Customer Focused Supply Chain Management

January 1, 2011

Supply Chain Management (SCM) was introduced in the 1990’s as a buzzword often used by logistics and software providers to describe the integrated network of product, information, and cash flow between the various entities in a supply chain. SCM has been embraced by many non-supply chain professionals simply as a new and faster way of acquiring goods and services using integrated software tools and global logistics.

Today, SCM is widely recognized as a better way of doing business in a complex global economy. Traditionally, Supply Chain Management has focused on negotiating long term agreements, cost reduction, outsourcing, third-party logistics, and the use of SCM software tools. Customer Focused Supply Chain Management, CFSCM, is a strategic approach to acquiring goods and services. CFSCM is based on the idea that by enhancing your customers’ overall satisfaction with your product or service, in the long run, you will improve the profitability and efficiency of your entire enterprise which includes your supply chain partners.

The overriding philosophy of CFSCM is that everyone in a customer’s supply chain is linked to the customer, and that the supply chain is only as strong as its weakest link. The strategy of CFSCM is to establish collaborative relationships up and down the supply chain; from upstream raw material suppliers to downstream final users of the product or service. With CFSCM we seek new and better ways to acquire goods and services that will increase our customers’ satisfaction and improve profitability.

Increased customer satisfaction means greater profitability, because loyal satisfied customers provide long term revenues and reduced costs. It is less costly to maintain satisfied customers than it is to acquire new ones. Also, by dealing with loyal “customer-focused” suppliers, you can achieve efficiencies and cost savings well beyond those achieved from the traditional approaches of competitive bidding and price negotiations.

The mistake that too many companies make is employing the tools and techniques of SCM without having first established collaborative relationships with their customers and suppliers. It is not the tools that make you successful in SCM; it is the relationships. Collaborative relationships start with trust, honesty, mutual interests, and mutual benefits. Traditional arms-length relationships with suppliers do not support collaboration. Many of these relationships are competitive based on everyone “getting their share of the pie”, often at the expense of others.

Once the entire supply chain becomes focused on the needs of the customer, you can begin to employ the tools and techniques of SCM: outsourcing, 3rd and 4th party logistics, supply chain collaboration, “early supplier involvement” (ESI), and SCM software.

The first step in implementing a CFSCM program is to establish free and open two-way communications with your customers and suppliers. Understand their needs. Work with them to solve design, fulfillment or quality problems. Establish functional interfaces between your companies. And, collaborate with them on product design and improvement.

Find out what the customer is looking for: low cost? speed to market? service? flexibility? technological innovation? Only when you truly understand the needs and strategic objectives of your customer can you set operational strategies for your company and the suppliers in your supply chain. The goal is to establish a smooth flow of information up the supply chain from customers to suppliers, and smooth flow of product and services down the supply chain from suppliers to customers. The more information that suppliers know about their customers’ actual requirements, the less inventory needed in the supply chain.

To illustrate this point: In the traditional supply chain with multiple tiers of suppliers and customers, each operation plans production or distribution requirements based on forecasted demand. Actual demand is only generated by a customer order. This means that each entity needs to carry inventory in anticipation of customer orders. Typically, each member of the supply chain will tend to “over-plan” inventory to assure “good customer service”. This is known as the “bullwhip effect”; where a small change in demand downstream generates increasingly larger demands as it progresses up-stream. In a “synchronized supply chain”, the actual demand captured at the point-of-sale can be communicated up the supply chain, using information technology, greatly reducing the amount of inventory that each entity needs to maintain in order to support customer service goals.

This example is one of the many ways that a customer focused approach to Supply Chain Management will improve customer service and profitability. Key performance factors such as reliability, responsiveness, flexibility, lower costs, and better resource management can be achieved faster, and more effectively through a collaborative supply chain than by the individual efforts of any one member of the supply chain.

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