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Value Creation Through Supply Chain

“You can have it in any colour as long as it is black

 

—Henry Ford”

INTRODUCTION

The value perceived by the customer is always in terms of cost and/or service. If the value perceived by the customer is high, he will be willing to pay more. The marketer should have the focus on the market where the value of the product/service is decided.

According to Peter Drucker, the purpose of any business is to create and maintain satisfied customers. The firm can earn profits only if it can create value in its products and deliver the same to the customer. Profit is the price paid by the customer for the product minus the cost of producing the goods. Hence, the price should always be greater than the cost. Thus, it is imperative for the firm to create value for its survival in the market. A market-oriented company always follows this concept. Customer value can be created through efficient and cost-effective operations of supply chains.

In olden days of mass production, people were just happy to buy products. This was true until Model-T was introduced by Henry Ford in 1937. The concept of choice was unknown to both customers and the manufacturers. However, today consumers demand more choices, higher quality, better price points and anytime anywhere delivery. Customers are spoilt for choices today and want value for money. Hence, value proposition through supply chain is important today.

M. Porter evolved the concept of value chain, which is the combination of nine generic value-added activities of the company. These activities work together and provide value to customers. The net result of value chain activities is profits if activities are performed cost effectively.

CUSTOMER VALUE

In today's dynamic markets, ensuring customer satisfaction demands the most visible and flexible supply chain. Customer value is defined as the benefits derived by the customer from the product or service at the lowest cost of acquiring, possessing and using of the product.

In other words, customer value is understanding of customers’ desire and aligning internal resources to respond to those needs effectively and efficiently. In simple words, it should have customer focus and subsequently customer support. To deliver customer value, organizations need to focus on innovation, quality in product and service, maximum utilization of available resources, skill sets of the employees and infrastructure to create the value. In general, value is a combination of a company's image, quality of product or service, and the price at which it is available. Quality service is the most important of all the factors which create value. For example, Nike created superior customer value by evolving unique footwear designs, maintaining consistency in quality, creating right image through its brand value, and filtering spurious goods by distributing the products through Nike outlets.

From the customer perspective value is based on two main dimensions: (1) solution to his problem and (2) his experience of solving the problem. From the problem-solving dimension, the value starts at a point, which is beyond the augmented product. From the experience dimension, value creation starts at a point beyond confidence building based on a safe and trustworthy experience that relies on respect, honesty and fairness. The customer value if managed properly will maximize the business prospective through customer satisfaction by catering to the needs of the customers. Customer service is a value producing activity in supply chain process. The value is intrinsically related with all activities in a supply chain and customer service is one of the vital and important activities in the firm's value chain.

The ‘bundle’ is made up of customer services, logistics and other value-added ancillary services or products attached to the core product, and this is the ‘bundle’ which determines the ‘value’ of the product. By looking at the product in this way one can recognize that ‘customer service’ is definitely a value adding activity, which makes significant contribution towards the total value attributed to a product.

Customer value in the context of SCM is of fundamental significance. This is because SCM is focused on providing system wide optimization of resources while producing superior customer value. The traditional concept of logistics management, was focused on reducing the transportation and distribution costs of the firm. But today, the logistics initiatives are concerned with customer service and its impacts on value. The concept of value needs to be appreciated in a much broader context in the supply chain framework where optimization and value creation extend beyond the firm's four walls to include other partners in the supply chain.

The concept of customized logistics service has been developed to emphasize the integration of logistics services with the core product in order to give each customer a value-added tailor-made product to suit his needs. Hence, the logistics service has become a key differentiator of a commodity product, wherein there is very limited scope of differentiation.

’Value’ is a subjective concept. It depends on the context too. For different customers the understanding of value differs. Thus, ‘value’ is determined by customers in the complex trade-off calculations. The challenges involved with creating a logistically distinct business are many and the success depends on the understanding of the customers and their needs. Hence, effective SCM requires customer segmentation based on their requirements and to implement a service strategy to these segments.

CUSTOMER SERVICE FOR COMPETITIVENESS

Customer service is a set of activities and programmes initiated by the firm to make the buying experience more rewarding. These activities increase the value of the product and services offered to the customer from the seller. Customer service is the most important dimension of the product or service offered to the customer. Value-added customer service is leveraged to gain competitive advantage. Good customer service builds customer loyalty amongst the existing customers and generates positive world-to-mouth communication, which will attract new set of customers. In other words, customer service is the basis for ‘Customer Relationship Management’ programmes, which many leading firms are implementing.

Customers evaluate services based on their perceptions. These perceptions are fulfiled by the actual service provided by the firm. These perceptions are affected by a high degree of intangibility and are therefore, very hard to evaluate accurately. The firms who can identify these gaps accurately and bridge them with value-added services will succeed in enhancing customer satisfaction level and remain competitive. Exhibit 4.1 lists the few cues affecting the customer perception of service quality. These cues on customer perception on the quality of service stimulate the satisfactory or unsatisfactory evaluations of the firm's services. Hence, the firm needs to bridge the service gaps (between the perception and actual) with its services to improve the customer satisfaction. These gaps may rise due to communication, standards adopted, service delivery and customer knowledge (Exhibit 4.2).

 

Exhibit 4.1 Cues Affecting Customer Perception of Service Quality²

Competence	Information about the firm reaching to customers through product brochures, manuals, Internet websites, sales talk and the product or services off erings of the firms
Reliability	Product or service delivery in terms of place, time and quality.
Responsiveness	Responding to customer telephone calls, emails, faxes and letters within the shortest possible time frame and resolving the customer problems or complaints in shortest possible time period.
Transaction security	This relates to the confidentiality of the transaction and customer information
Trustworthiness	This can be built up with evolving policies on product return, warranty and guarantee, and honouring commitments,
Access	Ease with which customer has an access to information on firm's product or services, his order status, product complaints, claims, damages in after-sales phase.

 

Exhibit 4.2 Customer Service Gaps³

Communication	Difference between actual service provided and what is communicated
	through the media.
Standards adopted	Difference in service standards adopted and the standard as per customer's
	expectations.
Service delivery	Difference in actual services provided and service standards of the firm.
Customer Knowledge	Lack of knowledge about customer's perception of the service standard.

The firms should make a note of these gaps and make efforts to fill them in order to satisfy customers and have a large customer base. Supply chain is the process whereby a large share in an organization's success can be achieved by delivering the product at the right place and at the right time. For physical products, it may be a manufacturing plant, a wholesaler, a retailer or an end user. For service products, it may be a point of sale or service like hotels, banks or hospitals. However, the focus here is on customer service, irrespective of the different ways, means and methods to achieve this. This approach requires the marketing orientation to all the functional areas of the organization. The logistics helps in creating the time and place utility of the product, which satisfies the customer need, which has both time and place as its dimensions. In the today's competitive markets, the success of the firm is judged by, how efficiently and effectively the firm manages these (time and place) dimensions by availing the existing opportunity and creating new opportunities for repeated sales to the same customers by providing superior service. Hence in supply chain process, logistics competency is critical to the customer service planning and needs to be developed as a core competency for developing sustainable competitive advantage.

SERVICE ATTRIBUTES

Efficient distribution is making the right product available at the right place and at the right time. This should be followed by after-sales service, if necessary, depending on the product and as per industry practices. In general, the product distribution is dependent on the length and breadth of the channel. The logistics programmes should be designed (customized) to the requirements of the channel partners. For these programmes to be successful, the channel members need to be serviced and motivated by the manufacturers. The services extended to this trading community require different attributes than those required for satisfying the end customers. The customer service attributes have two variants, one distribution and second the trading. The distribution aspects cover: order processing time, delivery consistency, delivery frequency and stock availability. The trading aspect covers credit facility, stock financing, service support and handling convenience.

Order Process Time

It is an important measure of customer service in SCM. It is the time between the placement of an order by the buyer and the supply of the material by the seller against order. This involves the supply of all the materials against the order placed in the agreed time frame without any error either in documentation or physical supply. This attribute helps in building a long-term buyer-seller relationship. The order processing time consists of the time required for registration of order in supplier's system after thorough technical and commercial scrutiny, material allocation and pickup from the work-in-progress inventory, warehouse, or distribution centres, packing of material, documentation and dispatch of material. A well integrated activities based on information flow will shorten the order process time and help in speedy delivery to the market.

Delivery Consistency

Customers do not want any deviation in delivery period irrespective of the number of trips or transactions. Delivery consistency means maintaining the same delivery period for delivering materials to the buyer over a period of time. For example, against the 50 repeat orders over the year, the supplier dispatches the material as per the agreed delivery time for 48 orders, in this case, the delivery consistency is 96 per cent. This is an excellent delivery performance. The delivery consistency speaks about efficiency and effectiveness of the seller's supply chain. In fact, to cover up inconsistency in deliveries, the buyer may carry excess inventory of raw materials and components and block more funds resulting into costs.

Delivery Frequency

The customer does not want to carry excess inventory but wants his operations to run without interruptions. As a result, the customer prefers frequent deliveries in small lots. This may increase the transportation cost, but reduces the inventory-related cost drastically, with a net effect of overall reduction in overall supply chain cost. The additional transportation cost may be borne by the supplier to compensate for the buyer's inconvenience. This practice of frequent deliveries of small lots is quite common in retail chains.

Stock Availability

With the excess stocks, the supplier may extend excellent service to the customer, but inventory-related cost reduces the profit margin of the business operations. Hence, the firm needs to strike a balance between the inventory level and the desired customer service level through the integrated logistics operations. The reduction in stock holdings may be exercised through a centralized inventory control from a single mother warehouse, by reducing the field distribution warehouses at multiple locations.

Credit Facility

Offering credit facility to the buyer for payment against material dispatched is one of the value-added services. This is done for building long-term relations with the customer and to get repeat bulk business from the buyer.

Stock Financing

In competitive logistics industry, the warehouse service supplier finances to the goods depositors by way of loan to an extent of 30–50 per cent of the stocks deposited. The loan is made available at lower than the bank interest rates. In Indian context, warehouses attached to cooperative sector industry, extend loan facilities to farmers to an extent of 70 per cent of the value of the food grains deposited in the warehouse.

Service Support

This may be in terms of the technical support for product installation, commissioning, process stabilizing, spare parts supply, routine equipment check-up as part of the annual service contract. Service support is required to keep the downtime of the equipment very low, as it ultimately has a significant effect on the productivity at customer's end.

Handling Convenience

The supplier, for convenience of material handling and storage at customer end, may develop novel methods for product unitizing such as pallets, boxes, or cartons. These methods are customized to suit the existing product handling arrangement at the customer end.

CUSTOMER SERVICE DIMENSIONS

The buyer will look for value for money that he is spending, while the seller, in delivering superior customer service, will look for a trade-off between cost and customer satisfaction. Hence, customer service depends on the phase of the transaction it is passing through. There are three phases associated with the goods exchange process. The degree of importance to each phase varies with organizations and depends on the product, and the customer requirements (Figure 4.1).

 

Pre-transaction Phase

Policy formulation for defining the service level comes under the purview of this phase. It gives guidelines to the operational staff regarding the dimensions and limitations on the customer requirement. In this phase, there is a creation of a service platform to the customer, so as to build credibility in the market and create positive image amongst the existing and the prospective customers. This phase will help in moulding the organization towards customer orientation and in turn will influence the image of the firm in the minds of the customer. The following are the important elements of the pre-transaction phase.

Formulating service policy   This will indicate the service standards of the firm. For example, Pizza Hut makes a policy commitment to deliver pizza to their customer within 30 minutes of the order. Further, they commit for free supply, in case the pizza reaches after 30 minutes. In this phase, the firm will have to evolve a policy framework for performance measures, evaluation methods, reporting structure and rewarding structure.

Service organization   For implementing the policy on customer service, the firm then formalizes the reporting structure, delegates the authority and allocates responsibility. The contact person's name and the contact number needs to be informed to the customers for getting information on order status, dispatch details, warranty claims and so on. A proper rewarding system will motivate the employees involved in customer service to effectively and efficiently interface with the customer.

Service structuring   The structure of the service delivery depends on the customer expectation, industry standard and the service standard of the firm. The capital goods marketing firm may extend a free periodic product check-up to gain competitive edge. In such case, he may absorb all service-related cost as a value-added free service to the client. For a sustainable competitive advantage, innovation in service is a must. Innovation adds value to the services provided to customers. These services may be offered as a complete package along with the product, which is rather difficult for the competition to meet or emulate. The importance of service structure is its delivery. This may vary with the product and the client's need. The delivery has two dimensions, that is, time and place. The firm may have to allocate and coordinate with its resources to deliver the services at the time and place desired by the customer. The Excide Industry Ltd, a leading automotive battery manufacturer in India, introduced ‘Bat-Mobile Service’ to gain competitive advantage. They are offering a free van service for battery-related problems (of any battery brand) on the vehicle stranded anywhere on the highways within the major metro-city limits. They have their own fleet of vans with equipment installed in it and their technicians accompanying and carrying inventory of new batteries dedicated to this service. The communication is through a centralized wireless network. This value-added service has resulted in customer loyalty and growth in the business.

Educating customers   This is done to minimize customer complaints on delivery of products, product operations and maintenance, spare parts inventory requirements and maintenance, freight charges, transit damages and so on. Customer education is done through manuals, training, seminars or workshops.

System design   There should exist a system to answer all the possible queries in the customer's mind, before placing an order. The system may be manual or fully automatic like in an e-commerce. The queries can be answered through FAQs or call centres. However, the pre-requisite of the system is the responsiveness of the organization to the customer requirements and the flexibility to take care of any unplanned events.

Transaction Phase

In this phase, the customer service is associated with routine tasks performed in the supply chain. All the activities in this phase require coordination in delivering the service to the customer as per the desired standard. The following are service variants associated with the transaction phase:

Reliability in order fulfillment   The most important aspect here is the reliability to fulfill the order within the agreed time frame covering the quantity and quality of the material ordered. This depends on close coordination and management of the various components of order cycle such as order processing, material planning, processing, allocation, picking, packing and transportation.

Consistency in delivery   The other important factor in transaction phase is the consistency of delivery in repeat orders. For example, out of 50 deliveries, say 30 are on time while 20 are with large deviations in delivery time. This will lead to production interruptions at customer end, who will be dissatisfied with such inconsistencies. The selling firm needs to improve upon this service element.

Order convenience   The barriers to order convenience are the paper work required by the supplier, compliance to various procedures, complex payment terms, poor communication network at suppliers end and poor coordination in marketing network of suppliers. In competitive markets, the above barriers may lead to opportunity loss and waning of customer base.

Order postponement   The customer, due to some reason may require the entire order or in parts to be postponed for execution in parts and in a phased manner. In yet another case, due to availability of certain product in future, the seller may allow the buyer to place the order now and ship the product when it is available on future dates.

Product substitute    In the event the product ordered can not be shipped due to certain manufacturing or quality problems, the seller may extend the service by offering a substitute product of similar or better quality in different sizes or from the available brands in the market at the same terms and conditions. He may do this with the consent of the customer to build a long-term relationship with the customer. Once the customer consents for the substituted product, the seller needs to closely interact and communicate clearly with customer.

Post-transaction Phase

In this phase, the seller tries to build a long-term relationship with the customer. In other words, it is the ‘CRM’ (customer relationship management) phase. For service-based products this is an important phase. The relationship depends on the service quality which may make or break the image of the company in the minds of the customer.

Order status   The customer after payment of part value (some times full value) of the product as advance, requires feed back on the status of the shipment on a periodical basis. Many leading firms have a consignment tracking and tracing system installed on their website, for their clients to have an online access to the information of the consignment.

Customer complaints, claims and returns   In many cases, the customer may get products damaged during transit, product may not perform as per functional requirement, or he may get a wrong consignment. To resolve these issues, the manufacturers have product return policies and implement these through the reverse logistics system.

Product installation, commissioning and technical snags   Technically complex products need installation, commissioning and stabilization services from suppliers, or product may develop technical snags during warranty period. To handle these issues, firms normally have separate departments only for after-sales service. The after-sales department takes care of the documentations, customers’ technical complaints, product installation, commissioning, stabilization and handing over.

Education and training to customers   This is an important service element in post transaction phase. In case of technically complex products, it is necessary for the seller to train or educate the user regarding the operation for getting the desired functional output. This may be done through the product manuals, training workshops or demonstrations.

SUPPLY CHAIN VALUE DELIVERY

The supply chain is a value chain in practice. The value is acquired from suppliers, value is added through company's manufacturing process and value is delivered through the company's distribution network (Figure 4.2). The company thus gains competitive advantage through supply chain by creating customer value at optimum cost. If costs are cut too much, the company's ability to service the customer diminishes drastically, and service is the key ingredient behind customer retention. If a firm's costs are too high, then a competitor may gain an advantage by efficiently balancing costs with customer value.

 

 

The objective of SCM is to have all links in the chain working together, delivering products and services to customers when, where, and how they want it. At the same time, SCM must focus on minimizing costs and resources so that value is enhanced. Most value chains will consist of the following three links:

• Resources: Acquiring the materials, people, and other resources to produce the required product or service.
• Production: Converting resources into finished products and services according to the demands of the customer.
• Distribution: Delivering products and services to customers.

The entire supply chain process is customer-driven and distribution is closest to the customer. Traditionally, distribution had several links: manufacturer to agent, agent to distributor, distributor to retailer and retailer to customer. In today's global e-commerce world, it is quite common to see only visible link such as manufacturer selling directly to the customer. By removing the links, lead time and transaction are greatly reduced within the supply chain.

A good example of supply chain with lot of ‘value addition’ is IKEA, a leading global ready-to-assemble furniture product retailer. The first part in the value-chain is product design, IKEA uses simple designs and parts. Secondly, IKEA keeps costs down by having the customer transport the product to the home and assemble the product. This eliminates non-value-added links in the value-chain. Third, IKEA sells products of extremely high quality. IKEA also leverages technology and its Scandinavian image to create a competitive advantage through inventory management and marketing. The leveraging of core competencies is critical to creating value out of the supply chain.

Thus, the entire supply-chain should be evaluated, from suppliers to end-users of the product. Supply chains must be externally focused in a highly competitive environment. This requires that firm should work very closely with suppliers, customers, and everyone involved in the supply chain.

A supply chain and a value chain are complementary to each other. The supply chain is nothing but value chain in operation. IKEA is integrated supply chain enabling the flows of products and services in such a way that value for customer is created. The customer perceives the value which triggers the demand. That flow process of demand is also called as a ‘demand chain’ and is exhibited through the flows of orders and cash that parallels the flow of value. The main task in supply chain is to focus upstream to integrate procurement and manufacturing activities and value chain task is to focus downstream to create image in the eyes of the customer.

The key to customer value is effective SCM, which links customer's engineering, production, financial and information requirements to supplier resources and capabilities. Therefore company should involve in designing the network, optimizing the resources, integrating the processes and synchronizing the activities.

Customer value is mostly dependent on supply chain performance. The failure to add value will reduce the customer satisfaction, which can be determined by service attributes such as on time delivery or cost. However, the value is determined by the performance of the entire supply chain, which extends over multiple partners and functional areas.

The emergence of information technology in the last 30 years has changed the perception of value to a great extent. Web-based shopping, banking and services not only have changed the patterns of human activities, but have also changed the perception of value. As information has become available with much greater ease, so has the ability of firms to provide a level of service, or a ‘bundle’ of product, which was quite impossible in the pre-’IT era’. The value-generating effect of improvements in transportation and distribution has resulted in reduced costs and greater service. These are possible now with the support of improved information technology and capabilities.

VALUE-ADDED SERVICES IN SUPPLY CHAIN

The purpose of providing services is to deliver value to the customer for the money he is spending in acquiring that product. For tangible products, to add value, intangibles like after-sales services are provided to the customer; similarly for intangible products, to add value, the help of tangibles is taken. For example, the ambience in a star hotel is supported by the presence of tangibles around, which speaks about the quality of service being delivered. The service can be categorized into three types as described in the following.

Basic service   For the business to get going minimum basic customer service is necessary. The basic customer service means, treating all customer equally and extending services to build fundamental business relationship. It is a bare minimum for survival of the business. The supply of spare parts for a trouble-free operation of machineries is the basic service a machinery supplier can provide for his product to be worth buying and build future relationship with the buyers.

Zero-defect service   The second one is the zero-defect service. This involves gearing up of business process for perfect operational performance. In zero-defect service, systems have significant role to play. The repetitive operations are performed without errors by automated systems. The essential activities such as speed, accuracy, reliability are well coordinated, monitored and controlled through the systems approach. The scope for errors is eliminated as manual intervention in performing the activities is minimal.

Value-added service   The third one is value-added service which is unique and add efficiency and effectiveness to the basic service capabilities of a firm. With value-added services, firms can deliver superior customer service which leverage competitiveness. These are basically tailor made or customized service packages for prestigious customers. These services are in addition to the basic services provided to customers by the seller. For example, a supplier may take up the responsibility of delivering a high value inventory at the customers end for their manufacturing operation. He may open a small shop in the buyer's premises to keep minimum inventory to meet customer's daily requirements. The supplier gets paid on a daily basis for the inventory consumed. Thus the supplier gets business on a continuous basis due to the value-added service he is providing to the customer. The customer is satisfied as his logistics-related cost for the item is zero. The supplier is happy as he gets repeat business and immediate realization of money for the material supplied.

In another case, a transporter may extend services of product mixing and labelling of packs in his transshipment warehouse before delivery of final product to the customer. He may also collect money from the customer on behalf of the seller against delivery of consignment. The typical value-added logistical services extended by the logistics service providers are as follows:

• Customized transportation (vehicles, perishables)
• Product mixing/packaging (products from two firms for co-promotion)
• Cross-docking
• Inventory management
• Web-based consignment tracking and tracing
• Frequent deliveries in small lots
• Reverse logistics

The other value-added services are time bound ones, such as inventory on demand for manufacturing assembly line, which may involve implementation of JIT (just-in-time) system to lower the inventory-related costs. VMI (vendor managed inventory) is another value-added service. The evolution of value-added services is an outcome of innovation. Innovation will result into differentiated services in competitive markets.

REVIEW QUESTIONS

1. Discuss how supply chain helps in extending differentiated customer service and also delivering value to the customer.
2. What are the various customer service attributes in supply chain system?
3. Explain with few illustrations the concepts of extending ‘value-added services through supply chain operations for gaining competitive edge’.
4. Discuss the various phases of customer service requirements in different stages of goods transaction process.

INTERNET EXERCISES

1. Visit http://www.supply-chain.org and study how SCOR model may be used to create and deliver customer value.
2. http://www.supplychainvalue.com/ is devoted to supply chain development and implementation of SC strategies. Read articles on customer value through SCM.
3. Visit the following Internet websites and find out more about the customer service and how it can be used as a tool for competitive advantage http://www.sbinfocanada.about.com and http://www.customerservicemanager.com.

VIDEO LINKS

1. Supply Chain Types & Value Streams, http://www.logisticsbureau.com.au/video-supply-chain-logistics.html
2. Cost to Serve -An Introduction analysis of the Supply Chain and the benefits it can reveal. http://www.logisticsbureau.com.au/video-supply-chain-logistics.html

PROJECT ASSIGNMENTS

1. All courier companies are struggling for getting a larger pie of the market through competitive product offerings. Study the supply chain of any one of the companies: Fedex, Blue Dart, DHL or AFL and prepare a report on how they are creating value for their customers.
2. Study supply chain of any national dailies like Times of India, Hindustan Times or Hindu. Find out how they are deploying their supply chain backed by marketing strategies to keep their customer satisfied adding value element in their products.