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Customer-Supplier

Relationships

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CUSTOMER-SUPPLIER RELATIONSHIPS AND TOTAL QUALITY 2

• From TQ perspective, every company is part of a long chain of customers and suppliers. Each company is a customer to its suppliers and a supplier to its customers, so it does not make sense to think of a company as only one or the other.• One implication of this concept is that the customer’s customers are, in a sense, your customers as well. It is important that a company must focus on both their immediate customers and those next in the chain.

The Customer-Supplier Chain

Customer / Supplier

Customer / Supplier

Customer / Supplier

Customer / Supplier

Coal MineCar Rental

AgencyAuto PlantSteel Mill

THE IMPORTANCE OF CUSTOMERS 3• The importance of customers has evolved over the years, from a view of customer as a buyer to increase profitability, to a view of the customer as an active partner and the focus of all quality activities. • Customer satisfaction translates directly into increased profits. However, while satisfaction is important, modern firms need to look further.• Achieving strong profitability and market share requires loyal customers – those who stay with a company and make positive referrals. • Satisfaction and loyalty are very different concepts.

4SATISFACTION VERSUS LOYALTY

• According to Patrick Mehne, “Satisfaction is an attitude and loyalty is a behavior”

• Customers who are merely satisfied may often purchase from competitors because of convenience, promotions, or other factors. Loyal customers place a priority on doing business with a particular organization, and will often go out of their way or pay a premium to stay with the company. Loyal customers spend more, are willing to pay higher prices, refer new clients, and are less costly to do business with.

5THE IMPORTANCE OF CUSTOMERS (cont’d)

• Poor-quality products and services lead to customer dissatisfaction in the form of complaints, returns, and unfavorable word-of-mouth publicity.

• Dissatisfied customers purchase from competitors.• One study found that customers are five times more

likely to switch because of perceived service problems than for price concerns or product quality issues.

• For many companies, “The Customer Comes First” is a guiding principle. It is impossible to overstate the importance of customers to TQ. Customers are at the very center of every TQ activity, and devotion to satisfying them is the first principle of TQ. Customers are recognized as the guarantee of the organization’s continued existence.

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6 THE IMPORTANCE OF SUPPLIERS

• The quality of goods and services received from suppliers, the upstream portion of the supply chain, has a significant effect on the quality of goods and services that downstream customers receive.• Suppliers are those companies that provide the organization with goods and services that help them to satisfy the needs of their own customers.• If a supplier’s performance is of consistently high quality, its customer can decrease or eliminate costly incoming inspections that add no value to the product.• The importance of suppliers is at least as great when they provide training, software, or other goods or services that do not physically become part of the final product; they will influence its quality nevertheless by shaping the quality of the processes used to produce it.

THE IMPORTANCE OF SUPPLIERS (CONT’D) 7• In business today, operations are often highly

decentralized and dispersed around the world. Consequently, managing a complex network of suppliers becomes a critical inter-organizational issue.

• Suppliers play a vital role throughout the product development process, from design through distribution.

• Increasingly, suppliers are viewed as partners with customers, because there usually is a codependent relationship.

8PRINCIPLES FOR CUSTOMER-SUPPLIER RELATIONSHIPS

• Three governing principles describe CSRs under TQ:• Recognition of the strategic

importance of customers and suppliers;

• Development of win-win relationships between customers and suppliers; and

• Establishing relationships based on trust.

• Every organization must recognize that its customers and suppliers are absolutely crucial to its success.

• Many employees don’t think that’s their “job” to serve customers beyond their job descriptions.

• Suppliers also must be considered crucial to organizational success, because they make it possible to create customer satisfaction. Neither the quality nor the cost of the organization’s product can be brought to competitive levels and continuously improved without the contributions of suppliers.

Recognition of the strategic importance of customers and suppliers 9

10•The goal of building partnerships with customers and suppliers can be seen as an extension of the teamwork principle that applies to all TQ activities and as a recognition that the needs of both partners must be satisfied if productive long-term relationships are to be created.

•Traditionally, customers have used many different suppliers for the same purchased item, and they typically have been awarded short-term contracts. This leads to a competitive situation.

•With few suppliers, companies don’t have to rely on annual bidding, and can award longer-term contracts. This enhances the motivation to work together for mutual benefits.

Development of win-win relationships between customers and suppliers

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11Establishing relationships based on trust

•This point is described by Juran as the “pattern of collaboration”

•The costs of mistrust are staggering: witness the tremendous number, detail, and rigidity of rules. Suppliers often incur substantial costs in terms of both money and time because of multiple levels of review and inspection (as in the case of the US Department of Defense’s contracts with its suppliers)

•If a trusting relationship between customers and suppliers can be developed so that neither must check up on the behavior of the other, the costs of monitoring, such as inspection and auditing can be avoided.

12• Collect Customer Information

• Acquiring customer information is critical to understanding customer needs and identifying opportunities for improvement

• In trying to understand customer needs, it is important to go beyond what customers say they need and anticipate what will really excite them.

• Some of the most popular ways to collect information about customers are surveys, service evaluation cards, focus groups, and listening to what customers say during business transactions, especially when they complain.

• Getting employees involved in collecting customer information improves worker skills and learning, makes work more meaningful, and enhances motivation.

PRACTICES FOR DEALING WITH CUSTOMERS

13 PRACTICES FOR DEALING WITH CUSTOMERS (cont’d)

• Disseminate Customer Information• After people in the organization have

gathered information about customer needs, the next step is to broadcast this information within the organization. After all, if the people in the firm are going to work as a team to meet customer expectations, they must all be “singing from the same hymnbook.”

• Customer information must be translated into the features of the organization’s products and services.

14 PRACTICES FOR DEALING WITH CUSTOMERS (cont’d)

• Use Customer Information• Customer information is worthless unless it is

used.• Customer feedback should be integrated into

continuous improvement activities.• Perhaps the most important use of customer

information is in developing business strategies and in designing goods and services. Analyzing customer information can uncover a myriad of opportunities for new and improved goods and services.

15PRACTICES FOR DEALING WITH CUSTOMERS (cont’d)

• Manage Customer Relationships• A company builds customer loyalty by

developing trust and effectively managing the interactions and relationships with customers through customer-contact employees. Truly excellent companies foster close and total relationships with customers. These companies also provide easy access to their employees.

• Customer-contact employees are particularly important. They are the people whose main responsibilities bring them into regular contact with customers – in person, by telephone, or through other means.

• Despite all efforts to satisfy customers, every business experiences unhappy customers.

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16PRACTICES FOR DEALING WITH CUSTOMERS (cont’d)

• Exploit CRM Technology• Customer relationship management software

is designed to help companies increase customer loyalty, target their most profitable customers and streamline customer communication processes.

• Technology is a key enabler of CRM. CRM systems provide a variety of useful operational data to managers, including the average time spent responding to customer questions, comments, and concerns, average order tracking time, total revenue generated by each customer from all goods and services bought by the customer -- the total picture of economic value of the customer to the firm, cost per marketing campaign, and price discrepancies.

17PRACTICES FOR DEALING WITH CUSTOMERS (cont’d)

• Don’t Ignore Internal Customers• Individual departments and key cross-

functional processes within a company have internal customers who contribute to the company’s mission and depend on the department’s or function’s products or services to ultimately serve consumers and external customers.

• The principle of mutually beneficial relationships also applies to internal customer-supplier relationships.

18PRACTICES FOR DEALING WITH SUPPLIERS

• Strong customer-supplier relationships are based on three guiding principles:

• Recognizing the strategic importance of suppliers in accomplishing business objectives, particularly minimizing the total cost of ownership;

• Developing win-win relationships through partnerships rather than as adversaries;

• Establishing trust through openness and honesty, thus leading to mutual advantages.

19PRACTICES FOR DEALING WITH SUPPLIERS (cont’d)

• Base Purchasing Decisions on Quality and Cost• The first and most obvious is that purchasing

decisions should be based on the quality of the product and not just its cost.

• Purchasing personnel traditionally have been rewarded primarily for negotiating low prices, and thus this has been their focus. Supplier firms have often responded to this situation in the obvious way: by doing WHATEVER they need to do to maintain low prices.

• Beyond the comprises this creates for the quality of the final product, there are two other problems with this approach:• Low purchase cost often does not equal low

overall cost, often referred to as life-cycle cost.

• Pressing suppliers for ever-lower prices will minimize their profits.

20PRACTICES FOR DEALING WITH SUPPLIERS (cont’d)

• Reduce the Number of Suppliers• Firms pursuing TQ also reduce the number of

suppliers they work with to the point of having only one supplier for some components. This increases the dependence of the organization on the supplier, thus weakening its bargaining position and exposing it to the possibility of an interruption in supply in the case of a labor stoppage or similar problem with the supplier.

• However, with this, administrative costs are greatly reduced. Also cutting the number of suppliers reduces the variability in the incoming products, making it much easier to control the quality of outgoing products.

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21PRACTICES FOR DEALING WITH SUPPLIERS (cont’d)

• Establish Long-Term Contracts• Related to the idea of fewer suppliers is the

practice of establishing long-term contracts with suppliers. Establishing long-term contracts allows suppliers to make greater commitments to improving the quality of products and provides grater opportunity for joint improvement efforts and the development of teamwork across organizational boundaries

22PRACTICES FOR DEALING WITH SUPPLIERS (cont’d)

• Measure and Certify Supplier Performance• Supplier certification is used by many

companies as the focal point of their supplier management system. Formal programs typically are established to rate and certify suppliers who provide quality materials in a cost-effective and timely manner.

23PRACTICES FOR DEALING WITH SUPPLIERS (cont’d)

• Develop Cooperative Relationships and Strategic Alliances• Increasingly, suppliers are viewed as

partners with customers, because there usually is a codependent relationship. Thus, the cornerstone of TQ-style customer-supplier relationships is cooperation. In a sense, practices such as long-term contracts and fewer suppliers create an environment in which cooperation can flourish.