How CRM Makes Supply Chains More Efficient Through Segmentation
Although for many enterprises it takes time for it to sink in, the result is inevitable. Marketing led the way with the concept of tailoring products and services to the requirements of specific groups of customers. It named its approach ‘segmentation’ and asked customers what they wanted, so that the company could produce different offerings that matched varying needs and wants.
Now that supply chain is fast becoming the one key competitive advantage that sets one business apart from its rivals, what could be more natural than to extend the concept to the supply chain as a whole – and to use marketing and customer relationship management (CRM) to pilot the process? Benefits can be multiple, including a boost to the bottom line as IT vendor Dell showed in reducing operational costs by US $1.5 billion by using CRM and SCM in a new multichannel market strategy.
One Size Does Not Fit All
Very rarely does a company ever have just one fixed offering. With choice and therefore power in the hands of end-customers, most enterprises try to adapt by supplying a range of products or services; under attack from competitors in one segment, they also attack back in others. The expectations of customers will vary – not just in terms of what they receive, but how, where and when. A brute force, one-size-fits-all approach in supply chain ends up over-serving some customers and under-serving others. This situation cannot simply ‘balance out’: the company will necessarily sacrifice profit in some areas and damage customer satisfaction (or even lose customers) in others.
Think of a firm making different lines of shoes, perhaps a basic ‘everyday’ range and a fashion range. ‘Everyday’ customers are more likely to want lower prices with reasonable availability, whereas fashion customers will often pay a higher price, if they can have their products right now. These are two different supply chain requirements; leading logically to segmentation into two different supply chain approaches.
Where Segmentation Can Help Supply Chains
Segmentation can have several advantages. Separating the supply chain into separate streams (several ‘virtual’ supply As for the shoe company above, segmentation allows a supply chain to be both efficient and responsive, and tackle the general problem of demand variability. By identifying the stable component of demand, a supply chain segment can be set up to serve this. Management then has more time and energy to focus on handling the variable parts. More granular or finer information about customer buying behaviour would help even more.chains on top of one physical one, for example) helps to address unprofitable parts of a company’s product and customer portfolio. A cost-to-serve analysis can assess the profitability of a customer account based on the supply chain resources consumed in serving that customer. This allows supply chain segments to be defined with specific characteristics in terms of inventory and shipping.
The stakes are important. An estimate of 30% is not uncommon for the unprofitable portion of a company’s supply chain portfolio when segmentation is not applied. On the other hand, the stable demand component often accounts for as much as 70% and only requires 30% of total management effort, leaving supply chain teams that much more time to change unprofitable activities in profitable ones.
The Role of Customer Relationship Management
Customer relationship management is about building and maintaining profitable long-term customer relationships; typically by supplying customers with what they want. To know what your customers want, ask them; or ask the customer relationship management system that the marketing and sales departments rely on to track what customers want, prefer, dislike and are likely to do in the near future.
Not only does an existing CRM system contain a ready-made database of customer information, but it is also a purpose-built tool for getting more. From web surveys that ask supply chain related questions, or unstructured notes made by customer service representatives, a CRM system can collect valuable data to show which groups of customers want which kind of service. However you do it, supply chain has to connect with the marketplace. Leveraging the knowhow and tools of your marketing colleagues is a smart way forward.
The Seven ‘R’s of CRM’s Contribution to Supply Chain
Good customer relationships are the result of ‘the right product, for the right customer, in the right place, at the right time, in the right quantity, in the right condition, and at the right cost’. CRM is a way to identify each of these ‘rights’ and to segment customers accordingly. Yet besides relationship marketing and cross-selling techniques favoured by sales and marketing, CRM can also be used to predict future customer behaviour. Forecasts can be made of the likelihood of customers’ purchases, and even of the risk that they may move over to a rival company and stop buying from yours.
US supermarket Walmart and Target both use CRM to run sales promotions aimed at specific customer groups, using these business analytics. Other advantages of well-tuned business analytics include being able to display key status information at any time (‘dashboards’ showing quantities of customer orders and levels of satisfaction, for instance); they can also give recommendations for immediate action according to the trends or events predicted for the future.
Putting SCM and CRM Together
On a conceptual level, information flows out of CRM and into SCM. On a practical level, there may be challenges to this apparent simplicity. Even if a company already has software systems for both, there is no reason to expect the two environments to be exactly in phase in terms of their activities, their data and their inputs and outputs. CRM systems already consist of sales automation, marketing information systems and call centre technology. SCM is built up of procurement, transportation, inventory, production, packaging and distribution. Throw an enterprise resource planning system into the mix, and the complexity grows further.
Whether an integrated system to give end to end supply chain visibility starts from SCM strengths in logistics, ERP solidity in financials or CRM precision concerning customers will depend on what needs to be created, modified or replaced. However, it can be done; in fact American Airlines has been doing it for years, taking customer information from its reservation systems and website to feed into planning for fuel, food, spare parts and more. And Cemex (second largest US producer of cement and concrete mix) uses CRM and SCM to guarantee future deliveries to the hour, without over-producing; a key capability for a company whose finished product sets rock hard so soon after preparation.
What Are the Results?
Showcase results include firms that reduce their inventory practically by half, while still managing to increase on-shelf availability to almost 100%. Other benefits include reductions in SKU complexity, increases in forecast accuracy, revenue growth and overall supply chain cost reduction. Does that mean that everyone is looking for supply chain speed and low costs? There are always exceptions. Some luxury goods niche manufacturers make a point of keeping their customers waiting to emphasise the exclusivity of what they sell. But if they choose to organise their supply chains like that, it’s also quite possible that they used CRM to confirm a net positive effect on customer buying patterns.
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