Loyalty Networks Crucial

Deloitte says supplier integration alone equals value destruction

NEW YORK, Oct 2, 2000 /PRNewswire via COMTEX/ -- According to a global study by Deloitte Research, manufacturers can be up to 70 percent more profitable by connecting with all trading partners through the Internet. Surveying 850 manufacturing executives in 35 countries, the report found that manufacturers typically focus on supplier integration alone, which is resulting in an enormous amount of value destruction. The problem is that most companies don't know where they destroy value.

"Today's manufacturing executives were raised in a product-centric era in which competitive advantage was achieved through product branding, quality and cost," says Jim Kilpatrick, global head of Deloitte Consulting's Supply Chain practice. "Improving supply chain performance with a focus on the supplier is more natural for them because that is what they know. However, in this Internet era, the power has shifted dramatically to the customer, and those companies that are able to integrate their supply chain and their customer strategies will achieve breakthrough performance."

The study, "Digital Loyalty Networks: e-Differentiated Supply Chain and Customer Management", supports this assertion. Only about one in 10 companies have established Digital Loyalty Networks, integrating efficient supply chain processes with effective customer relationship management (CRM) by leveraging new technologies to differentiate in real time the response to individual customers and segments. Companies concentrating exclusively on improving the supply chain or customer relationships are faring well, and the few that integrate both enjoy much greater shareholder value-54 percent and 19 percent higher, respectively.

In addition, it is generally believed that cost reductions achieved by linking supply and demand in online marketplaces can reach five percent or more of total purchases, which can amount to as much as $2.5 billion for large manufacturers, such as Boeing. Such savings could also have a dramatically positive impact on the company's earnings per share.

The Customer is Not Always Right
Without strong, integrated links between suppliers and customers, manufacturers will face serious threats as globalization and deregulation alter previously protected markets and networks of businesses. Well- implemented digital loyalty networks allow companies to differentiate between customers and prioritize them so that the most valuable customers are being served first.

"Automotive manufacturers such as DaimlerChrysler, Ford and General Motors are in the forefront of this movement, streamlining their supply chains through Internet trading exchanges, such as the newly established Covisint exchange, and investing heavily in customer relationship technologies," says Kilpatrick. "This will eventually enable these companies to better manage the entire order-to-delivery process and differentiate offerings to customers according to their value."

"Over the past five years, many companies have invested heavily in getting their CRM, ERP [enterprise resource planning] and supply chain houses in order. This investment is yielding unprecedented enterprise-wide access to information about customers' requirements, profitability and cost-to-serve. Digital Loyalty Networks are the next frontier of competitive excellence. They leverage these data across the enterprise, from the demand chain through the supply chain -- all focused on maximizing the lifetime value of customer relationships," said Steve Pratt, global head of Deloitte Consulting's CRM practice.

New Rules
The Deloitte Consulting study outlines some basic concepts for manufacturers to effectively integrate suppliers and customers:

  • Differentiate -- Abandon the traditional one-size-fits-all supply chain that yields similar lead-time and service levels for all customers.
  • Prioritize capacity -- Commit resources on a priority basis for the best customers.
  • Prioritize orders -- Fulfill orders on a priority basis. Not all sales are necessarily valuable sales; focus on the most profitable orders from the most loyal customers.

The long-term value to establishing Loyalty Networks will prove increases in marketshare by having a stronger base of loyal customers over multiple customers with widely varying demands.