The Impact of Practice and Policy on Performance

Abstract

The performance of a firm-as an entity that determines its own destiny, yet participates in a larger supply chain and global economy-is intricately interwoven with its own internal practices and policies (Human Resource, Customer Service, Supply Chain), as well as the larger forces of external policies (financial and governmental.)

Article

Chapter Three: Impact of Practices and Policies on Performance

The performance of a firm-as an entity that determines its own destiny, yet participates in a larger supply chain and global economy-is intricately interwoven with its own internal practices and policies (Human Resource, Customer Service, Supply Chain), as well as the larger forces of external policies (financial and governmental). A firm’s own policies (formal and informal) create the customer experience and impact supply chain effectiveness. To support customers and improve performance, winning firms have policies that encourage and enable innovation and creativity in their employees.

Customer-Facing Policies

Customer-facing policies in particular are key. They drive customer perception. “Customer-for-life retailers” such as Nordstroms are legendary for giving their salespeople wide discretion in spending company resources (e.g. expedited freight, special gifts, etc.) to satisfy customers; Talbots offers substitute items for half price if a desired size/color is not in stock; SAKS can tell you instantly if an out-of-stock item is available at any other location and offers to have it shipped overnight to you at no extra cost; the Ritz Carlton empowers their employees to spend up to $2,000 on a customer to fix any problem. Similar examples can be found in discount retail. The heavily marked-down office chair I wanted at Staples was not available in the local store, but they shipped one from a California store at no extra cost. I am sure they lost money on the transaction, but gained my loyalty. Customer-facing policies help these companies sustain and grow market share and (over the long-run) margins.

Of course one size does not fit all. Wal-Mart can’t have the same policies as Nordstroms. But don’t think Wal-Mart is not interested in a customer for life. Their policies of every-day low price enabled by aggressive “one-number” price negotiations with suppliers (i.e. no slotting fees, rebates, promotional funds, display fees, handling charges, etc.) translates into savings that are passed onto the consumer. Even with their ultra-low prices, Wal-Mart still has greeters and employees who will walk you to the right aisle, even if it is not in their department, to make sure you find what you are looking for. Developing the right policies that make sense for your target market is a key part of defining what your company is all about-your very identity and differentiation in the marketplace.

Service Policies

Service and warranty policies-and the quality of the service organizations behind them-are becoming increasingly crucial in customer buying decisions. The current emphasis on cost cutting in customer service has resulted in the “hot-line hell” many of us experience when trying to get things fixed or get questions answered. Intuitive and quick self-help is rare, and expert help-desk personnel are even rarer. (See table “Example of High Performance Service Policies” for call center best practices. How many companies do you know that adhere to these?) Service has become a critical area of customer dissatisfaction and represents a major opportunity for those who can master it, enabling them to steal market share from those who are still struggling to provide good service.

Example of High Performance Service Policies
1.
Answer all calls with a live person in less than a minute.
2.
Whenever possible, solve the customer’s problem on the first call.
3.
Do not rush call center representatives to get the customer off the phone.
4.
If placing a customer on hold is required, do not allow holds of longer than five minutes.
5.
Follow-up calls should be made by the company, not the customer, in less than 24 hours.
Source: ccStandards.com

Preventing the need for service calls in the first place by designing in innate ease-of-use and quality is the best practice, but one which many companies find too expensive in terms of added R&D cost and time-to-market. Linking the customer and service organizations back to R&D, e.g. giving engineers statistics on failure rates and ease-of-use issues, helps product developers continuously improve each generation of design by focusing on fixing those problems that are causing the most grief for customers. The additional R&D costs are a small price to pay considering the benefits:

  • Products and features matching customer needs/wants
  • Lower warranty/service costs
  • Fewer returns
  • Lower obsolescence
  • High quality = customer good will and market share
  • High reliability enables attractive, yet economical return policies (e.g. 3-year, no questions asked, unconditional warranty) that can be pivotal in customer’s purchasing decisions.

Supplier-facing Policies

Supplier-facing policy decisions must take into account the impact on total supply chain performance, not just performance to your own firm. For example, VMI (Vendor Managed Inventory) reduces the buying firm’s inventory levels and cash-to-cash cycle, decreases replenishment lead times, and decreases operating costs. However, the supplier absorbs the inventory and cash-to-cash burdens that the buyer just cast off and the supplier’s operating costs increase significantly. They now have to manage, audit, and inspect inventory at dozens or hundreds of locations, instead one or a few centralized warehouses. In the short-run, they buyer may be able to squeeze some performance advantage out of its suppliers, but in the long run those costs will likely flow back to the buying firm, especially as suppliers get smarter about measuring cost-to-serve for each of their customers.

Supplier-facing policies that result in net performance improvements for the whole chain should be adopted, for example, sharing market assumptions with your network of suppliers to make your supply chain more aware and responsive to changing market conditions and volatile demand.

External Policies

External policies, such as supply chain policies or government policies, can have a major impact on a firm’s performance. In highly regulated industries, a company’s ability to effectively deal with government regulations becomes a key competitive requirement. For example, the FDA drug approval process is an onerous burden on pharmaceutical firms (though it is necessary to fulfill a critical public need-assuring the safety and efficacy of new drugs). As a result, the battleground amongst pharmaceuticals has been largely in how effectively they deal with the burdensome FDA approval process to “quickly” (i.e. less than a decade) get their new drugs to market. In 1997, the FDA relaxed their strict restrictions on advertising of drugs. So competition in pharmaceuticals shifted to marketing. In response to these regulations, some firms focus exclusively on drug approval (so-called Clinical Research Organizations, such as Advanced Medical Services) or drug marketing (such as Spotlight Health). The very structure of the industry and basis of competition has been profoundly shaped by government regulations and policies.

Major events, such as the 9/11 terrorist attack and high-profile accounting scandals of Enron, et al, continually drive new government regulations. The ceaselessly evolving public policy landscape demands agility from companies in almost the same way that constantly changing market conditions (new technologies, changing customer demand, and competitor’s new products and strategies) demands agility.

Sarbanes-Oxley

The Sarbanes-Oxley Act requires companies to certify the fairness and accuracy of financial statements and the effectiveness of disclosure controls and procedures. Companies with poor existing internal controls may view Sarbanes-Oxley as another regulatory burden they now have to cope with. But, they can also use it as a catalyst to improve their supply chain performance. More accurate inventory balances reduce the need for large safety stocks and expediting. More accurate reporting of returns and better inspection controls improves quality, increases manufacturing yields, and reduces warranty costs. More consistent and accurate reconciliation of POs, invoices, receipts, and contract terms reduces overpayments.

For example, when it comes to inventory in the channel or at numerous, dispersed customer/VMI sites, many companies have weak controls, poor visibility, and loose or hard-to-enforce liability/return policies. Flying blind and exposed like that can create disasters during new production introduction, such as huge returns/ write-downs because the channel was still awash with the old product (which powerful channel partners send back regardless of the official return policy). Or stock-outs before the new product is available, resulting in your customers turning to your competitors (sometimes permanently) to fulfill demand. Serious problems also arise with lack of visibility into your inbound liabilities. So, rather than viewing Sarbanes-Oxley as just another regulatory burden, companies that currently have poor internal controls and visibility can use it as an opportunity and impetus to improve their supply chain performance.

Anti-terrorism Policies

In response to the 9/11 attacks, government policies have dramatically increased security requirements for international trade, with fundamental consequences for supply chain performance. The 24 hour manifest rule of the CSI (Container Security Initiative) means shipments will literally “miss the boat” if the manifest is not submitted 24 hours ahead of time. Companies that comply with voluntary programs such as FAST and C-TPAT will receive expedited release of commercial shipments through customs. Firms that exploit these new policies and leverage technologies such as RFID will see their shipments flowing through customs while there competitor’s shipments are hung up for days. Understanding and intelligently dealing with changing government policies results in a higher velocity, higher performance supply chain.

The Role of Technology

Many advanced practices and policies are only made possible by having the right technology to execute them. Saks’ and Staples’ policies for out-of-stock items required systems that instantly and precisely locate, allocate, and ship specific inventory, all in real-time (while the customer waits), by any salesperson, at any store. Implementing customer profitability-based policies requires information systems with adequate granularity of costing (e.g. activity-based costing). Many government regulations (e.g. traceability in pharmaceuticals and aerospace, 24 hour rule for container manifests) can only be done economically with advanced technology such as RFID/barcode/data collection systems, International Trade and Logistics software (ITL), and networked supply chain solutions.

The process of reviewing and reshaping policy must take into account new technologies that enable previously unimagined policies. Leveraging of technology in policy evolution is one key to staying ahead of the competition.

Conclusion

A firm’s policies are the tangible and specific manifestation of it’s vision, strategy, and culture. In a sense they give a manifest form to corporate self-identity. Policy decisions can determine the future of the enterprise-whether it is to be a stagnant bureaucracy or a vibrant, agile, and effective team.

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