Retailers have been tinkering with their supply chains for years, and yet they still tend to experience the same old problems: lots of unsold stock in the shops, and markdowns which savage their already thin margins. In a world of sophisticated technology and communications, how come they can't fill their shops with stuff we want to buy at full price, without generating huge overstocks along the supply chain?

Well, it could be that they have been looking in the wrong place. Think about a supply chain as having two main bits: an "upstream" bit, where all the product sourcing, buying, ranging, and distribution is done, and the "downstream" bit, where it all gets laid out in front of the customers. Most retailers have concentrated on the upstream end, i.e. ordering systems, smart range planning, forecasting, and price management. What they don't generally tend to do is think too much about the downstream end, where the customer makes the decision whether to buy the stuff or not.

This gap is understandable when we think of the "prescriptive" approach to retailing that has prevailed since the mid seventies. Customers tended to be in the dark about the choice they had, and so could be relied upon to buy what was put in front of them. They were not seen as individuals, they were "segments" and "socio-demographic groupings." We did what we were told; we bought what we were sold.

Well, things have changed. We travel more. We read more. We are open to many more cultural and social diversity than ever before, and we now know what we want.

We can think of the customer end of the supply chain as becoming "friction free." That is, customers can move from retailer to retailer very easily now (especially on-line). The once predictable and stable customer has become totally unpredictable, demanding, and totally disloyal. We have to turn our attention to making the upstream end of the supply chain friction free, in order to give the customer what they want. This means ripping out the fixed processes ("we can only deliver while you are out at work"), the inflexible administration processes ("you have to set up an account with us"), and the inept attempts at what is laughably termed "customer service." Only when the upstream friction has been removed will supply chains be able to react to what customers really want, and thereby generate long lasting relationships that will be rewarding for both retailer and customer.

Looking Upstream

There are different types of friction that exist in supply chains, and they exist at different stages along the chain. As customers become less stable and predictable, the challenge facing retailers is how to reduce the friction at their end of the supply chain (upstream) in order to become more reactive.
There are essentially 2 types of friction that exist upstream, which need to be reduced or eradicated in order to make supply chains more flexible. The first is process friction, and the second is transaction costs.

In the traditional model, customers were well behaved and bought what retailers put in front of them. They were happy with the levels of quality and service they received (or at least they didn't complain too much). This resulted in retailers building prescriptive supply chains that did not think too much about the customer. Long lead times, range planning, and clumsy distribution and replenishment models delivered significant cost efficiencies to retailers, but were not really "customer facing." Over time, the implementation of large retail systems and ERP solutions fixed these processes in "techno-concrete" to make them even more efficient. The end result is retail supply chains that are super-efficient from the retailers point of view, but very inflexible for the customer.

As customers are becoming more intolerant of this inflexibility, retailers are having to deconstruct their supply chains. Outsourcing and partnership models in areas of distribution, systems hosting, and customer contact management are becoming more common, and these allow retailers to select the bits of the supply chain they want to keep in house, and outsource the rest. The result is a process model that can be more flexible and reactive to customer demand, and provide a more customized approach to associated services, through home delivery, account management, and links to other partners.

The second aspect of upstream friction is transaction costs. Recent research suggests that supply chain transaction costs account for as much as 40% of total GDP. If it costs the same to raise a purchase order for a single pair of shoes as it does to raise one for 15,000 pairs, there is little incentive to be responsive to individual customer requests: it simply makes no economic sense.

However, technology advances in EDI and web communications are having fundamental effects on transaction costs. The cost of information exchange over the web is as much as 70% less than traditional models, and the cost of entry to EDI models is falling rapidly. Hosted web-enabled financial ledgers are eradicating the need for buy-side and sell-side ledgers to be maintained and reconciled, and businesses are seeing massive reductions in the costs of financial transactions. The result will be a more flexible approach to responding to individual customers.

Positive and Negative Friction

First, we need to clarify the differences between positive and negative friction at the customer end. Traditionally, businesses have introduced negative friction to retain customers. There are many examples, but what they all have in common are mechanics that make it too painful for customers to move to another vendor. Phone companies tell us that if we want to move to another service provider it will take weeks of complex form filling and correspondence.

We know that it really takes 30 seconds on their computer, but they don't want to make it easy. Banks and mortgage companies have always made it very difficult and expensive to move to another provider. If a retailer sells us shoddy goods, they prefer to give us vouchers for their stores rather than give us our money back. The list is endless, but the common theme is "if we make it tough enough, you won't bother to stray."

Businesses traditionally interpreted such handcuffs as "customer loyalty." Consumer markets are now explaining (with their feet and wallets) to these businesses that it was never about loyalty, but rather about negative friction.

So what can businesses do to re-introduce friction in a positive way? Well, there are some wonderful examples emerging of retailers who have figured out that product and price are no longer sufficient differentiators to retain customers (i.e. they can get it anywhere). What customers want today are additional levels of service, customized offerings, and above all, they want to be made to feel special and important.

Customers have more choice than ever where they buy their stuff. Their expectations of service levels are higher than ever; they are becoming increasingly intolerant of poor quality and service.

Today's way to a customer's heart is a friction free supply chain that is flexible and reactive to their needs, and a positive and warm relationship, which makes them feel special.