More and more companies are realizing that their supply chain plays a decisive role in business success and is the path to profitable growth. The potential is huge. But how do you improve delivery performance while maintaining competitiveness?
The short answer is: Open up the “black box” that supply chain often is. The best way to do that is to start creating transparency and mapping the relationships in your product and customer mix.
In this process, data is the key to building a supply chain that truly contributes to both customer satisfaction and profitability.
From bottleneck to competitive advantage
Let’s start by acknowledging that in most companies, supply chain is perceived as a bottleneck for customer satisfaction and is often blamed for not functioning optimally.
Your supply chain focus is likely also inward-looking, centered on warehouse and logistics, where KPIs are focused on keeping costs down.
That’s a shame, because logistics and warehouse activities in most companies are direct contributors to competitiveness. They play a major role in differentiating the business in the market and driving growth.
But the biggest issue is that most companies are not where they think they are — and they lack insight into how their own processes impact customer satisfaction and financial performance.
Hand on heart: Can you answer five key questions?
What is your revenue from your 10 largest and 10 smallest customers?
What is your profit from your 10 largest and 10 smallest customers?
Do your customers have different expectations regarding price, delivery time, and service?
Do you work with a shared understanding across sales, finance, logistics, etc. regarding customer size, profitability, and needs?
Has that shared understanding been translated into tools and daily practices?
Lack of transparency leads to poor results
When we advise companies, we repeatedly encounter two classic challenges:
Challenge 1: Your inventory consists of too many products your customers do not demand.
Challenge 2: Your customers demand products you do not have in stock.
Both challenges have a significant impact on customer satisfaction and company profitability.
The root cause is a lack of transparency or data that reveals patterns in product and customer behavior.
This lack of transparency means companies don’t know where to act to break the negative cycle. Logistics becomes a black box, and the result is that all customers receive the same service level — a so-called one-size-fits-all supply chain.
But it doesn’t have to be this way. It is entirely possible to create a more differentiated approach, where customers receive a service level that matches their needs and willingness to pay. This is what we call a customer-focused supply chain. At the same time, it is profitable for the business because customers pay for what they receive.
Differentiated service is the future
A strong example of a differentiated approach is the airline industry. When flying from Copenhagen to Mallorca with SAS, customers can choose between four service classes and price levels.
You choose your level of service — and pay accordingly.
This ensures that the service delivered matches the customer’s needs while remaining profitable for the company.
This stands in contrast to how most companies operate today — with a one-size-fits-all model. That means offering an average level of service — same price, same delivery time, same quality — across all customer segments. In practice, all customers are sitting in business class, but only a few are paying for it.
The three key ingredients in building a customer-centric and profitable supply chain are:
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Good data
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Visibility into cost-to-serve
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Insight into customer needs
We’ve already touched on the value of data and transparency. Let’s take a closer look at ingredients two and three.
Unlock your cost structure
Differentiated service requires cost-to-serve. In simple terms, cost-to-serve provides visibility into what it actually costs to deliver different service levels.
We know it can be difficult to map all relationships between costs and activities, as not all costs are directly linked to customers. But even simple customer-level analyses of revenue and product consumption can create a new awareness of customer profitability. As the organization matures, the model can be expanded to include, for example, freight costs.
Customer profitability becomes the starting point for a constructive discussion about over- and under-servicing customers — and how to bring balance to each customer relationship. This is the first step away from a one-size-fits-all model and toward a profitable supply chain.
Bridge the gap between supply and sales
Leadership must take the lead and pave the way for a shared understanding, a common language, and aligned goals across all functions in the supply chain. A Sales & Operations Planning (S&OP) process can be a valuable platform for building this alignment.
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