Business Analysis – Understanding your environment Which way is the future? – Planning in the age of uncertainty
Nov 052009

In the previous post I probably left out the obvious, which is that the best source of information about your customer is your customer. Collaborating with customers to optimize your respective supply chains or manufacturing processes can allow you to build stronger customer relationships and loyalty based on more than just price. But customer collaboration can be complex and costly, so before you get too involved you have to be pretty sure that the potential benefit is large enough to justify the cost and effort. Is your business with the customer substantial? Is there potential to reduce your combined inventories? Are there technical adjustments that could reduce manufacturing costs or improve productivity?

You also have to be aware that it takes two to tango. Your customer has to see the potential benefits and commit to allocating resources to the effort. You both have to be willing to share data, some of which may be proprietary or confidential, in order to identify and allocate the benefits of collaboration. Customers who take a confrontational approach with suppliers to get the best price often feel that information is power, and resist sharing information with suppliers for fear of compromising their negotiating position. And this brings up the issue of the issue of trust. Trust is important in any relationship, and that includes the customer – supplier relationship. If you can’t trust the other party to provide accurate data, keep your data confidential or not use it to beat you or your competitors down on price, you probably don’t have a good basis for successful cooperation.

Despite the difficulty, customer collaboration can be very beneficial, and can help you create a competitive advantage. I have been involved with a couple of very successful collaboration efforts in the last few years. In one case we began working with a customer to optimize the supply chain with limited success when we stumbled on opportunities to improve manufacturing costs. By re-focusing our efforts on understanding our respective manufacturing processes, including constraints and real costs, we were able to substitute products that cost much less to produce in some of our customer’s applications without impacting the quality of their finished product. We significantly reduced our manufacturing costs and shared the savings with the customer. With another customer, we worked together to review their specifications, which hadn’t been changed in years, in light of our manufacturing constraints and costs. We were able to make adjustments that significantly reduced our raw material costs and passed some of the savings to the customer.

In both cases, we generated substantial bottom line improvements for ourselves and our customers well in excess of anything we would have achieved in the normal course of business and price negotiations. In addition to the substantial bottom line benefits, the interaction at the technical, commercial and senior management levels significantly enhanced our relationships with both customers, and made it more complex and costly for them to change to another supplier.

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