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Customer Driven Global Supply Chain Designs

by Matthew B. Myers, Ph.D.

Within supply chains, logistics services have become a key source of competitive differentiation between firms. Yet significant challenges exist relative to developing supply chain service offerings for global business customers. Diverse regulations across borders, longer lead times, and increased transportation costs all add to the difficulty of managing logistics services internationally. As a service offering, logistics is often characterized by intensive customer contact, extensive customization requirements, and a reliance on extrinsic cues for service performance. Because of these qualities, logistics services are adaptable to specific customer segments, enhancing customer value and loyalty over time. In this article, we describe how Logistics Service Quality (LSQ) components can be used to identify global segments of logistics services customers. By identifying specific customer segments, some which may transcend national borders, logistics managers can benefit from reduced costs, enhanced revenue, and the ability to differentiate their offering from others in the highly competitive marketplace.

Introduction
Traditionally, supply chain managers have been focused on evolving their supply chain designs based on efficiencies and cost reductions. Dozens, if not hundreds, of consulting firms make their living by showing firms how to alleviate waste, minimize inventory, and reduce variable costs. As a result, many managers feel that by increasing operational efficiencies, they have developed meaningful supply chain and logistics strategies. Unfortunately, this is not the case, for two key reasons.

First, while being operationally efficient is today’s mandate for managers, operational efficiency (OE) should be considered a necessary but not sufficient aspect of global supply chain strategies. The reason for this is that OEs are often easily duplicated by the competition, reducing their value over time and forcing firms to constantly adapt new processes in order to remain competitive.

Second, as products become more ‘commoditized,’ meaning that competitive offerings are almost indistinguishable to the customer, firms often fall back to competing on price, further increasing the pressure to cut costs and find previously untapped efficiencies. Unfortunately, OEs and cost reductions can only go so low before firms begin to discard key resources, including human resources, in their competitive portfolio. They continue to compete on price, a never-ending downward spiral toward zero margins.

Luckily, an alternative exists to the OE dilemma. By effectively understanding what our buyers value in our logistics services, we may design our supply chains to enhance customer satisfaction and loyalty, thus increasing their value to our firm. In global supply chains, this is particularly important, since customer values are often driven by macro-market influences, transportation distances, and cultural dimensions that demand customized services from our firms. By increasing customer value, we are often able to charge premium prices and benefit from greater repeat purchases, thus keeping our margins open by methods other than decreasing operating costs.

How Global Clients See Value
Global customers have certain expectations relative to logistics services. As we will see in this article, these expectations constitute several dimensions of service, including order handling, order quality, information quality, and timeliness. Together, these functions are called logistics service ‘bundles,’ and the emphasis that firms should place on specific logistics tasks depends on how customer segments define value. Often, specific customer segments desire the same service ‘bundles’, and these segments can represent buyers groups located in multiple countries. Thus, we like to design our global logistics offerings to meet customer segment expectations, increasing their overall satisfaction with our offering, and making them more loyal longer our firm.
Recent research has found that two critical components of our logistics services, namely customers’ perception of order placement activities and perception of order receipt, influence customer satisfaction. Each of these components is broken down into several distinct dimensions. It is these dimensions which comprise our logistics service “bundles”. Furthermore, specific global customer segments can be defined by what individual groups value in our bundled offerings.

Perception of Order Placement Activities
Customers of global logistics services often place a premium on their ability to easily and effectively place orders for products. Customer satisfaction can be directly influenced by how ‘hassle free’ and smooth placing orders can be. Five specific dimensions are valued by global customers, namely:

  1. Ordering Procedures: These are how efficient and effective the procedures followed by the supplier are when taking orders. This includes automatic replenishment and other IT capabilities.
  2. Information Quality: This is the customers’ perception of the information provided by the supplier regarding products.
  3. Order Release Quantities: This represents product availability, including backorder and out-of-stock issues.
  4. Personal Contact Quality: The firm’s personnel in charge of distribution and ordering, and their ability to foster customer relationships, are key.
  5. Financial Procedures: In global supply chains, the ease of financial transactions, foreign currency negotiation, and credit terms are often critical to buyers.

Perception of Order Receipt
Customer segments are also defined by the importance they place on particular aspects of order shipment. Often, the personalized aspects of physical distribution of products influence customers in different ways. For example, when products arrive damaged or in the wrong quantity, how responsive the supplying firm is in fixing the problem is more important to some buyers than others. Sometimes this is culturally driven, and other times it is a function of the firm or market, but in any case it is important for the logistics manager to understand the value placed on this and other distribution service dimensions in order to keep the customer satisfied. Five dimensions of order receipt are seen as potentially critical to buyers.

These are:

  1. Order Condition: Lack of damage to orders.
  2. Product Quality: How well products work after they are received.
  3. Order Discrepancy Handling: How well the firm handles problems in orders after they arrive.
  4. Timeliness: Whether orders arrive at the customer location when promised.
  5. Order Accuracy: How closely shipments match the customer’s order upon arrival.
  6. Security Compliance: How well products flow through security constraints, such as CSI and C-TPAT in the United States.

Understanding Global Customer Segments
for Logistics Services

Generally, supply chain and logistics managers design their logistics efforts to meet transportation and regulation requirements in different markets, standardizing their services as much as possible to be operationally efficient. While this is fine, customers are often lost by not meeting their specific service bundle requirements. The good news is that groups of customers often have identical or similar values for logistics services, and thus our services can be standardized for these segments to enhance value. Typically, business buyers’ values are not defined by the market they are in, but rather by needs influenced by competitors, capacities, and customers. Thus, groups of buyers in different countries often have more in common with one another than with other consumers in the same country. As a result, we should tailor logistics services to meet these needs across borders.

An example of this tailoring can be found in the industrial chemical industry. One specific group of chemical buyers values timeliness and security compliance above all else, these buyers may be located in the U.S., Germany, and France, and as a group care little about ordering procedures, order discrepancy handling, or cross-currency financial terms. Another group of buyers of the same products will only buy from those suppliers offering automatic replenishment and long term financing, along with a specific account representative with the supplier to handle any unforeseen problems. These buyers may be located in the Venezuelan oil fields, in Indonesia, and Hong Kong. Clearly, these cross-national buyer segments are satisfied by different logistics service bundles, yet firms standardizing their logistics services are not meeting specific needs which keep customers, or, just as detrimental to the supplier’s bottom line, are wasting key resources by offering services not important to key segments in multiple markets. Thus, global logistics managers need to answer to critical questions: What factors account for differences in business customers’ satisfaction for these services across national borders? And, how do these differences reflect distinct segments in the global services market? By consistently contacting your customers, managers can ‘benchmark’ their progress in providing logistics services that meet global segment demands.

Getting Acquainted with Your Global Logistics Customers
Determining which service bundles are important to specific customer groups means questioning your customers (and potential customers) on a routine basis. Many gold-standard providers of global logistics services do this annually. Each customer group will have three important perceptions: what service dimensions they value, how well your firm provides those functions, and how well your industry competitors provide these same services.

The figure above shows how critical gaps are identified. First, we question customers on how important specific order placement and order receipt activities are to their businesses (these represent their valued service bundles). This is important not only for identifying where we must perform, but also acts as a cost saving activity by avoiding efforts (in additional service personnel, for example) which do not add value to the customer. Next, we determine how well those customers perceive our service handles those critical elements. These two tasks are accomplished using traditional survey methods, where we can quantify the differences between what is important to the customer and how well we provide that service dimension. These differences represent our global logistics service gap. Unfortunately, we often discover our service shortcomings to be negative, meaning we are not meeting customer needs for specific segments, leaving openings for competitors to benefit from our service failures. We can also determine how well the market feels we compare to our competitors on specific dimensions, this by asking customers to rate the industry at large on logistics service dimensions. While not compulsory, this extra information allows firms to benchmark against other providers.

Options for Addressing Global
Logistics Service Gaps

Once a firm’s logistics service quality gaps have been identified, there are a number of options available for developing strategies that close these gaps and enhance customer value. Several of these are offered in the accompanying table. For example, some customer groups may place an emphasis on the personal contact quality they receive from suppliers: we see this often in cultures such as those in Japan, southern Europe, and Latin America. Should a firm find itself at a competitive disadvantage in these markets, increased accessibility to employees, more frequent sales calls, and higher customer service quality through better trained personnel may increase customer value. Similarly, some global customers are more focused on global security issues than others, this due to geographic location and governmental constraints. A standardized logistics service offering for all customers often fails to take these discrepancies into account, meaning supplying firms can lose customers by not providing security initiatives to those customer segments that need them to move products quickly. U.S. firms, for example, are now preferential to global suppliers in compliance with CT-PAT and Container Security Initiatives, whereas this has little value to the average Argentine manufacturing importer. Modifying global supply chains accordingly is critical for satisfying profitable segments with significantly different service bundle needs.

Conclusions
Global logistics managers should understand the value of customizing their logistics services for specific buying segments across overseas markets. Too often, customers are lost because we seek to standardize our global supply chains in order to be operationally efficient, while failing to provide the distribution services necessary to add value for the customer. Different customer segments will demand different logistics services, and only by understanding our shortcomings in these service areas can we develop global logistics strategies that increase customer value, increase customer loyalty, and subsequently increase the profitability of our relationships with our buyers. Customizing our supply chains for specific customer groups is only possible by surveying customers regarding what they value, and understanding how they feel our firm is performing in the service areas they rate as important. Over time, strategies based on closing our service gaps lead to greater customer satisfaction, retention, and subsequently higher margins for global supply chain managers.

NOTES:
Mentzer, John T., Daniel J. Flint, and G. Tomas M. Hult (2001), “Logistics Service Quality as aSegment Customized Process,” Journal of Marketing, 65 (October), 82-104.