Getting Ready

Dec. 21, 2004
Your Customers -- Demand drives the value chain.

Many companies today talk about "process," and it's not unusual for a company to reorganize itself internally to interconnect various functions and lay claim to being "process-driven." But unless a company finds a way to get closer to its customers and understand their needs as never before, those processes will have been created in a vacuum. If creating a successful value chain depends on seeing beyond organizational boundaries, the first place to look is at your customers. That lesson hasn't been lost on American Standard Cos. Inc., Piscataway, N.J., which has gone through a profound reorganization during this decade with the customer firmly in mind. "Every time I visit a customer," says Hugh Hoffman, the company's process owner of chinaware order fulfillment, "I find several things we can do better for them." The very fact that Hoffman is visiting customers says something about the company's new thinking. Until American Standard revamped its value chain, the only employees who had regular contact with customers were salespeople. But in the position of "process owner," Hoffman is responsible for assessing customer needs and addressing every facet of the operations involved in meeting those needs, from manufacturing to logistics to invoicing. So he spends a fair amount of time in face-to-face meetings with customers, and the results have been extremely positive, as well as educational. Hoffman says that one customer in New Orleans, a redistributor of plumbing parts, was unhappy with American Standards fill rates. But when Hoffman paid a visit he found that the company had a novel way of keeping score: if one of its customers asked for a part that the redistributor hadn't received from American Standard, the redistributor assigned a zero fill rate for that particular order. "What we realized," Hoffman says, "is that we didn't always need to fill the entire order, although that certainly is our goal, but if we got them some of everything and avoided a complete out-of-stock situation, they were satisfied. So we took note of this, and they've been much happier with us." Like many manufacturers, American Standard operates on a sort of double standard when it comes to satisfying wholesalers and retailers. That's primarily because wholesalers carry far more product and usually rely on six weeks' inventory, so the fill rates often fall far below the levels that retailers enjoy. As recently as 1995 American Standard was achieving a fill rate of only about 40%, yet on the retail side it has done well enough to be named Home Depot's Supplier of the Year for 1998. To address that disparity, the company has found new ways to serve its wholesale customers and has gotten its fill rate up to an impressive 95%, just shy of the 98% it achieves on the retail side. The keys, Hoffman says, are better communication and better metrics. "The salesman remains the primary link between us and our customers," he explains, "but there are aspects of manufacturing, shipping, and other operations that the sales staff isn't as well-versed in as we are." By having someone in charge of the complete process meet with customers, American Standard can work out solutions that are tailored to different situations. "Since I work with manufacturing and shipping, among other functions. I know what we can do," Hoffman says. "We can directly negotiate with customers on the spot and come up with solutions much more efficiently than if sales or some other function had to act as an intermediary." At the same time, American Standard has modified the way it measures fill rates, to get a clearer picture of its performance. Rather than settling for a high-level view of pieces promised and percentage delivered, the company now breaks each order down by product family and tracks how many releases are required to fill an order completely as well as how much time elapses from the receipt of an order to its completion. All of this is in the name of better customer service, but--perhaps surprisingly -- American Standard has found that collaboration with customers isn't just about meeting their needs. It can also involve winning certain concessions from them. "We've asked customers to change how they do business with us," says David Gleditsch, demand-flow-technology formalization leader. "For example, in order to move away from this mindset in which inventory spells security, which can entail major quarterly adjustments up or down, we now ask large customers for more frequent orders. If possible we ask them to break them down into day-by-day needs." On the other hand, smaller customers may be asked to place an order only once a month. Because American Standard meets its shipping needs with its own fleet of trucks, avoiding a rash of small orders can help it ship more efficiently--and customers will benefit from lower prices. By reviewing demand more frequently, Gleditsch adds, American Standard can optimize all the processes by which it meets that demand. Once the company has proven to a customer that it can meet or exceed the customer's expectations on price, fill rates, and other quantities, American Standard isn't shy about asking for a bigger piece of the pie. "We've asked customers to take advantage of all of our products," Hoffman says, "and we've persuaded a number of them to drop competing products. Many wholesalers will carry a second line as a backup, but when we win their exclusive business we can give them even better service, and they save money by, among other things, having to deal with only one vendor." In short, when American Standard is on the supplier side of the value chain, it tries to win the same advantages it offers its own suppliers. This is a perfect example of what Robin Palmer, partner in charge of supply-chain management for KPMG Consulting, calls "right-to-left thinking." A traditional approach to the supply chain, he says, usually focuses on "buy, make, move" aspects of the business. But in the new customer-centric view of the world, "marketing, selling, serving" become the drivers. A recent survey by KPMG suggests that this lesson is sinking in. Two years ago, many survey respondents didn't even know what perfect-order rates were, and a larger number didn't track these data. This year, 60% of respondents say they are achieving at least a 90% perfect order rate. Survey respondents also said that better customer service and responsiveness were major goals for their nascent e-commerce efforts. In fact, manufacturers were more interested in the potential of e-commerce to improve ties with customers than to actually boost sales or profits through direct selling of merchandise. Laurie Widder, senior manager for supply-chain solutions at KPMG, says this may reflect the fact that supply-chain managers have been quick to identify the potential of e-commerce to improve different facets of operations. "We may see a shift toward emphasizing growth and profits," she says, "as more companies develop a clear e-commerce strategy. But for now, its potential to facilitate a move toward a value-chain model is becoming clear." In fact, this potential can manifest itself in a number of ways. Some companies, such as Rollerblade Inc., Eden Prairie, Minn., rely on their Web sites to educate customers about their products. But the firm is wary of selling over the Web. "We don't want to antagonize our dealer network," says marketing representative Nick Skally, although he doesn't rule out revisiting this issue, depending on what competitors do. Other companies are finding that the Internet can extend their customer reach in more ways than one. Hubert Co., Harrison, Ohio, a 325-employee, $90 million supplier of food-display-and-preparation products, initially launched a Web site that was little more than an electronic version of its traditional mail-order catalog. But after redesigning the site so that customers could better understand Hubert's full line of products and services, traffic increased 30%, in part because its presence on the Web allows the company to reach new customers: About 40% of online orders come from overseas. While the company's call center keeps limited hours, the around-the-clock nature of e-commerce lets customers order any time. Better yet, a typical Web order is 50% larger than a phone-in order. With its online business doubling every quarter, Hubert is now developing customized Web applications for its biggest clients. "We'll let customers do things like view their total budget online and see what they've spent so far," IS director Mark Green explains. "So our site isn't just a place to shop--it's a way to manage that entire facet of their business." And the customized Web applications give Hubert a much clearer picture of its customers' priorities and buying habits. The Internet can play a crucial role in bridging the supplier-customer gap in other ways as well. Consider e-Steel, an Internet-based market that provides a link between buyers and sellers of steel products. Launched this year, New York-based e-Steel is far more than a cyberspace bulletin board. "We can put a circle around the entire steel industry and provide the transparency that value chains require," says CEO Michael Levin. For example, a West Coast contractor that is in the market for 50 tons of rebar might go to a regional depot, which could be independent or owned and operated by a steel company. "But there is expense in that middleman scenario," Levin says. "With e-Steel, [the customer] can place the order directly, indicate a shipping date, and move closer to a JIT scenario." And steel companies could respond to need, rather than selling to third parties or carrying inventory in warehouses. But the vision for e-Steel goes further. The company integrates its computer systems with those of both suppliers and customers, so that each company can track orders, specify shipping, arrange for electronic payment, and address other functions as well. This link, dubbed Steel Direct, also enables companies to negotiate on price in a secure electronic environment. "It's possible for a steel company to give one price to a customer who does certain volumes and another price to someone else," Levin says. "This all can be done through e-Steel. We're not just a sales channel, but a market, so we serve many needs in the value chain." The automotive, electronics, and other industries are all seeing the emergence of similar players, often in the form of coalitions, providing a central way to facilitate transactions and pass data between all links in the chain. But closer ties to customers don't have to entail a technological bridge at all. Many executives stress that better forecasting is a key facet of an improved supplier-customer relationship, and sometimes all that's required to achieve this are a few phone calls. Joe Andraski, chairman of the Collaborative Planning, Forecasting & Replenishment Committee (CPFR), an industry group comprised of retailers and manufacturers, and a former executive with RJR/Nabisco Holding Corp., one of the CPFR earliest members, says that the effort grew out of a relationship between Wal-Mart Stores Inc. and Warner-Lambert Co. and concentrated on, of all things, Listerine mouthwash. "Both companies knew that forecasting was a big issue," Andraski says. "The retailer and the manufacturer usually had different information. So they found a way to collaborate on forecasting, which led to faster replenishment, which boosted Wal-Mart's sales of Listerine by $6.5 million." Andraski says similar pilot programs also have met with great success. Wegman's, a grocery chain in upstate New York, worked with Planter's Peanuts on a project that saw inventories cut by 18% while sales grew by 50%. And the sale of private-label nuts grew 20%, suggesting that when retailers and suppliers collaborate the results have a way of spreading into related product areas. Andraski says that CPFR "looks at the whole value chain. Forecasting often takes place in isolation, but when you discuss marketing plans, promotions, manufacturing capabilities, and all the other factors extending all the way back to raw materials, that's when you achieve the greatest success." "It's a running joke: Whose forecast actually drives production?" says J, Michael Hagan, chairman and CEO of Furon Co., a manufacturer of specialty polymer products in Laguna Niguel, Calif. He says that while closer collaboration with customers can lead to better forecasts, extending that kind of communication back to suppliers can not only facilitate timely delivery of goods and services, but can expand business opportunities. "Among the products we sell," he explains, "are seals, and our customers require many different kinds of seals, far more than we can or want to make. So we team up with other companies, often those that supply us, and we go to a customer with an entire line of seals. We make some, other people make some -- it doesn't matter. The customer can buy from one source, have one person they turn to. Behind the scenes we not only take care of revenue sharing, but since we have this tighter relationship, we can now collaborate on designing new products together, be they seals or something else." While Hagan says that his company relies heavily on the Internet and intranet connections to facilitate these efforts, the important thing is "to reduce your supplier base, identify the companies you work best with, and then look at what else you can do to create better solutions together." Jim Uchneat, a consultant with Benchmarking Partners in Boston, says that one important aspect in the manufacturer-supplier relationship is "to share not just data, but analysis. It's one thing to push lots of numbers through a pipeline, but another to sit down and agree on what it all means."

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