SUPPLY CHAIN MANAGEMENT

Chapter 2: Customer Value in Supply

Chain Management
 Reference
Prescribed textbook:
• Simchi-Levi, D., Kaminsky, P. & Simchi-Levi, E. 2003, Designing and Managing the Supply
Chain, 3rd edition, McGraw-Hill, USA.
Reference textbook:
• Bloomberg, D.J., Murray, A. and Hanna, J.B. 1998, The Management of Integrated Logistics: A
Pacific Rim Perspective, 2nd edn, Sprint Print, Prentice-Hall.
• Bowersox, D.J. Closs, D.J. and Cooper, M.B. 2002, Supply Chain Logistics Management,
McGraw-Hill/Irwin, New York.
• Christopher, M. 1998, Logistics & Supply Chain Management, 2nd edn, Pearson Education.
Essex.
• Cooper, J. 1994, Logistics & Distribution Planning, Kogan Page, London.
• Coyle, J. J., Langley, C. J. & Bardi, E. J. 2003, The Management of Business Logistics: A
Supply Chain Perspective, 7th edn, Thomson Learning, Canada.
• Coyle, J.J., Bardi, E.J. and Langley, C.J. 2003, The Management of Business Logistics, West
Publishing Company, New York.
• Greasley, A. 2006, Operations Management, John Wiley & Sons Ltd, Chichester, England.
• Johnson, J.C. 1999, Contemporary Logistics, Prentice Hall, Upper Saddle River, N.J.
 Reference textbook:
• Lambert, D. M., Stock, J. R. and Ellram, L. M. 1998, Fundamentals of Logistics
Management, McGraw Hill, USA.
• Rushton, A., Croucher, P. and Baker, P. 2006, The Handbook of Logistics and
distribution Management, 3rd edn, Kogan Page, UK.
• Stock, J.R. and Lambert D.M. 2001, Strategic Logistics Management, 4th Edn,
Irwin/McGraw-Hill, Boston.
• Mentzer, J. T., DeWitt, W., Min, S., Nix, N. W., Smith, C. D. and Zacharia, Z. G.
2001, ‘Defining supply chain management’, Journal of Business Logistics, Vool. 22,
No. 2, pp. 1 – 25.
List of additional readings
• Jääskeläinen, A. and Heikkilä, F. 2019, ‘Purchasing and supply management
practices in customer value creation’, Supply Chain Management: An International
Journal, Vol. 24, No. 3, pp. 317 – 333.
 Content

2.1 The shift of thinking about business in SC

2.2 The purpose of a business
2.3 The value chain
2.4 Understanding customer value
2.5 Strategic pricing and customer value
2.6 How is customer value measured?
2.7 Information technology and customer value
2.1 The Shift of Thinking about Business in SC

• One of the most significant breakthroughs in

management thinking in recent years has been the
realisation that individual businesses no longer compete
as stand-alone entities, but rather as supply chains
(Christopher 2005)
• Consider Dell’s Direct Business Model: from vertical to
virtual integration: why is this happening?
• What is the focus of this paradigm shift? Why does it
matter in the supply chain?
 2.2 The Purpose of a Business

• What is the purpose of a business

– Making profit?
– Satisfying customers?
– Etc.?
• And what about:
– Being “a good citizen”?
– Delivering values to shareholders?
– How are profits allocated?
– Etc.?
 The Purpose of a Business (C)

• Business activities involve parties to exchange

resources & work co-ordinately to achieve better
outcomes
• Stakeholder value becomes more focused in business,
i.e. employees, shareholders, public, etc.
• All parties are members in the “business ecosystem”,
‘an economic community supported by a foundation of
interacting organisations and individuals – the
organisms of the business world’ (Tapscott, Ticoll and
Lowy 2000)
• So why is it relevant in the supply chain?
 The Purpose of a Business (C)

SCM is similar to the business ecosystem

concept since it looks at the interconnection
between key processes both within firms and
between firms. SCM crystallises the business
ecosystem idea by providing a process
framework that enables firms to engage in co-
evolvement rather than competition. (Bechtel &
Jayaram 1997, p. 15)
 2.3 The Value Chain

• How do firms create value to their customers?

• The ultimate value a firm creates is measured by the
amount buyers are willing to pay for its products or
service – Buyer value (Porter 1990)
• Firms’ profitability is determined by buyer value &
costs (value > costs), and their competitive advantage
(cost, differentiation)
• Activities performed in competing in a particular
industry can be grouped into categories forming up a
value chain
 The Value Chain (C)

Firm Infrastructure
(e.g. Finance, Planning)

Human Resource Management

Support
Activities
Technology Development
M
Procurement a
r
g
i
n

Inbound Operations Outbound Marketing After-Sale

Logistics (Manufacturing) Logistics & Sales Service

Primary Activities

Source: Porter (1990)

 The Value Chain (C)

• How many value chains are there in a particular

supply chain?
• Is the concept of value chain another way to
understand the purpose of a business?
• The value chain concept is not about being able
to tangibly measure or see value at every step in
a production process or supply chain, but?
• And what does it imply from the above to
managers and employees in a supply chain?
 2.4 Understanding Customer Value

• How should a company measure the value of its

products or services?

• The emphasis has moved from internal measures

such as quality to customer satisfaction measures

• The supply chain has a huge impact on perceived

customer value:
– Prices vs. service?
– Delivery speed vs. price?
– Specialization or one-stop shopping?
 Understanding Customer Value (C)

• Recall that responding to customer requirements

is a basic part of supply chain management

• Customer value drives changes in the supply

chain, and is a critical input in determining the
type of supply chain for a particular product

– Large inventories
– High level of customization
Understanding Customer Value – The Dimensions

• Conformance to requirements
– Offer what the customer wants: anywhere, any time
– Demand impacts the supply chain: predictability, customer
access (ways of product penetration & arrangement)
• Product Selection
– A proliferation of options makes the supply chain difficult to
manage. How does it contribute to customer value?
– Three successful business trends
• Specialty stores
• Megastores
• Specialized Megastores
– Dealing with the proliferation:
• Build-to-order
• Centralized inventories (risk pooling)
• A fixed set of options covering most customers
Understanding Customer Value – The Dimensions
(C)
• Price and Brand
– Pricing, together with level of service, is a key part of the
customer experience
• Although price may not be the only factor to consider, there
may be narrow price range for certain products, i.e.
commodities
• Thus, companies can achieve cost advantage through supply
chain innovation
• Wal-mart, Coles (i.e. price rewind), Woolworth
– Brand works hand in hand with price
• As the number of salespeople decreases, the value of brand
increases
• This is particularly true on the internet
• Brand name may mean quality and prestige in customer’s mind
• Good brand name may command higher price, which can offset
increase in supply chain cost due to higher service level (supply
chain being more responsive)
Understanding Customer Value – The Dimensions
(C)
• Value Added Services
– It is hard to compete on price alone; remember sources of
competitive advantage?
– Value added services, such as support & maintenance, are on
the rise due to
• Commoditization of products
• The need to get closer to the customer
• Improving information technology that make offering value added
activities possible
– Customer access to their own data is an important value-added
service, i.e. account details, etc.
• Relationships and Experiences
– An increased connection between the firm and its customers
thru a relationship
– Learning relationship: using data mining to learn about
customers’ behaviour and suggest sales
– Mass customisation, unique experience
 2.5 Strategic Pricing and Customer Value

• Study these examples:

– Dell:
• Same product is sold at a different price to different
consumers (private/small or large
business/government/academia/health care)
• Price of the same product for the same industry varies
– Amazon: Books.com had a lower price than Amazon
99% of the time, yet Amazon had 80% of the market
in 2000 while Books.com only 2%
• Nikon, Sharp, etc.: Mail-In-Rebate, asking consumers to
mail coupon directly to manufacturers
• Why are they doing this?
 Strategic Pricing: Revenue Management

• A method integrating pricing and inventory strategies to

influence market demand, thus boosts revenue
• “Selling the right inventory unit to the right type of
customer, at the right time, and for the right price so as
to maximise revenue or yield (Simchi-Levi et al. 2003)
• Traditional Industries:
– Airlines
– Hotels
– Rental Car Agencies
– Retail Industry
 Strategic Pricing: Revenue Management

• Example:
– A cruise ship with C=400 identical cabins
– The Price-Quantity relationship: P=2000-2Q
– What is the price that the company should charge to
maximize revenue?
 Strategic Pricing: Revenue Management (C)

2000
Price P=2000-2Q

1000

No. seats
 Strategic Pricing: Revenue Management (C)

Price

Revenue=480,000

P0=1200

C=400 No. seats

 Strategic Pricing: Revenue Management (C)

Money on the Table=160,000

Price
Among 400 passengers, 200 are
willing to pay 1600, and 100 out
of these 200 can pay 1800;
P0=1200

C=400 No. seats

 Strategic Pricing: Revenue Management (C)

Price
Revenue=1600(200) + 1200(400-200)=560,000

P2=1600

P1=1200

Q2=200 Q1 =400 No.

seats
 Strategic Pricing: Revenue Management (C)

Price

P3=1800 Revenue=1800(100) + 1600(200-100)

+ 1200(400-200)=580,000
P2=1600

P1=1200

Q3=100 Q2=200 Q1 =400 No.

seats
 Strategic Pricing: Revenue Management (C)

• How can firm prevent customers from moving

from one class to another in the airline?
Sensitivity to Duration
Sensitivity to Flexibility

Low
Leisure No
Travelers Demand

No Business
Travelers
High Offer
Sensitivity
to
High Low Price
Source: Simchi-Levi et al. (2003)
 Strategic Pricing: Revenue Management (C)

• How can firm prevent customers from moving

from one class to another in the airline?
• Traditional requirements:
– Perishable inventory
– Limited capacity
– Ability to segment markets
• early-bird booking
• over the weekend
– Product sold in advance
– Fluctuating demand
 Strategic Pricing: Smart Pricing

• Customised pricing: to distinguish customers

according to their price sensitivity
– Dell: private, small vs large businesses, etc.
– Sharp and Nikon: mail-in rebates
• What is the manufacturer trying to achieve with
the rebate?
– Why the manufacturer and not the retailer?
• Should the manufacturer reduce the wholesale
price instead of the rebate?
Strategic Pricing: Smart Pricing (C)
 Strategic Pricing: Smart Pricing (C)

• Customised pricing

• With no rebate: retailer finds a price & order

quantity to maximise profit; manufacturer’s
profit is proportional to wholesales price

• With mail-in rebates: manufacturer influences

customer demand & provide an upside incentive
to retailer to increase order quantity
 Strategic Pricing: Smart Pricing (C)

• Customised pricing: managerial insights:

– Mail in Rebate allows supply chain partners to move
away from sequential strategies toward global
optimization
• Provides retailers with upside incentive
– Mail in Rebate outperforms wholesale price
discount for manufacturer
– Other advantages of rebates:
• Not all customers will remember to mail them in
• Gives manufacturer better control of pricing
 How is Customer Value measured?

• Remember that customer value is based on

customers’ perception of firm’s offerings
• Typical measures are service level & customer
satisfaction
• Supply chain performance measures are
important since they contribute to customer
value
– Remember SCOR – performance metrics?
 How is Customer Value measured? (C)

• Service level:
– Typically means ability to satisfy a customer’s
delivery date
• i.e. % of orders sent on or before promised delivery date
– There is direct relationship btw service level &
supply chain cost and performance
• i.e. demand variability, manufacturing & information lead
time determine level of inventory
– Customer value implies service levels
• i.e. some customers may be more sensitive to price while
others are to time
 How is Customer Value measured? (C)

• Customer satisfaction:
– Customer surveys are often used to measure
customer satisfaction
– However, they may not be the best way to learn
about customer value. Why?
– Customer loyalty is easier to measure and more
reliable to reflect customer satisfaction. How?
– Learning from customer defection can also provide
good lessons about their satisfaction
 Information Technology and Customer Value

• Customer benefits: changed compared to traditional

approach:
– Info. Tools, i.e. kiosk, voice mail, etc. increase
customer value while reducing costs (ATM,
automatic tellers, electronic transactions, etc.)
– Increased importance of intangibles, i.e. brand name
& service capability
– Increased ability to connect & disconnect
– Increased customer expectations
– Tailored experience, i.e. using data mining for mass
customisation
Information Technology and Customer Value (C)

• Business benefits:
– Using info. captured in SC (data mining) to create
new offerings
– Creating, & no longer responding to demand
– Learning about customers using the above makes it
difficult to switch vendors
• Business-to-business benefits:
– Performance & collaboration of firms’ suppliers &
service providers can be improved (i.e. Dell)
– Strategic partnering relies heavily on information
sharing → increased SC efficiency → enhanced CV