How do organisations handle the increasing pressure of today’s business world – increasing regulatory environment, heightened risk awareness, customers demanding increased flexibility and responsiveness, environmental footprint concerns, workforce pressures and rising costs.
In our view, there are 4 key pillars that are common to successful businesses. All successful businesses…
- Have a clearly defined strategy
- Are customer centric
- Innovate to stay ahead
- Focus on productivity
These 4 pillars are held in place by the organisation’s processes and systems, and the success is then cemented by the people and culture that exists within the organisation.
So how do we adopt these 4 pillars into our ways of working? This is the 2nd of four articles that discuss bringing these 4 pillars to life in a pragmatic manner, not just across the supply chain but also across the wider business environment.
The 2nd Pillar – Customer Centricity
What does ‘being customer centric’ mean? Does it mean undertaking everything that each customer asks of your organisation? Or does it mean being ‘set in your own ways’ of doing things regardless of the customer. In our view, both approaches are not sustainable.
There is a saying:
“All customers are important, but not all customers are equal”
This implies that some customers bring more value to the table than others, but it also implies that you must not ignore those customers who don’t bring as much value; your challenge is to ensure those customers needs are met efficiently and that you are clear about what you can and can’t offer.
In our experience, less than 10 customers bring 40% - 60% of the revenue and margin to an organisation – irrespective of whether that organisation had 100 customers or more than 1,000 customers. In effect, it’s the 80:20 rule taken to the extreme.
This is important - once you understand which customers and products bring the most value, you then can understand which raw materials are used for those customers and products. And as a result, you can adapt our planning and procurement strategies to protect that value. And the key to this is the principle of segmentation. The Business Dictionary defines segmentation as “the process of defining and subdividing a large homogenous market into clearly identifiable segments having similar needs, wants, or demand characteristics – refer http://www.businessdictionary.com/definition/market-segmentation.html.
You can use customer segmentation to classify the customer base into 3 – 4 segments. Revenue and margin are usually the two most important criteria within the segmentation matrix. But other criteria could include market share, willingness to innovate, willingness to jointly collaborate, global vs local player, growth potential, etc – an example of a 3-segment matrix is detailed in the following Customer Segmentation Matrix table.
Remember that your organisation is wanting to grow. Your Segment 1 customers should not only be those customers that already bring a disproportionately large share of revenue and margin, but also have the capacity to grow further. Their growth is your growth! Sometimes you may have a reasonably large customer who has the majority of their market share. Their ability to grow further is therefore limited (they’re prone to market share erosion by their competitors) and they might be better considered as in Segment 2 customer category rather than a Segment 1 category.
Customer segmentation on its own isn’t sufficient to drive our customer centric behaviours. Your customers buy your products, so customer segmentation goes ‘hand-in-hand with product segmentation. Products usually also follow the 80:20 rule albeit you may need to use some aggregation from SKU level into family level to get meaningful assumptions.
The Product Segmentation matrix ………………….
Segmentation and S&OP
Having defined the customer and product segments, these can now be used in the S&OP process as the foundation for managing competing priorities.
Sales and Operations Planning (S&OP) is a major business process adopted to manage the balance and trade-off between the conflicting preferences of the supply and demand. A properly implemented S&OP process routinely reviews customer demand and supply resources and “re-plans” quantitatively across an agreed rolling horizon. The re-planning process focuses on changes from the previously agreed sales & operations plan. While it helps the management team to understand how the company achieved its current level of performance, its primary focus is on future actions and anticipated results. It also links high-level strategic plans with day-to-day operations. It is one of the most critical business processes used to achieve best in class performance to consistently outperform competitors.
We’ll discuss the S&OP process in more detail as part of the 4th Pillar of Successful Businesses – the Focus on Productivity
Customer Value Management
Customer Value Management (CVM) is a powerful tool that organisations can use to determine the ‘stickiness’ of its customers. By surveying customers (preferably using an independent ‘market watch’ organisation to avoid bias), can determine the following 3 criteria:
- What products/services the customer most values
- How customers rate the supplier’s performance for those products/services
- How customers rate the supplier’s performance against the competition (ie their other suppliers of similar products/services
The outputs of the CVM Surveys include both the Nett Promoter Score (NPS - albeit it won’t usually be the sole KPI) as well as other valuable both quantitative and qualitative information from your customers. How to we use this information? Aligning the CVM results and NPS with the customer segments previously discussed, customer service strategies can be realigned to ensure the right levels of services are being appropriately applied to each customer segment, thereby enhancing customer and value retention and improving competitor resilience.
Segmentation principles are used to identify those customers and products that bring the most value to the organisation. Segmentation is used to define the level of service to each customer segment and to manage competing priorities within the sales and operational planning (S&OP) process. Customer Value Management (CVM) is a tool that can be used to ensure the services supplied align with those that the customers most desire, and to understand an organisation’s customer service performance against those of its competition, as the customer perceives it. Customer Plans are then adapted to provide the strategies for business growth.
Value Chain Connections Ltd can help with defining your segmentation process and adopting segmentation as a core part of your customer service parameters and S&OP process. For more information, visit our website www.valuechainconnections.com or contact Alistair (email@example.com, mob +64 21 610 918) or Natasha (firstname.lastname@example.org, mob +64 21 432 681).