gartner

Group and now as the Founder of Supply Chain Insights, Lora understands supply chain. She has

worked with over 600 companies on their supply chain strategy and speaks at over 50 conferences a

year on the evolution of supply chain processes and technologies. Her research wes designed for the

early adopter seeking first mover advantage.