Operational excellence, meet customer intimacy

Most organizations continuously strive to achieve operational excellence, but they spend less effort understanding customer needs — and few marry these two sources of customer value effectively. While a focus on lowering costs, improving quality, and providing consistent, reliable service will continue to be important, I see a shift in the coming decade to combining operational excellence with customer intimacy: tailored solutions for individual customers based on a deep understanding of their needs.

Consider Tesco, one of the world’s largest retailers with over 500,000 employees, which has spent the last three decades improving its supply chain processes, and the last two decades collecting and analyzing customer data. In the 80s and 90s,Tesco modernized its supply chain, introducing point-of-sale scanners, centralizing and/or automating ordering, distribution and warehouse control, and establishing electronic data exchange with its main suppliers. As a result, lead times to stores came down from as much as two weeks to two days, and lead times from suppliers fell from 2-3 weeks to three days. In 1996 Tesco adopted Toyota Production System approaches to take its supply chain operations to an even higher level. Working with suppliers, it mapped the flow of several product families and uncovered opportunities to streamline logistics. The company redesigned its processes so products flowed quickly from suppliers to store shelves, rather than be processed in batches in production, packaging, transportation, and stores. For example, Tesco introduced wheeled dollies for fast-moving products such as soft drinks, which dramatically streamlined handling between suppliers, warehouses, and the stores, improving cycle times and reducing costs.

But to get the full value of its improved supply chain capabilities, Tesco needed to marry its upgraded operations with a deeper knowledge of its customers than it could get from aggregated scanner data. So in 1993, the company launched its “Clubcard” with which customers could earn points for purchases, redeemable for discounts or gifts. While it was building loyalty with Clubcard points, Tesco quietly built up profiles of its card-holders, including which areas of the store they visited and their product preferences. Working with consultancy dunnhumby, they eventually defined 16 lifestyle “clusters” by combining in-store shopping data (which told them what customers bought and where) and home shopping data (which also told them what customers wanted to buy but which wasn’t available).

You may be saying, OK, so they built a customer database. What’s the big deal? The big deal, and what’s really powerful, is what Tesco did with the insights it gathered. It used the customer profiles to uncover unmet needs, and to design and launch a series of services to meet those needs, including smaller local convenience stores and online shopping. Tesco tracked where customers bought — online, or in convenience, High Street, supermarket or hypermarket formats. Then it customized the product ranges at smaller stores for the local customer base. With only 1,500 items, a convenience store has to get its product mix just right. As told to me by Dan Jones, the chairman of the Lean Academy who worked with Tesco, CEO Terry Leahy was convinced that the company should develop these new formats, and actively supported their development, despite the concerns of store managers that their sales would be cannibalized. (For more on the Tesco story, see Terry Leahy’s book Management in 10 Words and Dan Jones’ book Lean Solutions).

Linking supply chain capabilities and customer insights, Tesco worked out the operational details of how to deliver exactly what customers wanted to each type of store. Their agile supply chain allowed them to replenish small stores at the same cost as big stores — so they could charge the same prices in every format. They continued to use insights from Clubcard to regularly adjust offers, tweaking the supply chain accordingly. Interestingly, as soon as they rolled out home shopping, store managers saw increased sales rather than cannibalization and so were quickly won over.

If you listen to the hype about “Big Data” and “analytics,” it sounds as if it’s getting easier and easier to derive customer insights. But the truth is, translating data into insights is hard, and translating insights into new customer experiences is much harder still. That companies like Amazon and Netflix can help you purchase by recommending products is a step forward. But it is a bigger challenge to change order fulfillment and other concrete steps in the customer lifecycle as Tesco has done.

Few organizations have Tesco’s foundational discipline of continuous operational improvement, which allows them to take full advantage of the insights they can glean from analyzing customer data. Even fewer companies have the cross-functional teamwork that enables them to turn those insights into new customer experiences delivered by operations and customer service. But marrying these two competencies is quickly becoming a competitive necessity to deliver higher levels of value to customers than was previously possible.