20 Dec 2004  Research & Ideas

How an Order Views Your Company

HBS Professors Benson Shapiro and Kash Rangan bring us up to date on their pioneering research that helped ignite today’s intense focus on the customer. The key? Know your order cycle management.

 

Over a dozen years ago, HBS professors Ben Shapiro and Kash Rangan conducted research with colleague John J. Sviokla, focusing on the impact that a company's order management cycle (OMC) has on customers. Think of OMC as the process that manages the customer's order from the time it first comes into the business to the day the product departs the shipping dock. The researchers encouraged businesses to think of that order as the actual customer, and watched as they routed that person here and there among departments, perhaps ignored by an inattentive clerk or delayed by an administrative conflict. And then Shapiro, Rangan, and Sviokla took their own advice, following orders through eighteen companies to chart gaps in the OMC process.

Their article on the research, "Staple Yourself to an Order," was recently reprised as part of a Best of Harvard Business Review collection.

Thanks to the Internet, customer management software, and the success of Dell, the concept of order management and customer focus has proven profitable for those companies that have embraced it. They understand and can anticipate their customer needs better than their competitors, and can tune their organization's response to a fine degree. So why aren't more companies this customer-centric? We asked professors Shapiro and Rangan to view the changes in order management cycle that have evolved since their findings were first presented in 1992.

Sarah Jane Johnston: What led to your original study of the order management cycle?

Benson Shapiro: In the late 1970s, when I was teaching the Industrial Marketing course in the MBA program at Harvard, it began to become clear to me that to really manage many businesses, one needed to deal with order-level detail. Earlier, it had been sufficient to think about customers and products or services. But, because of increasingly intense competition, one now had to look at individual orders. My research assistant (at the time) and I wrote a case with such detail that it proved to be very popular and useful.

It is like having one's genetic code written into the birth certificate.
— Kash Rangan

Through the '80s the importance of order-level detail became increasingly clear. In the late '80s, when I was teaching [a course on] Integrated Product Line Management, the need for order-level detail screamed. It was clear that this was much more than a marketing project. Kash Rangan had a strong interest in supply/demand chains, and thought the project presented some interesting opportunities. John Sviokla, with a powerful background in management information systems, joined the team. And, for a time, Janice Hammond was involved because of her interest in optimization of supply chains and logistics.

I think that for all of us, the order cycle provided a wonderful window through which to observe the intricate details of revenue management, cross-functional coordination, and profitability management. After a while, Jan Hammond left the team, but her impact stayed. Kash, John, and I worked very hard to capture our findings in a single document. Alan Weber, at the time the Editor of the Harvard Business Review, did a magnificent job of taking our manuscript and making it accessible to managers.

Our initial hunch about the importance of order cycle management and the need to look at order-level details proved correct. It was a highly leveraged approach that helped support trends in re-engineering, supply chain management, activity-based costing, and continuous improvement.

Q: How much has changed in this area since your research was first published?

Kash Rangan: A lot has changed since the research was first published over ten years ago. With the proliferation of computing power and availability of powerful software, much of what we called the Order Management Cycle has been easier to track. In other words, data from the time a customer places an order to the time the order leaves for the customer location are now being captured routinely at many businesses. We could ship a packet at any U.S. post office, and get a tracking number to find out what is happening to its delivery. Dell Computer, of course, goes beyond that—you can track where your order is in the assembly process, even before it is ready for shipment.

What we have learned from a host of these new applications is indeed important. When we first did the research study, our focus was on customer satisfaction. We had argued that the order is a surrogate for the customer, and so by tracking its "smooth" or "bumpy" ride, we would be able to mirror how the customer would feel. But what we did not realize at that time was the enormous second-order impact of the OMC concept. Because the customer is identified and connected to the OMC when the product is being put together, it has been possible for manufacturers to leave those identification markers in the product. So later on when the same customer calls with an inquiry or a complaint, it is now so easy to go back to the database and pull out the product's history. It is like having one's genetic code written into the birth certificate. As a result, problem diagnosis after the product has been in the field has not only become easier, but also so much cheaper for manufacturers. Customer satisfaction over the life of the product has increased as a result.

Q: For companies that changed with the times, what improvements, if any, have they experienced in customer satisfaction and financial performance?

Shapiro: Unfortunately, we did not formally maintain relationships with the many companies that we used as field sites for the initial research. But, we have certainly watched many similar companies move from segment-and-account or product-and-service-level analysis into the greater detail offered at the order level. By and large, those companies that devoted themselves to the effort were richly rewarded. The order cycle gave them the opportunity to focus on the most profitable parts of their business. It also enabled them to segment different types of order to improve their efficiency. Taken together, the improvements in efficiency and the greater focus on highly profitable orders lowered costs and improved gross margins.

In addition, the emphasis on order cycle management provided a new tool to increase customer satisfaction. Because the order is an extension of the customer, it needed to be treated particularly well. The focus on order cycle management enabled companies to become much more tangible about "market orientation" or "customer driven." No longer were these vague philosophies or vacuous words. Now we could improve customer satisfaction by managing orders better.

Order cycle management also enabled executives to better understand the value they were providing with each order for each customer. As the value became clearer, executives were able to better price their products and services. It was now possible to price each transaction based on the value it created for the customer, as well as on its cost. As activity-based costing became more popular, it melded well with order cycle management to create greater precision in marketing, operations, and pricing. This led to greater profitability as well as to a tighter competitive focus and greater differentiation.

Thus, order cycle management contributed to cost optimization, revenue improvement, and better pricing. Each of these positively interacted with the others for the companies that did the best job of order cycle management.

Despite the overwhelming data, some companies just do not take the customer orientation seriously.
— Benson Shapiro

Finally, order cycle management helped to enable the supply chain revolution, which has improved return on inventory assets. Once people understood the need to deal with order cycle details, they were able to process more orders with greater satisfaction with less inventory. This significantly improved return on investment.

Taken together, these changes all led to significant increases in customer satisfaction and financial performance.

Q: What are the biggest obstacles for companies attempting to implement this strategy?

Rangan: The biggest obstacles remain exactly as they were ten years ago. While technology has enabled widespread application, fundamentally the core implementation problems remain. Some companies have done a great job, and some have not. To take advantage of the information and effect OMC changes, one has to coordinate across functions, disciplines, and departments. A company has to address issues of organization, incentives, and compensation. Moreover, the people who can affect the changes are human beings and so the psychology and sociology of change and who wins and who loses has to be designed into the system. Simply put, our concept of OMC is not simply a tool or methodology to measure customer satisfaction shortfalls. It also is a diagnostic to set in motion the wheels of customer orientation across an organization. That involves senior leadership.

Q: Has technology or the advent of the Web had an impact on the order management cycle?

Rangan: No question. Software vendors Seibel, Oracle, and others have made a $25 billion market out of CRM. Some of their key modules offer order management solutions and the corresponding efficiency that can then be gained by reallocating sales investments. Some small innovative firms like Comergent have taken it a step further. They offer an integrated demand chain management solution that gets as close to our OMC concept as one can. It links customer demand into backend ERP systems. It is impressive to see how technology has actually enabled the application of the OMC concept right from the entry point—a Web interface all the way to the factory. As I said in my previous answer, the potential is huge, but the application requires much careful thinking and management initiative.

Q: Do you see the current trend of intense customer focus continuing?

Shapiro: We believe that an increasing focus on customers is absolutely critical for companies to survive and prosper in these times of intense competition.

For a variety of reasons, there's considerably less differentiation across products and services than in the past. One way the companies can compete in this harsh environment is to provide better customer service by utilizing more detailed order management cycle approaches. But, despite the opportunities, many companies still do not understand the strong relationships among customer satisfaction, customer retention, profitability; as well as the relationships among order analysis, selection and management, and profitability.

The companies who seriously focus on customers inevitably do better. The interesting thing is that despite the overwhelming data, as well as a plethora of startling anecdotes, some companies just do not take the customer orientation seriously. On the other hand, companies such as Dell Computer have built whole businesses around the order cycle. In essence, Michael Dell's original concept was that all personal computers were alike because they depended upon Intel processors and Microsoft software. The only possible differentiation in running a personal computer company, he posited, was to provide better service and to make more money by leveraging order cycle management. The rest has been history. And, he is successfully applying that same approach to servers, printers, and perhaps even to other items as well. Order cycle management, combined with a careful focus on selected customers and needs, can indeed bring success now and in the future.

Customer
Particpation
Steps in the Order Management Cycle Sales Marketing Customer
Service
Engineering Purchasing Finance Operations Logistics Top Mgmt Participation
plans to buy 1. Order Planning Support Lead Support Support Support Support Lead Support coordinates
gets sales pitch 2. Order Generation Lead Support Support None None None None None some
negotiates 3. Cost estimation and pricing Support Lead Support Support Support Support Support Support some
orders 4. Order reciept and entry Support Support Lead Support None None Support Support none
waits 5. Order selection and prioritization Support Lead Support Support None Support Support Support some
waits 6. Scheduling Support Support Support Support Support None Lead Support none
accepts delivery 7. Fulfillment Support Support Support Support Support None Lead Support none
pays 8. Billing Support Support Support None None Lead None Support none
negotiates Returns and claims Lead None Support Support None Support Support Support some
complains Postsales service Support None Lead Support None None Support Support none

The order management cycle is supposedly everybody's job, but in reality, overlapping, poorly designed processes lead to confusion, delays, and customer complaints. Internal functions like marketing and operations don't communicate with each other, and top managers and customers alike are often out of the loop.

Lead leading role Support supporting role None no role

Copyright © 2004 Harvard Business School Publishing Corporation, All rights reserved.

From "Best of HBR—Staple Yourself to an Order," Harvard Business Review, p.165, Vol, 82, No.7/8, July/August 2004.

About the author

Sarah Jane Johnston is a content developer for HBS Working Knowledge.