In 2007, the book “Competing on Analytics” by Tom Davnport and Jeanne Harris became a business bestseller. The premise of the book was that companies could create a competitive advantage by using Business Intelligence (BI) tools in smart ways.

One advanced use of BI involves running a supply chain related experiment and then using a BI tool to measure the results. Supply Chain Management Review published an excellent article titled “The Case for Infrastructure Investment: Lessons from Medco and Staples” that illustrates this point.

Here is how Staples used its BI tool to figure out how much it should spend to improve on the perfect order metric.

In 2005, [Staples] conducted a study to quantify the cost of customer dissatisfaction resulting from order errors. The study, which looked at the company’s North American delivery operation, evaluated how customer retention was affected by out of stocks, late deliveries, fulfillment center errors, and product handling errors. Staples compared retention rates for equal-order sample size of orders delivered next day – on time – versus orders delivered late. It also compared retention rates of customers with perfect orders against those with problem orders. Finally, the study looked at the impact of problem orders by examining the correlation to those customers’ share of wallet.

 

The results of the study were eye-opening. “We found that for every X number of errors, we actually lose a customer,” says Donald Ralph, senior vice president supply chain and logistics. “So there is a real quantifiable value to being able to fulfill orders perfectly. Based on customer retention numbers and the correlation with defects, we use the lifetime customer value, new customer acquisition costs, and the cost to rework to show why doing things right the first time has significant economic value.”

I consider this nothing short of brilliant. I’ve done a lot of research on the ROI associated with implementing various forms of supply chain technology and I’ve never come across a company that thought it could put a real, quantifiable number on how supply chain defects lead to lower revenues. Usually, this savings bucket is completely ignored and supply chain projects are justified on inventory or labor savings.

The second example comes from FreshDirect, an online grocer that makes home deliveries in the New York City area. FreshDirect uses SAP BusinessObjects and a company representative participated in a panel discussion at SAP’s Influencer Summit in Boston last December.

As I wrote in a previous posting, FreshDirect has used analytics to improve its fulfillment process. Deliveries that contain damaged eggs, for example, were a particular source of customer dissatisfaction. Correcting this problem was a priority. The company’s reports showed that there were 20 complaints for every 1,000 egg deliveries as measured at the line-item level. FreshDirect began experimenting with different forms of packaging. One type of packaging reduced the complaint rate to 17 per 1000 deliveries, another type reduced it to 15. Finally, the company found a form of packaging that reduced the problem by one third.

Then one of its analysts asked a question that seems obvious in retrospect: “When I’m at the store, I open the carton to see if there are any damaged eggs before I put it in my shopping cart. Are the guys in the warehouse doing the same thing?” They weren’t. When this quality step was added to the process, FreshDirect’s complaints per thousand deliveries dropped by another third. After more tinkering, the company has reduced this key customer retention KPI down to 5 complaints per 1,000 deliveries.

Most companies know they should be competing on analytics; too few do. But you don’t have to be a multi-billion dollar corporation like Staples to do this. FreshDirect has shown that small, nimble companies can also use BI to improve supply chain operations.