Bruce E. Jacobs07.24.08
Customer Integration: Creating Disruptive Innovation
Bruce E. Jacobs
Few customers of medical device manufacturers and suppliers are fully integrated with their product providers, whether they provide raw materials, component parts, finished assemblies or finished products packaged for delivery. The customers could be end users such as hospitals and healthcare centers, branded OEMs, distributors or even component providers. Regardless of who the customer is on the end-to-end supply chain—from raw material sourcing to the end users—a major opportunity exists to create disruptive innovation with competitors and elate customers with exceptional service through customer integration.
The term customer integration applies to a manufacturer’s or supplier’s integration of its business and supply chain processes with the customer’s business and supply chain processes, whereby the provider to the customer is an extension of the customer’s own supply chain. The product provider works in lockstep with the customer to serve the customer’s end user with the highest level of service, at the least total landed cost for both the customer and provider.
The ability to integrate with key customers requires a higher set of performance standards and dramatically changes the rules of play for your competitors. Coupled with the high value your products offer, customer integration substantively increases your position in your customer’s hierarchy of valued providers; in addition, the performance expectation your customer has for your competitors increases. When you write the rules of play for customer integration, your competitors are put at a great disadvantage because the rules favor your company’s business and supply chain capabilities and processes. If your competitor writes the rules of customer integration with your key customers, the rules will favor your competitor.
Fundamentally, integration with key customers requires the provider to leverage expertise, knowledge capital, supply chain capabilities and business processes to optimize the customer’s performance with its customers—ie, meeting fill rates, lowering inventory, improving the total landed cost structure, replenishing product at the rate of consumption, resolving issues, providing custom services, etc. The more dependent a customer becomes on its key provider because the provider offers so much more than just good products, the higher the provider’s value proposition. In addition, the provider’s key competitive dimension shifts away from competing solely on price to competing on a wider bandwidth of customer service.
Principles of Customer Integration
There are three main principles to customer integration and making the integration with key customers work effectively:
• Business-to-business integration between the manufacturer and the customer, to work in unison to better serve and respond to the requirements of the customer’s customers. This requires multiple points of contact, interaction, communications, problem resolution and teamwork between numerous functional business units of the customer and those of the provider. Alignments occur across the two business organizations between the sales associate for the manufacturer and the customer’s purchasing agent; in addition, alignments occur between the manufacturer’s distribution operations, customer service, materials management, manufacturing operations and engineering and those of the customer. This integration begins to establish stronger relationships and open communications across the two business entities, adding substance to customer focus.
• Business process-to-business process integration. When the manufacturer’s business and supply chain processes work in harmony with those of the customer, they are integrated as though the manufacturer’s supply chain is an extension of the customer’s supply chain. For example, the customer’s forecasts, production plan, inventory planning and scheduling are shared and integrated with those of the manufacturer. These are used to plan and replenish product to the customer as needed, manage inventories for both entities and keep product available for the customer’s use. Purchasing costs and expedited orders are reduced, and lower inventory levels are achieved, resulting in a more flexible and responsive supply chain.
• Information-to-information integration, where the two players share each other’s information across the two supply chains to maintain their alignment and serve the customer’s customer with the highest level of service at the least total landed cost. Shared information between the manufacturer and the customer may include sales forecasts, inventory levels, production schedules, customer orders and delivery requirements, as well as defined performance measurements for both entities.
Success Factors
Critical to the success of customer integration is having the integration relationship’s operating characteristics defined for both the customer and provider. These characteristics include:
• Pressure to perform to the operating agreement defining the integration requirements
• Both entities’ business and supply chain processes extended into each other and working together to provide a continuous flow of product with minimal inventory across the supply chain
• An integration organization consisting of personnel from both entities who work as a team to meet the demand for product and focus on providing the highest level of customer service and improving the total cost structure for both entities
• A jointly defined business plan, improvement requirements and operating practices to achieve systemic performance gains, resolve issues and take corrective actions
• Agreed-upon performance measurements and openly shared information about performance and issues
An increasing number of customers are reducing their base of providers, increasing volumes with their remaining providers and extorting major price concessions and performance penalties in the spirit of “partnering,” forming “strategic business alliances” or developing “preferred provider arrangements.” When the disguise of this new relationship’s value is stripped away, the remaining providers with the added volume now are in for the “big squeeze” to lower their prices. Failure to comply with the pricing demands is not optional. Any long-term relationship that existed between the provider and the customer is no longer relevant.
Moreover, the customer may decide to use a Web-based auction to lower prices even further. When customer integration is in place with key customers, an auction for products with which the customer is provided through customer integration violates the very principles of customer integration, because the auction provides one dimension of value—lower price—instead of least total landed cost.
Not all customers can be integrated. A provider’s key customers—those few customers that provide a large portion of the provider’s sales—should be candidates for customer integration. Getting started requires answers to the following questions:
• What does customer integration look like for the provider and the integrated customer? This requires defining what customer integration means for the provider’s customers, how it will work and where the points of integration will be.
• What benefits are to be achieved through customer integration? This requires identifying the targeted business and economic benefits that will be achieved through integration for both entities.
• What is the work plan to put customer integration into place? This requires defining the work tasks and schedule for executing the tasks to implement integration for both entities.
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Customer integration is an untapped area of significant opportunity for both the provider and customer, but the rules of engagement must be defined to achieve the benefits and economic gains for both entities. Manufacturers and providers that recognize the opportunity and are the first to put their stakes down to define and implement customer integration will be the ones that define the rules of play to which their competitors will be required to adhere—and they will be the ones to create disruptive innovation.