Berry Et Al_1994_Customer-Driven Manufacturing

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1993

1994

of Operations

Pmduction Management. Vol. 15

. 3.1995 , pp. 4-15 .0 MCB

Press . 0144-3577

Customer-driven

manufacturingWilliam L Berry

Ohio State University, Columbus, Ohio, USA

Terry J Hill

London usiness School London, and

Jay E Klompmaker

University of North Ca rolina, USA

ntrodu tionThe gap between man ufacturing and marketing is legendary. T raditionaldifferences separate these key functional areas. Some argue that the cause istheir different cultures, value systems and traditions. O thers see it as a morefundamental division based, at least in part, on status and level of corporateinfluence. Whatever the origins, companies can no longer live with such prefer-ences or functional whims. With increased competition it is imperative toeliminate this problem if company is to succeed.

The real question, though, is whether these differences are the symptom orthe cause of the m isalignments one often sees between marketing and manu-

facturing strategies. If the misalignment is the result of bad employee attitudes ,then changing the organizational structure or employing effective managementskills will solve the problem.

Our experience in a broad variety of companies and industries convinces usthat it is instead the result of firms being unable to debate some core strategicissues. Typically functional differences are simply allowed to prevail and thereis no consensus on strategic direction. In times of greater competition thiscorporate luxury is, at best, irrational and at worst, irresponsible. Executiveswho are unable to put corporate strategic requirements ahead of functionaldifferences are living with yesterday s business values. To be successful in the

current environment, management must take a more objective, and trulybusiness-related perspective.

Bus iness bas ic s

The basic tasks of business are straightforward. They are to

• get and keep customers;

• make a profit;

and in such a way as to meet the short- and long-term goals of the organization.Explicit in both of these tasks is the need for marketing and manufacturing

not only to work well in themselves but also to work well together. To do so



requires a shared understanding of the business in order to achieve these basic C us to m er -d rivtasks. Strategy needs to guide both these functions by providing an overriding m an u fa c tu r inand appropriate business context. Optimizing either in isolation rarely leads to

optimal results. Thus, these need to be

driven by

greater whole which requiresoperating both functions from the perspectives of its customers.The source of the problem is often rooted in a company's failure to debate

corporate strategy. But, past actions are not the only way in which the status quo had been reinforced. Current strategic research and publicized approaches ^ ^ ^ ^ ^ ^ ^ ^ ^ ^to developing corporate strategy also put forward the provision of functionalstatements without either corporate context or stressing the need to link theperspectives of different functions. As a result, key strategic differences are notreconciled and the company operates at a competitive disadvantage, a factmade all the more serious in today's highly competitive and fast-changingenvironment.

An illustration of the polarization of these functional perspectives in strategyformulation is our recent experience with a US furniture manufacturer. Th iscompany has an excellent reputation for producing high quality, solid woodkitchen and dining-room furniture. It is sold through several distributionchannels including mass merchandisers, large and small independent furniturestores, furniture galleries, small furniture store chains, and mom-and-popoutlets. To meet corporate sales growth objectives, the marketing strategyincluded two principal elements. First, it planned to double the firm's salesthrough furniture galleries over the next two years. This required a widevariety of products to fill a gallery's floor space, including both high and low

volume items. Second, marketing also felt that sales to the mass merchandisersegment ought to be held constan t due to an all our eggs in one basketconcern.

An investment programme in the factory had just been completed bymanufacturing. The installation of automated equipment in the chair plant tomanufacture chair legs at a single machine was one example. The benefits tomanufacturing included the elimination of several operations, reduced directlabour, lower work-in-progress inventory, and shortened cycle times. However,set-up times were lengthened substantially. The orientation, therefore, of themanufacturing strategy implicit in the factory investment programme was oneto support higher volume orders and to reduce unit costs.

However, marketing was emphasizing gallery sales requiring a broadproduct line with a significant increase in the number of low volume orders,whereas manufacturing was moving the company to higher volume production,a strategy most suited to the production of furniture for mass merchandisers.The outcome of this mismatch between the marketing and manufacturingstrategies adversely affected corporate profits.

inding the real problemCompanies recognize the need to develop their corporate strategy based onintensive analyses of their industry, customers, competitors, emerging



omp etition analysis

Differentiation ompany analysis

Positioning

onsumer analysis

Marketing strategy

• Product• Price• Distribution• ommunication

Segmentation

Customer-drivemanufacturin

FigureMarketing strate

proc

These steps are well illustrated in the development of marketing strategy at apackaging materials manufacturer with which we have worked. The company

had developed a major pa ckag ing innovation th at enabled its customers t achieveimpo rtant opera ting saving s and improved consum er service in their retail stores.Th is innovation represented a major brea kth rou gh in differentiating the firm sproducts from those of i ts competi tors, forcing major competi tor pr iceconcessions. The com pany chose to target one segm ent of the market where 25customers comprised 80 per cent of the total market which, in turn, resulted insignificant reductions in marketing costs. The company also brought otherstrengths to this market. Their national network of manufacturing plants m adepossible the direct delivery of product to the retail outlets, which yielded a majorreduction in distribution costs, ensured supply, and offered rapid deliveryresponse. Moreover, the firm limited the range of packaging material sizes andcolours so that investments in high volume m anufacturing facilities could be mad ewhich perm itted low production costs. The outcome of the firm s ma rketingstrateg y led directly to ca pturing a large market share which led to critical pricingadvantages.

To be successful a com pany m ust do the basic ta sk s well and nothing is morebas ic than m anufacturing and marketing:. However, all too often manufac turing sstrategic inputs are not well developed, either alone or in line with the marketingstrategy. One reason for this is that typically a company does not incorporatemanufacturing perspectives into the key strategic decisions of its business. Theresult is that there is inadequ ate linkage between corporate objectives, ma rketing



O P M strategies and the manufacturing function. The assump tion is that manufacturing

,3 can somehow cope with the firm s chosen strate gic direction and the dynam ic

changes that characterize its current markets. Subsequent events at the packag ing

company referred to earlier provide an illustration of this inadequate linkageinduced, in this case, by dynam ic change s in the m arket.

Over time the firm s co m peti tors w ere able to dup licate this pa ck ag ing

innovation. Th e result wa s tha t the com pany sh are of the m arket fell to 5 per cent.In an attempt to regain the level of sales revenue to which the firm had becomeaccustomed, marketing chose to pursue sales to small retail outlets. Furthermore,the product range was broadened to include a much wider variety of sizes andcolours. The argument was made that the additional ink cost was negligible andthe increased colour flexibility wa s an im portan t factor in winning orde rs.

The com pany s high volume processes, installed to su pp ort the original

marke ting strategy, had major problems in ma king the colour changeovers an d incoping with the small volumes required by their new customers. As a result thecompany experienced significant decreases in manufacturing productivity andlevels of contribution. This, coupled with the increased price pressure in themarket, led to a substantial erosion of profits.

Manufacturing strategy

As stated earlier, a firm s most significant c orpo rate m arke ting decision is itschoice of prod ucts and c ustom ers. Likewise, the most significant corp oratemanufacturing decision a f irm makes is i ts investments in manufacturing

processes and infrastructure to be able to make and su pply its various pro duc ts tochosen marke ts. These decisions need, therefore, to embody the bus iness , as wellas the technical, requirem ents of customers.

W hat typically hap pens , however, is that com panies fail (often b ecause they donot know how) to develop a strategic perspective of manufacturing. The result isthat man ufactur ing invests in processes and inf rast ructure which are notnecessarily in line with the requ irements of its m arkets.

One outcom e of a com pan y s fai lure to develop a strat eg ic ap proa ch inmanu facturing is that stra tegy is replaced by a strategic vacuum . As with allvacuums approaches and activities are drawn into the resulting strategic void. It

attracts technical manufacturing solutions that are good in themselves but notnecessarily good for the busine ss. Being panacea-driven is too often the ap proachadopted in manufacturing as its perceived strategic contribution to the overallbusiness. However, since investments in processes and infrastructure are bothlarge and fixed, it is imperative that a business ensures that these decisions aretaken to support basic business directions.

This is illustrated by the decision of a farm equipment manufacturer thatinvested heavily in a sta te of the art flexible m anufac turing system (FMS). W hilethe FMS was heralded as a major technical innovation, its production volumecapabilities were not in line with those of the business. As a result the FMS

provided inad equate su ppo rt to the business th us adversely affecting profits.



0

ments that enable a firm to win business. Examples include; price and deliveryspeed. In marketing term s, the order-winners represent a way of describingbuyer behaviour. n manufacturing terms, the order winning aiter ia represent a

way of describing a market in terms of required manufacturing capabilities.When m arkets are viewed in these terms the business requirements agains twhich manufacturing capabilities can be assessed become apparent.

Qualifiers, on the other hand, are those criteria which a company needs to provide in order to be considered or short listed as a potential supplier. Exam ples

include delivery reliability and quality conformance. They are not less importantthan order-winners but different. Equally a company needs to provide qualifiersas well as to support order winners better than its com petitors. O nce a clearpicture has been established of a market or market segment, the best way ofsupporting these requirements can be debated. One dimension of this debate isprocess choice. M anufacturing has a wide range of investment options inproduction processes from which to choose. The keys to choosing between thesealternatives are the order winners and production volumes relating to a marketor market segment. Im portant issues in this choice are the trade-offs betweendifferent processes compared to the current and future needs of the business.

Process choice is, however, only one aspect of manufacturing strategy. Thedevelopment of appropriate manufacturing infrastructure to support theproduction process is another. M anufacturing infrastruc ture includes:manufacturing planning and control systems, quality assurance support,manufacturing engineering, employee skills and wage paym ents, cost controlsystems, and manufacturing performance measures. As the investment inmanufacturing infrastructure is often as large, if not larger, as that in processesas well as also embodying the fixed nature typical of most manufacturinginvestments it is also important, therefore, to make these choices in line withmarket requirements and corporate strategy.

Attention to the steps shown in Table I, and the interactions between thesesteps, in the development of corporate strategy provides a way of ensuring thata coherent strategy is developed by marketing and manufacturing.

Fixing the problem

As Figure 2 shows, the facets of both marketing and m anufacturing strategy

are linked through the essential workings of a business. However, manyorganizations are built on the principle of control through functions and

he essential links



specialization. In these organizations the strategic linkage displayed in Figure 2is replaced by two separate sorts of relationships. The one is marketingoriented involving products and customers while the other is manufacturing

oriented and involves processes and producers.Furthermore in many organizations this division of corporate tasks has beeneven further widened. In some cases that we have observed the organizationalstructu re now m ilitates again st the essential linkage between custom ersproducts manufacturing processes and infrastructure. To overcome thisproblem many companies have hired more and more people to undertake theselinking tasks as shown in Figure 3. The resulting overhead structures havehowever singularly failed to provide these essential needs. The outcomes havetypically been functionally oriented statements devoid of the essentialintegration that underlines corporate stra tegy formulation. For companies to besuccessful they need to incorporate the strategic perspectives of both

marketing and manufacturing as these are the strategic building blocks withwhich to fashion corporate identity and direction.

arket segmentationThe product and customer interface is within the province of the marketingfunction and is fundamental to its strategic resolution. key perspective of thisis segmentation. This entails a marketing review of its markets the recognition of

key differences within the whole and the separation of the whole into segments.

Customer-drivmanufacturin

1

Corporatestrategy Corporate whole

Finance/ / ^ Manufactunng/marke t i ng / operationsstrategy f \ strategy

Strategic change

Products/services

Producers AnalysisIn

creasingoverhead

expenditureto provide support

and specialist functionsto advise an d to link the

activities ot one dimensionto the other

Source [3]

igur

Increased overhstruct



PM Market definition is understandably a critical aspect in formulating marketing,3 strategy. It facilitates discussion of customer needs, requirements, and buying

behaviour. Market definition is normally accomplished by segmenting or

dividing a market into smaller parts that have unique characteristics such asdifferences in product use, geographic location, and m ethods of s les promotionor distribution.

Segmentation provides the basis for focusing marketing s efforts. It recog-nizes that a business can not be all things to all people. It provides a way ofcustomizing a firm s products so that marketing effectiveness is maximized,while reaching a sufficiently large group of customers to sup port a h ighlyefficient marketing effort. It also allows a business to charge different prices tosegments with different price sensitivities. This last advantage of segmentationtaken alone can add significant profits to a firm s bottom line.

Marketers use a variety of criteria for segmenting markets. These includecommon user requirements, measurable customer characteristics, common salesand distribution channels, and identifiable competitors. The segments must bepractical in the sense that they are sufficiently large to warran t targeting yetthey must be small enough to protect against the efforts of other competitore.

One major difference in the approach taken by companies to segment theirmarkets is caused by the type of customers served. In serving ultimate con-sumers, marketers segment their m arkets by geographic, demographic (agesex, income, occupation), psychographic (lifestyle, personality), or behavioural(user loyalty, benefits sought, purchase occasion) factors. Industrial marketersview segments in different terms. For example, purchase volume, buyer motiva-

tion, and purchase processes are more typical segmentation factors in thisarena. The result is a market definition that helps marketers develop efficientmarketing programmes directed to the individual characteristics of a segmentThese differences require subtle responses in, for example, pricing, productplanning, promotion, and distribution.

The rationale underpinning market segmentation is compelling Its relevanceto the choice of products and customers in the development of marketingstrategy is fundamental. However, many companies (often by default) assumethis perspective to be the only strateg ic view of their business that they need tomake. They fail to recognize that segmenting the market rom a manufacturing

perspective may be equally im portan t. The result is that the different demandson manufacturing made by customers in the same segment (or across differentsegments) are not recognized. As a consequence, manufacturing is asked tosup port the widely different requirem ents of a company s markets w ith thesame processes and infrastructure.

Though companies obviously recognize the technical and physical differ-ences between prod ucts and the necessary process investments tha t theserequire, they fail to appreciate the business differences th at often exist It isnecessary, therefore, to identify both the technical and business specificationswhen assessing the nature of manufacturing s task to meet the needs of variouscustomers and markets.



An illustration of the marked differences in business specifications with whichmanufacturing often has to cope is evident in the case of a UK steel maker. Thecompany manufactured steel sections from purchased billets by hot and cold

rolling mill processes. T he marketing group had targeted the customized sectionmarket as a major sales growth opportunity.

Further analysis of the customized market from a manufacturing perspectiveindicated that it actually included four segments as shown in Figure 4. The firstsegment was easily supported by current manufacturing capabilities. Thecustomers ordered standard alloy billets which were stocked as raw materialand the required customer lead times provided sufficient time to develop efficientrolling programmes in the mills.

The fourth segment was the most difficult for manufacturing to support. Herethe special alloy billets were made to order by suppliers whose delivery

reliability was poor. In some instances 45 per cent of a purchase order wasdelivered late. Furtherm ore the required customer lead times were relativelyshort producing frequent rolling mill set ups and inefficient schedules. Thus thissegment imposed a two-level risk on manufacturing in meeting the customerdelivery requirements. Special steel billets might be delivered late andmanufacturing might have a problem in rolling this type of material as it lackedknowledge of its processing characteristics. When these separations wererecognized the company was able to evaluate which parts of the market it wouldbest be able to support and the key investments and developments in manu-facturing to enable it to support desired segments successfully. Only by recog-nizing these differences between segm ents in the customized section m arketcould the issues be debated as part of developing an appropriate corporatestrategy for th is part of its business.

Thus just as segmentation is a fundamental perspective within the marketingdecision concerning product and customer selection and the rationale underlyingmarket segm entation it is equally essential to the decisions embracing

Customer-drivmanufacturi

Deliveryspeed 5an order

winner

Deliveryspeed is t anorder winner

3

1

4

2

Standardsteels

Specialsteels

FigurCustomized se

market segments steel manufactu

com



man ufacturing processes and infrastructure . Th e principle of segm entation is as

fundame ntal and applicab le to ma nufa cturin g's strate gic task as tha t ofma rketing W hat differs is its orientation.

A company's man ufacturing response to serving the needs of its three majormark ets wa s to have plants in all three of these geographical locations. From a

j ^ ma rketing perspective, the busin ess wa s considered to comprise a Europ ean, UK

and U market. These geog raphic differences were appropriate for distinguish ingthe different marke ting tasks. Th e company 's manu facturing resp onse had been tohave facilities located in all three geographical areas. However, a review of thecompany's markets based on relevant order-winning criteria pointed to a need tohave plant configurations based not on location but so a s to create a con sistent setof manufacturing tasks within each manufacturing grouping - the concept offocus. Plants were now rear ranged on the basis of grouping s imi lar

manufacturing tasks together rather than based on geography. Thus, one plantgroup now supplied products to the European, UK and US marke ts where thebusiness characteristics (qualifiers, order-winners an d volumes) were similar. Th isenabled man ufacturing to develop capabilities and und ertake investments in all itsplant configurations which were consistent with one another in their suppo rt forthe needs of the various m arkets in which it chose to compete.

Corporate debate shared partnership not coexiste nceTo provide the essential linkage between the selection of products and cus-tome rs and the choice of m anufac turing processes and infrastructure requires:

• relevant inpu ts from ma rketing and manufacturing;• agreem ent on the m arkets an d n:iarket segm ents in which the compan y

is to compete;

and for this to be undertaken within th e constrain ts of relevant corp orate envir-onm ents. Th e proposition ake what you can sell OR s ll what you can make isbased on argu m ents which are still at the root of the classic views of these tw ofundamental parts of a firm. The results are strategies reflecting the perspec-tives of the current dominant function rather than strategies balanced betweenthese equally important dimensions and addressin g the maxim what's best forthe bus iness (see Figu re 5).

Conclusion

Today, people smile whe n quoting Ford's any colour as long as it 's black philo-sophy. Failure to reflect m arket ch ang es in the 1920s led to General Motors tak-ing over market leadership from Ford. However, restricting options is a viablest ra tegy in cer ta in markets . Mazda 's Miata and Toyota 's Lexus are twoexam ples of th is : m ak ing only a t t imes when sp ace a l lows and to apredetermined colour mix has enabled Mazda to exploit successfully a marketsegment while more fully utilizing existing manufacturing resources; offering aluxury car with only colour and limited options ha s enabled Toyota to increase



Marketing Manufacturing

Manufacturing

Customer-drivmanufacturi

Marketing

Functionally-oriented strategies reflecting a manufacturing dominance A)or a marketing dominance B) need to be replaced by a strategic outcome

C) reflecting the pe rspectives of both functions.

Manufacturing Marketing

•

C )

igurCorporate stra

outcom es - functidominance or a bal

between perspecti

volume by applying the concept of standardization in a limited, high-pricesegment of a well-established market.

Corporate deb ate involves compromise between functions as well as p rovidingclear direction to functional initiatives and requirements. Coexistence is notenough Learnin g to liv with o r being sensitive to each othe r's perspectives, argu-ments and outlook is no longer adequate. Shared pa rtnership in corporate debateand strategic resolution is not only desirable but essential if firms are to grow andprosper in the 1990s. To achieve this, comp anies need to change from functionaldominance to functional debate as the way to develop corporate strategies tomeet the needs of today's dynam ic and increasingly com petitive marke ts.

eferences1. Hiil, T., Manufacturing Strategy: The S trategic Man agement of th Manufacturing

Function. 2nd ed., Macm illan, Bas ingsto ke, 1993.

2. Hill, T , Manufacturing Strategy: Text and Cases 2nd ed.. Irwin, B urr Ridge. IL, 1994.

3. Hill. T., Introduction to Production/Operations Managem ent: Text and Cases 2nd ed.,

Prentice-Hall, Hemel Hem pstead, 1991.

Berry Et Al_1994_Customer-Driven Manufacturing

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