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The Supply Chain Revolution
Innovative Sourcing and Logistics for a Fiercely Competitive World
By Suman Sarkar AMACOM
Copyright © 2017 Suman Sarkar
All rights reserved.
ISBN: 978-0-8144-3879-4
CHAPTER 1
DRIVE CUSTOMER SATISFACTION–THROUGH EXCELLENT SERVICE
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BENEFITING FROM EXCELLENT SERVICE
What do companies such as Amazon, Chick-fil-A, Apple, Marriott, Starbucks, and American Express have in common? They are all known for excellent customer service. Customers tend to be loyal to businesses that have great customer service, and many are willing to provide referrals to their friends, family, and colleagues. Consumers will blindly purchase from these companies despite the fact that some of their prices are higher than the competition's. It is the belief that if the customers are not happy with the product or service, the company will do everything it can to rectify the problem quickly; customers will not have to wait in line for an hour to get the problem fixed. Customer service is not only important for consumer-oriented businesses but also for businesses that service other large corporations. Companies embrace customer service as a way to stand out from the competition when product differentiation is low or customers are fickle.
Most people associate customer service with the interaction that takes place between a company and its customers, and not so much with supply chain. However, a company's ability to provide excellent customer service depends to a large extent on its operations — its ability to deliver a product or service quickly and as promised, or to replace or return a defective product quickly. You would not be happy to receive a fax machine from an online retailer when you ordered a printer, and then have to wait for four weeks to get the product replaced, despite the polite apologies of the customer service agent. You may forgive the error the first time but would be unlikely to order from the store again if it happened repeatedly.
For happy customers, consistency and quality of product or service delivery are important, and supply chain plays a critical role in making that happen. To be known for service, a company should have intimate knowledge of customer needs, develop service models that are difficult for the competition to match, and then find a way to get customers to pay for the better service. Involving the supply chain organization up front can help identify different service models that can be offered to the customer. The supply chain team can estimate the costs and effort associated with each. The sales team can then negotiate the price with the customer in a business-to-business situation.
Customer service is a team effort. It's important that frontline colleagues are supported by a well-oiled machine that can meet or exceed customer expectations.
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AMAZON'S CUSTOMER SERVICE ADVANTAGE
When Jeff Bezos founded Amazon in 1994, he vowed to become obsessed about delivering excellent customer service. The success of Amazon was mainly due to Bezos's focus on meeting customer needs in unique ways that were difficult to replicate by competitors. Amazon has relied on and invested heavily in its supply chain capabilities to support customer needs.
Amazon has received both good and bad press, but one thing everyone agrees with is that Bezos's company has an outstanding customer service record. USA Today reported in 2015 that "for the sixth consecutive year, Amazon.com has topped the customer service Hall of Fame. Less than 2% of survey respondents reported a poor experience, and 59.4% reported excellent customer service, by far the highest percentage among all companies reviewed."
Amazon's superior customer service is no accident; it comes from Bezos's personal commitment. A few quotes from him will help you understand his philosophy:
* "We're not competitor obsessed, we're customer obsessed. We start with what the customer needs, and we work backwards."
* "Focusing on the customer makes a company more resilient." Bezos famously brings an empty chair to meetings to represent the most important person in the room —"the customer."
* "If you make customers unhappy in the physical world, they might each tell six friends. If you make customers unhappy on the Internet, they can each tell 6,000."
Bezos makes himself personally accessible to customers. He is known to forward customer complaints to the appropriate person in the company, adding a "?" in his email in order to ensure a prompt response and resolution to the problem. It is hard to compete with a company that has such outstanding customer service. Even Walmart is struggling against Amazon's onslaught.
Another example of Bezos's unique focus on customer service is his concept and implementation of Amazon Prime, the company's breakthrough promise to deliver packages within two days. It's a service model that competitors find difficult to replicate. A decade ago, most packages took a week or more to get from door to door. Two-day shipment was so expensive that customers often preferred to visit a local Walmart or Target store if they needed something quickly.
Amazon's ability to provide two-day delivery derives from a focus on its supply chain, which reduces reliance on expensive UPS and FedEx services. It has an unparalleled distribution network and continues to improve it every day. Amazon is now investing in robots in its distribution centers to handle peak volume, expanding its truck and air fleet, and even tinkering with new ideas such as delivery by drones. Amazon is also expanding the concept of same-day delivery in many cities as well as toying with the idea of Uber-type services for delivery of packages. To make last-mile deliveries cost-effective, Amazon is opening warehouses near the major cities. As of 2016, Amazon is estimated to have 180 warehouses and can now deliver packages with in-house resources in 30 major metropolitan areas.
Though Prime has increased shipping cost, it has also proved another important point for Amazon: Customers are willing to pay for better, faster service. Amazon has raised the Prime membership fee from $79 to $99 to pay for increased shipment cost, with minimal customer pushback — and membership continues to grow.
Bezos has upended the traditional belief that increased customer service comes with an increased cost. He has shown that customer service can be improved while remaining economical and, more importantly, has convinced customers to pay for expanded services.
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BEST BUY'S CHALLENGES WITH CUSTOMER SERVICE
Let's look at another example: Best Buy. In 1966, Richard M. Schulze and a business partner opened Sound of Music, an electronics store specializing in stereos, in St. Paul, Minnesota. They renamed the store Best Buy in 1983 to reflect their marketing campaign. The company expanded its product offerings to include home appliances and VCRs. Stores started to place all stock on the sales floor rather than in a stockroom, had fewer salespeople, and provided more self-help product information for its customers.
Best Buy also did away with salespeople working on commission, in order to make the shopping environment free of the high-pressure tactics used in other stores. In 2004, Forbes magazine named Best Buy as its "Company of the Year." The company grew rapidly. It introduced the innovative service team known as the Geek Squad and eliminated mail-in rebates to address negative customer feedback. An increasing trend toward online shopping, however, began to erode revenues and profits in the 2010s.
Best Buy's biggest mistake seems to have been customer service failures. Customers routinely complained about bad experiences with pushy and unhelpful store employees. The customer service problem was compounded by Best Buy's lack of supply chain capabilities. It failed to ship thousands of preordered items that consumers planned to give as Christmas presents, and then failed to take responsibility for the failure.
The company's inventory management and reverse logistics systems for repair and return were notoriously bad. A lot of product sat unsold in stores. In the face of declining revenue, management aggressively cut costs and kept operations as lean as possible. This drove profit margins higher and kept investors happy in the short run. But a company can never achieve growth by cutting costs. To survive, Best Buy needed to have sustained sales growth, which could only be achieved by providing an improved customer experience. Unfortunately, Best Buy continued to focus on price promotion and expansion into consumer durables to attract customers but not so much on improving customer service.
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INCREASING SERVICE LEVELS
Many companies improve customer service when they realize that product differentiation is not helping them sell more products, but they don't do it in a financially prudent way. When I ran sourcing projects for my clients, suppliers would provide free services as a way to sweeten the deal. Over time, it became an acceptable industry norm.
Take the example of the facility management industry, which provides day-to-day employee services such as food preparation, janitorial, and office relocation. The suppliers charge their actual employee cost and add a management fee to account for their profit. The management fee is meant to ensure that suppliers are providing oversight for their operations. As competition became stiff, the suppliers started to put the fee at risk based on performance, and now it is an acceptable norm that the management fee will only be paid if the facility management supplier is doing everything right. This represented a drop from assured to completely at-risk profit. The risk profile of the facility management suppliers has increased, resulting in concern from their investors and customers about the sustainability of their offering.
Is a high service level necessarily bad? No. However, if your service levels do not vary by type of customer or if your customers are not willing to pay for better service, you are potentially overservicing your customers. Our experience across industries shows that companies seldom segment their service offerings, thereby allowing all of their customers access to the same high level of service. This results in significant cost increases when compared to the actual benefits from the increased level of service. Why does this happen? Costs are frequently not visible to customers, who are not offered incentives to choose the right service level. They end up asking for more service without considering the service cost.
The system works in a surprisingly similar way inside corporations as well. Many companies have set up their corporate functions, such as real estate, IT, HR, and procurement, as a shared services organization. The centralization effort is made with the hope that it will reduce costs through economies of scale. Instead, many firms are finding the costs of shared services going through the roof instead of coming down.
For example, a shared services organization at an aircraft company increased costs by 20% despite a decline in revenue. Why did this happen? It is hard to drive scale in the services area unless you completely restructure work processes. Also, the customer organizations better managed their expectations when they had to pay for their real estate or HR staff. They were okay with their offices being cleaned once every day. However, once centralized, the costs are shared by a larger pool, and no one challenges the need for an increased service level, such as getting the office cleaned immediately after a small spill. Without a disincentive, customers will continue to ask for better service even if they do not need it. It is similar to everyone ordering the most expensive dish on the menu at a dinner when the bill gets split equally.
To be known for service, a company should have intimate knowledge of customer needs, the ability to provide service that is difficult for its competition to match, and a way to get customers to pay for the better service.
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TAILORING SERVICE LEVEL BY CUSTOMER SEGMENT
Most companies lack an understanding of the customer's need for service in different customer segments. Typically, only a small group of customers requires a high level of service. When faced with competition or customer requests, companies tend to increase the service level for all of their customer segments irrespective of their size or profitability.
For example, at one corporate bank, a group of customers was demanding a higher standard of service, which included having a personal banker, an investment specialist, 24/7 customer support, and other benefits.
The bank faced a distinct risk of losing these customers if it failed to provide an increased level of service because other banks were starting to market their services aggressively. To address the growing demand, the bank provided the improved service to all of its customers and did not charge for it. This resulted in a significant cost increase and impacted the bank's profitability.
Our analysis showed that only the segment of customers who maintained large investments with the bank was asking for the increased level of service. These customers were also willing to pay extra for the better service, which would have offset the increased cost. All the other customers were not that interested in the improved services, but they were willing to use them if they were provided at no extra cost. The bank would have managed its costs better if it had divided its customers into separate segments.
I have developed a three-step approach to separate customers by segment, define a menu of service levels, and match service levels with segments. It is a good way to think about service levels that can be offered to customers.
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FIRST STEP — CLASSIFY CUSTOMERS BY SEGMENT
Most companies classify their customers for marketing or sales efforts. They use psychographic (lifestyle) or demographic segmentation to classify their customer base and identify the unique needs for developing products or services. However, these classifications are not useful to identify what service levels are needed to win in the market. Segmentation based on business metrics such as volume, profitability, or the strategic nature of an account has shown to be more useful. For example, Amazon Prime was targeted at customers who shop heavily online, irrespective of their lifestyle choices or demographics.
We were hired by a leading multibrand retailer to analyze its store delivery service costs. The costs were increasing rapidly, and the client wanted to know how it could fix the problem without compromising its operations. We found that its stores asked for increased delivery services from distributors without consideration to cost. The increased level of delivery service included daily servicing, using a dedicated truck, and delivering before 6 a.m. The service requests were made to optimize store labor but did not take into consideration the cost of delivery. It made sense to provide a higher level of service to premium locations and high-volume stores. But extending the same service to stores in remote locations created a significant cost burden. The distributor had to send partially filled trucks to service remote location stores, and it made no financial sense.
To analyze the problem, our team used a simple framework to segment stores for the retailer by defining their service levels (service-level agreements, or SLAs) in the Dallas market, which was chosen as a test market. The retailer had 85 stores, and all of them received the same level of service. We considered two important variables when determining the store segment. The first variable was store profitability and volume; the second variable was brand criticality (the degree to which the retailer wants to showcase certain stores). For brand criticality, think, for example, of the way Apple showcases its Fifth Avenue store in Manhattan. The segmentation showed that out of 85 stores only 5 stores needed a high level of service, 24 stores needed a medium level of service, and the rest could get by with a minimum threshold of service. High service levels typically involve delivery first thing in the morning and multiple deliveries in a week. Medium level of service may mean morning delivery and one to two deliveries in a week. A basic level of service may include delivery during the day and one delivery each week.
High service levels ensure that a store manager has all the required stock before the store opens and does not have to keep much inventory. Low service levels may inconvenience a store manager with receiving deliveries during the day and may mean holding a week's worth of inventory in the back room. Medium service levels are less inconvenient and require less inventory holding compared to low service levels. Our segmentation study showed that the retailer was overservicing 80 out of the 85 stores — or roughly 95% of stores in the Dallas area. See Figure 1.1.
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Excerpted from The Supply Chain Revolution by Suman Sarkar. Copyright © 2017 Suman Sarkar. Excerpted by permission of AMACOM.
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