Customer Value Management...the next Reengineering process

In 1990, Michael Hammer a professor of computer science at MIT, published an article in the Harvard Business Review in which he claimed that the major challenge for managers is to obliterate non-value adding work, rather than using technology for automating it.  He called his concept reengineering.  The concept was to help organizations fundamentally rethink how they do their work in order to dramatically improve customer service, cut operational costs, and become world-class competitors.   Reengineering primarily became a mechanism for cost reduction.  It made a lot of manufacturing leaner and a lot meaner, but it focused on the inside of the organization.  Any linkeage directly with the customer for the most part was insignificant.

I have a good friend and client who was until his retirement the Senior Vice President at Nalco Chemicals, which is the largest water treatment company in the world.  Dan was famous for saying that you can't save your way into prosperity, that only comes by growing your profitable business.

However, research has shown over and over that organizations still don't have a handle on true customer profitability.   The truth is that some customers are deeply unprofitable. Simply doing business with certain customers can have a significant impact on reducing profits and shareholder value. On the other hand other customers are fabulously profitable--but too often in my experience the effect of the bad-news buyers over-whelms the stars.

Further, we know that the corporate understanding as to how the customer views the intrinsic or extrinsic value of the products is even farther down the comprehension pole.

What does any of this have to do with customer value management?

First a definition.  I will use Jim Anderson's from the Value Merchants...

"Value is the worth in monetary terms of the technical, economic, service or social benefits a customer receives in exchange for the price it pays for a market offering."

Understanding Value

 There a 3 views of value...

1. The value attributed by the product value proposition
2. The customers view of the products value
3. The real value today for the company

Value will be created for the company as a result of the product deliverables in terms of its performance, customer cost savings or other added value. 

Let me give you two examples where superior value drives my buying proposition.

Gillette Razor Blades

I recently brought two types of Gillette razor blades to a conference on value management to test their value parameters and assess to what degree they compete with each other.  One was a pack of 12 Gillette Good News disposable razors that sell for approximately $12 Canadian and the other was 1 Fusion Power razor with 1 extra blade that sells for approximately $16 Cdn.

I use the Fusion, which I love and offered both razors to the group.   I couldn’t give away the Good News blades, but all the participants were happy to accept my Fusion, which I wouldn't part with.  When I questioned the group on their spendthrift ways, their response was…’my face is worth the extra money.’

Synthetic Oil

I use synthetic oil in my sports car instead of regular oil even though the price is approximately double.  Why?  Its better, I love my little car and this is good for it.  

However, there are many more examples where the value difference is insignificant or unclear. 

Value is Transactional

Customer value must be transactional with the measure of value based upon...

1. the actual profitability of the product;
2. the product profitability as measured against its value proposition;
3. the product profitability as measured against the portfolio of customers that it fits into.

The chart below is an analysis of products by volume, margin, and profit velocity. 

• The products within the circle are all directed at the same market segment and carry the same value proposition.  
• The size of the ball is based upon the current evaluation of the products margin.  
• The X axis on the chart measures margin per unit of time through the 'constrained vessel'.  I call this profit velocity and will spend more time discussing this metric in later posts.

The implicit goal of any manufacturing facility is to drive as much margin as possible through its constrained vessels per unit of time.  Using this measure we can see that the actual value of the products are significantly different.  However, in most manufacturing environments products are not measured by profit velocity and therefore this group would be seen as having both equitable and positive margins driving positive value.   The organization would not see this differential.   Therefore this value opportunity is lost. 

What is the difference?  Where are the problems?  What is causing the value differential?  Those aren't easy questions.  But to truly manage customer value, the differential must be clarified.

In this example all of the products within the circle are coils of aluminum that are produced as second tier automotive parts that the customers will make into radiators or condensers.   The customer specifications of the blue product at the bottom of the circle requires a 12 centimeters diameter spindle to wrap the coil.  All of the other customers in this portfolio have converted to a standard 16 centimeter spindle.   The impact of this seemingly innocuous difference is that the coil is less stable and must be produced more slowly, resulting in significantly lower run speed, lower yield and lower value than its peers.   Neither of these problems are picked up by the cost accounting system as costs are averaged.

If this differential were to be addressed the value gain would obviously be very substantial.  But to accomplish this requires two critically important outcomes.  The organization must move to create a  learning organization, that utilizes the data from customer value analysis such as the chart above as an input to drive change.  The second component is to think without boundaries.  Today, partly as a result of the work done on reengineering the common belief is that the next wave of cost cutting can only be achieved by more effective management of the supply chain.

Organizational learning is really a misnomer.  What we mean by this is to create an environment ...

'where people continually expand their capacity to create the results they truly desire, where new and expansive patterns of thinking are nurtured, and where people are continually learning to see the whole together.'  (Senge 1990: 3)

Senge's very powerful and widely read book, was unfortunately not widely translated into actionable outcomes.  How do you create an organization...

• where learning and adaptation is a natural part of core process, and 
• removes boundaries to improve the cohesiveness from suppliers right through to the customer?

The answer of course is to build in new corporate wide feedback systems and appropriate reward systems that recognize and drive the new behavior.  Unfortunately, this is much easier to write down than deliver.

I have struggled with how to create and then teach the requirements for a learning organization.  What I needed was a way to provide an easy conceptual framework that linked feedback to learning.

The idea of using the metaphor The Art of the Bull’s Eye to create the link between feedback and learning a very complex task came to me several years ago when I was at a friend’s house in the country.   He took me out on the deck and proudly presented his new high-end air rifle.    With a sly grin David turned to me and pointed to a cup that was attached to a post about 30 feet away and said, “Let's have a contest to see who can hit the cup the most out of 20 shots.”   I am a competitive guy and I like nothing more than a good challenge.  Even though I had little experience with shooting a rifle I knew I could take this guy. 

Twenty shots later, sigh, I hadn’t hit the target once.   My ego was damaged!  While sitting down and having a beer (its true about Canadians, cottages, and beer) and contemplating my failure, I realized that I had no idea where the pellets were flying and therefore had no idea how to change my behavior, how to learn. 

So, being the enterprising guy that I am, I went into the garbage and found a piece of cardboard (probably the bottom of the beer box), took out a magic marker and drew a bull’s eye.  

With the new target in place I took my first shot and missed the cardboard completely. (not good).  So I guessed it went high and lowered the gun and found the upper left corner.  Now I had feedback.  Over the next 20 shots I slowly began to learn how to aim that rifle and gradually began to move the pellets into the middle of the target.

More next week...

The Art of the Bull's Eye


 

The Art of the Bull's Eye is a 7 step structured process that helps manufacturing organization's create organizational learning and drive customer profitability and customer value.




We chose the metaphor of a Bull's Eye since the process of becoming a marksman requires...

• both the perspectives of art and science;
• finesse and strength;
• the capability to both adapt to various conditions and yet be extremely decisive;
• the practical applications of mathematics through the understanding of wind, barometric pressure and heat;
• the discipline to keep refining the process and a feedback mechanism to drive the refinements.

But, what is even more cool about the concept of the Art of The Bull's Eye is that it is also a metaphor for striving for perfection.