Customer Collaboration – Delivering Value to the Market

By: Charles L. Johnson

Summary

Cost reduction is most effectively achieved only in close collaboration between the customer and a provider that truly understands the customer’s problems and is capable of providing solutions more reliably then the competition.

Understanding Cost Reduction in Terms of Reliable Performance

Unless competitive advantage derives from some proprietary capability or technology, a successful supplier will focus especially on the reduction or elimination of any source of variability in the production or on-time provision of goods or services, or variability in quality expressed as the durability and utility of its product.

Where markets provide generally equivalent products or services, cost reduction must be focused on reducing the hard cost and/or such hidden, implicit cost that variability in quality or delivery levees against the price/performance experienced by the buyer. Only a collaborative approach necessarily provides the greatest opportunity for the customer to benefit without deprecating the viability of the supplier. Why then is this approach lauded but ignored?

First, certain market behaviors are de facto standards reinforced over many years of Darwinian-Keynesian hybrid concepts choking out more meaningful mechanisms. While the notion that inefficient suppliers will be driven from a free market is fundamentally correct, it is a fallacious supposition that a supplier driven from a free market is necessarily inefficient.

Too often, predatory tactics and surreptitious back-room deals and social objectives stack the deck against those companies otherwise able to compete on a level playing field. Regulating prices is not the answer. But a blind referee who is told how to call the fight by bookies is hardly the alternative.

Second, true collaboration presupposes that the customer is relying on the supplier to provide the goods or services more efficiently then their own organization would otherwise make or perform for themselves – if the purchaser could create an equal quality product or service more cheaply, it would. But, since the procurement process typically stops with the cost of the contract price, the customer foregoes examination of how collaborative efforts to share information about component purchases or services for a given provision might otherwise achieve the highest value at the least cost.

Collaborative commerce relies upon transparency - the willingness to share raw product or service cost. While this should be an easy concept, both buyer and seller prefer to rely on auctioning to bring about the lowest cost, which is a particularly naïve behavior, however common.

Supply Contracts and Arbitrage

Most industrial concerns are typically oriented more toward supply contracts with extensive terms and conditions which, while legally relevant, have little practical impact on commercial discourse and remedies.

Also, while significant technological effort has resulted in lowering the cost of procurement activities, extensive pre-award qualification and validation of firms is usually followed by additional periods of post-award bid conditioning. The greatly inflated cost of these mechanisms implies a concern apart from improving delivered value. These mechanisms are as costly as the sweetheart deals and other unethical practices that once proliferated unchecked for which these practices targeted and did provided significant exorcism.

But perhaps the more subtle aim, intended or discovered was arbitrage of short-term market conditions. The absurdity is that outside of consumerism, business to business buying always undergoes off-setting market corrections and only those skilled at arbitrage or large enough to impact one side or the other of the supply and demand equation realize any benefit from these cycles; all the while, real increases in end-of-chain value is effected only by new technology or adjusted economies of scale (witness the incredible predilection toward merger and acquisition hallmarking global business concerns over the last 25 years).

The distinction for proprietary advantage exists only in the premium price that an exclusive advantage supports. But, since most businesses decry the price gouger’s moniker; where a premium is charged for the proprietary advantage, hard cost data is typically well obscured.

This is easily translated into marketing hype claims of confidential and proprietary information, as to imply that there is some legitimate claim to the value most companies seek to justify.

Most companies however, do not actually possess a real proprietary advantage; nevertheless, they hide their cost structure beneath a competitive cloak. This is either ignorant insecurity or blatant obfuscation and in either case, the wrong message for the prospective customer: without a bona-fide proprietary advantage, hard costs are easily surmised.

Price/performance Implies Higher Value – a Better Product or a Lower Cost Equivalent

The accomplishment of being the market’s leader is highly enviable. But the means for achieving this distinction are contrary in many ways to how many small and medium size businesses develop, and requires a discipline for long term thinking that most “get it while you can” profit seekers aren’t interested in and dependable, conscientious smaller concerns are incapable of sustaining.

Too often, cost reduction strategies are relied upon to support decreasing prices in a bid for market share. Ultimately, without a significant reduction in hard production costs, such strategies only decrease the delivered value by increasing transactional risk in the form of concealed non-conformance or late delivery. Worse, pure price reduction strategies aimed at squeezing the competition produce no real economic benefit and fail to focus on increasing net value delivered.

The only correct answer focuses on eliminating price/benefit variability. Eliminating price/benefit variability may only be achieved by adept companies that embrace and assert within their organization, a heuristic set of simple values, which if used to qualify and prioritize activities will:

1. Enhance management decision logic and execution;
2. Support coordinated acquisition of both external and internal opportunities to improve collaboration in every aspect of the organization’s interaction with the customer; and,
3. Focus process development on effective results that are measurable, not implied, and then rely on continuous process improvement to improve efficiency not to save money on human resources, but to free those resources to initiate further process development.

This is called a heuristic set of simple values because the effort exerted to satisfy a lower value that violates a higher value is counter-productive. But, when properly applied even minimally, the results sought are natural consequences of the intrinsic applicability of the values themselves and the priorities they establish.

They are presented here, as the conclusion to, rather then as the backdrop for the overall premise that collaboration with the customer is the most logical way to increase the overall value delivered to a market.

Customer Focused

1. Identify, understand and solve the customer’s real problems.
2. Market forces require continuous evaluation of how well existing product or service offerings solve real problems: all too often, real problems have little to do with already acceptable form, fit and function.
3. Don’t feed steak to a poodle when hamburger will do – the product does not define the problem.
4. Incremental improvements address incremental change and are valid opportunities in industries devoid of, or subject to slow technological advance. Otherwise, real improvement often requires a totally new solution and a commitment to research and development or analytics in advance of the industry norm.

Team Oriented

1. Developing creative resources implies an organizational mindset that expunges prima donna behaviors and exposes inadequacy and efforts to hide incompetence.
2. Human resources must be free to focus on those problems too complex for generalization.
3. A relationship with the customer is always necessary, however impersonal, if the value of the solutions delivered are to be objectively measured.
4. Surrogate ownership of the organization’s functions is vital for moral.

Process Driven

1. Eliminate variability in performance.
2. Effective business rules and processes free human resources to focus on complex problems: too often, efficiency is valued higher then effective solutions.
3. Processes must be designed to eliminate variability measured in terms of cycle times and defects; and,
4. Processes must support and sustain continuous improvement and adjust smoothly to broad swings in activity without sacrificing reliability.