Operational Excellence goes hand in hand with knowing the customer intimately
Most organizations continually strive to achieve operational excellence, but they spend less effort understanding customers' needs – and few effectively bring these two sources of customer value together. While the focus on cutting costs, improving quality and consistent, reliable service levels remains important, I see a shift over the next decade toward combining operational excellence with customer knowledge: solutions tailored to specific customers based on a deep understanding of their needs.
Consider Tesco, one of the largest retailers with more than 500,000 employees, which spent the past three decades improving its supply chain processes and the past two collecting and analyzing customer data. In the 1980s and 1990s, Tesco modernized its supply chain, introducing barcode scanners at the point of sale, centralizing and/or automating ordering, distribution and storage control, and establishing electronic data interchange with its main suppliers. As a result, the lead time for storage was reduced from two weeks to two days and supplier lead time dropped from 2 weeks to two days. In 1996, Tesco adopted the Toyota Production System approach to take its supply chain operations to even higher levels. Working with suppliers, they mapped the flows of several product families and discovered opportunities to streamline logistics. The company redesigned its processes so that products flowed quickly from suppliers to the shelves instead of being processed in batches in production, packaging, transportation and stores. For example, Tesco introduced wheeled platforms for moving high-demand, fast-moving products such as soft drinks, which dramatically streamlined movement between suppliers, warehouses and stores, improving cycle times and reducing costs.
But to get the full value of its improved supply chain capability, Tesco needed to combine its improved operations with a deep knowledge of its customers, which it would obtain from aggregated digitized data. So, in 1993, the company launched its “club card” (Clubcard), with which customers could earn points on purchases, redeemable for discounts or gifts. While building loyalty with the “club card” points, Tesco patiently worked through the cardholders' information, including which areas of the store they visited and their product preferences. Working with the consultancy Dunnhumby, they eventually defined 16 lifestyle groups, combining in-store shopping data (which showed what customers bought and when) and home shopping data (which showed what customers wanted to buy but was not available).
You may be saying, OK, so they built a customer database. What's the big secret? The big secret, and what is really powerful, is what Tesco did with the data it gathered. It used the customer profiles to discover unmet needs and to design and launch a series of services to meet those needs, including smaller convenience stores and online shopping. Tesco tracked where customers shopped – online or at convenience stores, supermarkets or hypermarkets. It then customized the product range in the smaller stores to the local customer base. With only 1,500 items, a convenience store has to get its product mix right. As I heard from Daniel Jones, the chairman of the Lean Enterprise Academy, who worked with Tesco, CEO Terry Leahy was convinced that the company should develop these new formats and actively supported their development, despite store managers' concerns that their sales would be cannibalized. (To learn more about the Tesco story, see Terry Leahy's book “Management in 10 Words and Daniel Jones's “Lean Solutions”).
By combining its supply chain capabilities with customer data, Tesco worked out the operational details of how to deliver exactly what customers want for each type of store. Its agile supply chain allowed it to replenish small stores at the same cost as large stores – so it could charge the same price across all formats. They continued to use the club card data to regularly adapt their offerings, adjusting the supply chain as needed. Interestingly, once they started selling online, store managers saw a growing number of sales instead of cannibalization and were quickly convinced.
If you listen to the hype about “Big Data” and “Analytics”, it sounds as if analyzing customer data is becoming easier and easier. But the truth is that interpreting the data is hard, and translating it into new customer experiences is even harder. Companies like Amazon and Netflix can help you shop by recommending products, which is a step forward. But it is a huge challenge to change order fulfillment and other concrete steps in the customer life cycle as Tesco has done.
Very few organizations have Tesco's grounded discipline of continuous operational improvement, which allows them to take great advantage of the data they manage to collect through customer data analysis. Even fewer companies have cross-functional work teams that enable them to turn this data into new customer experiences through operations and customer service. But bringing these two competencies together is quickly becoming a competitive necessity for delivering higher levels of value to customers than was previously possible.
