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Building Customer Value Models

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No, thanks Start chat. Consider this: A producer of chemicals used in extracting oil from wells routinely performed a field analytic monitoring service for its customers to determine when, and in what amounts, they should apply its products. Rather than finding value drains by chance, as in the example, suppliers can set out to detect them by using field value assessment in conjunction with activity-based-costing analysis.

Identifying and eliminating value drains results in better allocation of resources and improved profitability. Virtually always, the results more than pay for the cost of doing the field-value-assessment research. Value models provide that information. Knowing that an improvement in some functionality is important does not tell a supplier if a customer is willing to pay for it.

At the same time, a model allows the supplier to see how the value of its new technology varies across applications, customer capabilities, and usage situations. For example, the supplier could ask managers in different functional areas of customer companies to evaluate potential improvements.

Specifically, the supplier wanted to know how the customer would value some near-term-achievable changes in technical attributes, such as gloss or dispersibility. Knowledge of how their market offerings specifically deliver value to customers enables suppliers to craft persuasive value propositions. Consider the case of Greif Brothers Corporation, which produces fiber drums, plastic drums, and intermediate bulk containers for food products and chemicals manufacturers.

Rather than competing on a price-per-container basis, Greif markets complete packaging systems. How does Greif develop its propositions? First, a Greif strategic account manager, together with a representative from the customer, builds a value model to understand total costs. Greif developed its current model based on information from 20 major customers. Key elements include the costs associated with tracking and retrieving the drums, cleaning and maintaining them, testing and recertifying recycled drums, and all the associated paperwork.

Greif has found that customers—both existing and potential—can readily assign monetary values to some elements but that other elements are more difficult to pin down. For those elements that are harder to quantify, Greif takes its analysis to a deeper level. Consider the benefit of environmental stewardship. During the presentation, they discuss the merits and prices of each solution. At the core of all successful working relationships are two essential characteristics: trust and commitment.

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To demonstrate their trustworthiness and commitment to customers, progressive suppliers periodically provide evidence to customers of their accomplishments. Sales managers at Greif, for example, give customers quarterly reviews that document actual cost savings. Applied Industrial Technologies AIT , a major distributor of specialty replacement bearings, power transmission components, and fluid power products in the United States and Canada, provides another good example.

AIT primarily serves maintenance, repair, and operating MRO supplies markets within the primary metals, mining, pulp and paper, utilities, chemical processing, textiles, food processing, and agricultural industries. It operates more than branch locations across the United States. In , the company began to market a value proposition promising to help its customers improve productivity rather than simply selling them parts at a low price. Through value assessment, the company began to work with its customers to help them save money in areas such as maintenance, inventory, and energy consumption—any measurable area other than purchasing.

And to support their efforts, the company has developed a customized software program that calculates cost savings.


Sales representatives can run the program on laptops while visiting customers. Then, either on a quarterly or a semiannual basis, AIT presents each customer with a report that documents the savings, allowing customers to assess firsthand the value AIT has delivered. In order to establish credibility for its reports, AIT asks customers to sign and return a copy.

The company keeps track of the performance of each cost-savings initiative and aggregates the totals. Understanding value in business markets and doing business based on value delivered gives suppliers the means to get an equitable return for their efforts. The essence of customer value management is to deliver superior value and get an equitable return for it, both of which depend on value assessment.

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Grainger, the MRO supplies distributor, is an excellent example of a company that has realized the benefits of measuring and monitoring value for its customers. The company has even established a consulting arm, Grainger Consulting Services, specifically to help customers understand the total cost of MRO supplies management. Grainger and Its Customers Benefit. Grainger distributes maintenance, repair, and operating MRO supplies and related information to the commercial, industrial, contractor, and institutional markets in North America.

At each company, GCS detailed the steps involved in acquiring an MRO item and outlined the estimated costs associated with each step. Since the original studies, GCS has gained extensive experience and knowledge in building customer value models, which it calls total cost models. And as its reputation has grown, it has increasingly offered its consulting services on a for-fee basis to clients. Pharma Labs is a rapidly growing pharmaceuticals manufacturer. At one of its largest plants—a facility with employees—purchasing managers were questioning whether to outsource their MRO procurement and inventory management processes.

During the meeting, two GCS managers toured the facility to gain an overview of its MRO-supplies-management processes. The consultants told the Pharma managers, for instance, that some companies do not account for MRO supplies inventory and associated carrying costs. Following the meeting, GCS proposed that it perform what it calls a baseline assessment, which documents the total costs of MRO supplies management and then, following that assessment, offer Pharma managers some strategic recommendations about how they could improve their operations.

To begin, GCS put together a case team, which consisted of a consulting manager, a consultant, and a business analyst. Pharma Labs formed a steering committee and a project team.

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The steering committee comprised the relevant department heads, such as maintenance, purchasing, manufacturing, inventory management, management information systems, and finance, and was responsible for project oversight and strategy development. The project team was a smaller cross-functional group with representatives from each of the departments on the steering committee and was responsible for working with the GCS case team. Generally, GCS looks for the elements of its customer value models in four primary areas: processes from how the need for items is identified to payment of invoices , products product price, usage factors, brand standardization and application , inventory on-hand value and carrying costs , and suppliers performance, consolidation and value-adding services provided.

In each area, GCS defines value and cost-saving elements such as freight and courier charges and the cost of overtime , specifies the measures for the elements such as procurement cost per purchase order, number of suppliers, and inventory accuracy , collects the data and analyzes them, and specifies measures for monitoring performance.