The Supply Chain

A Customer’s Perception of Value

By Bruce E. Jacobs

Manufacturers of medical products provide a value proposition to their customers. But how is value perceived by customers? How is it defined?

Depending on your point of view, value may be defined in various ways at each step of the end-to-end supply chain: company engineers develop and design products that provide value to customers who want and need them; manufacturing operations produce the product, adding value to materials through labor and manufacturing expertise; company salespeople sell products with value; freight carriers provide value by delivering the product to the customer. From the point of view of every player in the end-to-end supply chain, each contributes value—from the customer’s receiving dock, back through the manufacturer’s shipping, warehousing and manufacturing operations—to the suppliers, product designers and engineers.

But each player’s point of view can be myopic. A discussion about value among all the players would be similar to the chicken and the pig debating which provides the greatest value to breakfast. The chicken and the pig’s perceptions of the value they provide are factual but not relevant. For players in the end-to-end supply chain, the only value that is factual and relevant is what the customer perceives as value. How does a medical device manufacturer define value as perceived by the customer? In its simplest form, there are four primary dimensions of value as perceived by the customer, a combination that includes:

• Quality—provided in the products and services the customer receives

• Customer service—delivered at every point of contact with the customer

• Price—paid by the customer for the product and service

• Lead time—needed to acquire the product, ie, the time from the customer’s order placement to product delivery to the customer’s dock

In today’s competitive business climate, a medical device manufacturer must be proficient in all four dimensions of value to meet the minimum threshold to compete in the market. Enterprises no longer can excel at just one dimension of value if they expect to succeed in the market. Because competitors are savvy enough to exploit any single dimension of value, as well as improve the others, the four primary dimensions always need to be improved.

Quality

The foundation of value is quality. It permeates every dimension of value. The absence of quality in just one product or service can negate the value of every product or service a company offers. Today’s customers don’t easily forgive poor quality; once perceived, it is extremely difficult and time consuming to convince them otherwise, regardless of subsequent efforts to improve a product or service.

Simply put, quality as perceived by the customer implies the absence of any perceived undesirable characteristics, defects or errors. Any dimension of value becomes insignificant without quality: customer service is no longer service, price becomes irrelevant to customers in search of it and the lead time from order placement to delivery cannot be maintained.

Customer Service

As a dimension of value, what the customer perceives as customer service is what keeps the customer returning. The highest achievable level of customer service is when the company delights the customer at every point of contact—order entry, customization, order fulfillment, packaging, delivery, invoicing, warranty, service and returns, for example. Too many customers suffer through never-ending telephone prompts just to speak with a person who either can’t answer their questions or is unable to make a decision to resolve customer issues. If you want to know how your customer service is being perceived, become a “customer” and experience it firsthand. Only then will you be able to define customer service as perceived by the customer.

Price

As perceived by the customer, the value dimension of price too often is misconstrued by manufacturers as “value.” Price is what the customer pays for a product or service; it equates to the monetary exchange for the value of the product or service as perceived by the customer. As less value is perceived, the customer is more likely to pay less or find a substitute of comparable value for a lower price. Regardless of the cost incurred to create the value provided in the product or service, what is important is the price the customer is willing to pay for the perceived value. This is proved every day with Web-based auctions, where price and value as perceived by the customer are more closely aligned.

Lead Time

As perceived by the customer, lead time is the most misunderstood value dimension. Today, many customers require just-in-time (JIT) capabilities from their suppliers, which means the customer carries a minimum inventory of your product. To provide product on a JIT basis (without your customer running out of your product) requires dramatic improvement in your lead times, and all must be improved, including:

• Receipt of the customer’s order to delivery to the customer’s dock

• Manufacturing lead times to produce product

• Supplier lead times for providing materials and component parts

Lead time incorporates the other dimensions of quality, customer service and price. It cannot be improved without improving quality. By its very design, any improvement in lead time improves customer service. As lead time improves, the total cost structure for the product or service is reduced, which enables price improvements, if required.

The Value Formula    

Providing value is all about the customer’s perception of value. Any other perception of value outside of the customer’s is not relevant.  You can improve value as perceived by the customer by focusing on the improvements of the four fundamental dimensions of value. Improve quality and customer service, and value improves. Improve price and reduce lead time, and value improves as perceived by the customer.

Too many companies choose to compete on a single primary dimension of value, failing to recognize the bar has been raised by customers and competitors for acceptable performance for the remaining value dimensions. An enterprise whose strategy is to compete on just one dimension will eventually sub-optimize its success by not leveraging the other three dimensions of value. Competing on price alone is a self-degradating cycle because customers eventually will require quality, customer service and better lead time. Competing on customer service alone is an honorable intention but is primarily an enabler value dimension required by the customer. Competing on quality alone will set your product apart but soon will be replicated by your competitors. Competing on lead time alone requires the other dimensions to improve but not sufficiently enough for lead time to sustain a competitive advantage.

Numerous value formulas have been developed by various companies and consultants to depict value, as perceived by the customer, in numeric terms resulting in an overall value. For example:

This and similar formulas are used to provide structure, content and framing for a company’s value, as perceived by the customer. They are used to define and assess the dimensions of value and identify which value dimension drives their markets. Over time, customers will shift their focus on these dimensions, as they will expect better quality, service, price and lead time. Therefore, the performance of each dimension will require continuous improvement, as competitors also will improve on the various dimensions as required. In this framework, defining value as perceived by the customer adds substance to an otherwise nebulous term defined by numerous perceptions, when only the customer’s perception of value is reality.

Bruce E. Jacobs is a principal with BKD, LLP, a CPA and advisory firm, and a member of BKD Manufacturing & Distribution Group, providing solutions for the management and financial needs of medical device businesses. Bruce has more than 26 years of experience in manufacturing and distribution strategies. Contact the author at [email protected].