value insights

Customer Value Processes Disintegration Risks- Valutrics

Demanding markets are creating new types of challenges for managers in supplier organizations. Powerful customers increasingly demand that sellers provide problem-solving and creative thinking about their business. They require the commitment of, and access to, the supplier’s total operation.
Success in the new marketplace increasingly demands the careful and systematic integration of a company’s entire set of capabilities into a seamless system that delivers superior customer value.

Functional specialisms, complex corporate divisionalization, and multi-leveled bureaucracies have often been at the center of problems in delivering consistent, superior value to customers. Often disintegration is simply because internal functions have different goals and performance metrics, and sometimes it is just silly. Some examples are illustrative of some of the silliness resulting from disintegration.

Sales and Supply Chain Management
In one company, the Sales Director found that his major customer
was ordering a product sporadically, as and when stock control indi-
cated the need to re-order. He realized that if the customer could
be persuaded to adopt continuous replenishment, he could substan-
tially reduce the stock he needed to cover the sporadic orders. This
is an increasingly common situation in repeat purchase situations
and the customer was happy to cooperate. Two days into the new
continuous replenishment system, the very unhappy customer
phoned to say he was almost out-of-stock of product and on the
point of taking his business elsewhere. The Sales Director raced to the
distribution depot to find out what had happened. The answer was simple—the distribution system prioritized large orders. The smallest
orders were lowest priority and often not picked by the end of the
day. By definition, continuous replenishment produces the smallest

Sales and Operations
In a leading clothing company, the sales manager was told to increase
sales targets for salespeople and not to worry about production capacity,
which was none of his concern. Urged on by his sales manager,
a salesperson pulled off a major deal with a national retailer. The
factory cannot deliver. The customer is furious. The salesperson is
demotivated. The sales manager is tearing his hair out…
Sales and the Accounts Department
Many salespeople report that one of the most negative impacts on
customer relationships can come from the Accounts Department. The
internal employees in accounts who operate credit control, invoicing,
and payments, and handle account queries can inadvertently undo
large investments of salesforce resource spent in building a customer
relationship and winning an order, simply because no one has ever
provided them with any information about the company’s sales strategy
or customer preferences.

Sales and Human Resource Management
The quality and skills of the people who deliver service and man-
age relationships with customers directly reflect HR strategy—which
determines how they are selected, trained, evaluated, and rewarded.
If HR managers are not party to marketing and sales strategy, how can
they recruit and train people appropriately to implement the strategy?
Yet, in many companies this appears to be what HR specialists are
expected to do. It is hardly surprising that they work with out-of-date
person profiles and skills requirements.

Sales and Marketing
Failing to link sales operations with marketing campaigns has led
to many famous debacles—the stockouts caused by aggressive sales
campaigns that were never mentioned when sales forecasts were done.
In the music industry, EMI, for many years, put huge pressure on
salespeople to get as many music CDs into retail stores as possible—
which resulted in around 35 million discarded CDs each year. Under
new management, EMI has centralized sales, marketing, and adminis-
tration, in part to improve coordination and integration.
The consequences of weak integration can be massive. In the late-
1990s aircraft manufacturer Boeing tried to expand production of
planes so quickly that suppliers were unable to make parts rapidly
enough. Unfinished planes stacked up in factories, forcing man-
agers to close production for a month to allow the over-strained
supply chain to catch up. The result was a rare year-end loss and
$2.6 billion in charges against earnings over two years for Boeing.
Underpinning the crisis was the fact that the salesforce had struck
deals to sell hundreds of aircraft at fire-sale prices because finan-
cial executives had not shared information about how much it cost
to make one, and sales targets were related to volume. Salespeople
did deals on an implied assumption that the factories had infinite
capacity to make planes, because no one had communicated with
them about production capacity. Now Boeing has a high-level man-
agement group that must approve major aircraft orders. This group
includes engineers and accountants and makes sure factories can
deliver work on the promised timetable and that suppliers can deliver
parts on time. Nonetheless, in 2008 Boeing’s innovative 787 aircraft—
the Dreamliner—was the fastest selling new airliner in history, but
slow off the assembly line and plagued with supply chain delays.
The cost of selling more aircraft than you can make is huge penalty
payments to disgruntled airline customers.

Actually, to look on the bright side, sometimes, customers are more
than happy for suppliers to show signs of disintegration. One Marketing
Director recently explained to us why he wanted to kill his Sales
Manager. The company had imported 20,000 DVD players from the
Far East for £15 a machine. The plan was to sell these to small stores
and chains with a wholesale price of £25, and a recommended retail
price of £50, offering good margins to the supplier and the trade. So
far, so good. However, Mr. Numpty the Sales Manager was delighted
to report that he had been able to sell 10,000 players in a single deal
to one of UK’s largest supermarket chains—let us call them BigCo—
for £17.50 a player, allowing the supermarket to sell them for £20.
He was pleased with himself. He became less pleased when the Mar-
keting Director pointed out that the remaining 10,000 machines were
unsaleable, to anyone other than BigCo. Why would any independent
retailer buy the machines for a wholesale price of £25, when BigCo
was retailing them for £20? The Marketing Director says the worst of
it was knowing that someone at BigCo was grinning and saying ‘do
you think they have had that conversation yet—shall we make the
call?’ Sure enough, when the call came, BigCo offered £10 a player for
the remaining 10,000 machines. He had to accept—losing £25,000 on
the overall deal. That is why he wants to kill Mr. Numpty his Sales
Manager. Not getting your act together may be expensive, even if
sometimes smart customers rather like it.
If disintegration costs us money and leads to poor performance
with the customer, then it follows that we need something better.