Strategy consulting & executive-education

The Distribution Organization (DO) for our client, a large electronics manufacturer, managed the supply chain to office resellers. The DO was in the early stages of implementing a major new systems integration initiative. In recent months, the DO’s Reseller customers had increasingly demanded faster order fulfillment; the resulting corporate dictate was to cut turn-around-time (TAT) as measured from order-to-shipment. The DO began shaping the systems integration effort around measuring and reducing TAT.

At this point, the DO engaged DPVG to help rethink distribution strategy, prior to finalizing systems changes based on TAT. With our help, the Team conducted in-depth interviews and analysis of about 10 large resellers across the US. Using the DPV discovery methodology, we focused on observing and analyzing what these resellers actually did, rather than relying on asking them what they wanted from the DO. The Team thus studied the business model of these customers, understanding the VP that each tried to deliver, and how, including what role the DO and its products played.

We documented a series of typical ‘scenes’ from ‘Video One’ in each reseller, focused on various functions and processes relevant to the DO, within each customer. The analysis of these ‘scenes’ helped the DO Team understand how orders were placed and then fulfilled, from each reseller’s perspective, and then how the reseller took and fulfilled orders and otherwise met the needs of their customers, the end-users of the DO’s products.

In this way, the Team found two surprising promotion/service/order patterns, revealing two distinct segments, neither of which would actually benefit greatly by reducing TAT.

• ‘Steady’ resellers conducted no promotions and had a steady level of consumption. But they were experiencing wide variance in order-fulfillment times, with significant stock-outs on the DO’s products, yet at the same time, average inventory seemed far too high. Resellers engaged in speculative ordering whenever revisions in DO-products were rumored, and often placed small, ‘uneconomic-quantity’ orders. The DO tried, ever harder, to fill orders as fast as possible, often pressing carriers to expedite shipments. Sometimes surprised by a DO truck’s arrival, and trying to prevent excessive inventories, resellers often refused or delayed delivery acceptance. In total, these dysfunctional behaviors created a vicious cycle of noise and chaos in the supply chain, ultimately exacerbating order fulfillment errors and inefficiencies.
• ‘Spikey’ resellers, in contrast, were promotion-driven, with high volume spikes, then troughs. The DO was late, too often, in delivering on large retail promotions. Spikey-reseller orders were given the same priority inside the DO as other orders. When a promotional order was late, resellers would often place a second order, and the DO would usually try corrective measures, such as expediting orders, often only resulting in excessive inventories at the reseller after a sale was over. Resellers used a mixed bag of order-transmission methods, resulting in inaccurate, inconsistent data inside the DO. And these resellers also engaged in speculative over-ordering. Although Spikey resellers wanted to promote the DO’s popular products, to drive store traffic, the unreliable order fulfillment caused these resellers to cut back promotional activity on the DO’s products, seriously impeding growth.

Although customers had focused on TAT, they would actually benefit most from one of two versions of greater reliability, not reduced TAT: for Steady resellers, every delivery should arrive at exactly the same, predictable time interval after the order (neither earlier nor later); for Spikey resellers, every promotional delivery should arrive either early or on time, but never late.

STEADY RESELLERS: implications for the DO value-delivery strategy

Based on this exploration of Steady resellers’ current experiences, the Team constructed an improved scenario, a ‘Video Two.’ In that scenario, which formed the basis for a new, superior value proposition (VP) to Steady resellers, the DO would ask them to change order behavior significantly. Requested changes included: connecting to the DO’s systems electronically; placing only orders of ‘economic’ size (bulk vs small quantity); rigorously accepting deliveries as scheduled; and providing steady orders, not engaging in speculative over-ordering.

In return for making these changes, Steady resellers would be able to rely absolutely on receiving all orders on the 5^th working day, without exception. Even though this pattern would actually represent longer or no-better TAT in many cases, it would – of much greater actual value to resellers – produce at least -10% lower inventories, a cut in stock-outs to near 0%, thus growing revenues and customer satisfaction, and significant reductions in other order costs (receipts/order, invoices to match, etc.). The price of the DO’s products would continue to be at a premium versus competitive products.

This new VP was a classic tradeoff – resellers were asked to make substantial changes in order and delivery-acceptance behaviors, while continuing to pay the same premium price as previously. However, the superior resulting experiences they would thereby derive would more than compensate for these negatives.

To provide this very different VP to Steady resellers, the DO made comprehensive adjustments. It now focused its new systems initiative entirely on measuring and minimizing variance around 5^th day deliveries (rather than on reducing TAT). Moreover, this 5-day delivery timing was now measured from order placement to actual arrival at the reseller (not order receipt to shipping from the DO’s dock, as with TAT). The DO learned new behaviors to improve that 5^th day performance, tightly monitoring that metric, seeking out root causes in any failure, and then intensively eliminating those causes (whether occurring inside the DO, a carrier, or the reseller). DO managers systematically unlearned old behaviors such as constantly expediting shipments. ‘Economic order quantities’ were refined precisely, and rigorously enforced.

To communicate this new VP, the DO built on the just-completed process of in-depth interviewing and exploration of Steady resellers. This process had produced a collaborative consensus on the new solution, which was far superior for both the resellers and the DO. Now the DO went to all reseller management teams and presented the VP, documenting the estimated economic value for the reseller of the promised resulting reductions in inventory, stock-outs, and other order costs, and of increased satisfaction by resellers’ customers. The DO further provided explicit assurance of its promised consistent 5-day performance, and thoroughly demonstrated the corresponding changes in the DO’s processes, systems, and training.

In these resellers, DO business improved greatly: stock outs neared 0%, revenues grew over 5%, reseller-inventories went down sharply and end-customer satisfaction went up significantly..

SPIKEY RESELLERS: implications for the DO value-delivery strategy

Similarly, the Team constructed a winning ‘Video Two’ scenario and new VP for Spikey customers. These resellers would also be asked to connect to DO’s systems electronically, and to rigorously accept deliveries as scheduled; they were also asked to refrain from second orders.

In return, the Spikey resellers would never receive a promotional order late (on-time, early, but never late). Thus, they would be able to use the DO’s best selling products to drive growth, without risking the unforgiveable retail sin of running an ad without product to sell, and without an inventory glut following an inadequately-supplied sale. The previous price premiums on DO’s products continued. Again, this VP was somewhat of a tradeoff (as customers would have to learn and adopt new order systems and practices), but in net superior value for Spikey resellers.

To provide this Spikey VP, the DO: focused the new systems integration effort on accurately identifying any promotional order (distinct from other Spikey, or Steady, orders); flagged every promotional order, giving them unmistakable top priority; ensured that carriers integrated this same flagged-order system; helped Spikey resellers convert their electronic systems to integrate with the DO’s; followed up systematically with Spikey customers to ensure elimination of second-orders, speculative over-ordering, and refused/deferred delivery acceptances.

To communicate this VP to Spikey customers, the DO: again built on the earlier process of collaborative dialogue with reseller management teams; presented the estimated value of these resellers being able to aggressively promote the DO’s products (without fear of missing a sale); conveyed the explicit promise of never delivering a promotional order late; and demonstrating the DO system changes, including priority flagging, in support of this promise.

In these resellers, confidence in the ability to strongly promote the DO’s products grew rapidly, and promotional support from Spikey customers helped drive the DO’s products to great success.

CONCLUSION

Prior to this exploration of resellers’ actual behaviors and their consequences, using the DPV methodology, the DO (and other interested parties in the DO’s corporation) were sure that customers wanted, and needed, a reduced TAT solution. However, that belief reflected an incomplete understanding of what solution would be of most value to resellers, and illustrates how easy it is for intelligent, customer-oriented managers to fall pray to the traps of ‘Customer Compelled’ culture.

Asking, and listening to what customers say they want, is no substitute for the DPV approach:

• Deeply study what customers actually do, ‘become the customer’ to discover what experiences potentially would be most valuable for them;
• Then translate those insights into specific, actionable value-delivery strategy – winning VPs and the key actions needed by function to provide and communicate those VPs