CSCMP's Supply Chain Quarterly
Strategy
December 08, 2019
Strategy

How to respond faster to changing customer needs

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This excerpt from the new book Customer-Driven Disruption explains four steps companies can take to react quickly to changing customer preferences and deliver their products or services with little to no disruptions.

Editor's Note:This article is excerpted with permission from Customer-Driven Disruption by Suman Sarkar. Published by Berrett-Koehler © 2019. All rights reserved.

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.1 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 address customers' changing needs

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 intellectual 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 startups in their space and then buy them out in the hope of catching the next big thing. Startups let companies test new ideas without significant investment; 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 counter-productive 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' 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. Fast end-to-end delivery and [product] 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 customers buy at the promotion price, the toothpaste company and the retailer make less profit on that toothpaste, while the customers simply delay the purchase of their 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.2

Another disadvantage of deep discounts is that it makes it difficult to predict future buying patterns. 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 and Starbucks 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 percent to 70 percent of the next year's sales. Market share improved. Moreover, the productivity of the sales team rose by 30 percent to 50 percent 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 percent of the sales price to 55 percent. 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 percent to 90 percent. At the same time, quality improved; the defect rate decreased from 30,000 defects per million items produced to 5,000. 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, andcapacity 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.

Notes:

1. Todd Haselton, "Report Shows Why Apple Should Have Launched iPhone X Sooner," CNBC (December 5, 2017), https://www.cnbc.com/2017/12/05/delayed-iphone-x-launch-hurt-global-iphone-share-kantar-says.html

2. Mike Colias, "GM to Idle Detroit Car Factory Amid Slow Demand," Wall Street Journal (October 12, 2017), https://goo.gl/16TDns

Suman Sarkar is a partner with global management firm Three S Consulting.

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