Linking Buy and Sell Sides

Deloitte: Firms with "digital loyalty networks" twice as profitable

New York  May 20, 2002  Consumer businesses that create "digital loyalty networks" to link their customer management and supply operations are twice as profitable as competitors that do not, according to a new study from Deloitte Research.

However, in its survey of executives at nearly 250 major consumer businesses in 28 countries, Deloitte found that while a handful of consumer companies  including Colgate-Palmolive, Herman Miller, Dell, Heineken and Avon Products  are reaping considerable rewards by leveraging Internet connections, these firms represent a distinct minority. Only 17 percent of consumer companies, according to the survey, are using the Web effectively, while 41 percent score low on both supply chain collaboration and customer loyalty.

Deloitte defines a "digital loyalty network" as highly developed links between a company's supply chain and customer management operations  "digital" because they hinge on the use of the Internet and other digital technologies to collaborate; "loyalty" refers to the network's goal of boosting satisfaction and retention of the most profitable customers and, in turn, driving that efficiency throughout the entire supply chain; and "network," meaning that the information is shared seamlessly with customers, suppliers and other business partners.

"Companies with fragmented operations are going nowhere fast," said Jim Duffy, principal in Deloitte Consulting's Global Consumer Business Practice. "The smart money is on those companies that aggressively integrate with their customers and suppliers by building tight bonds that engender loyalty. Digital loyalty networks are the way to do that."

Duffy explains that "loyalty networkers" outperform their competitors because they are able to identify their most valuable customers and adjust their service based on customer requirements, lifetime potential and an intimate understanding of supply chain cost on a customer or segment basis. In addition, they build supply chains that can move in tandem with their suppliers' operations.

In the report, "Consumer Business Digital Loyalty Networks," Deloitte found that consumer companies with digital loyalty networks are two to five times more likely to achieve superior performance in sales, market share, customer service and other key measures, and much more likely to generate higher shareholder returns.

Establishing a digital loyalty network requires companies to rethink their approach to customers and suppliers, presenting three key challenges:

1. Bridging the divide between supply chain and customer service operations. Supply chain management (SCM) and customer relationship management (CRM) initiatives typically have operated independently of each other. This divide is amplified by different working styles: Supply chain managers tend to be more process-oriented and thus more receptive to diving into operation details to root out inefficiencies. Marketing and sales teams, while managing even more information about things like customer segments and trade promotion, thrive in a less predictable world of changing customer demands, creativity and experimentation.

2. Incompatible information, measure and rewards. Marketing, sales and service tend to keep their own records on customers in different systems and formats that can't be integrated easily with the data that supply chain managers possess. Measurement and reward systems can also be so contradictory that both sides find it difficult to define mutual benefits.

3. Continually rising customer expectations. Despite improving customer service and delivery, customer satisfaction may deteriorate because the expectations for service have risen, and what was once seen as "great service" is now viewed as simply "doing what you promised."

"Overcoming these challenges doesn't begin with a bureaucratic overhaul of an organization, but instead, by creating links between existing systems and processes on the demand and supply sides of the house," said Duffy. Deloitte asserted that three elements play major roles in establishing and maintaining these connections:

1. Consumer/customer-centric vision. Digital loyalty networks begin with a clear, shared vision about how to differentiate product and service offerings for different customer segments. A company must develop and institutionalize a mindset that puts customer needs first, and it must determine which customers and customer needs can be served profitably.

2. Network partnership strategy. To get every critical party  from the raw material supplier to the retail outlet to the consumer  to play a role in the digital loyalty network, companies must create strategies that considers all players and provides "wins" for all.

3. Open business and technology architecture. "Because participating in a digital loyalty network requires a significant investment of time and money for every player, staging small, incremental initiatives can help recruit players because it enables them to see the benefits before jumping in with both feet," said Duffy. As pilot initiatives progress, successful companies will standardize their policies, business processes, software applications and data architecture to create a open platform that is scalable and secure.