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Bringing Outsiders In
One of the most important lessons in business is that when you create value for your customers, you have the opportunity to capture value for your shareholders.
There are three ways a supplier can create value for its customers. A supplier can help its customers sell more. Sometimes this involves taking market share, and sometimes it involves bringing new customers into the market. A supplier can help its customers achieve premium prices. Sometimes this involves product improvements that help a firm move up along the good-better-best spectrum, and sometimes this involves developing product and service options that customers are willing to pay for. The third opportunity involves bringing ideas that take costs out of the system through various types of process, materials or other efficiencies. Firms that can identify and implement strategies that achieve any of these three contributions position themselves and their customers for profitable growth.
The following three case studies illustrate contributions that created value for customers and translated into value for the firm making the contributions:
- An electrical products manufacturer studied purchases made by electrical contractors from its distributors for one line of its low-voltage products. It learned that four product bundles accounted for more than half of the unit sales from that product line. It developed a “kitted offer” of those four products. The result was widespread applause from distributors and contractors who loved the simplification that resulted in ordering, fulfillment and inventory management. All parties, including the manufacturer, benefited from cost savings. And the manufacturer saw an increase in sales as contractors shifted to this manufacturer’s products because of the time saved from these kits.
- A food equipment supplier whose customers were food processing and packaging companies had heard significant complaints about its order entry process. Most of this company’s products were engineered to order, and in its study of these complaints, it concluded that it forced customers to go through parallel and often duplicative tracks, one associated with placing the order, the other associated with defining the equipment specifications. It re-engineered its processes and found that the time required to place an order successfully was reduced by more than 25 percent for both customers and its staff.
- A drive train parts supplier serving commercial vehicle manufacturers was asked to identify ways to achieve double-digit cost savings for one of its large customers. Teams from the two companies, working together, spotlighted packaging as one opportunity. As one engineer observed, “We spend a lot of money and resources packaging the product, and then our customer spends a lot of money and resources unpackaging it. There was no good reason, such as damage protection, for this. It was just something we had always done.” Eliminating this activity alone yielded half of the cost reduction goal.
Internal vs. external
Over the years, industrial engineers have made significant contributions – ones that helped to improve the bottom line – to their firms. The majority of these contributions can be characterized as an internal focus, identifying improvements in the company’s own processes and systems. While such improvements translated into better competitiveness or resolved a technical challenge important to the success of the business, they largely were invisible to the firm’s external customers.
The examples in the three case studies above involved an “external focus,” creating value along one (or more) of the three ways described above for both external customers and their company’s shareholders. There are many such opportunities, and this paper shares lessons that can help IEs contribute more frequently and effectively by creating value for customers and translating that into value captured by shareholders.
Advocating an increased external focus has nothing to do with the relative quality of contributions between those that are mostly internal and those that involve an external impact. But there are numerous untapped opportunities for value creation that can be realized, with high payoffs all around. The companies that make each and every department and employee customer facing are those most likely to lead their industries. IEs can take three actions that can allow their companies to become part of such success stories: looking down the customer chain, analyzing economic relationships and investing in relationships.
Customers on a chain
Lesson one: Look down the customer chain and identify the ways in which your company connects to later-stage customers. A customer chain is the pathway from a business to its customers, often extending for many stages and involving multiple third-party organizations. For the electrical product manufacturer, the customer chain extended from the manufacturer to its distributors to electrical contractors to end customers. The insights that sparked the kitting concept originated with a study of the contractors, their typical job applications and associated product requirements. In the other two case studies, the insights only required understanding the next stage of the customer chain. But even that source of ideas is ignored far too often by businesses looking for opportunities to create value.
Looking down the customer chain is a demanding task, requiring much more than a casual effort to understand how products and services travel from loading docks to the end customers. It is necessary to understand exactly how the company’s products and services are used at each stage of the customer chain, and how they affect operations, market position and the customer’s cost structure.
For example, one company supplied engines to various equipment manufacturers. The engine share of the bill of materials ranged from less than 10 percent to more than 50 percent, across equipment types. And the “adjacent costs” that were connected to the engines, spanning everything from manufacturing assembly to warranty, ranged from less than 5 percent to more than 25 percent. For those equipment costs in which either (or both) of these engine shares were high, there was enormous opportunity for optimization yielding shared savings and success stories. Knowing which equipment manufacturers’ operations offered high potential allowed this firm to focus its resources correctly and invest in a detailed understanding of what actions could be taken to save costs.
The strongest argument for taking a customer chain perspective when looking at opportunities for process or systems improvement is that there are far more opportunities for optimization when a larger system is considered. In all three of these case studies, at best a part of the potential could have been identified and realized had the analysis been confined by the company’s own boundaries.
Businesses should develop models that help them understand the degree to which their companies’ products and services enter into their customers’ profit-and-loss statements. As the engine example above suggests, the opportunities for a high-impact cost saving initiative are greatest when a supplier’s product or services account for a significant element in the customer’s cost equation. Several other signals should motivate IEs to look for opportunities that involve an external focus. For example, sometimes a customer faces price pressures in its end market, but the supplier’s product only accounts for a modest component of the customer’s cost structure. In that instance, opportunities to re-engineer the overall process, taking costs out of the system, likely will be embraced by the customer as a route to improved cost competitiveness.
A lesson in economy
Analysis of the economic relationship between the supplier and the customer motivates the second lesson, namely to be open to shifts in the roles and boundaries between a supplier and its customers or between departments within an organization. The kitting role assumed by the electrical products manufacturer replaced a task previously done in some combination by the distributor and the contractor. The new order entry system developed by the food equipment company shifted responsibility for pricing to the engineering team that worked with customers on specifying the design for the equipment that they wanted to order. And the “no packaging” option developed by the vehicle parts company and its commercial vehicle customer required changes in the logistics and quality control processes of both companies. Again, the lesson is that removing boundaries creates more and more opportunities for value creation.
The value of breaking down boundaries is best illustrated by the case study involving the food equipment company. The engineers that looked at that problem commented, “Both the order entry team and the equipment design team were truly efficient. Both had processes that were streamlined about as much as could be done. It was only because customers were complaining about having to answer the same questions twice that we even looked at this. And then we saw we were in fact doing the same thing twice, efficiently, but nevertheless, twice.”
Over and over, IEs have seen the contribution that customers can make to a supplier. More often than not, the customer knows what changes the supplier could make to become a better supplier. And the firms that have the relationships that allow such insights to be learned are those that win in the end.
One tool used successfully in many applications is a reverse audit. In this case, teams from the supplier and customer review the other company’s processes and systems in areas that overlap between the two companies and in areas where the auditing organization has expertise. Insights like the one cited in the food equipment case study frequently emerge from this process, with customers pointing out ways that their suppliers can improve.
There is value associated with such reverse audits in the other direction. They are an exceptional way for a supplier to bring value to its customers, and many organizations use this concept to elevate customer relationships to a higher level. Suppliers have a unique vantage point in that they often serve customers in very distinct industries and across firms that differ in heritage, size, management style and other factors. As a result, they implicitly develop insights about best practices involving the use of their own products and services. Most of the time, executives of supplier organizations can identify their smartest customers, those that were most efficient or otherwise stood out in how they used the supplier’s products. These insights can become highly valuable when applied in the context of a reverse audit.
A relational perspective
The third lesson is that investments in relationships can yield major dividends in innovations that take costs out of the system. In all three of the case studies, the companies involved had strong and successful business relationships, ones that extended far beyond the sales team and the purchasing executive. The industrial engineering teams that created the “no packaging” option had a strong track record of successful interaction. In fact, in the prior year, each had done a reverse audit of the partner organization’s operations, working to identify ways that each firm could implement best practices.
In studying supplier-customer relationships that work, multiple touch points are characteristic of successful relationships. The relationships portrayed as two pyramids touching only at the point where the sales executive interacts with the purchasing executive are ones that lose the information and familiarity needed to identify opportunities for improvement. Those that have a spectrum of touch points, bringing functional experts together with their counterparts, are those more likely to create shared successes.
Such relationships cannot be created without an ongoing commitment. For example, one firm experienced a “perfect storm” in 2009 when three of its largest customers came to it demanding price concessions – a reality experienced by many in that year’s tough economy. In one case, the firm had a strong and healthy relationship with the customer, and it collaborated to find cost savings that more than met the original demands for price concessions. In the other two instances, the supplier’s same offer to work together to find cost savings was rebuffed. It was a case of too little, too late. Investing now in the relationships that can provide an ongoing stream of value contributions is also the way to prepare to respond to future demands made by customers.
Company-wide is a good thing
Recently, a company’s senior vice president of sales wanted to take a different approach to the firm’s largest customer relationships. His business had organized its sales force by region, but many large customers had facilities in many different regions. He had worked with his sales team to determine which customers were the largest, across all regions, and was contemplating anointing them as strategic accounts to be managed by a single team.
While applauding his recognition that some customers likely were strategic and required a different approach to the relationship, his plan had two elements of concern. First was the fact that size alone does not define strategic importance. Second was the fact that this initiative had not been extended beyond the sales organization.
The primary basis for calling a relationship strategic is the supplier’s ability to deliver value to that customer, as a one-sided strategic relationship will go nowhere. And, without any negative reflection on the sales organization in this and other firms, the ability to deliver value to a customer goes far beyond sales. More often than not, it is from product, service, engineering and other parts of a business organization that value creation opportunities will emerge. The company’s senior vice president of sales agreed to bring other parts of his firm into the discussion to identify relationships that could create real opportunities for value, projects that would be significant in terms of scale and growth.
The roster that emerged was markedly different than that defined by size alone. And, more importantly, as this company began to implement new approaches to the selected relationships, it was able to draw upon expert resources from throughout the firm, bringing to these customers the types of value-creating expertise illustrated in the above case studies.
These shared lessons come from work with many organizations over many years. In some instances, executives respond to external process improvement plans with: “Of course. That’s what we do. It’s second nature in our firm, and we appreciate the lessons learned from other businesses, as we’re always looking for ways to do it better.” That happens about 20 percent of the time. The more frequent response of executives outside of sales is something like: “We really wish we could do that in our firm, but seeing a customer is like seeing the Loch Ness monster. There are rumors that they exist, but none of us have ever actually seen one.”
The latter situation is a sorry one. These same companies typically are consumed with the goal of figuring out how to avoid becoming a commodity and learning how to become a strategic supplier to their customers. They are missing an opportunity. In almost every instance in which suppliers have listened to their customers, the businesses have heard suggestion after suggestion as to how they could do a better job and increase the value that they contribute.
The potential is there. What is required is the willingness for suppliers to challenge – and empower – their entire organization to help their customers point out the most effective route to overcoming the supplying company’s obstacles to growth and profitability. Taking an external focus, being open to changed roles and boundaries and building strong supplier-customer relationships centered on value creation are critical steps in the process that puts businesses on the path of profitable growth.
Authors: George F. Brown Jr. and Atlee Valentine Pope