Executive Briefings

Will Pendulum Shift from Customer Service to Cost Reduction?

The elongation of the supply chain on both ends of the spectrum has resulted in a phenomenon where companies are able to compete at a global level for customers. Companies that were previously handicapped by lack of channel partners, high levels of investment in advertising and marketing are able to leverage the internet and compete with their larger competitors. In other words, globalization has resulted in increased customer centricity.

The approach that companies have adopted in the last few years to manage their customers has been to meet the expected customer service levels at any cost. This "customer is king, come what may" philosophy will not work in today's hyper-dynamic competitive environment. Companies need to become smarter about managing the trade-offs between customer service and costs. They also need to understand their customers better in terms of the nature of products that they demand, the types of attributes associated with the products that are important to them and so on.

Some of the key areas of interfacing between customer relationship management and supply chain management are:

• Customer level forecasts: Customer service level is the key metric impacted due to lack of customer centricity. By being able to perform Pareto analysis on the customer base using profit as the metric, key customers can be identified. Their customer service level requirements and the input of the account management teams of these key customers can then drive the customer level forecasts.

• Evolve towards short-term forecasting. Focus on continuous measurement of order-to-delivery lead-times, and conduct process re-engineering sessions for collapsing or improving some steps. Also focus on increasing the frequency of the consensus forecasting process. In recent times, newer paradigms have emerged that are based on pattern recognition and other sophisticated algorithms for doing near-term forecasting in highly dynamic environments such as apparel, food/beverage, and consumer packaged goods. These steps will allow companies to meet the promised delivery dates more efficiently.

• Long tail of supply chain. Traditional forecast modeling was designed around the premise that there are a few critical customers who determined the forecast volumes whereas the rest were not so critical and hence the normal distribution. With elongation of the supply chain on both the customer and supply sides, the long-tail effect associated with a larger number of customers sharing a smaller piece of the revenue pie has become a critical issue. In addition, these customers are demanding differentiated products faster and at a lower price. One approach by which Best-in-Class companies are working around this issue is to become more market responsive by reducing overall lead-times.

• Integrating sales opportunity forecasts with build forecasts. There is a need to provide proactive visibility to sales opportunity mismatches with operational plans. This improves the demand shaping (promotions process) and reduce investment in last-minute incentives and last-minute rush or overtime production to accommodate sales target increases.

• Demand sensing at the customer. Retail environments are constantly evaluating ways by which demand signals can be accurately captured and transmitted to the corporate merchandise planners at retailers as well as account teams at the CPG companies.

• Sustainability and health-conscious consumers. Customers are demanding greener products as well as healthy products. The organic foods sector is gaining traction rapidly as well as health-specific foods (low sugar, gluten-free etc). The supply chain of organizations should be flexible enough to manufacture and distribute these products that have a compressed product lifecycle as compared with the other traditional products.

The Outlook

Companies should resist cutting costs indiscriminately and should perform a profit margin impact analysis to fire some customers if needed. In other words it's better to lose those customers that will have minimum impact from not only a revenue but also a profit margin perspective.

The approach that companies have adopted in the last few years to manage their customers has been to meet the expected customer service levels at any cost. This "customer is king, come what may" philosophy will not work in today's hyper-dynamic competitive environment. Companies need to become smarter about managing the trade-offs between customer service and costs. They also need to understand their customers better in terms of the nature of products that they demand, the types of attributes associated with the products that are important to them and so on.

Some of the key areas of interfacing between customer relationship management and supply chain management are:

• Customer level forecasts: Customer service level is the key metric impacted due to lack of customer centricity. By being able to perform Pareto analysis on the customer base using profit as the metric, key customers can be identified. Their customer service level requirements and the input of the account management teams of these key customers can then drive the customer level forecasts.

• Evolve towards short-term forecasting. Focus on continuous measurement of order-to-delivery lead-times, and conduct process re-engineering sessions for collapsing or improving some steps. Also focus on increasing the frequency of the consensus forecasting process. In recent times, newer paradigms have emerged that are based on pattern recognition and other sophisticated algorithms for doing near-term forecasting in highly dynamic environments such as apparel, food/beverage, and consumer packaged goods. These steps will allow companies to meet the promised delivery dates more efficiently.

• Long tail of supply chain. Traditional forecast modeling was designed around the premise that there are a few critical customers who determined the forecast volumes whereas the rest were not so critical and hence the normal distribution. With elongation of the supply chain on both the customer and supply sides, the long-tail effect associated with a larger number of customers sharing a smaller piece of the revenue pie has become a critical issue. In addition, these customers are demanding differentiated products faster and at a lower price. One approach by which Best-in-Class companies are working around this issue is to become more market responsive by reducing overall lead-times.

• Integrating sales opportunity forecasts with build forecasts. There is a need to provide proactive visibility to sales opportunity mismatches with operational plans. This improves the demand shaping (promotions process) and reduce investment in last-minute incentives and last-minute rush or overtime production to accommodate sales target increases.

• Demand sensing at the customer. Retail environments are constantly evaluating ways by which demand signals can be accurately captured and transmitted to the corporate merchandise planners at retailers as well as account teams at the CPG companies.

• Sustainability and health-conscious consumers. Customers are demanding greener products as well as healthy products. The organic foods sector is gaining traction rapidly as well as health-specific foods (low sugar, gluten-free etc). The supply chain of organizations should be flexible enough to manufacture and distribute these products that have a compressed product lifecycle as compared with the other traditional products.

The Outlook

Companies should resist cutting costs indiscriminately and should perform a profit margin impact analysis to fire some customers if needed. In other words it's better to lose those customers that will have minimum impact from not only a revenue but also a profit margin perspective.