Closer to the Customer: Customer Relationship Management and the Supply Chain

As they get closer to end consumers, supply chains will encounter a basic truth: today's customers are not easy to please or hold on to. They are increasingly knowledgeable and demanding, and if one company can't deliver what they want, they will find another that can. As a result, a typical firm loses anywhere from 10% to 30% of its customers in a given year. Marketing expert Regis McKenna has noted that the "ticking of real-time technologies is teaching the consumer to expect and demand immediate satisfaction," leading to what he calls the "never satisfied customer."

In this environment, advantages based on product or service innovation tend to be short-lived; instead, the key to success is the ability to forge long-term, profitable relationships with customers. That means that simply "listening to the customer" or enhancing customer service is not enough; to build truly nimble and responsive supply chains, companies must strive to be "customer centric." To do so, they must overlay their product and market orientation with a customer view--that is, to make sure that all activities add value for the customer. They must encompass the customer's viewpoint and incorporate it in strategies, plans, actions and measurement systems. And they must strive for seamless, real-time integration both horizontally across customer-facing processes--such as marketing, selling and service -- and vertically to back-end supply chain processes.

The Practice of CRM
Creating such customer-centric organizations is the goal of CRM. Far more than simply improving the effectiveness of individual sales and marketing or customer service initiatives, CRM drives the wholesale transformation of the relationship between company and customer. It encompasses all of the activities that go into identifying, attracting and retaining customers, and focuses on aligning the whole organization to building profitable, lasting relationships with customers.

To forge such relationships, CRM focuses on the central tenet that not all customers are created equal. In virtually every business, different customers provide a different return on investment to the company. Often, executives find that one 80:20 rule applies -- that a relative handful of customers account for the lion's share of profits.. CRM strives to identify the customers that provide the greatest return to the company, and optimize relationships with those customers.

A clear understanding of customer profitability is critical, because it enables the organization to differentiate the level of service it provides to various customer segments according to their needs and value to the company. For example, a company might offer high-value customers extras such as incentive pricing or customized products -- and at the same time reduce service to or even "fire" customers who are not so profitable to the company. So, a comprehensive view of customer profitability lets companies focus resources where they will do the most good in terms of strengthening key customer relationships and bolstering top-line growth. Such differentiated treatment does not mean that some customers get "good" service and others get "bad" treatment. It simply means that different customers get the service that is most appropriate for their needs and the company's profitability.

When companies provide targeted, differentiated treatment to various customer segments, they begin to reap benefits in two key areas: they increase their share of the customer and they improve their ability to retain customers.

"Share of customer" refers to the percentage of a given category of goods or services a single customer purchases from a company, as opposed to what the customer buys overall or could potentially buy in that particular category. For most companies, increasing the share of customer represents an enormous -- and relatively untapped -- growth opportunity. Simply put, it means companies can generate additional revenue and profits without incurring customer-acquisition costs. For example, a leading insurance company, which has made customer retention a cornerstone of its business, has grown its assets under management from $20 billion to $40 billion in less than a decade, even though its customer base grew only 33% over the same period.

Customer retention is important because companies find it is less expensive and more effective to retain a current customer than to attract a new one. An Accenture study of the wireless communications industry found that reducing the rate of customer turnover by just 1% can boost the average wireless company's annual revenues by about $150 million. In general, research shows that loyal, repeat customers have a greater lifetime value for the organization, because they:

• purchase more frequently than other customers
• purchase more than other customers
• purchase more higher-margin product than other customers
• promote the company among potential customer, because they are satisfied

There is nothing abstract or hypothetical about such benefits. For example, when a U.S.-based plastics company focused its attention on its most profitable business customers, it cut its customer base from 800 to 90--and increased its revenues by more than 400%. Similarly, a major pharmaceutical company that used CRM techniques to segment and target its markets reaped a 30% increase in forecast sales, and a 25% increase in market share.

In short, the effective use of CRM techniques puts the focus on profitable customers, allowing the supply chain to better calibrate service levels to meet the needs of various customer segments, as well as to reduce costs. And it provides a greater degree of stability, continuity and predictability in the customer base--which in turn make planning and operations far simpler all along the supply chain.

Two rapidly evolving areas of CRM are particularly relevant to the supply chain: "customer insight" -- the continuous process of aggregating data to understand and anticipate customer needs -- and electronic commerce, which is presenting new opportunities and challenges in terms of managing customer relationships.

Developing and Using Customer Insight
Developing insights into what the customer wants, needs, and values is at the foundation of CRM. To develop such insights, companies must be able to draw on and integrate information from a wide range of sources, including reports from the salesforce, market surveys, focus groups and, increasingly, electronic sources such as internal billing and customer information systems, the Internet, EDI systems and call-center data about customer interactions. Today's data warehousing and data mining techniques, when used in an integrated fashion, enable companies to manage huge amounts of such data, and to understand what customers want with increasing accuracy. Having such accurate information in hand allows companies all along the supply chain to carry less safety stock, improve demand planning and the geographic distribution and allocation of materials, and produce customized products.

Understanding customers in greater detail also makes it possible to move beyond the traditional portrait of the customer as a general abstraction, a 30-to-40 year old high-income male, for example, or a middle-aged female executive who flies more than 100,000 miles per year, to a more detailed understanding of smaller and smaller groups, right down to the individual level. One U.S. consumer products marketer, for example, keeps a database covering some 30 million customer households, allowing it to keep track of up to 2,000 data points covering everything from demographics and buying patterns to credit histories, hobbies and birthdays. That wealth of detailed information enables the company to design marketing programs for specific types of customers, and boost individual "wallet share" by offering repeat customers appropriate incentives, such as free gifts or installment credit. The approach clearly keeps customers coming back for more: In the company's catalog business, some 80% of revenues comes from repeat buyers.

Linking Customers to the Supply Chain
It's also becoming more and more practical to connect CRM activities and customer insight information with upstream operations in the supply chain -- that is, to seamlessly link the supply chain's "generate demand" activities with its "fulfill demand" activities. At its most basic level, this means sharing transaction data among partners to help keep inventories low. But at another, more sophisticated level, it typically entails connecting frontline employees--those in the call center, the sales force, customer service reps, etc.--with the right data in the supply chain. A frontline employee taking an order from a customer, for example, must have visibility to updated inventory and production data in order to provide accurate delivery information to customers asking about their orders. At the same time, network-enabled information sharing between supply chain partners, such as a retailer and a manufacturer, can provide upstream partners with insights into the customer that can help guide product development and manufacturing.

By combining the rich information, insights and relationship-building capabilities of CRM on the front end, and the ability to create real-time electronic links between "generate demand" and "fulfill demand" activities, the supply chain can become increasingly responsive. Indeed, technology is rapidly making it economically feasible to offer a growing range of products on a "mass customization" basis, and even to begin serving "markets of one." That is, computers and networks are opening the door for an increasing number of companies that want to expand on the concepts seen in Dell Computer's ability to deliver custom-configured computers within a few days, or Levi's Personal Pair™ program, which electronically relays measurements to the factory to drive the production of custom jeans¹. Those are information-based capabilities, and with the ability to move more information--and better information--through the supply chain, such capabilities should only grow.

The Opportunity and Challenge of Electronic Commerce
On another front, electronic commerce is having a tremendous impact on both CRM and the supply chain. In particular, the proliferation of electronic delivery channels--from kiosks and the Internet to telephone, EDI and e-mail--provides a wealth of new ways for companies to interact real-time with customers. Manufacturers can sell direct; for example, and new partners can be brought on board with relative ease.

These new channels make an awareness of CRM practices more important than ever. For example, a manufacturer that sells direct via the Internet is actually entering a new arena in which it has no experience--it has traditionally had distributors and retailers between it and the customer. As a result, that manufacturer should proceed with caution, making sure its frontline employees are trained to deal with customers and that their systems are integrated with credit, shipping, manufacturing and other key areas. The manufacturer must be able to understand and serve the "right" profitable customers. If it fails to pay close attention to the way it handles customer contacts, that manufacturer runs the very real risk of doing more harm than good by annoying or failing to serve customers.

With the advent of electronic commerce, companies do not have to make the black-and-white choice between going direct or being removed from the customer and working solely through an intermediary. For example, a major Canadian oil company traditionally worked through local distributors to reach remote, rural customers. Those distributors constituted a vertically integrated channel, handling all aspects of customer contact. The oil company naturally wanted to get closer to those customers--but instead of simply going around the distributors, it broke up that vertically integrated channel. The distributors retained responsibility for delivery, and improving service on that front. Billing and marketing were centralized, and taken over by the oil company. This hybrid arrangement allowed both companies to focus on the activities where they could add the most value for the customer.

As companies take advantage of the proliferation of electronic channels, they must also find ways to manage across all the channels they have in place. A given customer will typically use more than one channel over time, which means that channels must be managed in a coordinated fashion so that customers receive consistent quality and information wherever they come in contact with the organization. Such coordination is also necessary to get a holistic, accurate view of total customer activity, and to deliver differentiated service to different sets of customers via the most appropriate sets of channels. All of this means that the information from these channels must be pushed back into the organization and integrated across channels. What's more, each channel must be backed up by the right technologies, processes and organizational structures, so that the supply chain can deliver on increasingly aggressive product and delivery "promises" made on the front end.

The Role of Process
As powerful as customer-insight tools and electronic commerce are, they will have a limited CRM benefit if the supply chain itself is not built around the customer. And creating a customer-centric supply chain depends on developing a process-oriented view.

In a recent study of CRM practices, the Economist Information Unit (EIU) and Accenture found that many executives believe that functional and organizational structures stand in the way of building relationships with customers. Such structures tend to fragment and compartmentalize the various activities that go into serving the customer, and make it difficult to move insights about the customer back into the organization. A process view cuts across those functional boundaries allowing the organization to focus on business results and outcomes, rather than internal tasks and activities, and to be organized around a single, overarching element -- the customer.

By definition, a process view facilitates the integration of front-line activities with upstream supply chain operations, because processes cross traditional boundaries, including those between organizations. So the process view enhances the ability to drive the customer view back up into the supply chain. Executives in the EIU study clearly recognized the importance of such an approach, and a majority said that they expect to more than double the "routine and intensive" integration of their front line sales processes with their customer service, product development, strategic planning and financial processes.

CONCLUSION
CRM is a complex, multifaceted discipline that involves rethinking and re-examining everything from technology and processes to the skills and abilities of employees. In reality, it involves transforming the entire organization. That means that CRM cannot be approached in a piecemeal fashion. It requires a clear customer strategy that lets the company--and by extension the supply chain --determine how technology, processes and culture can be used in concert to manage customer relationships. A good customer strategy should describe how the organization will:

• continuously attract new customers
• increase each existing customer's spending on the most profitable products and services
• retain profitable customers
• grow the percentage of long-time customers
• avoid relationships that are unprofitable

Today, CRM is a competitive necessity for individual companies--and as supply chains evolve, it will soon become a source of advantage for them as well. It is the key to organizing around customers--to meeting their needs and earning their loyalty in a consistent, profitable manner. And that, in turn, is the key to creating more efficient and effective supply chains and, ultimately, succeeding in a turbulent, competitive world.

About the Author
Dale Renner is the Managing Partner of Accenture's global Customer Relationship Management (CRM) practice. The CRM practice advises companies on how to optimize their organization's delivery capability to customers through the integration of marketing , sales and service functions to sustain profitable revenue growth. In his twenty years with the firm, Mr. Renner has worked across many industries, including automotive, printing and publishing, data base marketing, retail, and food and consumer packaged goods.

Mr. Renner is a member of the Advisory Board shaping a unique Center for Customer Insight at the University of Texas at Austin and recently led the development of a joint research project with the Economist Intelligence Unit, titled "Managing Customer Relationships: Process Excellence in Identifying, Attracting and Retaining Profitable Customers."

Mr. Renner received his Bachelor of Science degree in Business Administration from Iowa State University.

Footnote

1. www.levi.com/us/personal-pair/welcome.html