Category Archives: Value

HOW TO BUILD A BETTER CUSTOMER

behaviourIn my last post (What Defines A “Bad” Customer?) I made the points that the primary measure most organizations use for their customers is Profitability and that customer behaviour can negatively impact profitability.  In this post I want to look at some of the traits of a “Good Customer” and how we can influence them.  I am going to ignore profitability since everyone is already thinking about that one.  I’m sure you all remember the catch line from “Field of Dreams” – Build it and they will come.  Let’s modify that to “Build happy customers and the profits will come” and move on to other traits.

I would like to propose three “Good Customer” traits in addition to profitability – Loyalty, Effectiveness, and Willingness to Partner.

I think most people would agree that there is far less brand loyalty now then there was in years gone by.  The problem is that it is expensive to be constantly replacing customers so how do we encourage loyalty in our customers? If you ask people why companies switch suppliers most would say because of lower prices, because of bad service or product, or because of a process change.  While these are undoubtedly major reasons, over the years I have seen many reports on the reasons companies change suppliers.  They do not always agree with each other but the largest category in most of these reports was “Other”.  This Other category tends to get overlooked as it is a combination of many little reasons and most organizations prefer to concentrate on big reasons so they get  a good return on their effort.  Instead of looking at the specific reasons it would be far better to concentrate on what all these reasons have in common.  David Moseby & Michael Weissman in their book The Paradox of Excellence make the point that Quality, Price and Service by themselves are not enough to maintain loyalty.  You need to be communicating regularly with the customer and ensuring they are aware of all the good things you do for them.  Sure, someone may have a cheaper price but will they also provide this or that specific value add.  Communications is critical to maintain a loyal customer.

Effectiveness, at first glance, may seem like a strange trait to be looking for but if you stop and think about it, you are already using that as a measure of your suppliers.  When we pick our suppliers we want to know that they will do what they agree to and that they will still be there tomorrow to provide the service or product we want.  It is the same with customers, we want them to still be there in the future to buy our service or product and the more effective they are the more competitive they will be.  The more competitive they are, the more of their product they will sell and (hopefully) the more of our product they will buy from us.  So not only do we want our customers to be effective, we should be doing everything we can to make them more effective.  Can we shorten our lead times?  Can we integrate our systems better with their systems? Do we have any training available such Lean Six Sigma that we can share with them?  And how do we encourage all this?  Well first we need to understand the customer as best we can.  This means talking to them, not just through the sales force but at as many different levels as we can.  Set up reciprocal visits between engineers, or purchasing or logistics…  You never know where the next great idea will come from. Communications is critical to maintaining effectiveness, both in your organization and in your customers.

Over the years what companies have competed on has changed, from quality, to cost, to service, to value. For the last several years people have been suggesting that most companies now compete based on who has the most effective supply chain.  The assumption is that an effective supply chain will have the lowest cost, best service and the fewest problems which allows you to be more competitive than your competition.  The problem is that most organizations are only looking in one direction – backwards at their own supply chain.  They also need to look forward to their customers and on through to the ultimate consumer.  Unless you are selling to the ultimate consumer you are part of someone else’s Supply Chain and as pointed out earlier, the more product a customer sells, the more product you can sell to them.  This means that it is in your best interest to pay as much attention to the supply chain above you as to the supply chain below you.  But what makes an effective supply chain?  Companies  working together to find and improve any constraints or issues in the movement of product and information through the supply chain.  This means partnering together, possibly setting up joint teams to map and review adjoining processes.  (Can you say Kaizen?)  If companies are not willing to work together as partners in a Supply Chain they will always be at a disadvantage to other chains that can and will work together.  So how do we encourage this willingness to partner?  Communications is critical to both understanding the needs, wants, & desires of your customers and to working together effectively as partners in process improvement.

If we look back over this posting, what do we see?   There is one common element to encouraging Loyalty, Effectiveness, and Willingness to Partner.  This common element is… Communications.  So how do we build a better customer?  In order to improve at all levels and in all the interactions we need to communicate effectively with them…at all levels and in all interactions in order to build a better customer.

If you would like to discuss how to measure the true cost of your customers’ behaviour I would be more than happy to meet with you and to explore this in more detail.  Please feel free to contact me at edwhite@jadetrilliumconsulting.com to discuss how a Customer Value Survey can help your organization.

If you would like to read more about this topic check out the other posting on my website – http://jadetrilliumconsulting.com

Hope you enjoyed this posting.  Talk to your friends and co-workers about their experience and thoughts about customer value, especially what it means for your organization.   And, as always,I would love to hear back on your (and their) thoughts.  Just fill in the comment box below along with your contact information to let me know what you think.

WHAT DEFINES A “BAD“ CUSTOMER?

behaviourThe last couple of posts we have talked about ranking customers and possibly even “firing“ the bad customers.  This automatically leads to the question – What do we mean by “bad“ customer?

In order to define what makes a customer good or bad we need to first define what the parameters are that we are making this decision on.  I am sure for most people the first parameter that would leap to mind is…profitability.  The customer I make the most profit from must be a good customer.  This is probably true IF you truly understand what profit you are making from a customer.  Profit is not necessarily a case of invoice minus cost because most organizations have something called overhead which is divided to become a per unit cost.  This fractional cost is then included in the total cost for each product.  In other words – most companies do not, and cannot, trace their overhead costs to a specific customer or order.  For some costs such as light, heat, or power this is not really a problem as customer behaviour does not substantially affect usage.  There are however a number of overhead costs that can be, and are, affected by customer behaviour but since we are not tracking cost to this behaviour we do not truly understand their effect on profitability.  An example of behaviour that can directly affect overhead cost can be found in the typical customer service department.  The headcount in this area is controlled by the workload which involves – contacts with the customer base to provide information, taking orders, modifying orders, processing order requirements into the company system and communicating changes back to the customer.  Who specifically does these tasks, and how, is obviously different in each company but someone does these tasks and unless you have a different person assigned to each customer it would be very difficult to track back the cost of this connection back to specific customers.  This means the cost of the department is usually just summed up and added to the overhead costs.

Now let’s look at the normal behaviour of two customers.  Customer A provides a realistic forecast of requirements, places orders with at least the required lead time, does not normally make changes to the orders and always pays within the limits of the terms & conditions of the PO.  Customer B does not believe in forecasts or lead time, constantly put a rush on orders, changes orders within the lead time and cancels orders at the last minute.  In addition they regularly withhold payment for material that is delivered, usually because their internal paperwork is incomplete.  Customer B is also your biggest single customer.  Which is the better customer?  More importantly, which is the more profitable customer?  Every one of those bad habits I listed for Customer B costs you money.  They are consuming far more of the customer service resources than customer A is, which you have to pay for in additional headcount and tools (desk, computer, phone, etc).  They are also creating problems in your planning system, production and logistics area’s as everyone tries to react and keep this very important customer happy.  Every one of these problems, reschedules, emergency change overs and expedited shipments of raw materials and finished goods cost you money.  Possibly even more importantly, all these issues may be impacting your ability to deliver On Time, In Full to your other customers which is putting their business in jeopardy as well.  Finally, because they are your biggest customer, you are probably offering them a discounted price due to higher volume.  So tell me again… which customer is more profitable?

Please note, I am not advocating firing the customer but instead, that you need a realistic understanding of relative profitability.  If you decide you want to keep the business then you need to decide how to modify the relationship.  Assuming you have competitors, and most of us do, this is not exactly an easy thing to do but there are possibilities.  One method that I like is to provide the customer free training on process improvement.  The intent would be that, as they improve their processes, you should see improvement in the way they place orders.  Obviously a difficult thing to do if the customer is substantially larger than you are but there are some ways of working around that.  For instance, if you are hosting training for your own people invite the customer to send a couple of their people as well.  Maybe even host a customer session where you invite people from several different customers.  APICS has a Lean Enterprise Workshop Series that could be used for this purpose.  If Lean is working for you, why not help your customers have it work for them as well.  It might improve their processes and if it makes them more competitive they will need to buy more from you to cover the additional sales.

Another possibility is to add upcharges to the bill when the customer does specific things.  As an example if they place a rush order there will be an upcharge of $X.  I am not much of a fan of this method both because it annoys the customer and because the sales staff have a bad habit of waiving the charge “this time” so it really loses it effect.  Another way of accomplishing the same effect, (behaviour change) could be to offer “good behaviour discounts”.  Quote them a price that is a little higher but has discounts tied to the behaviour you want to change, such as so many dollars off if the order is received outside the lead time.  This would then give them the ability to receive a very competitive price if they control the orders properly but if they do not, then you get to recoup some of the costs by not paying the discount.

If you would like to discuss how to measure the true cost of your customers’ behaviour I would be more than happy to meet with you and to explore this in more detail.  Please feel free to contact me atedwhite@jadetrilliumconsulting.com to discuss how a Customer Value Survey can help your organization.

If you would like to read more about this topic check out the other posting on my website – http://jadetrilliumconsulting.com

Hope you enjoyed this posting.  Talk to your friends and co-workers about their experience and thoughts about customer value, especially what it means for your organization.   And, as always, I would love to hear back on your (and their) thoughts.  Just fill in the comment box below along with your contact information to let me know what you think.