What Key Performance Indicators (KPIs) should your company use to benchmark its supply chain capabilities? Another way to think about this question is to ask: What do our customers want? What will cause them to buy more goods from us? What will they pay more for?
Your customers should be grouped into cohesive channels with similar buying behaviors. So, for a consumer goods company, one channel might be its largest and most demanding retail customers. Another channel might be smaller retail partners and a third group might be the wholesale channel.
The next step is to assign supply chain metrics to these different channels. For example, a key “want” for large retailers is to ensure that when customers come into their stores, goods are on the shelf for them to buy. For this channel, one core metric could be on-shelf availability.
For wholesalers, price might be the overriding factor. They want promotions that allow them to buy goods in bulk more cheaply. For this channel, KPIs related to achieving price efficiencies are the ones that matter the most. You might ask, for example, what is our cost per case pick? How does that compare to our competitors?
This is a fairly simple idea, but it is not easy to execute. There are several hurdles, but I will only discuss one of them today.
If you ask customers what they want, they will say “We want lower prices, cooler products, and better service.” But what really matters to them? What will cause them to buy more goods from you? What will they pay extra for?
A rigorous approach to answering these questions is to do conjoint analysis.
Here is how Wikipedia defines conjoint analysis: “Conjoint analysis requires research participants to make a series of trade-offs. Analysis of these trade-offs will reveal the relative importance of component attributes.”
For example, let’s say you are a hotel manager and you are trying to figure out what kind of offers to send to different groups of customers. You might survey a group of customers and give them a choice of paying $200, $250 or $300 for a hotel room that could have a view of the ocean or of the parking lot, and it could have a King-size bed or two double beds. Almost everyone will pick $200 / ocean view / King-size bed as their first choice. But things get interesting from there. For their second choice, what will the customers give up to keep something they want? Will they give up price to keep the ocean view? Give up the King-size bed to keep the low price? And so on. The trade-offs your customer makes provides you with insights into what they truly value.
Ask your customer directly what they want and you are already negotiating. Have them do a conjoint analysis and you get to the core of what they define as value!
Conjoint analysis can help you answer questions like how much more a customer will pay for 2% stock outs vs. 5% stock outs, or how much more they value a branded product vs. a private label one? It’s never just about price – it’s about selling value, which is always a tradeoff between price and some quality of goods or services received. Conjoint analysis helps you better understand the tradeoff your customer is making so you can focus on the things that bring them value!
So, how can a consumer goods company with different channels apply conjoint analysis? To answer this question, I talked to Cameron Tipping at IIBD, a boutique consulting firm that specializes in conjoint analysis. Cameron leads the firm’s engineering-intensive industry practice with a focus on providing strategic consulting, strategy facilitation and conjoint market research.
I asked Cameron how his firm would approach a small channel that only had a few customers (e.g., a channel composed of just Walmart and Target). He said that he would try to get everyone at the chain that influences the buying decision to answer the questionnaire. For a Walmart, it might be just three or four key people for a particular category. Their answers might not all agree. One executive might put higher value on the brand, while another might value on-shelf availability more. But armed with this information, you can tailor your pitch appropriately to each buyer. In channels where a few people move major amounts of money to a few suppliers in a category, knowing the tradeoff they are making when they define value can give the supplier a big competitive advantage.
Most companies assume they know the KPI’s. Be careful! Research conducted by Cameron using conjoint analysis found that the sales and marketing teams were often more price sensitive than the customer. “Again, value isn’t always price,” Cameron commented, “which is a trap we tend to fall into.”
How much do these conjoint analysis studies cost? According to Cameron, he has heard of large, well-known consulting firms charging as much as $300,000 for executing studies with large sample populations. “The good news for our industry,” Cameron said,” is that we typically don’t have large amounts of decision makers, so studies can generally be done for $40,000 to $50,000.”
In conclusion, for many companies, benchmarking themselves on a set of one-size-fits-all supply chain KPIs does not make sense. KPI’s are channel specific. Sometimes they should be customer specific. Cameron put it simply this way: “Assuming you know your customer is dangerous. Understanding them is imperative!”