Steven A. Melnyk
Professor of Supply Chain Management
Michigan State University
East Lansing, MI 48824

Newcastle Global Innovation Chair in Supply Chain Management
University of Newcastle
Newcastle, AU

Daniel J. Stanton
Associate Professor of Operations Management
Jack Welch Management Institute
Charlotte, NC 28270

In the past, conventional practice had it that all communications between the customer and supply chain went through marketing. This structure allowed marketing to focus on the customer, and the supply chain management to focus on execution and delivery. For supply chain, this focus often took the form of a driving emphasis on cost reduction. This wisdom is now being challenged. Due to a “perfect storm” of forces including changes now taking place in the market, changes within our customer base, changes in technology, and changes within the supply chain itself, companies are now discovering the power of having supply chains that are “customer centric” – supply chains where the key customers are identified and focused on, and where there is direct contact between the supply chain and these customers. In this article, we explore these changes, their implications for supply change management, and their implications for management – both within the supply chain and within the firm. The wall between the customer and the supply chain is coming down and things will change.

In the American Midwest, there is a company that manufactures, sells, and supports industrial equipment. Its customers are varied and include engineers, designers, and maintenance personnel. In the past, the relationship between the customer and the supply chain ran through marketing – the customer talked to marketing who then relayed the content to supply chain. If the information communicated from the customer involved changes to orders, these changes were captured through the Sales and Operations Planning system (SOP) and the Master Production Schedule (MPS).  This relationship was not that unusual – marketing worked with the customer; the planning system coordinated activities; supply chain worked to the schedule. No need for supply chain to talk to customers or even know anything about the customer.

The problem, however, was this system was not working.  It took too long for changes and requests to work their way from the customer through marketing and then to the supply chain.  Even when it was communicated, the changes were often distorted as marketing added their “spin” to the information.  Even worse, the supply chain and the customer were not even aligned.  The supply chain focused on cost and meeting the schedule; the customer often wanted responsiveness and flexibility.  Ultimately, customers became frustrated; supply chain personnel became confused (if we were meeting the plan then why was the customer upset?); top management concerned (with competitive pressure increasing and long-term customers buying from the competition).  In response to these developments, top management formulated a radical solution – the supply chain would work directly with customers; they would get to know them up close and in person; supply chain would focus on those things that customers wanted (and would be willing to pay for).

The new system was introduced; the results were unexpected.  Customers now began to see the firm in a far more positive light relative to the competition. In addition to strengthening their brand, they discovered that customer complaints dropped, lead times fell, and performance improved. For the first time, the supply chain team was able to align their own goals with their customers’ needs because they truly understood who they were serving from first-hand experience. When there was a problem, the supply chain team had a new perspective on the issues, and could think more creatively about how best to resolve them. Unlike in the past, cost was no longer the primary driver. Ultimately, the company had discovered the power of the customer-centric supply chain.

There is much discussion today of the strategic supply chain – unfortunately without telling the reader what exactly is meant by such a term. We have a very specific definition of the strategic supply chain – it is a supply chain that is integrated into, and supportive of, and aligned with the firm’s operating business model; it is a supply chain where the focus is on business, not supply chain excellence.  When we link supply chain to the business model, which operationally defines corporate strategy and objectives, we make the supply chain inherently strategic.

Figure 1:The Business Model

The business model strives to ensure consistent alignment between the three elements – between what the key customer expects, what the firm has promised (the value proposition) and what it can deliver (capabilities).  Two points must be made. First, maintaining this alignment is no mean task given that most firms are operating in environments characterized by aggressive competitive forces, changing technology, and government actions that are often difficult to predict. Second, and important from the perspective of this article, the business model demands that the supply chain knows who the key customers are, what they want (recognizing that not all outcomes are equally important) and how they will use the outputs generated by the supply chain. Simply put, you cannot be strategic without knowing who your key customer is.

These various attributes have shaped not only how customers view their interactions with Amazon but also their interactions with other companies. This extends beyond Amazon to other companies. For example at the Supply Chain Outlook Summit conference held in Chicago from November 2–3, 2015, one of the participants—a manufacturer of automation equipment—observed that his customers were now demanding the same things that Amazon was offering: full information, reliable deliveries, and 24/7 service. The Amazon effect is real and it is changing customer expectations of the firm as a whole and its supply chain management system.

The Customer-Centric Supply Chain – Changes in the Customer Base
Mical Solomon (2014), writing in Forbes, noted that in 2015 a major marketing change took place – the "millennial" customer, those born between 1982 and 2004, replaced the “baby boomers” as the key consumers.  With about 80 million millennials, they now make up over 25% of the U.S. population. More importantly, unlike baby boomers, this is a generation that is actually growing in size.  Millennials are fundamentally different from baby boomers in their demands and these demands are directly impacting and shaping the supply chain.  Consider the following demands:

• The customer is the star:  they want and expect the buying and shopping experience to be focused on them. They want the marketing experience to differentiate between buying (a regular activity that involves fairly standard products) and shopping (where the act of identifying the product to be delivered is critical).
• They expect and crave a true, authentic personalized experience as customers.  Shopping is important to these consumers.  They want to be involved in the design and delivery of the product. They do not want a transaction; they want an experience.  That is why we see the rise of providers such as Blue Apron, Fresh Now, and M-Tailor.  In these experiences, the supply chain is highly visible and the buying experience highly personalized.
• They care about your values as a company.
• They expect your technology to work.
• They want to collaborate and co-create with your brand.
• Convenience is key and speed of fulfillment is now demanded.  They want easy ordering systems and for these consumers, speed, not cost, is king.

One result of this change in customer base is the increased importance of supply chain visibility.  Visibility, something previously only required by the corporate buyer as a way of dealing with supply chain risk, is now demanded by the consumer.  As one senior Starbuck’s executive noted on a PBS special about coffee:

Technology has always played a major role in supply chain management, whether it was computers and MRP planning of the 1970s and 1980s, or robotics, or the Internet. Yet, the technology that promises to bring the supply chain closer to the customer is that of the Internet of Things (IoT).  IoT refers to the network of physical objects or “things” that are embedded with software, sensors, and network connectivity that enable the collection, exchange, analysis, and communication of data in real time.  IoT includes smartphones, sensors in cars, equipment, appliances, fitness monitors, smart watches and product tags.  To get an idea of the impact of IoT, consider the following: by 2020, it is estimated that there will be over 50 billion such devices. Along with RFIDs, improved analytics, and social media, what IoT brings to both the supply chain and the market is: (1) the improved ability to quickly sense and seize opportunities taking place on both the supply and demand sides, and, (2) the ability to offer the market new services that are derived from this sensing and seizing capabilities.

The first opportunity was recognized by O’Marah, Davis, and van Hull (2017) in their report on the digital supply chain.  With IoT, supply chain managers can now identify in advance problems in their supply chain.  Smart sensors can now be embedded in products to quickly identify how customers use these products and more importantly to flag potential faults in the products – flaws that by themselves and occurring in isolation may seem random but that are indicative of systematic problems in the products when aggregated.

This is exactly what Pirelli, the world famous tire manufacturer, has done. Pirelli has recently announced the introduction of the Connesso tire.  This is an integrated tire and software platform that collects information about tires, their condition, and their use.  This information is then relayed to the Pirelli Cloud for storage and analysis.  This data can be used to help Pirelli better understand how their products are being used and to flag the potential presence of any design flaws in their products. Simultaneously, this capability has enabled Pirelli to offer its customers a new service based on this sensing capability. Drivers can now access real-time performance information using an app.  If there is a problem, the driver will be alerted via the app and directed towards the closest available repair shop where the tire can be fixed or replaced.  Furthermore, the app will also book an appointment with the shop automatically.  In this example, we see the two capabilities offered by the new technology in action.

However, there are two important impacts that these new technological developments impart. First, they enable organizations to identify (sense) changes both in supply and demand quickly and often without reliance on the other organizations to participate. Second, and more important, these developments short-circuit the “bullwhip” effect that has persistently plagued the supply chain manager.

Both researchers and practitioners have long realized that a simple, small change in customer demand becomes amplified as it moves through the various components of the supply chain.  More important, as demand information is relayed through the system, it consumes time (thus delaying responsiveness) and the information becomes distorted.  Consequently, what is received is very dated and you are not sure whether you are dealing with actual customer demand or whether you are seeing the impact of other parties in the downstream supply chain.  This changes with the new technology. Information that took weeks to become available to supply chain managers can now become available in days; information that was corrupted now clearly reflects what is actually taking place in either the supply or customer spaces. 

The challenge for the supply chain manager now is two fold. First, to reduce the time from the moment that this information is collected until that information is made available to the supply chain manger. This means addressing the extent to which the firm’s own planning system is a source of delay as the various systems interface with each other. The second is to shift from deliberate management to fast management – from waiting until all the information is in and then acting after thorough analysis, to acting quickly on the basis of incomplete and changing information (recognizing that you will be wrong some of the time but that your supply chain has sufficient robustness to absorb any errors created by “wrong decisions”. The costs of waiting until you are certain outweigh the costs of acting quickly).

One computer company experienced first hand the power of this new technology. Previously, it took between 45 and 80 days for this company to become aware of problems involving its personal computers.  Even then, the information could not be trusted.  By reviewing social media comments, review boards, and other comments posted by its customers, it was able to identify a design/quality problem in the power adapter of its newly released personal computer within five days.

Before leaving this discussion, we should note that the visibility created by the new technology into both the demand and supply spaces is not only critical to the supply chain manager, it is also being increasingly demanded by the customers. Customers want visibility into the supply chain; they want to know the provenance of the products and services that they consume. To drive home this point, consider how various car manufacturers responded to a recent revelation by the Guardian in 2016.

Recently, the Guardian (UK) noted that many of the world’s biggest car makers – companies such as Vauxhall (UK), BMW, Volkswagen, and Audi – had launched investigations into their paint supply chain chains. The reason – this was in response to an article published by the Guardian that linked many of their supply chains to illegal mines in India where child labor and debt bondage was widespread. In fact, according to this article, children as young as 10 years old were being used to extract mica – the mineral that made car paint shimmer – from the ground and to sort it.  This was dangerous, hard labor. In many cases, the children were working at the mines rather than going to school because their families needed the money.

Three Indian exporters – Mohan Mica, Pravin, and Mount Hill – seemed to be the major transgressor. These companies, in turn, sold their raw materials to customers such as Fujian Kancai, a company whose customers included cosmetics giant L-Oreal, P&G, PPG and Axalta (the last two customers are leading car paint suppliers in a 19 billion USD world car paint maker.) As a result of this report, Vauxhall (part of the GM group), BMW, and Volkswagen have launched investigations into their paint supply chains in response to the Guardian article, since this finding, if supported, is against company policies that prohibits such practices.

Why did these carmakers respond as they did? Because they knew that these practices mattered to their customers. They also realized that they were responsible not only for their actions but also for the actions of their supply chains. Ignorance was no longer acceptable.

The Customer-Centric Supply Chain – Changes in the Supply Chain
If these prior four factors were not enough, there is evidence emerging that supply chain managers themselves are recognizing the value of and the need to be customer-centric.  This observation was based on data generated from the “Supply Chain Management: Beyond the Horizon” research project (for more information, see the description found at the end of this article).  After talking with managers from over 60 leading supply chain management systems, the research team began to realize that a critical test of the effectiveness of the supply chain was the extent to which the supply chain and its management was customer-centric.  This test focused on performance measurement.

Specifically, those supply chain managers that used their key customers’ key measures as their own seemed to continuously excel in performance. The epiphany for this came out of an interview with the top management team of a Midwestern manufacturing and design company.  As the VP of Supply Chain Management presented, prior to this change, meetings with the firm’s key customers were often contentious and drawn-out affairs. Each company came to the meeting armed with their measures (which often did not align).  Consequently, the first two hours of every meeting were devoted to deciding which measures to use and how to “translate” between the various measures.  The meetings proceeded to go downhill from that point on. This all changed with the supplier sought out and hired a new, more strategic head of supply chain management. 

One of the first actions taken was to use their key customer’s measures as their own measures.  While initially greeted with surprise and somewhat disbelief, the people began to see the logic and benefits offered by this approach.  First, meetings with their customers become shorter and less contentious.  Gone were the two hours needed to decide whose measures to use. Second, the supplier began to recognize what constituted value for their customer – it was anything that caused their customer’s key measures to go up.  The supplier began to build a strong case that working with them was not just good for costs; it was also good for them.  It goes without saying that this approach works best when the customer’s measures align with the firm’s value proposition and strategic statement.  When this alignment fails to occur, there are naturally problems. This led to an interesting observation about supply chain management in the 21st century:


Another innovation involving the supply chain is that, for the supply chain to be truly effective, it has to be customer-centric; for a supply chain to be customer-centric, its personnel have to think of the key customer not as a market segment, but as an actual person. This point was driven home in an interview with a bicycle manufacturer of inexpensive bicycles that were sold through large stores (e.g., Meijers, Toys R Us, Walmart).  Previously, the manufacturers had thought that their key customers were parents and children. Yet, they realized that this focus was wrong. Parents bought their bikes not based on name brand but on availability. Availability, in turn, was influenced by two specific people working within these mass merchandise stories – the store manager and the purchasing agent. Consequently, they focused on these two people. Their goal was to make it easy for them to place orders and for the sales to be profitable.  With this change in orientation, the bike manufacturer found their sales increasing.

Finally, supply chain managers have now recognized that they are the prime determinant of Moments of Truth (MOT) in their companies.  The concept of the MOT was first proposed by Jan Carlzon (1987), past CEO of SAS Airlines. What Carlzon noticed is that the customers’ view of the company serving them was strongly influenced by their last direct interaction or Moment of Truth with that company. These MOTs were strongly influenced by factors such as the front line personnel, inventory, and capacity – factors under the control of the supply chain.  His goal was to manage every MOT with the goal of enhancing the company’s reputation with its customers.  If that is the goal (it appears to be so given the factors discussed under the change in customers), then the supply chain by definition must become customer-centric.  When the supply chain misses a delivery, the result is a negative MOT; when a delivery driver goes out of his or her way to ensure that an order is delivered on time and with quality, that is a positive MOT.

In short, supply chains are discovering that it is highly beneficial to become customer-centric.

From Straight Lines to Triangles – Implications of the Customer-Centric Supply Chain
There is a change taking place in how the supply chain deals with customers. In the past, our relationship with the customers was similar to that found in Figure 2 – a straight line relationship.  The new relationship that is the heart of the customer-centric supply chain is illustrated in Figure 3 – a triangle.

There is now a direct relationship between the customer and supply chain management. However, this new relationship brings with it certain key implications for both the supply chain manager and for corporate management overall. These include the increasing need for fast management, acceptance of the "P" status as the new black, and the need to embrace the new realities of the customer-centric supply chain.

Fast Management
Managers must now manage fast rather than managing deliberately – a fact that is not new to today but which was first realized during the Korean War. During the Korean War, the U.S. military was shocked by the losses suffered in air-to-air combat. Advances in technology from propeller to jet fighters, combined with the best pilot training system in the world should have given the U.S. Air Force a huge advantage over their adversaries. Yet, what the Air Force found was that pilot mortality was distinctly bimodal in distribution – with many pilots being shot down within days of their introduction to combat. To get to the heart of this situation, the Air Force brought in one of the best “out-of-the-box” thinkers – Colonel John R. Boyd.  After reviewing the data, he determined that the reason for many new pilots being shot down lay in their decision-making process, which was too deliberate.  That is, they waited until they were sure of achieving a kill. With closure speeds of in excess of 1300 mph (thanks to the change in technology from propeller to jet driven fighters), this left them with little if any time for reacting. By waiting, they became victims, not victors. He realized that the technology – and therefore the entire context for air-to-air combat – had changed the rules of combat. Pilots needed to make decisions faster, with less information. So the Air Force began training pilots to make decisions using the OODA loop procedure - a four step cycle, consisting of Observe, Orient, Decide, and Act, to guide their decision-making.

The same thing is happening in supply chains. Technology gives us the capability to see further and faster. Supply chain managers need to learn how to make decisions more quickly, and need to have levers that allow them to take actions at a distance. Supply chain managers need the equivalent of an OODA loop to take advantage of new technologies and make decisions at the new speed of business. This new strategic response cycle consists of the following steps: (1) sense (the threats/developments), (2) assess (are these developments important now or in the future), (3) formulate (a response), (4) deploy (the response), (5) evaluate (did the response work?), (6) recalibrate (are our original goals still appropriate or do they have to be re-evaluated?), (7) learn (by asking: what went wrong? What went right? What was missing?), and, (8) repeat. The key now is SPEED! In today’s world, the coin of the realm is speed not cost!

“P” status (Preferred Status) is the New Black!
In today’s world, managers have recognized that the key to success is achieving “P” or Preferred status. For customers, this means that they are seen as the Preferred customers to their suppliers; for suppliers, this means that they are seen as being the Preferred suppliers to their customers. In practical terms, this means that whenever a customer has a need, they will go to their preferred supplier first.

Achieving this “P” status provides strategic advantages, even in an environment where customers have many choices in suppliers. If you understand what has the greatest value to your key customers, and if you align your supply chain to these metrics, then you will be in the best position to grow the relationship – increasing top line revenue and increasing market share. This is the lesson that Amazon has painfully taught its many competitors – because it is the P supplier to many of its customers, these customers always turn to Amazon when they have a need to fill!

Embrace the Change
These changes in the supply chain are now taking place; the evidence of their emergence is too compelling to be simply dismissed as academic tripe!  While many firms will chose to ignore these developments and continue to do business as they always have, some firms will change and embrace this new world. These firms will thrive and flourish as they discover new ways of better serving their key customers.  For the others, survival will be more problematic.  For these firms, we offer the advice given by W. Edwards Deming when he was confronted by a board from a large multi-national company who wanted to know if they had to do everything that Dr. Deming recommended regarding Total Quality Management:


The Brave New World of the Customer Centric Supply Chain
The business landscape is changing quickly due to major trends that affect every industry. New business models, changes in the customer base, the powerful Amazon Effect, new technologies, and changes in the supply chain itself are all forces that need to be addressed strategically. Adapting to these changes will require companies to implement customer-centric supply chains. To enable this transformation, companies must first identify their key customers, and then structure their organization so that the supply chain team is side-by-side with the sales and marketing organization in building and managing those relationships. When faced with decisions and trade-offs, the key question should always be “what would make us the P supplier for this key customer?” The wall between the customer and the supply chain is coming down, and the result is the emergence of the strategic supply chain.

Steven A. Melnyk is professor of Operations/Supply Chain Management in the Eli Broad School of Business at Michigan State University. He is also the Global Innovation Chair in Supply Chain Management at the University of Newcastle (Australia).

About Supply Chain Management: Beyond the Horizon
Strategic Supply Chain: Beyond the Horizon (SSC:BTH) is a long-term project aimed at identifying and exploring emerging issues in supply chain management both domestically and internationally. This project, jointly sponsored by Department of Supply Chain Management, the Eli Broad School of Business and APICS, has over a three year span studied over 60 leading supply chain management organizations. The results and insights obtained from this project have been fine-tuned and tested in a series of focused workshops. This project has been led by David Closs and Pat Daugherty of the Department of Supply Chain Management at Michigan State University.