How Customer Partnerships Lead to Internal Success
The ultimate partnership is that between suppliers and customers. It is said that the customer defines quality, and in a true customer partnership, customers should be involved in the product design/definition process for all except the most innovative items, so that quality and performance can be properly defined. Many companies either over- or underspecify products because they never asked what the customer needed.
In some cases, customers don’t know what they need, and, in that case, innovators should push on but quickly gather feedback for design updates in the second round of release. Apple is very good at this. Steve Jobs often said that customers would have never asked for an iPod, but once they had one they asked for it to be attachable to a shirtsleeve for running and exercise. These feedback loops can dramatically shift the landscape for companies, allowing them to innovate in a responsive way.
Markets change swiftly, and partnerships between suppliers and customers can help address rapid change. Customers need speed—speed in getting products to market, in getting new products from design to distribution, and in responding to unexpected demand. Because markets change so quickly, companies need to be agile and flexible in order to avoid getting caught with obsolete inventory. The ability to shift production and distribution rapidly is a core competency that suppliers need to develop to partner effectively with their customers. By increasing speed, flexibility, and agility, suppliers can dramatically increase their value to their customers.
If you’re going to measure only one thing from an operational perspective, it is shipped on time. If you can’t ship on time, customers become unhappy and look for new suppliers. By working with customers to help predict and smooth demand, suppliers can serve them better and provide innovative products at the right time in the right quantity at the lowest possible cost.
The concept of the Perfect Order embodies this ideal. A Perfect Order is completely error-free. The measure is of the percentage of orders delivered to the right place with the right product, at the right time, in the right condition, in the right quantity, with the right documentation, and, eventually, with the right invoice. Perfect! Some companies will actually fine their “partners” for errors, sometimes to the tune of many thousands of dollars. Fines are a poor basis for a partnership.
The key here is to align the company’s goals with the customer’s goals to help everyone serve customers. Once again, collaboration and partnership are different in that regard, much the same as committees and teams. Note that these partnerships apply, no matter what the products or services are; as long as there is a supplier and a customer, partnerships can be developed, even within the company.
By reversing the perspective on the supply chain and looking at the customer first, companies can improve and innovate in ways they never thought of, while optimizing their performance and service levels. After all, your customers have a vested interest in your success.
Can Demand Be Managed?
One of the keys to success in Lean or World Class is smoothing the flow of materials or services throughout the supply chain. One way to accomplish this is by managing demand, which not only improves cash flow and profitability but also allows companies to serve their customers better and allows customers to plan their operations better.
Many companies rely solely on sales forecasts to drive production or distribution planning. They often don’t try (or don’t know how to use) customer real-time information for planning purposes. Wal-Mart helped pioneer radio frequency identification (RFID) to hasten the flow of product movement information to help plan deliveries and load trucks. Many other companies use point of sale (POS) information to see what products moved from customers’ shelves, usually the day before, but sometimes in real time so that shelves can be restocked to maximize sales and service levels.
Toyota uses an allocation process to help their dealers promise very fast turns on cars ordered to customer specifications. Using the allocation process, they tell dealers how many cars of each type they can access and, thus, smooth production at least at the model level. By having very flexible factories, they can produce the options quickly for best customer service.
Partnerships prioritize customer outcomes, rather than profitability and cash flow as driving forces. In her book Leading With Noble Purpose: How to Create A Tribe of True Believers, Lisa McLeod writes that when companies focus on their purpose in the context of serving customers first, the profit and cash flow will follow. She cites a number of examples where this perspective led to dramatic growth, far higher than previously achieved with executive focus on profits. In these partnerships, customers are motivated to provide their suppliers with all of the information they need to serve them successfully and accelerate profit and growth.
At Supra, we provided our suppliers with a rolling monthly forecast for the next 12 months to help them plan materials and labor flow, thus helping to drive costs down and service levels up. We also had almost 100 percent Kanban (an auto replenishment system) with our suppliers, which tended to smooth the flow of materials through smaller, more frequent order quantities. In some cases, every time we submitted a Kanban pull, we also sent an updated short-term forecast to help refine planning, which allowed us to achieve a 99.8 percent shipped on time with inventory turns over 15.
Getting Information Quickly
One of the keys to success in customer partnerships is the rapid movement of information both up and down the supply chain. Remember, partnerships are based on relationship and trust, and the foundation is communication. Getting information and getting it quickly is critical to strong relationships with customers. The kinds of information that can be shared include
Order information
Designs
Product specifications
Quality requirements
Invoice/payment information
Performance measures/scorecards
General relationship status
Upcoming needs
Changes in the way business is being conducted
Forecasts and plans
The sooner the partners have the information, the sooner they can take action to deliver products and services on time, to specifications, and at the lowest possible cost. Strong, rapid communication helps make that happen.
Customers and suppliers working in partnership can also help design the distribution networks to move materials through the supply chain faster and with lower investment in inventory. Working together to understand product demand and flow, the partners can determine what items should go where to provide the best possible service.
One of my clients was a major distributor of plumbing materials ranging from fire hydrants to sprinkler systems to irrigation systems and construction pipes. They had over 30 branches in the northwestern United States that served a wide variety of customers. Working with their customers to understand the demand and flow of materials in each location, they discovered significant differences in the types of products needed in each region. For instance, demand for irrigation products was high east of the Cascade Mountains, but the population west of the mountains had higher demand for sprinkler systems. Understanding the customers’ demand patterns allowed the company to redesign its distribution network for efficient inventory placement while keeping the levels down. This yielded better service, higher profits, and lower capital investment in inventory.
There are a number of ways to foster good communication. Many companies focus on electronic communication, but face-to-face is often the most effective means, especially if the information is complex, important, or proprietary. Many times, using a meeting as an excuse to visit the customer or supplier not only helps cement the relationship but also contextualizes how products and services are used.
One past client made metal parts for military vehicles that were produced by the customer. We asked the customer to bring a completed truck to my client’s facility so that the employees who made the parts could see how they were used on the truck. The employees enjoyed climbing around on the truck looking for the parts they had made, and when they saw their parts, it was like a proud papa looking at his baby in the nursery. The perspective that provided made a difference to the employees’ attention to detail and understanding of performance, which made the quality and speed of delivery even better.
Having meetings alternating between customer and supplier locations helps in many ways. At Supra, our purchasing team visited key suppliers every six months and the suppliers visited us on alternate quarters. That way, we could see how the suppliers were making our parts and they could see how their parts were used. In addition, many more people could be involved in meetings and tours, further solidifying the relationships. As VP, Operations, I’d go along on the visits at least once a year to build my relationships with the executives of the supplier company, which was particularly useful when something happened that needed executive intervention, such as reallocation of resources to meet a crisis or opportunity.
Tools such as e-mail and video conferencing can be effective for certain kinds of communication, but I feel strongly that nothing beats face-to-face for strengthening relationships. A good mix of frequent communication can provide dividends when working with partners.
Thinking Backward: Reverse the Supply Chain for Innovative Results
Many companies think about how their suppliers can better serve them through services such as vendor-managed inventory (VMI), where the supplier comes onsite, inspects the inventory-holding locations to see if replenishment is needed, and delivers and stocks the product without anyone from the company actually touching the stock. This saves a lot of labor time and provides just-in-time delivery, which can dramatically reduce inventory levels and invested cash. The interesting thing is that companies can do that for their customers as well, but often they don’t think about proposing it as a service until the customer asks. Most companies should just turn around and look down the supply chain toward their customer and provide the same services to them that they ask for from their suppliers.
One innovative approach is to improve customer service levels by having the customers run your warehouse operations. Alaska Communications (ACS) dramatically cut warehouse costs and increased service to its construction contractor customers by having the contractors actually run the company’s warehouses. ACS provides wire line services throughout the state of Alaska. Each year, it tackles major construction projects to install and maintain telecommunications infrastructure. To provide better service to customers and construction crews, the company has several warehouses throughout the state, two of which experienced highly variable demand but were staffed full-time.
ACS partnered with a contractor to replace ACS warehouse personnel with part-time contractor personnel to create a variable workforce (in balance with variable demand) and improve service. The contractor provided personnel as needed to receive and dispense materials at the warehouses to construction crews at (potentially) all hours of the day.
The result was a win for both parties. ACS reduced their labor costs by 75 percent and gained much-needed flexibility to handle the highly variable load during the construction season. Outsourcing improved service levels, reduced costs, improved agility, and boosted capacity. ACS avoided layoffs by not replacing staff members who retired.
The customers reaped several benefits from the new arrangement, including better communications with ACS, early notification of new project opportunities, and flexible hours for the warehouse location that better met their needs. This partnership between ACS and its contractor/ customer had its rough spots initially, but trust, relationship, and strong communication helped both companies increase their capacity and profitability beyond what they could have achieved separately.
Auto replenishment systems such as Kanban and VMI can help manage and smooth demand to shorten supply chains and accelerate the movement of materials. This not only helps improve service but also allows new products and designs to be introduced more quickly and without exposure to slow and obsolete inventory.
Using Supplier-Managed Delivery to Improve Customer Service
ACS has a unique challenge being in the state of Alaska where winter lasts almost eight months a year. For a telecom company, putting fiber cable into the ground, building small support buildings throughout the state, and putting up communications towers can be particularly challenging when the ground is frozen. A typical construction team, the internal customer for supply chain management, is comprised of 12 to 16 people and the projects can be miles away from any support such as motels and restaurants. Sometimes movement has to occur using snowcats, snowmobiles, and other nontraditional means. Suffice it to say that if crews are standing around waiting for parts, the costs can add up very quickly.
ACS used to do almost all of their own kitting and delivery of parts from central or branch warehouses strategically located around the state. Parts requirements would be planned by construction engineering, ordered by purchasing, and stored in the warehouses until needed by the construction project. Some of the difficulties in delivery of complete parts kits included
Lead times from suppliers
One project “borrowing” parts allocated to another project
Warehouse mispicks
Warehouse out-of-stock situations
Lack of standardized parts callouts
All too often, crews had to wait for parts before they could complete their jobs.
The company decided to partner with one of their key suppliers to have the supplier kit the entire construction package at the supplier’s warehouse and deliver the kit directly to the construction site, or place the kit in a container, which could be delivered to ACS and transshipped to the site without being opened. The supplier would even arrange for parts they didn’t normally carry to complete the kit for shipment.
The results of this partnership included
Dramatic reduction of parts shortages and waiting at the construction locations
Construction jobs being completed quicker, allowing for more jobs to be done during the short construction season
Inventory at the warehouses was cut by almost 75 percent
Warehouse activity was reduced and productivity greatly improved
There were also great benefits for the supplier partner:
Increased volume of business because they provided the total span of parts for all jobs
The ability to leverage their warehouse resources due to the increased volumes for greater productivity and use of assets
“Locking in” the business by becoming the key supplier for construction projects
Better pricing from their own suppliers because they were buying in larger volume
A seat on the project design team so that they could see requirements much earlier, allowing better plannings
This became a big win for both partners and served the internal customer (the construction teams) much more effectively.
ACS also achieved dramatic results by developing creative ways to partner with external customers. Their Juneau warehouse was only open from 8:00 a.m. to 5:00 p.m. five days a week, due to the total annual volume of activity, but during the summer construction season, it is light outside for over 20 hours a day. Contractors liked to maximize their activities during those long daylight periods and were frustrated that the warehouse was not available during the entire daylight period. Rather than add staff for the short construction season, which was difficult due to both limited availability of people and training requirements, ACS approached the customer/contractors and asked if they would be interested in running the warehouse for ACS during the summer. One contractor jumped at the chance.
One concern was ACS’s ability to control parts when they were essentially letting the fox into the henhouse. But since ACS brought all of the parts to the warehouse from suppliers in Seattle or by transfer from other warehouses, they knew exactly what was going to the Juneau location. Because ACS provided the specifications for the construction projects, they knew exactly what should be going out, and periodic audits checked what remained in the warehouse. The operating contractor owned any discrepancies.
The result was a 65 percent reduction in warehouse costs for ACS and much greater project productivity for the contractor. The contractor also had the advantage of seeing the parts arrive for new projects far sooner than when they used to be notified. This customer partnership provided dramatic benefits to both parties in the relationship.