2.5 Tailored Logistics

In a perfect world, you would provide outstanding logistics services to every customer—always. But, we don’t live in a perfect world, we live in a world characterized by uncertainty and constrained resources. Customers are unpredictable and they change their minds—and their preferences. This makes it hard to always meet their needs. Even if you could anticipate every customer need, you probably wouldn't have enough resources to fulfill every customer request. Your rivals don’t either. No one provides the highest levels of customer service and order fulfillment to every customer all of the time.

Now, a little good news: You don’t have to. Every customer has unique needs and some of your customers expect perfection in every instance. They are important enough to demand six-sigma performance—i.e., 3.4 defects per million—everywhere, including logistics. 1 Other customers do not need such exacting order fulfillment—nor are they willing to pay for it. The bottom line: Not all customers are created equal. Nor is every transaction equally important. Success depends on your ability to align service offerings to individual customer’s real service requirements. This principle is called . Figure 2-2 depicts this idea, showing the two endpoints of a logistics service continuum.

Figure 2-2: Tailored Logistics Along the Relationship Continuum

Managing Transactional Relationships

Most customer relationships—perhaps 80%—are transactional. 2 Transactional means cost driven and arm's length. Transactional doesn’t mean unimportant. Transactional customers are vital to profitability. Importantly, transactional customers almost always know they are not your most important accounts. They don’t expect you to bend over backwards to meet their needs. But, they need and expect efficient service. They do not have resources to waste with inefficient transactions, processes, or partners. Further, like you, they want to be treated fairly. Your goal must be to build efficient systems supported by policies that promote fairness.

What are the benefits of fair and efficient relationships with transactional customers? For starters, customers are more forgiving of the occasional service failure if they view you as a reliable supplier. More importantly, good relations lead to repeat business. Never forget that some of your transactional customers may one day be your strategic partners. Companies like Apple and Dell were born in garages and college dorm rooms, later to grow into industry leaders. If you invest in good relations today, you will be viewed as a better partner in the future. Poor relations, by contrast, increase complaints and damage reputations—and may lead to expensive litigation.

Managing Strategic Alliances

Although they represent fewer than 5-10% of most companies’ customer relationships, strategic alliances account for disproportionate sales and profits. 3 These key customer accounts are great proving grounds for new products and services as well as for innovative operating practices. Managed well, customer allies are partners in profit. Thus, most companies do bend over backwards to keep their top customers happy. Table 2-1, for example, compares service offerings for transactional relationships to those for key accounts. Consider the resource commitment required to deliver on the near-perfect service levels promised to key customers. Customer alliances build on the following:

  • Long-term focus.

  • Senior leadership involvement: from relationship development to problem solving.

  • Cross-organizational teams are widely employed.

  • Shared resources, including engineering talent, training, financing, and operating capacity.

  • Shared risks and rewards.

  • Open communication and linked information systems.

Table 2-1
Segmented Service Offerings
Service Offering Transactional Customers Strategic Alliances
On-time Delivery 90% 98%
Lead Time Within Week Next day
Time Window Compliance On day promised 15-minute
Fill Rate 90% 98%
Complete Orders 85% 95%
Payment Terms .5%/10 net 30 1%/15 net 45
Customer Support Website / Call Center Cross-company Team

Why should you invest in strategic customer alliances? Relationship stability is one reason. Longer-term, larger-volume contracts drive steady revenue, make planning easier, and improve capacity utilization (e.g., production, warehouse, and rolling stock). The result: lower costs, better service performance, and a strong foundation for investments in new product and process technologies. Customers also benefit, reaping lower costs, higher availability, enhanced responsiveness, and better product quality. Further, both partners seek learning and invest in one another’s capabilities. Consider the following examples:

  • Honda lends upstream suppliers engineers to help them improve their processes. 4

  • General Electric, via a program called At the Customer, For the Customer, sends six sigma gurus to key customers to help them improve their processes. 5

  • Procter and Gamble provides cash-constrained customers capital to upgrade plant and equipment to improve operating efficiency. 6

This resource sharing creates unique capabilities, improving operating performance and relationship quality.

Defining Relationship Intensity

As you develop a tailored logistics strategy, you need to keep one point in mind: Establishing the wrong relationships with the right customers diminishes return on investment (i.e., wasted investment or lost opportunity). Defining appropriate relationship intensity is the key to fulfilling current customer needs while maximizing long-term value co-creation. The following three hints can help you find the balance between short- and long-term needs:

Grow with Loyal Customers

Growing the top line profitably can be done in two ways: acquire new customers or retain and increase sales to existing customers. Research suggests that going out and convincing new companies to become customers costs five times more than growing sales with satisfied and loyal existing customers. 7 Besides, if your service is not good enough to retain customers, it probably is not good enough to attract new customers. Companies that offer inferior customer service tend to replace frustrated customers with ignorant ones. 8

Figure 2-3: Great Logistics helps Create Loyal Customers

Measure Lifetime Customer Value

What is a profitable customer worth over a lifetime? Few managers know. Max & Erma’s, an Ohio-based restaurant, became concerned that its employees viewed customers as a $20 meal or a $5 tip and decided to run the numbers. Decisions makers asked,

  • How often did Max & Erma’s best customers visit?

  • How large was the average ticket?

  • How many new, potential customers did these loyal customers introduce to the restaurant?

The leadership team learned that its best customers were worth $25,000 profit over a lifetime.9 That’s a lot of burgers! Knowing what a loyal customer is worth can help you rethink what you are willing to do to create the loyalty needed to keep customers coming back.

Remember Empathy

An old Swiss adage says, “You cannot slice a piece of cheese so thinly that it only has one side.” Every buyer/supplier interaction is seen from two perspectives: yours and the customer’s. Decisions you make today influence tomorrow’s relationships. For example, some years ago, the chef of a small restaurant placed an urgent order with an Italian frozen foods distributor—for two boxes of peas! Despite promoting its ability to accommodate tough requests on short notice, the distributor refused the order. Shortly thereafter, the chef became the food and beverage manager of Italy’s leading hotel chain. He didn’t, however, forget his previous experience. The hotel refused to buy anything from the distributor. 10

To summarize, tailored logistics involves delivering the right service to each customer. Key accounts merit consistently outstanding service. Transactional relationships deserve fair, efficient service. Well executed, tailored logistics can drive profitable growth. Of course, not every relationship is so easily classified. To augment basic service standards, many companies offer a menu of service offerings. They invite customers to decide if they want and are willing to pay for extra services. Pillsbury used activity-based costing to help it determine what price to charge retailers for services such as modular promotional pallets, direct store delivery, cross docking, and one-way pallets. 11 Menu pricing can also be used to introduce services on a trial basis to see if strong demand will emerge.

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