As discussed in part one of this post, much is being written about how to manage the supply chain threat of COVID-19. While much of it focuses on disruption threats to inbound supply chains from suppliers, the longer-lasting challenge is managing your customers through the crisis period to maximize their long-term loyalty and profitability.
Five rules form the cornerstone of an effective customer management program in a time of supply disruption:
1. Prioritize your customers by profitability;
2. Incorporate your emerging channel strategies;
3. Align sales compensation with your priorities;
4. Develop product substitution groups;
5. Prevent over-ordering.
In part one, we discussed prioritizing your customers by profitability. Here are the remaining rules:
2. Incorporate Your Emerging Channel Strategies
The current era is characterized by the emergence of critical digital channels and omni-channel management. The digital giants are gaining prodigious market share in industry after industry through their Web-based capabilities. Most companies are sprinting to catch up, at the risk of their very survival.
It is critical, therefore, to incorporate your channel strategy into your customer supply prioritization. This will ensure that your crucial new strategic capabilities will continue to develop and grow. This has to be systematically integrated into your customer management strategy to ensure your long-run viability.
3. Align Sales Compensation with Your Priorities
There is an old adage that a sales rep might understand your priorities and buy into your priorities, but he or she will (and should) do what you pay him or her to do. Another way to put it is that the fundamental rule of sales is, “work your pay plan.” If the pay plan is wrong, it is not the salesperson’s fault.
This means that sales compensation (e.g. commissions, quotas) has to be adjusted to reflect your priorities. The root problem is that all too many companies fail to develop realistic priorities, as explained above. This leads to the counterproductive scramble for product and the first-come first-served processes that are so harmful to short-run profitability and longer-run customer loyalty.
4. Develop Product Substitution Groups
Substitution groups are sets of products that perform the same function. These are important in the normal course of business both to enable sales reps to move customers to a higher-profit product mix, and to ensure high fill-rates when a product stocks out (and the customer has agreed to a specific substitute).
These groups are essential in times of supply disruptions because they can ensure steady supplies, even if the disruptions are intermittent. However, this needs to be agreed with customers in advance.
5. Prevent Over-Ordering
Over-ordering is a characteristic difficulty in times of product shortage. It has two main sources: customer hoarding, and unadjusted EDI replenishment algorithms.
Inventory hoarding is a natural response to supply shortages. The core logic is that purchasing departments try to grab product whenever it is available as a protection against later shortfalls. This causes extreme problems for suppliers because they cannot forecast actual customer demand. Instead, sales reps scramble to grab tight supplies to meet their customers’ accelerating requests, leading suppliers to short other customers – especially their large profit-peak customers with whom they typically have vendor-managed inventory or other operating ties that ensure the correct order flow.
The second cause of over-ordering is unadjusted EDI replenishment algorithms. If products are allocated to customers, most replenishment systems will simply recognize the shortfall in product availability and endlessly order more. We have seen cases where replenishment systems order the same product multiple times per day. The problem is that the supplier’s systems interpret this as incremental demand, and award more scarce stock to the over-ordering customer.
The solution is to develop a set of agreements with customers to allocate products relative to historical demand, unless the customer notifies the supplier that its product demand has actually changed. For example, profit-peak customers could be supplied at their historical demand; profit-drain customers at 75-80% of their historical demand; and profit-desert customers at 60% of their historical demand (unless they contract for a larger share of wallet). It is very important to develop explicit agreements with customers on this so they can make similar agreements with their customers.
Effective Strategic Management
Times of product scarcity are the most important times to grow your customer loyalty with your most important customers. Done well, you will preserve short-term profits, and lock in long-term sustained profit growth. Done poorly, you will generate years of damaging customer ill-will.
The key to success is to focus your top management team on relentlessly driving a strategic customer management plan based on the five rules for growing customer loyalty. This provides the basis for turning despair into lasting victory in a period of supply disruption.
Jonathan Byrnes is a senior lecturer at MIT, and founding chairman of Profit Isle. Reach him at [email protected]. John Wass is CEO of Profit Isle, a profit acceleration SaaS company with proprietary analytics that have produced sustained year-on-year profit increases on tens of billions of dollars of client revenues. Reach him at [email protected]. Byrnes and Wass are co-authors of the forthcoming McGraw Hill book, “Choose your Customers: How to Compete Against the Digital Giants and Thrive.”