08/7/09

Use Value Chain Analysis for Customer Satisfaction

When a company starts to hear their customers saying “it’s very difficult to do business with you” without providing exact details; when a company sees their internal customer service scorecard showing good numbers, but the customer survey result shows “poor service”; or when a company starts to see their long term customers switching to their competitors; it is the time for the company to evaluate their value chain to understand what they need to do win the trust and confidence back from their customers.

However, it seems difficult to figure out what customers are really looking for, and it’s difficult to decide which actions to take to improve the customer experience. There are many functions in the company, what exactly are the areas causing negative customer experiences? In order to understand what activities are leading to customer satisfaction, we can begin with the generic value chain and then identify relevant firm specific activities.  “A value chain is a chain of activities. Products pass through all activities of the chain in order and at each activity the product gains some value.” (Wikipedia) Using value chain analysis will quickly help a company map out “touch points” with customers, capture pain points, and identify opportunities for process optimization. I’d like to use a case of an equipment rental company to explain how value chain analysis is used to identify issues in order to enhance customer experience.

In this case, customers choose to rent instead of buy equipment for a lower cost but at the same time expect good service. Customers can have the company deliver equipment to them or pick them up with their own trucks. After finish using the equipment, the customer can self return them to the company service locations or the company will arrange collection from customers upon request. Customers pay an initial fee when they receive equipment and then start to pay rent based on the days of usage. Below is the value chain analysis I did for the company to understand how each function interacts with customers and how they can impact customer services. Please note below analysis only include primary activities. Supporting activities such as procurement, technology, human resource and firm infrastructure are not in the analysis, although they can also indirectly impact customer experience from different prospective.

A Value Chain Analysis

Primary functions of inbound logistics, operation, outbound logistics, marketing & sales, and customer services are interacting with customers on a daily basis; hence activities under those functions directly influence customers’ satisfaction and their purchasing decision. By breaking down those functions into activities, we can easily see the components in the value chain and how they create and build value for customers. By asking questions for each activity, we can thus realize what customers are expecting for each activity and whether there is enough to be done to guarantee customer satisfaction.

I’m not going to explain each activity in detail. The result of this exercise is to help company executives realize the challenges from their existing process structure and to make the right decisions and actions to truly “serve” customers. Executives should also face the fact that internal metrics are not always reflecting a customer’s true experience. When the metrics are designed to meet internal criteria and when those numbers are tied to employee performance bonuses, we can expect that employees are incented to make a good number instead of to provide good service. For example, on-time delivery performance is a key measurement for each employee in the company. However, the company only measures the shipments with Prove-On-Delivery (POD), and thus filters out at least 10% of data from measurement because carriers do not provide POD for every single shipment. The company measures on-time based on the final date stored in the system. When a shipment is going to be late, the employee in Logistics calls the customer to get “approval” of changing the date of delivery in the system, as if customer had another choice. At the same time, the company defines the on-time delivery window which is not necessarily what the customer is asking for. Using a six sigma term, there is a gap between internal specifications and external customer measurement. Unfortunately, because of political reasons and high pressure for “performance”, even functional high level executives are not willing to change the wrong measurements to correctly reflect real performance. No wonder that even with high performance numbers in the service scorecard, we can not prevent customers from switching to competitors.

From such a value chain analysis exercise, many functional experts can identify process improvement opportunities and take necessary projects to reengineer processes. However, without further data analysis, the analysis won’t lead to a priority list to allow the company to put the limited resources to the most critical processes. Besides, the company will not make fundamental changes without establishing performance metrics truly reflecting customers’ requirements. Value chain analysis can help companies to understand where they can create value for customers.  However, only when the company truly embraces “customer experience” and makes fundamental changes will the value chain create real value for customers.

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07/18/09

How Supply Chain Service Drives Customer’s Loyalty – My customer Experience with Zappos

Being a supply chain professional, the “sad” thing is that I always translate my real life experience into supply chain practices and theories. This time, I would like to tell a story of my Zappos ordering experience and how I see their supply chain service.

I was shopping for a pair of shoes for my wedding. I didn’t buy the shoes from a local store because I wanted to find something cheaper. The first thought coming to my mind for online shoes shopping is Zappos, which can explain the good reputation of Zappos being the leader of online shoes shopping.

The goal of supply chain management is to provide the right product at the right place with right price. Online shopping eliminates the barrier of place, but it requires an efficient delivery. On their easy to navigate website, I found the style of shoes I was looking for at a discounted price (supply chain theory: availability of right product at right price). It showed three pairs in stock for my size, so I placed my order online.  In 10 minutes after completing the entire transaction, I felt I should have waited to search more options, so I wanted to cancel the order. Then I realized Zappos didn’t provide me the option to cancel online. I had to call their 24 hours customer service hotline. With my professional habit, I also measured how long I was waiting while calling customer service, roughly 30 seconds. Since 24-hour service is provided, the waiting time of less than one minute is more than acceptable, although I wished they provided me the option of online cancellation to eliminate my call to their CS.

Shortly after I cancelled the order, I decided to order the shoes again. What an unpredictable customer behavior…However, when I tried to place a new order online, I noticed that their stock availability became two. My supply chain instinct told me that their stock availability was not updated simultaneously when my first order was cancelled. I decided to call CS and see if they could reactive my old order, instead of placing a new one.

Samantha in CS answered my call (now she @samiamquinn is my twitter follower @BettyFeng and following because of my tweet about Zappos CS). Over the phone, I could feel her warm personality and joyful smile, totally contradictory to the cold voice of a CS from CHASE credit card I recently experienced.  She placed a new order for me and upgraded my order to VIP for next business day delivery. Samantha explained that since my order was placed after cutoff time, I should receive my order on Monday morning. As someone working in logistics, I fully understood what cutoff time meant, so I didn’t expect my order to be batch processed until the next morning and picked up by their carrier UPS at the end of the next day.

To my surprise, I received shoes from Zappos the next morning! I have shopped online many times before but never experienced such quick delivery. As a regular customer with knowledge of supply chain management, Zappos order processing and fulfillment amazed me. The order was placed at 10:30pm in the night, shipped out of the Zappos warehouse in Shepherdsville, KY, and delivered to my home in Orlando, FL at 11:15am the next day.  The whole process can be illustrated as the following:

Zappo Order Flow

The email time stamp of order shipping confirmation was 2:30am, so it’s from a 24 hours operated warehouse. I looked up all of flights from Louisville to Orlando in the early morning for more insight. It seems only the flight was leaving at 5:46am and arriving at 10:03am could make the final delivery at 11:15am.

Needless to say, with my knowledge in order management, I understand how many activities and challenges are behind this 13-hour process from order to delivery.  The speed of order processing and delivery is something extraordinary. For regular order processing, it normally takes one or even two days lead-time to let the system batch process customer orders and check their credit,  then have the warehouse pack the product and ship it out by the end of the business day. Below are three key components to enable Zappos make a delivery at such speed:

  1. 24 hours customer service. I’m guessing Samantha in CS kindly manually processed my credit and dropped my order to a delivery request. Generally the late night order is after the cut-off time so it’s unlikely to have been processed by a system batch job.
  2. 24 hours warehouse operation. This is the most important factor for their incredible speed. Without 24 hours operation in the warehouse, the delivery request will not be picked, packed and shipped by early morning for a late night order.
  3. Close partner relationship with UPS for early morning pick-up, or multiple pick-ups in a day. This is most likely the reason why Zappos’ warehouse is located close to UPS’ main global hub in Louisville, KY.

Like Zappos’ logo indicated: powered by service. Zappos uses customer service as their brand to achieve customer loyalty, especially when customers have a lot of choices. Zappos demonstrated to me an exceptional example of customer service not only through their CS rep, but also through their supply chain. Their supply chain system and management for order fulfillment is overall robust and agile, except the fact that I can’t cancel an order online and their stock availability can’t be updated immediately after order cancelation. I mentioned in my earlier article that supply chain is a revenue driver, because supply chain services of order fulfillment and on-time delivery directly impact customer satisfaction and loyalty. I know the case I just experienced with Zappos was extraordinary, but you can expect that I will be their long term customer after such a great experience and will happily recommend Zappos to others. I also believe that a company willing to do extraordinary things for their customers with a higher standard of supply chain service will be competitive and successful for the long term.

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