5
CUSTOMER-FOCUS STRATEGY 3: CUSTOMERS WON’T WAIT
WE LIVE IN AN era of instant gratification. Whether they’re buying a car or a custom-made suit, customers want it their way, now. And if you can’t deliver it fast enough, they’ll buy it from someone who can. Online, waiting even a few seconds is too much for some customers.1 When sites load too slowly, they abandon their shopping carts and go straight to the competition—and with the range and ready availability of competing products in almost any field, there’s plenty of it. But leaders still believe brand loyalty will somehow make their customers willing to wait while they develop or deliver products. Those days are long gone.
Consider Under Armour. The company created synthetic fibers to keep athletes dry and cool, even during heavy workouts—and the clothes caught on. Soon, people who didn’t even play sports were buying them, and even Nike and Adidas couldn’t compete with the upstart company. Then the company’s customers wanted workout clothes that performed like Under Armour’s offerings but were fashionable, too. But the company kept its focus on clothes for athletes. It offered Curry sneakers—great for basketball, but not fashionable. No one wanted them. Unable to adjust to their changing market, Under Armour’s revenue and profitability plummeted. From 2011 to 2017, its revenue growth declined from 39% to 3%, while net income declined from 7% to −1% (figure 17).
Under Armour is not the only company to ignore its customers’ needs! Many companies stick to what’s worked for them in the past. Some sit out a change, claiming it’s a fad. Others have invested so much in their products or services that they’re afraid to let them go. Still others think they can’t justify the cost of developing new products.
FIGURE 17 Under Armour’s year-over-year revenue growth and net income. Source: “Financials,” Under Armour, https://goo.gl/qGJaFf.
Look at what used to be one of America’s most successful companies. In 2012, Coca-Cola dominated markets worldwide. But then people decided they wanted healthier drinks. New York City Mayor Michael Bloomberg even tried to prohibit the sale of oversize sweetened drinks and to make sizes over sixteen ounces illegal, hoping to lower obesity rates. Coke and others sued, and they won the legal battle. But they lost the war. The court battle revealed how the industry had suppressed news on links between sugar and obesity, and that made healthier drinks even more popular than they already were.
In 2016, per capita Coke consumption dropped to a thirty-one-year low—and competitors like Indra Nooyi, the PepsiCo CEO, started investing in healthier drinks and snacks. From 2012 to 2017, Coca-Cola’s revenue declined from 3% to −15% and PepsiCo’s revenue increased from −2% to 1%. Also, Coca-Cola’s net income declined from 19% to 3% while PepsiCo’s declined only marginally, from 9% to 8% (figure 18).
FIGURE 18 Coca-Cola and PepsiCo year-over-year revenue growth and net income. Sources: “Annual and Other Reports,” Coca-Cola Company, https://goo.gl/RZeVrB; “Annual Reports and Proxy Information,” PepsiCo, https://goo.gl/QgWCFx.
Successful companies embrace change, challenging as it often is. They spot new needs and respond with new offerings before the competition does—and then change again before competitors can respond. Consider Amazon’s approach to reading. Although Amazon sold more paper books than anyone, when they realized that customers wanted e-books, they brought out the Kindle, long before their competitors had a similar product. Then, when audiobooks became popular, Amazon made them available too—for a fee. Amazon stays popular because, when customers’ needs change, Amazon offers new products before anyone else does, at cost-effective prices.
But most companies don’t respond that well to changing customer needs, even companies that have been very successful with their old products. They don’t plan. They make customers wait and lose their hard-earned success to competitors. Consider Tesla. Its first electric car was hugely popular and outperformed other high-end cars. But when the company tried to develop a mass-market car, it stumbled. In fact, the company went through what Musk called “production hell.”
At first, all went well. Customers were enthusiastic at the prospect of buying a Tesla for $35,000, and the company eagerly took orders for five hundred thousand cars and offered refundable deposits. But Tesla had no experience with mass production, and the learning curve was steep. It was rumored that some of the parts in the Model 3 were handmade. There were reported labor issues due to mass firings related to union issues and challenges with Tesla’s ramp-up in China.2 Tesla could barely produce five thousand vehicles a week by the middle of 2018! It never met its delivery dates and had to return the deposits.
How could they get this so wrong? Their first products were for early adopters, who were buying a Tesla as a second car. These customers were willing to wait. But mass-market customers, counting on their new car, were not. While Tesla missed deliveries and returned deposits, and China was making plans to ban gas- and diesel-powered cars, competitors got their electric cars ready. Tesla created the need for electric vehicles, but competitors like General Motors (GM) and BMW were the ones who benefited, while Tesla was battling short sellers and negative news from Musk’s antics.
Having a winning product or being first in a field, like Tesla, is no good unless you embrace change. When customers’ needs change, successful companies come up with new products or services, speed up their design and production, and deliver the new products quickly, at affordable costs. If you don’t, your competitors will.
Thinking about these questions will help you assess how competitive your company is.
• How quickly does your company notice and respond to changing customer needs?
• How long does your company take to develop new products, bring them to market, and create effective service models?
• How quickly are other companies in your industry doing these things?
Your answers are a good guide to how long your company will remain successful. And if you are a new entrant, answering these questions about dominant players will help you identify opportunities for disruption.
INTRODUCE NEW PRODUCTS OR SERVICES QUICKLY
Companies spend an inordinate amount of time designing their products or services. Most have a complicated process for developing and testing new ideas, to avoid failure and financial risk. Unfortunately, the steps are often so cumbersome that many a good idea gets squelched. And the whole cycle of testing can take so long that by the time the product actually launches, customer needs have changed or more nimble competitors have captured the market.
The mobile payment market in China provides a case in point. Alipay was formed to deal with the lack of trust between Chinese buyers and sellers. Each side always suspected the other of fraud, and this lack of trust impacted e-commerce volume. So, in 2004, Alibaba, the huge Chinese e-commerce giant, launched Alipay. The service kept the buyer’s payment in escrow and did not release it to the seller until the buyer had confirmed receipt of the product. Alipay resolved the trust issues and Alibaba’s volume increased significantly. By 2013, Alipay had 80% of China’s mobile payment market. But then customers wanted something different: a direct, peer-to-peer payment service. Alibaba did nothing.
In 2014, WeChat, which had started as the Chinese equivalent of WhatsApp (the cross-platform messaging and VoIP service owned by Facebook), came out with an innovative idea that was easy to sell to Chinese customers. WeChat took advantage of an old Chinese custom, hongbao. Hongbao are the red envelopes filled with money that Chinese people give to family and friends on special occasions such as weddings or the Chinese New Year. WeChat described its service as hongbao online, calling it WeChat Pay. Within a year, WeChat Pay had more users than Alipay. Alipay added a peer-to-peer payment feature a year later, but by that time, the damage was done. Alipay had lost its dominance. As figure 19 shows, by 2016, WeChat Pay had grabbed 38% of the Chinese payment market.
Could Alipay have stopped WeChat Pay completely? Probably not. But it could have avoided significant loss of market share if it had launched a peer-to-peer payment service more quickly. All companies must respond fast, as soon as their customers’ needs change. Once a need arises, customers will buy the first available product or service to meet it well. This is true no matter how popular or innovative your product or service once was. To keep ahead of your competitors, you have to be constantly embracing change and launching new products before competitors do.
FIGURE 19 China mobile payment market. In 2016, the market was equivalent to $8.6 trillion. Sources: Market size from iResearch, embedded figure, in Tingyi Chen, “China Mobile Payment Report 2017,” WalktheChat, June 25, 2017, https://goo.gl/b9KAE8; market share calculated from Analysys data, in “Alipay vs. WeChat Pay—Who Is Winning the Battle?,” ASEAN Today, February 28, 2017, https://goo.gl/Yke9aJ.
AFTER LAUNCH, PLAN FOR QUICK SCALING TO KEEP UP WITH DEMAND
Even companies that embrace change by innovating can lose their competitive advantage if they spend too much time doing R&D and not enough on getting their operations ready for launch. This is a common error. Companies don’t plan for adequate capacity at their manufacturing site or at the suppliers’ end.3 Then the lack of capacity, or lack of flexibility in changing capacity to keep pace with fluctuating demands, ends up delaying delivery to customers. Competitors take advantage of the delay to catch up, and the innovating company loses out—all because it didn’t prepare its operations for the launch!
Take a look at Boeing’s struggle to meet the demand for the 787. As soon as the 787 was unveiled, in 2007, customers wanted it. The aircraft enabled point-to-point connections, unparalleled fuel efficiency, and all the passenger comforts that airlines were demanding. However, Boeing not only struggled to introduce the product but also took several years to deliver it to customers commercially. Its suppliers were not ready to meet the increased demand and, for one reason or another, Boeing had to ask its customers to wait. Airbus then developed its competitive product, the A350, in time to catch up with 787 deliveries.
The result was that Boeing missed its chance to dominate the new format in which it had invested so heavily. Now, to compete with Airbus, Wikipedia notes that Boeing is rumored to be losing millions of dollars on every 787 it sells. Had Boeing planned its operations better, it could have delivered on time (too quickly for Airbus to catch up) and increased both its revenues and it profits. Boeing unveiled the plane in 2007 but didn’t start deliveries until 2011. From 2011 to 2015, deliveries increased from 3 to 135, whereas Airbus started A350 deliveries in 2014 and increased them to 78 by 2017. Deliveries of 787s have plateaued since 2015, while A350 deliveries have grown (figure 20).
Zara, a fast fashion company, understands the importance and implications of responding quickly to changing customer tastes. They get new catwalk trends to stores on time by speeding up the supply chain. How? They keep their manufacturing facilities close to the market instead of locating them in distant Asian countries, so new designs reach stores within a week. They produce in smaller quantities, based on actual customer demand, and supply their stores twice a week. Only the less trendy clothes, like T-shirts, are outsourced to Asian countries.
FIGURE 20 Boeing 787 and Airbus A350 deliveries. Source: “List of Boeing 787 Orders and Deliveries,” and “List of Airbus A350 XWB Orders and Deliveries,” Wikipedia, accessed March 22, 2019.
The other advantage: because Zara updates its stock constantly, customers come in to check it frequently. It’s estimated that customers visit a Zara store seventeen times a year—other stores average three visits a year.4 Plus, since Zara produces in smaller quantities, it rarely marks anything down and thus has a greater profit. In fact, fast fashion stores offer fewer markdowns; the percentage is estimated to be 15%, compared to 30% for the rest of the apparel industry. Zara has seen phenomenal growth in Europe and now in the United States. Other apparel retailers are closing stores in the United States, but Zara is opening them.
However, it is the ability to deliver to customers quickly—not low prices—that drives success in the fast fashion industry, and that’s true for other industries as well. The ability to quickly take your new products or services to market can make or break any business. Look at Airbus. It can introduce products and scale quickly because of its planning, which includes streamlined operations. Its modular design significantly simplifies its operations and allows it to scale as demand changes. It buys partly assembled products from suppliers and assembles them at its plant. Boeing still struggles with streamlining its operations—and so its time to market is longer and its costs are higher.
CREATE THE RIGHT SERVICE MODEL
When faced with changing customer requirements, it’s vital to develop an effective model for servicing your new business. This ensures that your cost structure and pricing (unlike Boeing’s) are appropriate for your new product or services. Getting this right will also stop your competitors from stealing your customers with lower-priced offerings.
Most companies don’t get it right, though. They use their old service models for their new products, which rarely works. It would be like McDonald’s offering burgers from grass-fed cows, on gluten-free buns, without raising its prices, and then making each one from scratch, without figuring out how to serve them fast enough. Customers might love organic burgers at low prices, but they wouldn’t wait half an hour for them. They would go elsewhere—and even if they didn’t, McDonald’s would lose money on each burger served, as Boeing does on its 787s. Old service models won’t meet new customer needs, as the service may not be optimal or its cost may be higher. New service models will meet the new needs better. Then, once those become popular, you need to fine-tune them to further reduce cost—fast, before your customers move to disruptors.
The information technology service (outsourcing) industry since the dot-com bust shows the perils of not adapting—and the opportunities that provides for disrupters. Until the early 2000s, the IT service market was dominated by big U.S. companies like IBM, CSC, EDS, and Keane. But soon after the dot-com bust, in the early 2000s, a few Indian upstarts, such as Infosys, began delivering IT services. They had skeleton staffs in the United States and outsourced programming, data warehousing, customer support, and the like to India, where workers were far less expensive. At first, only a few American customers dared to use these upstarts, but once companies realized how cost-effective they were, many began outsourcing IT to India.
The icons of the industry tried hard to deliver IT support from offshore, too, but by then it was too late for them to catch up. Most went out of business, and today only once-mighty IBM remains in the IT service business—and even it is a fraction of its former size. Meanwhile, Infosys has consistently increased its revenue while maintaining its margins. From 2012 to 2017, IBM’s Global Technology Services (GTS) revenue growth remained negative, between −2% and −10%, while Infosys revenue growth remained positive, between 6% and 11% (see figure 21). GTS and Infosys maintained similar gross margins, while GTS’s gross margin remained between 37% and 39% and Infosys’s gross margin was between 37% and 42%.
Companies are (understandably) too slow to recognize when their approach to client services is not working. It’s hard, risky, and expensive to change the service model when it’s seemingly performing well. So companies remain attached to their old models until they’re so far behind that it’s too late for them to catch up. That’s what happened to the U.S. IT industry. To avoid their fate, you need to recognize when your old model is frustrating your customers—either in terms of its cost (as was the case with U.S. IT companies), of the service itself, or of its timing. And then you need to discard the old way of doing business and quickly come up with a cost-effective new one.
FIGURE 21 IBM Global Technology Services and Infosys revenue growth and gross margin. Sources: “Financial Reporting,” IBM, https://goo.gl/vqwkWD; “Financials and Filings: Annual Reports,” Infosys, https://goo.gl/yTyzFP.
HOW TO RESPOND FASTER TO CHANGING CUSTOMER NEEDS
In the past, whether people were buying a product or a service, companies could keep the customer waiting and still keep their business. In restaurants, at checkout counters, or on the phone with a call center, customers waited. Those days are ending; we’re all impatient now. If your products aren’t available and someone else’s are, your customers will buy from the competition.
This is even true for Apple, the company that commands more brand loyalty than almost any other. When the iPhone X shipment was delayed by two months, in 2017, Samsung was there with its Galaxy S9, and customers were too. The research firm Kantar says the iPhone X’s delayed launch hurt iPhone’s market share around the world.5 If Apple’s loyal fans won’t wait, no one will.
Apple is still the largest company in the world in terms of market capitalization, but your company may not be so lucky if you make your customers wait. The concept should change from What’s the appropriate wait time? to What can we do to not make customers wait? If customers can’t wait a few seconds for an e-commerce site to load, there is no reason for you to design your service thinking they will wait for you. By making them wait, you are only frustrating them, and they will look for alternatives. Instead, design your service with no wait time, so your customers will leave other services for yours. Use their impatience to your advantage.
Here’s how to get your products or services to them on time.
Step 1: Quickly Develop Products/Solutions That Address Customers’ Changing Needs
As shown with Alipay, Boeing, and the whole U.S. IT industry, if a company doesn’t address its customers’ changing needs quickly enough, its competitors will, and those customers may never come back. It’s much harder to win customers back once you’ve lost them than it is to keep them—and it costs more, too. Too many companies count on customers’ loyalty. But being the first to design or offer something means nothing to customers if they can’t get it from you when they want it.
Here’s how to get a good enough handle on customer needs and be quick enough at developing new products to keep your customers.
Be a fast follower. Fast fashion wins with customers by closely following catwalk trends and what’s selling in competitor’s stores. They are never first with a fashion—sometimes they even get sued for blatantly copying competitors’ designs. But their methods work. To emulate them, find the company that sets the standard in your industry and then quickly develop rival products without infringing upon their property rights. Think how other ride-sharing companies copied and improved upon Uber. There are parallels in all industries.
Keep an eye on proxies. In some industries, you have to watch for proxies to understand changing customer taste. The restaurant industry can provide excellent insights into changing tastes in food. If customers want healthier food in restaurants, they’ll want healthier food at home too. Similarly, television shows are created based on successful movies. That’s one reason why big studios like Disney own television stations.
Watch industry trends. Some customer preferences change slowly. In those industries, it’s wise to be part of the trend rather than fighting it. For example, utilities’ slow move to renewable energy is prompting wise players in the oil and gas industries to diversify. The Saudis are already doing it by moving some assets from oil and gas to other industries, like tourism. Companies such as BP, Shell, and ExxonMobil, on the other hand, are fighting the trend and keep investing everything in oil and gas—and are hoping that customers will keep wanting carbon-based fuel.
Follow global trends. Worldwide trends can be guides; what’s popular in one country sometimes succeeds in another. Kao Japan created the Swiffer cleaning products and now Procter & Gamble sells them worldwide. Discount grocery chains such as Aldi, from Germany, spread throughout Europe and are starting to enter the United States. Yoga started in India and then became popular in the West, while Western gyms are gaining popularity in India. The best way to decide which international products will be successful in your local markets is to understand your customers’ needs. For example, Patanjali products, made from herbs and plant chemicals, may appeal to U.S. millennials, whereas packaged food may not appeal to Indian customers, who desire fresh produce.
Trial and error. Sometimes none of the above apply to your industry. But there’s one surefire method: come up with ideas and test them. Amazon does a great job of testing and perfecting an idea before launching it on a large scale. Many companies keep a close tab on start-ups in their space and then buy them out in the hope of catching the next big thing. Start-ups let companies test new ideas without significant investment, and the pharmaceutical and tech industries have profitably done this for years.
Step 2: Create New Service Models
Finding new ways to serve your customers once they have the new product or service is crucial. Even if they love the product or service itself, they may not continue to use it without a new service model to go with it. And using the old service model with the new product may not work for you, either. It’s better to design a new service model, one that optimizes both performance and cost.
Consider corporate law firms. For the legal industry, the requirements of large corporations are changing. Corporations now want fixed fees and “all-you-can-eat” advice, and some even want it 24/7. The corporations say they’re tired of negotiating every statement of work; they want their external lawyers to behave like in-house counsel, supporting their needs for a fixed fee. Some law firms pay their lawyers less than they did historically, while others allow fewer to become partners. Both are knee-jerk reactions that will be counterproductive in the long run.
It would be better for law firms to change how legal services are provided. For instance, if they created different service models for different situations—say, by using paralegals to review contract language and saving senior counsel for complicated issues—they could satisfy their clients’ needs in ways that worked economically for the firm, too. So far, not many law firms are thinking this way, but if they don’t, some upstart firm will. And that will completely disrupt the legal services industry.
Step 3: Speed Up the Supply Chain
A company can’t react to changing customer preferences quickly unless its supply chain can also react rapidly. Too often, however, the supply chain becomes the bottleneck. When Steve Jobs returned to Apple as CEO, in 1997, he focused his talent on three problem areas: product pipeline, marketing, and supply chain. At that time, Apple had on hand two to three months’ worth of supplier inventory and another two to three months’ worth of finished goods inventory. Thus, Apple was projecting demand four to six months in advance of customer demand. Naturally, it was often wrong and couldn’t respond to the real demands when they arose.
So Jobs hired Tim Cook to fix the problem. Cook replaced factories with contract manufacturers and cut back on warehouses and inventory, both of which reduced factory-to-customer lead time from months to days. Cook’s efforts to improve Apple’s supply chain were an undeniable factor in the company’s financial success. Without Cook’s supply chain, all of Jobs’s design innovation and marketing savvy would have been wasted, because too many customers would have been waiting too long for the brilliantly designed and marketed products.
Although there can be no one-size-fits-all approach to speeding up supply chains, the suggestions that follow have helped many companies in many industries remove common bottlenecks.
Remove or reduce nonmoving inventory. The process of speeding up the supply chain starts with reducing or removing nonmoving inventory. A significant portion of most companies’ inventory just sits in warehouses, occupying valuable space, clogging the system, and slowing down the supply chain. The nonmoving inventory ties up cash that could otherwise be used to generate revenue. Nonmoving inventory should be scrapped or deeply discounted. If neither is possible, move it out of the regular supply chain’s warehousing and hold it off site to make room for goods that are selling. Even better, stop piling up nonmoving inventory by analyzing why it’s not moving and developing strategies to fix the problems.
Simplify ordering. Customers can now order products in several ways: with their computers, through apps on their phones, or by phone calls. Everyone knows that these methods cost sellers less than retail stores, and that online orders cost less than call center orders. But did you know that online orders also are the most likely to be error free? Error rates increase as the number of people involved increases. Ordering errors cost time and money through confusion, incorrect shipments, and increased customer returns.
Simplify the network. Simplifying the supply chain by having separate supply chains for separate purposes can significantly speed things up. Companies could have separate supply chains for fast-moving, slow-moving, and nonmoving products. This separation may be at either the manufacturing or the supplier end, depending on the product and the demand for it. Simplification also could involve removing warehouses and simplifying the material flow.
Simplify delivery. The last mile of the supply chain—the delivery to customers—is both the most expensive and the most important for customer satisfaction. As we have said, customers won’t wait. Companies could speed things up by delivering fast-moving products directly to the customer from the factory—or from the vendor, if manufacturing is outsourced. They could control costs by consolidating shipments of slow-moving items, as Ikea does when it delivers furniture to customers.
Flexible manufacturing. As we discussed in chapter 5, fast end-to-end delivery and personalization require flexible manufacturing, which can handle smaller lot sizes and faster changeovers.
Simplify supplier interactions. The interactions between a company’s internal organization and external suppliers often create logistical and other problems that hamper the supplier’s performance. Companies hire suppliers for their expertise, but many internal organizations, threatened by the supplier or not understanding its reasoning, force the supplier to follow their own procedures. Needless to say, this slows everything down and creates more problems. The solution is simple: let external organizations do the work, and hold them accountable for the output, but don’t micromanage, and put in place plans that will facilitate cooperation and communication.
Reduce sales promotion. Most companies offer frequent sales promotions, in the mistaken belief that this is a good way to increase revenue and profits. They believe that, by doing so, they are triumphing over competitors, but actually they are borrowing from their own future. Sales promotions clog retailer shelves with inventory, and they don’t work anyway; no one is going to brush their teeth fives time a day because a retailer is running a promotion on toothpaste! Even if a customer buys at the promotion price, the toothpaste company and the retailer make less profit on that toothpaste, while the customer simply delays his purchase of the next tube.
This is just as true for big-ticket items. Think about how car dealerships got clogged with compact and midsize sedans in 2017. Many had a ten-month backlog, because customers didn’t want the cars. This kind of thing creates a ripple effect in the supply chain. Plants and suppliers have to build capacity for peak consumption, which sits idle during rest of the year. After the 2017 disaster, automotive companies stopped production for months and suppliers had to shut their plants for even longer.6
Another disadvantage of deep discounts is that it makes predictions about future buying patterns difficult. Companies can’t accurately plan for the few days of buying frenzy, and products produced based on extrapolations from it have to be scrapped—or even discounted more deeply later. It’s unrealistic to expect companies to get rid of sales promotions completely, but they would be wise to limit them to a few times a year, such as at Thanksgiving and Christmas (in the United States). And it’s worth remembering that super-successful companies like Apple, Starbucks, and Trader Joe’s never run sales promotions. Finally, discounting is a self-defeating incentive in the long term, because it can lead to customers buying your products only when they are deeply discounted.
Consider this real-life example of how speeding up the supply chain helped a consumer goods company, which we will call Derby. The company was promoting products like shampoos, soaps, and diapers in a developing market. Customers were unhappy because, although the new products were heavily advertised, they weren’t always available in stores. Derby’s sales channels were clogged with inventory left over from repeated sales promotions. The competition took advantage of all the excitement Derby had created and launched their own brands.
So Derby reduced inventory, streamlined its network, and reduced the number of warehouses—all of which sped up the supply chain. Derby then regained its market initiative and began launching products every month, with new products like toothpaste, cosmetics, and diapers contributing 50% to 70% of the next year’s sales. Market share improved. Moreover, the productivity of the sales team rose by 30% to 50% as it focused more on selling new products than on pushing old ones to distributors and retailers.
Operationally, the cost of delivery declined from 75% of the sales price to 55%. Additionally, system inventory shrank from 115 days to 60 days. The percentage of perfect orders—meaning orders where the right quantity was delivered at the right time, with the correct billing—rose from 40% to 90%. At the same time, quality improved; the defect rate decreased from thirty thousand defects per million items produced to five thousand. Products were fresher when they reached customers, whose satisfaction with the company’s product naturally increased. Retailers and distributors were happy to work with the company again.
Step 4: Produce Only What Your Customers Are Buying
Producing only what and as much as your customers are buying is always prudent. It keeps capacity available and prevents production and supply chain bottlenecks caused by overproduction. That’s what Zara and other fast fashion companies do. They idle their plants when they don’t have demand and refuse to produce products that are not selling. This gives them the capacity to make new products quickly.
Most companies don’t do that. They mass produce in large quantities to keep costs down, believing that making more costs less. So operations teams are incentivized to keep the plants running even when the products aren’t selling—and eventually get scrapped or deeply discounted.
These things happen because companies don’t plan properly for production. They base their plan on forecasts created from history, not on present market trends. History can’t predict the future. Statistically, forecasts are wrong as often as they’re right. Too many things change—competitive action, customer taste or preference, disposable income—to predict customer demands based on past behavior.
Real-time demand information is a better guide. Shipping new products for the first time takes guesswork, but after that, you can base shipments on actual demand. That way, you use production capacities only for things that are actually selling. Even if demand data is not readily available, you can ask customers about future demand or orders. If that is not possible, then firms can estimate demand based on a customer’s production plans and inventory levels. When selling to customers, then, companies can use actual order information instead of forecasts as a trigger for shipment and production. As demand information becomes more reliable, inventory can be reduced and capacity can be freed up for new product launches. The motto should be “Don’t produce if the product is not selling.” Otherwise, the product will occupy warehouse space, be either written off or sold at a discount, and dilute brand value.
RESPONDING FASTER TO CUSTOMER NEEDS
Customers are more impatient than they once were. Millennials want everything now and are impatient about everything from their careers to their purchases.7 They have little brand loyalty and will embrace other products or services if their old favorites don’t show up on time. This is true of millennials all over the world. Either you adapt to this mind-set or you lose to companies that respond to it quickly. And it’s not just millennials; older generations are getting impatient too. They don’t like to wait at a checkout counter or on the phone, and they won’t wait for their favorite brands, either.
Leaders must figure out how to do things so that their customers don’t have to wait. Otherwise, before they know it, their customers will be buying from their competitors. And, for most business leaders, doing things faster means thinking in entirely new ways, ways that match their customers’ new expectations.
Let’s see how Under Armour tried to do this. In 2018, the company was working on improving its operational efficiency by reducing inventory—and the corresponding number of SKUs. But speeding up the supply chain only benefits you if you have a product that your customers love. Otherwise, you’re just reducing your costs without giving customers what they want. When their customers wanted fashionable workout clothes, Under Armour should have hired a fashion designer to create clothes customers could wear as casual, fashionable clothes—not just as athletic clothes. Then they should have kept experimenting and changing their designs based on what customers bought. Once they had done all that, it would have been smart to focus on producing smaller quantities, as fast fashion does. Instead, Under Armour only became more efficient at making what their customers didn’t want.
A similar approach could help other companies to respond more quickly to customer needs. Tesla, for example, could have increased its output by thinking of its operations differently. Instead of producing everything in-house like other car manufacturers, it could have taken an approach similar to Apple’s. Apple designs and markets its products but gets contract manufacturers to actually produce them. Similarly, Tesla could have designed and distributed the Model 3 and provided critical technology, such as the battery. Then, they could have asked another car manufacturer—one with experience in mass-producing low-cost cars—to make the Model 3. This would have been a win–win for both companies.
Following these steps will undoubtedly mean that companies like Under Armour and Tesla (and your company?) will have to change their design and operations completely. But these steps have brought many a company out of its death spiral and allowed it to begin its climb back to health and prosperity.