Although the religious significance of the winter holidays often goes unacknowledged in corporate boardrooms, everybody who works for consumer goods producers, retailers, or logistics providers is well aware of the financial significance of having products manufactured, shelves stocked, and deliveries made before December 24. Nobody wants to hear from disappointed parents—not to mention very irate senior executives—that they ruined Christmas for thousands or even millions of kids because they couldn't keep their supply chain promises.

So what happens if you're one of the world's biggest retailers, with a reputation built on timely deliveries, and you're not able to fulfill all of those orders in time for Christmas? And what do you do if the reason you're going to be blamed for all the very unmerry Christmases is that you failed at the very thing you're supposed to be better at than anybody else—having full visibility into your supply chain?

That's exactly what happened to online retail giant Amazon in December 2013. That whole experience has become a supply chain legend, a kind of worst practice horror story used to frighten young supply chain professionals who are tempted to take shortcuts when developing their logistics strategies. “If it can happen to Amazon,” the warnings sound—a game-changing industry leader that won its customers over so completely that it could launch a paid subscription service based on the promise of free guaranteed deliveries—“then it can happen here, too.”

So what made December 2013 such an unmerry Christmas for Amazon? Basically, the retailer failed to deliver on its promises to deliver—those “guaranteed to arrive by” dates became more fiction than fact because the package delivery companies Amazon relied on—mostly UPS, and to a lesser extent FedEx—were overwhelmed by the sheer volume of goods people were ordering in the days leading up to Christmas, and there simply weren't enough cargo planes available to accommodate all those packages. As The Wall Street Journal described it, on the morning of Christmas Eve that year, while employees at the UPS Worldport air hub in Louisville, Kentucky, were madly scrambling to sort and prepare packages to be loaded onto planes, dozens of other workers were just “standing around idle because the unexpected glut of packages from last-minute shoppers had swamped the company's air fleet.” As UPS explained, demand was much larger than it forecast.¹

Although UPS is extremely efficient and its Worldport operations is almost legendary in its ability to sort and ship out packages day in and day out (see Chapter 11), its system was overwhelmed by the sheer volume of parcels that arrived with promised delivery dates before December 25. After all, it was the retailers themselves who attempted to game the system to their advantage by luring in online shoppers with deeply discounted products “guaranteed” to arrive before Christmas, and then pinned all their fulfillment hopes on the logistics capabilities of UPS, FedEx, the USPS, and other delivery specialists. And it was the retailers—Amazon, Walmart, Kohl's, and others—who ended up having to explain to unhappy customers what went wrong

As Eric Best, a serial entrepreneur focused on e-commerce retail fulfillment, told the WSJ, “It's easy to blame UPS, but it's the retailers that are pushing these next-day shipping offers in the final hours of the shopping season. Retailers are driving consumer expectations to get stuff they ordered by the next day, and the later shoppers wait, the harder it is to predict.”

And as the bellwether for all online retailers—and indeed, for all retailers of all types—Amazon was determined to apply the lessons it learned from the Christmas 2013 fiasco to make sure such a customer service failure would never happen again. In fact, CEO Jeff Bezos had already delivered a preemptive strike against delivery failures when he revealed (during a 60 Minutes interview) that Amazon was developing a fleet of autonomous delivery drones that can transport objects and packages weighing up to five pounds within 30 minutes of an order being placed, within a 10-mile radius of an Amazon fulfillment center. Admitting that both the technology and the infrastructure to make neighborhood delivery drones a reality were still years away, Bezos pointed out that while technology might make faster deliveries possible, the “big idea” that defines Amazon is customer centricity—“putting the customer at the center of everything we do.”²

And it's that drive to keeping the customer satisfied that continues to propel Amazon to devise new technologies and processes. “We know our customers want things faster. They want ordering from us to be as predictable and automatic as entering a room and turning on the light,” explains David Bozeman, vice president of Amazon Transportation Services, who describes his team's focus on customer service as being more like customer obsession. Whether it's the more than 200,000 warehouse robots the company had deployed throughout various operations by 2020, the artificial intelligence-powered Echo and Alexa devices that among other things allow customers to order products from Amazon by voice, or even the more fanciful projects the company has patented such as a flying warehouse blimp that could serve as a fulfillment center for delivery drones, Amazon is doing both the big things and the little things it needs to do to ensure its customers have products delivered to their doorsteps (or even inside their homes, thanks to another innovation called Key that allows delivery personnel access to a customer's front door through a scanning device).³

The challenge, Bozeman articulates, isn't just to satisfy the customer, but to be able to anticipate the customer's future needs as well. And the secret to Amazon's success, he reveals, is to focus on the supply chain basics. “Your supply chain has to be nimble and flexible, but at the same time you need to be solid on basic supply chain and operations work.”

The Perfect Order

As the pace of commerce has dramatically increased, the patience of customers has similarly decreased. “Better, faster, and cheaper” just isn't good enough anymore; customers today are demanding perfect orders, shipped on time to the minute, at a cost that barely leaves any margin for error—or profit. Every manufacturer faces the same crucial challenge: Your customer expects perfect orders and shipments every time—can your supply chain deliver them, every time? If you can't, then your company faces the consequences of invoice deductions, lost sales, and even lost customers if your customer's expectations are not met.

Edward Marien, long-time director of supply chain management programs at the University of Wisconsin (now retired), describes exactly what a perfect order should look like when he refers to a “customer bill of rights.” According to Marien, the customer has the right to expect:

1. The Right Product in the
2. Right Quantity from the
3. Right Source to the
4. Right Destination in the
5. Right Condition at the
6. Right Time with the
7. Right Documentation for the
8. Right Cost⁴

Failure to deliver on any of these rights can be costly, and the ripple effect from failing at just one of them can be devastating, especially in time-sensitive situations (and these days, everything is time-sensitive). By failing to get products to all of its customers in time for the holidays, Amazon didn't come anywhere near close to perfect order fulfillment. It didn't matter much if they had the right quantity, the right cost, or the right documentation—with delivery by December 24 being the ultimate pass/fail test, Amazon and its logistics partners failed the test.

Amazon didn't waste any time overhauling its logistics weaknesses. While revealing its drone delivery program got the company a lot of attention and publicity, it was old-fashioned transportation rather than cutting-edge technology that helped Amazon address its most pressing need: tighter control over its own supply chain. To do that, the company launched (via acquisition) its own air cargo fleet, Amazon Air, with a hub in Cincinnati, and expected to have 70 planes by 2021, with service to 20 cities. More visible to consumers, of course, has been the growing fleet of Amazon-branded delivery vehicles and trailers, which became almost ubiquitous in neighborhoods during the COVID-19 pandemic, when stay-at-home protocols saw consumers turning to home delivery—from Amazon and others—for just about every product they used to buy in brick-and-mortar stores.

True, Amazon's total logistics costs have skyrocketed over the years, growing more than twenty-fold from 2009 to 2019, according to analyst firm Statista. While the company's shipping and fulfillment expenditures were 15.6% of net sales in 2009, those costs had nearly doubled to 27.9% by 2019. But, not coincidentally, by 2020 Amazon also had nearly 39% market share of all e-commerce sales in the United States. So, whatever the cost, Amazon's growth parallels its ability to deliver quickly, consistently, and correctly to its customers.⁵

The High Cost of Imperfection

Companies today are measuring their supply chain performance by analyzing how often they can deliver perfect orders, as well as how much it costs to be perfect. Consumer packaged goods giant Procter & Gamble, for instance, defines a perfect order as a product that arrives on time, complete (as ordered), and billed correctly. When P&G set out in the 1990s to measure how close it was coming to this high-water mark, it discovered that every imperfect order was costing it $200. P&G found it had too many areas of imperfection that added unnecessary costs: the cost of redelivery when orders were late; replacement costs if shipments were damaged; processing costs for quantity adjustments, as well as price and allowance deductions.⁶ Since that time, the company has committed itself so fully to a customer focus that it's been named one of the top supply chains in the world 16 years in a row by analyst firm Gartner.

In the book Supply Chain Redesign, authors Robert B. Handfield and Ernest L. Nichols Jr., offer the following equation companies can use to calculate the total cost of moving a product through their supply chain, and then determine how best to reduce costs without reducing service:

Price per unit

• + Containerization cost
• + Transportation freight costs
• + Duties and premiums
• = Landed cost
• + Incoming quality control
• + Warehouse costs
• = Dock-to-stock cost
• + Inventory carrying costs
• + Defective materials
• + Factory yield
• + Field failures
• + Warranties
• + Service
• + General and administrative costs
• + Lost sales and customer goodwill
• = Total cost⁷

Every Day Is a Holiday

Earlier in this chapter, we looked at how failure to deliver packages in time for the Christmas holidays in 2013 led to a renewed push for better processes and technologies, and while there are still occasional hiccups and glitches, the Christmas seasons have come and gone relatively snafu-free since then. That by itself is a testament to retailers creating and then enhancing the various best practices we've discussed; it's even more impressive when you consider that the retailers themselves have created even more holidays to drive even more shoppers online during what used to be off-peak seasons.

As Greg Hewitt, CEO of package delivery specialist DHL Express US, has observed, e-commerce has helped to expand holidays well past their regional and local origins. “Chinese New Year and Duwali have joined Christmas and Valentine's Day as important, global holidays that see a significant spike in online shopping—and corresponding delivery needs,” he notes. “Consumers are looking across borders and finding opportunities to buy in seasonal holiday times that were once confined; consider that Alibaba's Singles' Day for Chinese shoppers now reaches the Philippines, Thailand, Malaysia, Singapore, and Vietnam. Amazon's Prime Day has also expanded to new global regions.”⁸

These new global holidays, Hewitt points out, have put a significant strain on supply chains. “Delivery networks need to adapt to these instances of sporadically high orders, especially given that consumers expect fast and on-time delivery regardless of whether they are seeking a holiday present or a deeply discounted item for personal use,” he says. Alibaba, China's answer to Amazon, has developed its own logistics network, Cainaiao, to streamline the order fulfillment process for Singles' Day. Of course, not every company can afford its own logistics network, which is why regional fulfillment offers companies a way to get closer to their customers.⁹

One Good Return Deserves Another

Our consumer culture has become so fickle, particularly in this era of e-commerce retail, that even when an order is perfectly delivered—the right product, the right condition, the right time, etc.—the customer still might not be happy, and will end up returning it. The problem has gotten so bad, thanks to the rise of e-commerce and the attendant ship-it-back-if-you're-not-satisfied culture, that the cost of product returns is now well north of $400 billion, with some predicting that amount could top $1 trillion at some point in the 2020s. That's how much it costs US manufacturers and retailers in lost sales, transportation, handling, processing, and disposing of goods that were purchased but ultimately returned. It's estimated that customer returns can reduce a retailer's profitability by 4.3% and a manufacturer's by 3.8%. Returns have always been a problem for retailers, as historically 5% to 10% of goods bought in a brick-and-mortar store are returned; lately, though, with e-commerce's growth showing no signs of slowing, the return rate has also climbed ridiculously, accounting from between 15% to 40% of all online purchases.¹⁰

According to supply chain consulting firm Tompkins International, these are the top six reasons customers return products:

1. Customer ordered incorrect product or size.
2. Customer decided product was not needed or wanted.
3. Customer returned the product without giving a reason.
4. Product did not fit description on website or in catalog.
5. Product did not fit customer's expectations.
6. Company shipped incorrect product or size.

These six reasons account for nearly 75% of all reasons for returns, and yet only the fourth and sixth reasons are attributable to company error. “From the customer's viewpoint, it really doesn't matter who caused the product return,” observes consultant Bruce Tompkins. “The customer wants to return the product with as few difficulties as possible, and the company wants to retain its customer and keep costs down. Returns are inevitable, so why not use metrics to monitor and improve reverse logistics activities?”¹¹

That's precisely what high-tech manufacturer Logitech has done. Product obsolescence is a constant irritant to the high-tech industry, where the value of a consumer device seems to start dropping as soon as the product leaves the design stages. “Price erosion is the silent killer,” says Gray Williams, a consultant with Symphony Consulting and formerly vice president worldwide of supply chain for Logitech, a manufacturer of computer devices. Because returns can amount to as much as 10% of all outbound shipments, Logitech is constantly striving to synchronize its supply and demand to keep inventory moving.

That synchronization involves a process called progressive dispositioning, where the goal, as Williams explains, “is to continuously identify and disposition excess as early in the cycle as possible.” Dispositioning includes repairing, refurbishing, liquidating, and recycling/scrapping. The returns process includes auctioning off excess inventory via online websites. “You need to keep your inventory moving,” he says, “so disposition your excess and obsolete inventory wherever it is located, whether that's in the factory, a distribution center, or the channel.”

Reverse logistics is often misinterpreted as just a way of making pennies on the dollar off of products that you didn't think you could even give away any more. Logitech, however, is methodical in the way it measures its return processes. It uses an excess inventory index that calculates the cost of doing nothing (i.e., how much money the company stands to lose by not properly dispositioning its returned/excess products):

Period costs include warehousing, standard revision costs, maintaining excess and obsolete reserve, and the cost of capital. The price erosion factor depends on the company and its products, but by way of example, let's assume it's 1%. If a company is carrying $40 million in current excess inventory and has $30 million excess in the channel, when you add those together you get $70 million; when you multiply that amount by 1%, it equals $700,000. Then add in the total period costs—let's say it's $1.3 million per month. For that hypothetical company, the cost of inaction for one month is $2 million.

To benefit from a reverse logistics effort, a company first has to know what its actual return rate is, and then determine what return rate is acceptable. James Stock, a professor with the University of South Florida, studied product returns and found that many companies don't know what's coming back, how much is coming back, or what recovery rate to expect. “In our study, companies doing really well are seeing 80% to 90% recovery rates. Average companies realize rates around 60%. For companies doing poorly, 40% is the norm,” Stock observes.¹²

Supply Chain in Reverse

Although historically many companies have more or less accepted returns as a necessary cost of doing business, that's no longer the case. In addition to allowing companies like Logitech the opportunity to reclaim revenues that would otherwise be lost, a reverse logistics program can also help companies improve their products. “Product failure and returns information can be fed back to sales or research departments to identify root causes such as packaging or product design errors,” note consultants Jonathan Wright and Michael Joyce with Accenture's Supply Chain Management practice. Focusing on reverse logistics can also help companies reduce or eliminate the product defects that led to the returns in the first place.¹³

According to Accenture, only 5% of electronics and high-tech products are returned due to product defects. “Buyer's remorse” is responsible for 27% of the returns, but the overwhelming majority of high-tech products are returned with nothing wrong at all. As Tony Sciarotta, executive director of the Reverse Logistics Association and previous director of asset recovery and returns management at high-tech appliance manufacturer Philips Consumer Lifestyle, puts it, “no fault found” became the bane of his existence. Philips was seeing a 40% return rate on MP3 players, for instance, but 90% were classed as “no fault found.” That led Philips to stop thinking of returns as a product issue and instead as a customer experience issue, and to focus on what exactly it was about the product that led so many customers to want to return it.¹⁴

After consulting with colleagues at other high-tech companies, Sciarotta started asking, “How do we make these products easier to use so we do not get the returns, and why are so many returns happening?” The answer was to address potential problems at the design stage of the product by focusing on ease of use and interoperability. If the product was simple to purchase and simple to use, then it wouldn't be returned as often, he explains. The thinking at Philips became, “We have to make products that the customers love,” and the company embraced the concept of ease-of-use in its designs. Each division of the company also formally established a returns department with the goal of reducing the amount of product returns.¹⁵

The payoff for better managing returns can be significant. Accenture has estimated that by reducing the number of “no fault found” product returns by 1%, a major high-tech manufacturer such as Philips could save more than $20 million annually in return and repair costs.

Money in the Bank

The book The Value Profit Chain relates the story of a manager of a chain of Domino's Pizza outlets who taught his employees to think of the lifetime value of a customer, not just a one-off $8 purchase. If somebody orders one pizza per week for 10 years, that represents a total of $4,000 spent over a decade. The manager told his employees, “Think of the customer as having $4,000 pasted on his forehead, which you peel off $8 at a time. Then act accordingly.” To reinforce his message, he would give bonuses to the employees with the fewest number of customer complaints.¹⁶

While the pizza manager's estimate was based more on his gut than on a spreadsheet calculation, he had the right idea. One of the keys to building successful and long-term relationships with customers is being able to calculate customer lifetime value, a metric that attempts to measure how much a customer will spend throughout his or her entire relationship with a company. To arrive at this value, determine how many regular customers you have (let's say it's 1,000), how long they typically remain loyal customers (say it's five years), and your typical net profit over that period of time ($5,000,000). Divide the total net profit by the number of customers and you end up with $5,000. So every one of your regular customers is worth $5,000 in profits over a span of five years.

This rudimentary example illustrates why companies consider a good customer to literally be money in the bank, which is why nurturing and extending the lifespan of a customer is a trait common to best-in-class supply chains. Variously referred to as “hero customers,” “loyalists,” and “apostles,” these customers have bought into the promises your company offers them, and keep coming back for more. It's important that you accurately identify the 20% of your customer base that makes up this loyal “hero” base, because these customers produce all of your profits.¹⁷

A Better Way to Sell Mouthwash

Back in 1995, retail giant Walmart launched an initiative with the simple goal of establishing a closer relationship with its vendors, an effort that was borne mainly out of frustration with the status quo. Pharmaceutical supplier Warner-Lambert (now part of Pfizer) had a problem keeping Walmart's shelves stocked with its popular Listerine mouthwash product. It was the classic retail dilemma—the out-of-stock rate was far too high, which forced Warner-Lambert to maintain significant safety stock to satisfy the demand from its retail customers. Jay Nearnberg, Warner-Lambert's director of customer replenishment at the time (now senior director of collaborative planning and process management with Pfizer), was feeling the pressure since the out-of-stock problem was costing his company millions of dollars in lost sales. It was also hurting the company in terms of credibility, both with retailers and with consumers.

Walmart had laid down the law: Warner-Lambert needed to get its in-stock levels up to 98%, or else. The “or else” included such dire punishments as the retailer cutting back on shelf space, no longer supporting promotions, and refusing to add new products from the company. So, for Nearnberg, failure to reach 98% was not an option.

As Ronald Ireland, information technology manager with Walmart at the time (now a consultant with Oliver Wight), remembers, Nearnberg consulted with the retailer about its automated replenishment system, Retail Link, and learned that Warner-Lambert, like other suppliers, could use the system to access point-of-sale history as well as a 65-week forecast. Up to that point, Warner-Lambert wasn't using Walmart's Retail Link to develop its own forecasts; for that matter, neither were most of Walmart's other suppliers.

“It was well known that Walmart's demand forecasts and replenishment schedules were inaccurate,” Ireland explains. “There also would be challenges in integrating a single customer's forecasts into production planning without additional customers' critical mass also included.” Walmart, however, assumed that its trading partners would provide useful feedback that would improve the quality of the forecasts. The real goal, according to Ireland, was for the suppliers to collaborate with the retailer to improve the accuracy of the forecast and replenishment schedules. “The replenishment plan,” he explains, “was based on the forecast, so it was imperative to create as accurate a demand forecast as possible. The more accurate the forecast, the more accurate the replenishment schedule would be.”¹⁸

Ultimately, the two companies launched a pilot program called collaborative forecasting and replenishment. This project let both companies share and compare sales and order forecasts, with one of the benefits being that Warner-Lambert now knew when Walmart was scheduling promotional events. In the past, not knowing exactly when such promotions would occur, the drug company's strategy was to keep enough inventory on hand to prevent out-of-stocks.¹⁹

By linking customer demand with replenishment needs, the in-stock percentages for Listerine increased from 85% to 98%. Equally impressive was a sales hike of $8.5 million during the pilot test, which not only convinced Walmart and Warner-Lambert that sharing information with supply chain partners was a good idea but also led in 1996 to a full-scale launch of the slightly renamed collaborative planning, forecasting, and replenishment (CPFR) effort, under the sponsorship of the Voluntary Interindustry Commerce Standards (VICS) association.²⁰

A Nine-Step Program for CPFR

The basic CPFR process model developed by VICS focuses on these nine steps:

1. Develop a front-end agreement. The retailer/distributor and manufacturer establish guidelines and rules for the relationship.
2. Create a joint business plan. The manufacturer and retailer create a partnership strategy and then define category roles, objectives, and tactics.
3. Create a sales forecast, based on the retailer's point-of-sale (POS) data and other information. The sales forecast is then used to create an order forecast.
4. Identify exceptions for the sales forecast. The partners identify items that fall outside sales forecast constraints set jointly by the manufacturer and retailer/distributor. They then develop a list of exception items.
5. Resolve/collaborate on exception items. The partners then submit an adjusted forecast.
6. Create an order forecast. The partners combine POS data, causal information, and inventory strategies to generate a specific order forecast that supports the shared sales forecast and joint business plan. This allows the manufacturer to allocate production capacity against demand while minimizing safety stock. It also gives the retailer increased confidence that orders will be delivered.
7. Identify exceptions for the order forecast, based on the predetermined criteria established in the front-end agreement.
8. Resolve/collaborate on exception items. As with step 5, the partners then submit another adjusted forecast.
9. Generate the order. The order forecast becomes a committed order.²¹

Don't Expect Collaboration to Be Easy

CPFR is just one in a long tradition of retail-centric efforts to solve a problem that can't really ever be solved but at least can be guessed at more intelligently: How many products are consumers going to buy, and when? Vendor-managed inventory (VMI), for instance, which got its start several decades ago, is a replenishment practice where the manufacturer manages the inventory of its products at a retail location. The retailer provides regular inventory updates to the manufacturer, who's responsible for replenishing that supply as needed. The manufacturer benefits by having more reliable sales data to base its forecasts on; the retailer benefits because it no longer has to maintain its inventory levels. VMI involves the supplier, rather than the retailer, taking responsibility for maintaining the retailer's inventory levels based on transactional data shared by the retailer.²²

Other collaborative processes, such as quick response (QR) and efficient consumer response (ECR), have the advantage of being more responsive than processes based strictly on customer forecasts. As author Paul Myerson explains, “[QR and ECR] are driven largely by actual customer demand and also provide visibility in out-of-stock situations so that manufacturers and retailers can react more quickly. Point-of-sale information can add visibility across the entire supply chain as well when included in a collaborative replenishment process.”

Collaborative efforts in general, as we've mentioned earlier, are difficult to set up and even more difficult to achieve consistent and lasting value. Myerson estimates that as many as 8 in 10 collaboration attempts end up in failure, for any number of reasons:

• Relying too much on technology or a single type of technology
• Failing to understand when it's the right time to collaborate
• A nagging element of distrust among supply chain partners
• A lack of commitment to the process from senior management
• Spreading limited resources too thin over too many competing initiatives

So with such a high failure rate, why even bother trying to collaborate? Simple, Myerson says: “Collaboration is well worth the effort as it can result in reductions in inventories and costs, along with improvements in speed, service levels, and customer satisfaction.” So it really does all revolve right back to where it started: the customer.²³

Respecting Your Partners

As Jeffrey Liker explains in his book, The Toyota Way, one of the key principles that automaker Toyota follows day in and day out is: Respect your extended network of partners and suppliers by challenging them and helping them improve.²⁴ (See Chapter 6.) Echoing that philosophy, Robert Handfield, a professor at North Carolina State University, observes that, even during times of recession and economic turmoil, companies need to work with each other, as it's in everybody's best interests that their industries do not fail. “Managers of supply chains need to reach out to critical suppliers and work on strengthening their business,” Handfield notes, “both to weather the crisis and increase profits for the future.”²⁵

Consulting firm Plante Moran conducts an annual study to determine exactly which automotive original equipment manufacturers (OEMs) did best when their suppliers were given a chance to weigh in. In a 2019 survey of more than 400 Tier One suppliers, Toyota and Honda were far and away the companies suppliers preferred to do business with, although tellingly none of the six major OEMs studied were given a grade of good. (The Plante Moran OEM-Supplier Working Relations Index measures each OEM on a matrix that includes Good, Adequate, Poor, and Very Poor. Toyota came the closest to the Good threshold.) GM and Ford took the third and fourth slots, near the bottom of the Adequate rankings. Nissan and Fiat Chrysler (FCA) brought up the rear, with grades of Poor.²⁶

Explaining the significance of the rankings, Dave Andrea, principal in Plante Moran's Strategy and Automotive/Mobility consulting practice, observes that given the competitive pressures automakers are under, “they need to be laser-focused on improving their supplier relations in order to best leverage their supply base.” Over the first two decades of the twenty-first century, the Working Relations Index (launched in 2001) has illustrated that the heart of OEM buyer/supplier relationships is trust and communication. On the supplier side, that trust is demonstrated through such activities as price reductions on parts and investments in new technology, with the expectation being that the OEMs will reciprocate by continuing to do business with the supplier.

But it's not just purchasing that influences how well an OEM will score in the rankings, Andrea points out. “For instance, the study asks to what extent late or excessive OEM engineering changes impact on-time development or quality and cost targets, whether the supplier is given flexibility in meeting cost and quality objectives, and whether the supplier is involved early enough in the OEM product development process and kept involved throughout the process.” All OEM functions need to be aligned to take cost and time out of the entire supply chain to meet the OEM's cost objectives as well as to help the suppliers' cost and financial performance, he says.

Suppliers contribute roughly two-thirds of the value of an automobile, Andrea explains, so it is clearly in the OEM's best interest to be a preferred customer to do business with. In short, he says, “Focusing on improving supplier relations has never been more important for the automakers.”²⁷

A Culture of Customer Satisfaction

For several decades, J.D. Power and Associates has studied and measured customer satisfaction, honoring those companies that are best at listening to their customers' voices. Companies who reach that exalted best-in-class status consistently do three things:

1. They collect the right information from their customers.
2. They properly analyze that information and ensure that it gets into the hands of the people who are in a position to use it.
3. They properly act upon that information.²⁸

Companies have discovered the value in using web-based surveys and call centers to collect targeted information from their customers. Business analytics and customer relationship management (CRM) programs are available to crunch through all the mountains of customer data that come in and put that data into some kind of actionable context. But how do you know exactly what to do with that information? J.D. Power suggests every company should be able to answer these four questions:

1. Do you know how satisfied your customers are compared to your competitors' customers?
2. Do you measure how well each individual branch or department in your company is satisfying its customers?
3. Do you understand your customers' needs (i.e., what it takes to make them happy and, more important, get them to do business with you)?
4. Do you know how closely customer satisfaction is tied to your bottom line (i.e., its impact on loyalty, word of mouth, etc.)?

Question 3 is the most important, according to the J.D. Power book Satisfaction, because “understanding the needs of your customer provides a filter through which every decision must be screened. Developing a new product or service? Every phase of that process must begin and end with customer needs. Features, options, pricing strategy; they all depend on the wants, desires, and concerns of your customers.”

The ultimate best practice, as borne out by numerous studies J.D. Power has conducted over the years, is to build a culture of customer satisfaction from the top down, insisting that every employee throughout the organization focus on the customer and then empowering them to do so. If you fail to keep your customers satisfied, they'll find somebody else who can.

How to Get the Most Out of a Relationship

The term collaboration means different things to different people, and can be used interchangeably to describe activities that are transactional, tactical, or strategic. To get a better idea of what collaboration actually means in the real world, Accenture teamed up with Logistics Today (which has since morphed into Material Handling & Logistics) to conduct a collaboration-focused survey of supply chain executives. From that study, a working definition emerged: Collaboration refers to cooperative supply chain relationships—formal or informal—between companies and their suppliers, supply chain partners, or customers, which are developed to enhance the overall business performance of both sides.

The survey also identified the barriers to collaborating with trading partners, which include technology and data hurdles; difficulties in measuring performance; an unclear value proposition; concerns about data security; and a lack of trust. Collaborative efforts require a lot of time and effort, and the payoff for companies typically lags their biggest customers. That can often lead to a “Why even bother?” attitude, which inevitably will doom any collaborative relationship.

So how do you make collaboration work? John Matchette and Andy Seikel, executive partners in Accenture's Supply Chain Management practice, offer these guidelines for getting the most out of a relationship:

• Fit the relationships to your strategy. Define the link between overall strategy and collaboration opportunities, identify the purpose of each collaboration, and be prepared to react quickly to changes in strategy or environment.
• Identify the best partners. Use a range of competitive and market sources to develop the intelligence to spot and evaluate potential partners.
• Optimize your relationship portfolio. Develop systems for timely reporting to enable faster, better-informed decision making about the collaboration. Know how to identify new opportunities based on activity in your current portfolio. Make sensible trade-offs between internal efforts and alliances.
• Maximize day-to-day performance. Use performance measures that reflect the organization's overall business objectives so that the people involved in the collaboration will be able to communicate the “why” and “what” of every alliance they form and to share experiences across alliances.
• Manage the relationship. Plan to communicate and maintain continuous personal contact with key people at partner organizations. Success on this front makes it possible to develop new opportunities from existing relationships.
• Capitalize on your collaboration's assets. Capture and adopt best practices. Share information and leverage collaboration-created assets across the parent company.²⁹