1.3 What Do Customers Value?

Why do you need to know what customers want? Answer: Customers make purchase decisions based on the value they expect to obtain. The question in their mind is, “Is the value worth the cost?” If your goal is to obtain and retain customers, you need to deeply understand what customers value.

Economic Utilities

Economists often discuss value in terms of utilities; that is, what a “product or service does” for the customer. You need to manage operations to create or contribute to four utilities:

1. Form utility is the primary responsibility of purchasing and operations managers who acquire inputs and transform them into products or services of greater customer value.

2. Possession utility falls within marketing’s domain and consists of efforts to communicate (i.e., promote) a product’s value and then facilitate the exchange process.

3. Time utility emerges from effective management of all value-added processes that influence when a product is available for purchase.

4. Place utility is primarily the charge of supply chain managers who assure that products and services are where customers expect to find them—when customers want them.

A correct understanding of economic utilities helps you design your company’s value-added processes and supply network. Your customers, however, seldom talk about form, possession, time, and place utilities when they are selecting and evaluating suppliers.

Value Dimensions

What do customers talk about? To find out, gather a sample of supplier scorecards from your customers. Examine them and you will find five criteria are common across most scorecards: cost, quality, delivery, agility, and innovation (see Table 1.1). What do your findings mean? Answer: To win customers’ business, you must grasp the nature of these value dimensions and build the operating systems to create and deliver them.

Cost

Companies are under constant cost pressure. You can expect your customers’ purchasing team to be unrelenting in their efforts to reduce costs. Globalization has given them alternative sourcing options—options that often possess low-cost labor advantages—emboldening them as they ask for lower prices. To reduce costs, companies pursue a combination of four strategies.

Process Improvement

The key to improving productivity is to promote learning, a critical foundation of lean management. By minimizing work rules and increasing training, especially in lean practices, you can empower workers to find better ways to do things.

Automation

Technology makes process redesign possible. Many manual tasks have been automated. New technologies such as artificial intelligence (AI), additive manufacturing (i.e., 3D printing) and robotics will continue to enable process redesign. You must constantly ask, “Can technology help us do this job in a better way?”

Offshoring

Improved logistics have reduced the total landed costs and delivery reliability of products made in distant lands. You can take advantage by locating manufacturing facilities in far-flung countries with low-cost inputs. Just remember, offshoring adds risks to your supply chain.

Outsourcing

Sometimes another member of the supply chain can do a specific activity better than you can. When this happens, you can move from make to buy, outsourcing that activity to a supply chain partner so that your firm can focus on what it does best.

By constantly improving processes and carefully evaluating resource availability and supply chain capabilities, you can effectively pursue the ultimate goal of cost performance: The lowest total landed cost to your customer. As your cost competitiveness improves, your company can capture market share, increase scale economies, improve profitability, and invest in future capabilities. Cost improvements can drive a powerful cycle of competitiveness.

Quality

Quality is often defined as conformance to specs. A customer focus, however, means that quality is nothing more or less than meeting customer expectations. For over 100 years, L.L. Bean’s one-of-a-kind 100% Satisfaction Guarantee exemplified this philosophy:1

What do you think of L.L. Bean’s guarantee? Pretty amazing, isn’t it? It really does focus on customer expectations and experiences!

Now, can you see any problems with it? By 2018, L.L. Bean discovered that “customer” behaviors had changed. Specifically, L.L. Bean found that people were acquiring old, tattered, and torn L.L. Bean products in yard sales—or even taking them out of garbage cans—and returning them for a refund. L.L. Bean had to change! Still customer focused, L.L. Bean updated its policy as follows:2

So, what do customers expect? David Garvin, a Harvard professor, identified eight factors that customers use to assess quality.

1. Performance—refers to a product’s operating characteristics.

2. Features—are the unique characteristics that distinguish a product from rivals’ products.

3. Reliability—defines the user’s ability to count on the product not to fail.

4. Conformance—is how well a product conforms to design specifications.

5. Durability—refers to a product’s life expectancy (also, mean time between failure).

6. Serviceability—is the speed and ease of repair when problems occur.

7. Aesthetics—are perceptions of fit and finish (also, artistic value).

8. Perceived quality—refers to a product or brand’s quality reputation.

As for managing quality, Six Sigma (6σ) is the gold standard in quality philosophy and practice. Motorola launched Six Sigma in 1985. The goal was simple—eliminate defects. Motorola chose to call its quality program Six Sigma because a process that achieves 6σ quality, produces only 3.4 defects per million parts made.

Six Sigma follows the DMAIC methodology—Define, Measure, Analyze, Improve, and Control—and applies statistical tools to identify and remove the causes of defects in value-added processes. As process variability is eliminated, quality improves. Jeffrey Immelts, former CEO at General Electric (the company that made 6σ popular), called Six Sigma the common language at GE.3 Everyone from the loading dock to the C-suite is expected to speak the language of Six Sigma. Simply put, quality is important everywhere.

You may wonder where quality ranks in importance among the five value dimensions. Quality is often more closely scrutinized than cost in purchase decisions and has been called the most vital factor in long-term success. W. Edwards Deming went so far as to say, “You are not obliged to manage quality. You can also choose to go out of business.”4

Delivery

Customers value speed. Fast, reliable delivery cycles improve forecast reliability and reduce the need to carry inventories. Delivery, however, is more than just "doing things fast.” It is also the ability to be fast consistently. This is Toyota’s secret! Lean, just-in-time processes across the source-make-deliver process enable Toyota to operate with minimal inventory—sometimes as little as two to four hours of supply. By synchronizing operations, materials flow into and through production like water through a hose. Finished products move with equal fluidity to dealers around the world. The result: Toyota leads the auto industry in developing, manufacturing, and delivering high-quality cars consistently on time.

Toyota—like other companies that compete on time—wins because it operates with short order cycles and minimizes variability across all of its value-added processes. Your takeaway: Any activity that lengthens the time or increases the variability of the order cycle damages your firm’s ability to deliver on time. A parts shortage, a late supplier delivery, a machine breakdown, an inaccurate order entry, or a transportation delay hinders delivery performance, driving up costs and disappointing customers. Research has shown that firms that experience delivery glitches report 6.92% lower sales growth, 10.66% higher growth in cost, and 13.88% higher growth in inventories.5

Agility

Change is the only constant in today’s business world. The ability to act quickly—i.e., to adapt or respond—as customers make special requests, competitive requirements change, or the unexpected happens is critical. Recent disasters—e.g., 2011’s Tohoku earthquake off the coast of Japan or 2020's coronavirus pandemic—crippled global operations, stressing the need to build agile and resilient supply chains. Agility enables your company to deal with the risk inherent in lean, global operations. It also enables you to recover from the unexpected more quickly and resume operations faster than rivals. Sun Tzu summarized the power of agility as follows: “Every minute ahead of the enemy is an advantage.”6

Agility, like the other value dimensions, is a cross-functional capability that relies on effective information systems, well-designed processes, and the adaptability of your firm’s people. The following steps are critical to create agile, responsive operations.

• Make agility a priority throughout the firm and across supply chain relationships.

• Map processes to make them visible and to identify agility-enabling activities or decisions. Use the map to initiate risk-mitigation discussions and identify operating alternatives.

• Use information systems to monitor operations, link to customers, promote proactive environmental scanning, and share information on a real-time basis across the network.

• Cross-train workers and organize work in multifunctional teams.

• Design performance measures to value agility.

• Build learning loops into every process throughout the organization.

Toyota relies on its highly agile supply chain. Suppliers are required to locate near Toyota’s production facilities for fast, reliable, and flexible delivery. Within Toyota’s factories, information and logistics systems synchronize materials flow to incoming orders—enabling custom assembly. Further, Toyota can build multiple models—e.g., Camry sedan, Sienna minivan, Highlander SUV, and Lexus RX 330—using the same platform and on the same production line, helping it mix and match production to meet market demand. If Toyota does not properly forecast market needs, it can quickly adapt to them.

Innovation

Staying relevant means you need to innovate. The time between new product introduction and product “obsolescence” is constantly shrinking. Rivals can copy and introduce their own “new-and-improved” version within six to nine months.

Apple’s iPhone illustrates your innovation challenge. The iPhone wasn’t the first smartphone; however, it changed consumer expectations. To do this, Apple needed to do more than invent the iPhone. Apple needed to constantly re-invent the iPhone. Pushed by rivals like Samsung, Apple brought a new iPhone to market every year from 2007 to 2014. Apple’s failure to bring a cool, must-have iPhone to market in 2015 tanked Apple’s stock price. Investors feared Apple had lost its innovation touch.

The bottom line: Research has long shown that bringing products quickly to market is the key to financial success. In one instance, products introduced six months late, but within budget, realized a 33% decrease in expected profits over the first five years. Products introduced on time, but 50% over budget, realized only a 4% reduction in profit.

Process innovation—often overshadowed by the quest for new products—is also critical to sustained success. Consider the fate of two industry-leading process innovators:

Walmart

Walmart’s persistent improvement of cross-docking methods over a 20-year time period ensures high levels of on-shelf availability at everyday low prices. Walmart continues to work with suppliers to improve the efficiency of its back-office operations (focusing on details like palletization and RFID tags) even as it strives to find ways to involve customers to reduce check-out times and improve the service experience.

Dell

Much of Dell’s success resulted from patents, not for its products, but for various aspects of its manufacturing processes. By 2003, Dell had earned more than 550 business-method patents. Michael Dell’s mantra was “Celebrate for a nanosecond, then move on.” Industry analyst Erik Brynjolfsson noted, “They’re inventing business processes. It’s an asset that Dell has that its competitors don’t.”7

The key to process innovation is to cultivate a culture of experimentation and learning within the four walls of a company as well as across the supply chain. The benefits of these efforts include greater efficiency, enhanced quality, and faster cycles. And don’t forget, process innovation is much more difficult to copy than product innovation.

Now, a warning: Dell’s eventual undoing was a failure to bring the right new products to market quickly. When asked what surprised him about the computer industry, he answered, “I didn’t see [tablets] coming.” 8 Your long-term competitiveness depends on how well you innovate both processes and products.

Now that you have an idea of what customers want, let’s talk about the operating context where value is created and Lean Six Sigma is implemented.