How an Order Views Your Company

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.

Bringing 'Lean' Principles to Service Industries

Thanks to the pioneering success of Toyota, the concept of a "lean" operating system has been implemented in countless manufacturing companies and even adapted for industries as diverse as insurance and healthcare.

With its focus on standardization, quality improvement, cost reduction, and efficiency, lean's influence (and various interpretations of its tenets) continues to grow. In their working paper "Lean Principles and Software Production: Evidence from Indian Software Services," HBS doctoral student Bradley Staats and professor David Upton examine what happens when Wipro Technologies, an Indian outsource provider of software services, launches its own lean initiative.
"In terms of operations and improvements, the service industries in general are a long way behind manufacturing," Upton says. "The motivation for this work was to gain some well-grounded research on how improvements can be brought to services through some of these lean concepts."

Not all lean manufacturing ideas translate from factory floor to office cubicle. For example, tools such as the andon cord, a rope that manufacturing workers pull when they encounter a problem on the line, are not directly replicable in software as there is no line to stop.

"What we hope to do," Upton says, "is to distill the relevant aspects of lean manufacturing so that managers can see how these tools were applied successfully in a service environment similar to their own."

Unfortunately, lean's prevalence has led to some misconceptions.
"Some people think lean means 'not fat,' as in laying people off," Upton says, noting that in their paper they propose that the difference in a lean operating system comes from how it alters the way a company learns through changes in problem solving, coordination, and standardization.

They also draw on a framework of 4 principles of the Toyota Production System defined by HBS professor Kent Bowen and Steven Spear (HBS DBA '99):

Rule 1: All work shall be highly specified as to content, sequence, timing, and outcome.

Rule 2: Every customer-supplier connection must be direct, and there must be an unambiguous yes or no way to send requests and receive responses.

Rule 3: The pathway for every product and service must be simple and direct.

Rule 4: Any improvement must be made in accordance with the scientific method, under the guidance of a teacher, at the lowest possible level in the organization.

Wipro gains efficiency
In the paper, Staats and Upton describe how Wipro first launched its lean initiative in 2004 with a core team of managers. The small group visited lean manufacturing companies and discussed the concept's basic principles before each manager adopted a project in order to implement this new approach to software services. Of the projects, 8 out of 10 showed greater than 10 percent improvement in efficiency.

"Some people think lean means 'not fat,' as in laying people off." —David Upton

With those results in hand, the core team decided to roll out the approach across the firm. By the end of 2006, Wipro had 603 lean projects completed or in the works (the company typically had 1,100 projects under way at any one time).

"One of the important lessons we've seen on the ground is how Wipro approached the launch of this lean initiative," Staats says. "They didn't come out with big banners and say, 'OK, today your work is lean work, and yesterday it wasn't.' They started with a small group and recruited other people from there. It was a very controlled experimentation."

In their research, Staats and Upton document how the use of lean principles affected the workflow at Wipro. The concept of "kaizen," or continuous improvement, for example, resulted in a more iterative approach to software development projects versus a sequential, "waterfall" method in which each step of the process is completed in turn by a separate worker.

By sharing mistakes across the process, the customer and project team members benefit individually and collectively from increased opportunities to learn from their errors; the project also moves along more quickly because bugs are discovered in the system earlier in the development process.

Wipro also uses tools specific to the software development process based on lean principles. The DSM (design structure matrix), for example, defines connections and pathways for a project's workflow and suggests an order of tasks. A complementary tool, the SCE (system complexity estimator), ranks a software module based on its complexity and compares its actual architecture with its ideal (simplest) architecture in order to learn where a team might need more or fewer skilled members. The company also employs the more familiar lean technique of value stream mapping (VSM) to identify and decrease wasted time and effort throughout the software development process.

Improving from the bottom up

While most organizations struggle with implementing a new system, fighting the general inertia that many employees experience when faced with yet another new initiative, the goal of lean is to open up the work process and abolish the usual hierarchies. According to Staats, this seems to have happened at Wipro.

"It was interesting to talk to some of the less senior team members, because they were getting involved in much bigger-picture issues than they ever had before," he says. "In the case of value stream mapping, every member of the team was able to get a sense of the overall picture of what they were doing and spot problems they wouldn't have been able to see before."

"It's about unlocking the power of thousands of software engineers."—Bradley Staats

Staats suggests that the use of lean principles at Wipro could have qualities of a "Trojan Horse initiative." From the outside, lean accomplishes the short-term goal of productivity (getting inside the city's gates), but it could also lead to more radical, innovative change (the sacking of Troy).

"One of the main ideas behind lean is to take parts of a task that don't require human intervention and give them to machines so that humans can focus on the important issues," Staats explains. "The same is true in software, where you have the added benefit of being able to give some of your work to a computer, which can process it more reliably and quickly than a human."

More time, coupled with a better understanding of the different moving parts of a project, creates feelings of empowerment in workers who haven't traditionally taken part in innovation.
"It's about unlocking the power of thousands of software engineers and encouraging innovation up and down the organization," Staats says. "You can impact productivity while also changing the problem-solving capabilities of the organization."

Ideas into action

Wipro is typical amongst Indian firms in its thirst for knowledge, Upton adds.
"These companies are intellectual environments. People are very interested in taking conceptual ideas and figuring out how to put them into practice. There's not the same division between the 'real world' and university research that you often encounter in the United States."
Staats and Upton traveled to Wipro's offices in Bangalore on multiple occasions, interviewing employees at all levels to examine the company-wide effects of lean; they plan to return to India this fall and will continue to monitor developments at Wipro.

Says Upton, "There's a question as to where things go down the road: whether this continues to be a lean implementation or evolves into the Wipro Production System when they develop enough new approaches to their work. We want to stay around that question to reflect on it and apply it to services more broadly."

About the author
Julia Hanna is associate editor of the HBS Alumni Bulletin.

Sharpening Your Skills: Operations Management

Questions to be answered:

- Can "lean" productions methods improve service industries?
- How can a company's order management cycle impact costs and margins?
- How does resource allocation lead to strategy failures?
- Can operations become a competitive advantage?

Can "lean" productions methods improve service industries?

Bringing 'Lean' Principles to Service Industries

Toyota and other top manufacturing companies have embraced, improved, and profited by lean production methods. But the payoffs have not been nearly as dramatic for service industries applying lean principles. HBS professor David Upton and doctoral student Bradley Staats look at the experience of Indian software services provider Wipro for answers.

Key concepts include:
- In terms of operations and improvements, the service industries in general are a long way behind manufacturing.
- Not all lean manufacturing ideas translate from factory floor to office cubicle.
- A lean operating system alters the way a company learns through changes in problem solving, coordination through connections, and pathways and standardization.
- Successful lean operations at Wipro involved a small rollout, reducing hierarchies, continuous improvement, sharing mistakes, and specialized tools.

How can a company's order management cycle impact costs and margins?

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.

Key concepts include:
- The order cycle provides a window through which to observe the intricate details of revenue management, cross-functional coordination, and profitability management.
- Current product-tracking technology makes problem diagnosis much easier than the time of the original study.
- By and large, companies using this methodology see lowered costs and improved gross margins.

How does resource allocation lead to strategy failures?

What Really Drives Your Strategy?
Why do so many companies veer off their strategic plan? Look for a disconnect between corporate strategy and how resources are allocated, say Harvard Business School's Joseph L. Bower and Clark G. Gilbert.

Key concepts include:
Company strategy is more than the statement presented in company documents; it's the actual aggregation of commitments and their relationship to the realized strategy of the firm.
Operating level decisions can change the de facto strategy of the firm.
Strategic resource allocation involves planning from the bottom up and involves all levels of the organization.

How can operations become a competitive advantage?

Operations and the Competitive Edge
Many managers expect operations organizations to fulfill only a support role. But an effective operations strategy can give you a competitive advantage. An interview with professor Robert Hayes.

Key concepts include:
- Managers must rethink many of the basic principles of good operations management that worked in the past.
- Companies must adopt a strategy for improvement that fits the specific needs of the organization at that point in its life.
- Assigning a team to carry out a job may not always be the best idea. Sometimes it's more effective to let a gifted individual do the task.

Thinking Twice About Supply-Chain Layoffs

Published: December 8, 2008
Author: Julia Hanna

It's the most wonderful time of the year—or that's how the song goes. But this year's decline in retail sales has resulted in definitely uncheery employee layoffs and payroll cuts, a trend that is likely to continue.

While the vicious cycle of declining sales and layoffs is to some degree unavoidable, research by HBS assistant professor Zeynep Ton suggests that retailers should make labor decisions thoughtfully.

"Many retailers see labor more as a cost driver than a sales driver."

Her advice: Consider the supply-chain foot soldiers—stock clerks, trucking coordinators, inventory managers—as potential profit drivers rather than the first troops to cut in a downturn.
Ton's working paper, "The Effect of Labor on Profitability: The Role of Quality" , examines how mundane activities such as stocking shelves, setting up displays, labeling, and returning unsold merchandise to distribution centers can seriously affect an organization's bottom line and undermine its strategy.

"My research reveals that what happens in the last 10 yards of retail supply chains is really important. Customers often experience stockouts not because the supply-chain plans are poor, as we often assume, but because they are not executed well at the stores."
Boots on the ground matter a lot. "When there aren't enough workers on the selling floor, it's those ‘boring supply-chain activities' that are affected first," Ton observes. "If employees are spread too thin, they're going to be rushed. Then they either make mistakes or take shortcuts to get their work done."

Merchandise ends up being misshelved, or not shelved at all. The store claims to have it, but neither the customer nor employees can find it. If other stores have the same product, customers will go there instead—and may never return.

Labor as profit driver
"Many retailers see labor more as a cost driver than a sales driver," says Ton. The findings from her four-year study of 268 stores owned by a large specialty retailer tell a different story. Based on extensive fieldwork, interviews, and quantitative data, Ton's research indicates that increasing the amount of labor at a store is associated with an increase in profit margin. This did not come about through the impact of more labor on service quality, but through its impact on conformance quality—those "boring supply-chain tasks." For this retailer, Ton calculated that a one-standard-deviation increase in store labor brought about a 10 percent increase in profit margin.

These findings ran contrary to the thinking of store managers that Ton interviewed. They consistently identified service quality as a top indicator of store performance, and their evaluations by higher management gave service quality (e.g., clean bathrooms and employees greeting customers and making eye contact) a 20 percent weight in importance, as compared with 10 percent for store conditions (e.g., shelf organization, labeling, and general presentation) and less than 1 percent for returns of unsold inventory to distribution centers.

"I call these people supply-chain foot soldiers."

Having items in storage areas but not on the selling floor didn't count at all in their evaluations, but it counts a lot in customer satisfaction and customer retention, and it wastes a lot of time for store employees.

"What's not to like about an enjoyable service environment and knowledgeable employees? But they aren't always the key to profits," Ton says. "My findings suggest that for retailers that sell undifferentiated products, offer a self-service environment, and compete on the basis of product availability, having the right product in the right place at the right time with the right label and of course with the right price may be what really drives customer satisfaction."
Another significant factor was an emphasis on minimizing payroll expenditures, a not-uncommon strategy for retailers that view it as an obvious way to cut costs. At Ton's research site, in fact, as at other organizations, a manager's evaluation depended in part on meeting or going below the monthly payroll plan.

"Of course managers will err on the side of having too little versus too much payroll, especially when they have limited control over sales," says Ton. "And of course, those boring supply-chain tasks won't get done."

"Retailers have to cut labor to some extent when sales are lower," Ton says, "but they need to be careful about how low they go." She acknowledges the difficulty of pinpointing this ideal number of payroll hours in an industry full of uncertainties.
"In an optimal world, a manager would know exactly how much workload would exist at a store in any given month. In reality, that's never clear—some customers require more time than others, and sometimes shipments are delayed. What's worse, with high levels of turnover and absenteeism, store managers never really know exactly how much labor they'll have."
Ton has more on her mind than operational excellence. She has interviewed dozens of retail workers and store managers and gained a good feel for their concerns.

Supply-chain foot soldiers
"I call these people supply-chain foot soldiers," Ton says. "The folks who work in retail stores and distribution centers and the truck drivers who move between them. In general, they are lower-wage employees who are on the losing side of the widening income gap." Many work multiple jobs. When a manager changes his or her hours, it can upset a delicate balance of work schedules, family commitments, and child care, which in turn can derail increasingly fragile family budgets. In a survey of Wal-Mart employees, for instance, scheduling even beat out health care as workers' most pressing concern.

"Someone asked me why I'm interested in labor in the supply chain. The answer from my head is that we have evidence of how important people are to the total equation. So my future research will definitely focus on identifying better process designs and labor management practices at stores and distribution centers with the goal of improving operational performance and ultimately increasing profits and wages and offering a better work environment. The answer from my heart is that I would like to help improve the working conditions of so many hardworking, hard-pressed people."

That kind of progress could bring year-round joy to everyone in the world of retail.

About the author
Julia Hanna is associate editor of the HBS Alumni Bulletin.