Order Management as a Core Competency
By Linda H. Mullinix -- Supply Chain Management Review, 6/1/1998
Leading companies are coming to an inescapable conclusion: Order management must become a core competency. They understand that to achieve their most important business objectives—reduce cycle time and cost, meet and exceed customer expectations, increase return on investments, and create a win-win environment for all involved—they need to completely re-engineer their order-management processes.
This can be a formidable task. To create a customer-responsive, end-to-end order-management process, management needs to break down functional silos, invest in technology, and integrate all related activities. Streamlining the flow of information across corporate boundaries—and to customers—is another essential condition of effective order management.
In recognition of the central role that order management plays in business today, the American Productivity & Quality Center's (APQC) International Benchmarking Clearinghouse recently conducted a benchmarking study titled "Order Management: A Core Competency." The findings provide important insights into specific order-management areas that need to be improved or re-engineered if organizations are to maintain a competitive advantage in the marketplace.
Fourteen leading companies participated in this in-depth benchmarking endeavor, with one organization participating as a sponsor and partner. Eleven of these organizations sponsored the study to gain insight and information on best practices in order to improve their internal processes. Four participants were identified as having strong or innovative order-management programs in place. They joined the study as best-practice "partners." The company representation spans many industries: computer hardware, machinery manufacturing, forest products, medical products, retail/department store, chemical, paper and paper products, automotive manufacturing, and telecommunications. (For a list of the study participants, see accompanying sidebar.)
These participating organizations have found that they can't manage what they don't measure. And they can't maximize process improvements and profitability without measuring what is important to the customer. The study underscored an important truth: It is the customer who is driving changes and improvements to order-management systems and processes. With every technological advance, customers enjoy an ever-widening array of options for conducting business. Through the Internet, intranets, and extranets, they now have the ability to purchase products and services 24 hours a day in a seamless, near error-free environment. This reality delivers a sobering message. With the options continually expanding, customer service becomes the key in differentiating an organization from these emerging competitors. And the main ingredient of superior customer service is order management.
The study's intent was to identify and examine innovations, best practices, and key trends in order management within the broader context of supply chain management. From the analyses of information provided by the participating organizations, three specific mandates for improvement emerged:
- Break down the functional silos and organizational barriers.
- Strive to deliver the "perfect order."
- Leverage order management to gain a competitive edge.
Traditionally, order-management functions and processes have resided in a variety of departments and functions, all of which operate in their individual silos. Within this environment, orders typically pass from department to department and person to person. In some cases it is not uncommon for an order to languish on someone's desk for as long as two weeks before being passed to the next processing area. The problems inherent in this scenario are many. Among the more damaging are these:
- Orders are lost or delayed.
- Information sharing between departments or functions is limited or non-existent.
- Customers are faced with multiple points of contact, which can result in low service levels and high levels of dissatisfaction.
To avoid these adverse outcomes, organizations need to tear down the functional silos and take a process-oriented approach. In short, companies need to adopt what's become known as an integrated supply chain management model.
The leading companies in this benchmarking study are, in fact, organizing their order-management systems around the supply chain concept, integrating different functional areas into one entity. This facilitates the management of inventories across corporate boundaries, while eliminating silos and increasing information flow. The functional areas typically integrated include purchasing, manufacturing operations, inbound and outbound logistics, invoicing/billing, claims/adjustments, and international operations.
By integrating these functional areas and having them report to a single individual within the supply chain organization, companies create a framework within which all components of an order can flow seamlessly. This level of integration encourages parallel processes and eliminates non—value-added activities. It also aids in aligning key performance indicators (KPIs) across the organization as a whole. In addition, successful order-management systems usually link to production schedules and partner with sales and marketing, customers, and suppliers.
The companies participating in this study incorporate certain key activities in the order-management process. For our four partner companies these include:
- Order editing: How changes, additions, and deletions are made to orders.
- Customer relations: Programs and procedures for dealing with customers and resolving any problem areas.
- Order generation: Methods of creating the order, such as EDI, fax, phone, paper, and so forth.
- Order priority: Guidelines for responding to orders or handling emergency shipments.
- Returns: The policies for handling returned products.
- Order communication: How order information is communicated to customers, whether manually or electronically.
Three of the partners also consider billing and invoicing to be part of the order-management process and two partners include planning and order fulfillment in that process.
Alignment of Key Performance Indicators
The study participants overwhelmingly agreed that meeting and exceeding current customer needs is a primary objective of improved order-management systems. One way they accomplish this goal is by measuring performance/service categories—or key performance indicators—on a regular, ongoing basis and then sharing that information with customers. Exhibit 1 shows the degree to which study participants measure and share data on these key indices.
In addition to aligning key performance indicators, the partner companies are organizing around the supply chain model to realize other benefits. Most notable of these are reduced cycle time and improved service. A supply chain approach also assists in quickly identifying areas of opportunity and increases single-call transactions. All of these enhancements lead to streamlined business processes and improved financial performance.
The Importance of Customer Feedback
The partner companies in our benchmarking study aggressively collect and analyze customer feedback as part of the KPI process. This enables them to determine customer expectations more accurately and identify areas requiring corrective action.
Three of the partner organizations studied actually define key performance indicators based on customer feedback. By using KPIs, they capture not only what is important to the organization's success but also what's important to the customer. This information is essential to defining order-management cycle time and fill rate—two key customer-service metrics. Competitive benchmarking and annual customer surveys also are used here.
By comprehensively collecting customer feedback, partner companies have been able to make positive changes in their order-management processes. Customer input has led to improvements in such areas as information systems, personnel performance using team-based alignment, cycle time, customer service, and—perhaps most importantly—profitability.
Study participants use a wide variety of measures that provide them with performance information for order management. Of these, typically seven to 10 are key. In the best-practice organizations, these measures are generated and communicated electronically. Little or no manual activity is involved.
Centralized Order Management Preferred
In their effort to dismantle the functional silos, the majority of organizations benchmarked are moving toward centralization of the order-management process. They agreed that hardware, people, and maintenance are more economically used in a centralized order-management environment than in a decentralized one. They believe that centralization facilitates integration of order management with other operating systems, such as production planning/scheduling, transportation management, warehouse management, invoicing/billing, pricing, and debit/credit.
The participants also report that centralization results in better customer service and enhances customer perception that a company is "easy to do business with." By partnering with other internal activities, the order-management function can more seamlessly deliver the full package of service capabilities. Finally, centralization facilitates the delivery to customers of value-added services, such as Vendor Managed Inventory.
Through centralization, in short, decisions involving an array of issues can be coordinated from a single point. This gives the customer a more consistent message from the company, while simplifying and improving customer access. All of the partner companies and just over half of the sponsors operate in a centralized order-management environment, and all expressed satisfaction with this approach.
Another area of partner agreement centered on the need for centralized and consistent data and common data files. These data qualities were viewed as a keystone to excellent and consistent customer service. The ability to make data available across the organization was vital to business success, the partner companies agreed. Furthermore, it aids in expediting orders and in order accuracy. Notably, all of the best-practice partners have a centralized data operating environment and use common data files.
In addition to transmitting order data to their customers efficiently, the best-practice companies communicate organizational strategies, plans, and performance measures as part of the order-management process. (See Exhibit 2.) A few short years ago, sharing this kind of "proprietary information" would have been unthinkable. But in today's era of integrated supply chain management, the leading organizations recognize the value of an open approach.
Complete, comprehensive control of the order-management process ensures that complex cost-to-cost and cost-to-service trade-offs can be made. Customers want—and expect—to contact one person who is familiar with their account and who can resolve their problems quickly without transferring them to other departments. By coupling activities and forming teams, companies can streamline and unify the order-management process to create a seamless operation that works well cross-functionally.
Striving for the "Perfect Order"The survey respondents universally agreed that order management played an important role in their customers' decisions to buy from them rather than from the competition. All of the study's partner organizations and 89 percent of the sponsor organizations report that "meeting and exceeding current customer needs" is a chief objective in improving their order-management systems as they strive for the "perfect order."
These study participants view order management as the critical component of customer service—and customer service as one of the critical determinants of business success. "Customer service differentiates us from our competitors," one partner company stated. "Order management is the key to customer success, as is the ability to produce the parts on time. On-time delivery, defect-free product at competitive prices, and adherence to customer specifications all start with order management." This observation pretty well sums up what most study participants view as the essence of a "perfect order."
The benchmarked companies gauged how well they were achieving their perfect-order goals through performance measures and customer-feedback programs. These varied from organization to organization and were based on the specific customer needs of each company.
The study also revealed that by bringing their customers into the process, best-practice organizations linked order-management performance measures to corporate goals and strategic planning. Information most often shared with customers included organizational standards/goals, policies, mission statements, and performance measurements.
This information is communicated from the responding companies to their customers through monthly perfect-order reports, performance scorecards, face-to-face meetings, and newsletters. Some of the organizations benchmarked also use customer-service liaisons to communicate this information.
The "Perfect Order" Concept
The "perfect order" concept itself is a logical extension of Total Quality Management (TQM). It demonstrates a company's commitment to delivering perfection to its customers. Perfect orders bring with them a host of significant benefits. Among other advantages, they let companies:
- Consistently meet or exceed customer expectations.
- Improve customer-service flexibility.
- Reduce order-cycle time.
- Reduce variable and inconsistent service.
- Create an environment for better decision making.
- Identify major bottlenecks and deficiencies within the order-management system.
Asked to define the "perfect order" in their environment, each partner company gave its own definition, which reflected the distinct needs and requirements of internal and external customers. Yet their definitions did share some common elements. Specifically, they concurred that a "perfect order" is delivered complete and on time, is accurate, and has a correct invoice.
Other metrics study partners include in their "perfect order" definition are direct-fill rate, orders filled complete, pick accuracy, information requests addressed through a single contact, on-time shipment, and on-time delivery.
Though the nature and frequency of perfect-order measures and other performance indicators differ by company, several metrics emerge as fundamental to the order-management process. And, while all of the organizations studied use these core metrics to varying degrees, the best-practice partner companies apply them more comprehensively than their sponsor counterparts. (See Exhibit 3.)
Tracking and Measuring the Perfect Order
Timely customer feedback is an integral part of measuring the perfect order. Yet key performance indicators sometimes are measured retrospectively because a customer may take as long as a month to submit feedback on an order. This causes delays in resolving any issues or problem areas, which invariably heightens customer dissatisfaction. One way of addressing this situation is to track and measure the percentage of perfect orders over time. The partner companies benchmarked conduct this "trend" analysis on a monthly basis.
Surveys and customer interviews represent other methods of tracking and measuring perfect orders. Two partner companies use formal surveys, for example, while another conducts on-site interviews.
In addition to defining what a "perfect order" is, the study participants described what a "perfect order" is not. Specifically, they outlined what contributes most to the imperfect order. Exhibit 4 shows the characteristics of an imperfect order, comparing the responses of the study sponsors and the partners.
- Continually improve supply chain integration and planning processes to improve stock availability.
- Work with carriers to improve consistency, which often means requiring these carriers to transact business via electronic data interchange (EDI).
- Form teams for measuring customer service, reporting on performance, and implementing process improvements.
- Establish a finished-goods process that is monitored for accuracy on an account/part number basis.
It's clear from the study findings that by adopting the "perfect order" concept, companies can more accurately gauge how well they are meeting or exceeding customer needs and expectations. With this knowledge, they are better positioned to actually deliver perfection to customers—both internal and external.
Leveraging Order-Management CompetencyWhen organizations can point to order management as a core competency—when they can consistently execute the perfect order—they stand to realize a significant competitive advantage. To cite one critical area, the ability to deliver time savings through order-management excellence is a major leverage point. Time can be a powerful weapon to reduce cycle time, cut inventories for both the company and the customer, improve profitability for both, and enhance customer value.
One of the primary objectives across all partner companies, in fact, is to enhance their order-management systems through reduced cycle time. All of the best-practice partners have launched recent initiatives to accomplish this goal, whereas only 29 percent of sponsor companies have done so. Study participants are cutting cycle time by:
- Developing online, real-time interactive information technology (IT) systems, which have all but eliminated human intervention.
- Merging departments and creating cross-functional teams. This serves to eliminate handoffs between groups, improve internal processes and communication, and establish a common point of contact for internal/external customers. By transitioning to a team-based structure, one partner organization was able to cut its cycle time from 12 days to two days for one team and one day for the other.
- Creating EDI programs.
- Implementing inventory-management and replenishment arrangements.
- Managing and replenishing customer inventories.
Order-management competency also can be leveraged to implement Just in Time (JIT), Quick Response (QR), and Efficient Consumer Response (ECR), which support and facilitate supply chain management and time-based competition. Such programs enable the manufacturer to become the low-cost supplier and expand the value created for customers. Properly applied, techniques like JIT and ECR can result in more accurate supplier forecasts while improving the timing and accuracy of production plans. These techniques enable the reduction of obsolete inventories and result in markdowns or write-offs of inventory at both linkages—manufacturer and customer.
For the customer, JIT, QR, and ECR can eliminate—or at least dramatically reduce—safety-stock and cycle-stock inventories. And this, in turn, enables the customer to shift management resources to other critical areas and eliminate non—value-adding activities.
Vendor Managed Inventory (VMI) is another technique being used successfully by the benchmarked companies. Seventy-five percent of partner companies and 60 percent of sponsors are involved in managing their customers' inventories. Exhibit 5 indicates the most typical methods study participants use to manage customer inventory more efficiently.
Information technology stands out as the most promising enabler for improving the order-management processes and achieving the desired competitive leverage. By using state-of-the art technologies such as EDI, e-mail (external and internal), Internet, intranet, Web page, and IVRU (Integrated Voice Recognition Units), the benchmarked companies are creating fully automated order-processing systems. They are dramatically increasing seamless transactions, eliminating functional silos, and reducing cycle time—while at the same time improving order accuracy. (Exhibit 6 shows technology usage among the sponsor and partner companies.)
- Better customer information.
- Real-time accurate inventory information.
- Real-time EDI.
- Increased seamless transactions.
- Elimination of functional silos within the organization.
- Development of career paths based on key job requirements.
- Completion of skills-assessment grids in teams.
- Ability to receive detailed reports not available before.
- Increased and improved communication flow.
Notably all of the study participants maximize EDI to receive, process, and transmit orders to and from customers. They are using this technology to automatically respond to customer inquiries relating to estimated ship/delivery dates, prices, service charges, and promotion allowances.
These companies keep abreast of current technology and organizational systems by attending industry conferences, benchmarking best-practice companies, obtaining customer feedback, and maintaining relationships with key technology providers. This makes them better equipped to adapt and adopt processes that enhance their order-management systems. Through performance measures, customer feedback (both internal and external), surveys, on-site interviews with customers, and benchmarking, these companies are able to document weaknesses in existing systems.
The Empowerment AdvantageAll study participants recognize the tremendous benefits not only of organizing their order-management process within cross-functional teams but also empowering employees to resolve customer complaints and inquiries without hand-offs or delays. Empowerment begins with selective hiring procedures and comprehensive training programs. It is fostered by sharing customer feedback with employees and aligning employees in cross-functional teams. The concept is reinforced through rewards and incentives.
Speaking to that human component of order management, one study partner said: "The greatest strengths of our order-management system come from the people who, day after day, drive the orders through to production. Our company shares the profits on a monthly basis and involves people throughout the company in visits to our customers to better understand their needs.
"It is very well understood throughout the company," this individual continued, "that unless our customers succeed, we will not succeed. In the event of a decision that the individual [employee] is not comfortable making alone, the team will be huddled and management team members sought if necessary. However, the key result must be the best attempt at satisfying the customer's needs, regardless of the size of the team sought to make that decision."
The Lessons LearnedA number of important "lessons learned" emerged from the APQC benchmarking study on order management. For one thing, aligning employees in teams across the entire order-management process increases awareness of customer needs and unites employees in their desire to provide seamless service. The team approach brings multiple benefits to both the customer and the organization itself. Internal morale rises to new levels, employees feel an ownership in the company, internal processes become more efficient, communication is enhanced, cycle time decreases, and performance goals are met more frequently. The bottom line is better service and a more satisfied customer.
The study also underscored the importance of empowerment. The best-practice companies are implementing highly effective hiring practices, training opportunities, career pathing, and reward and incentive programs. They're also comprehensively sharing information so that employees can better respond to customer needs and resolve any problem areas.
Another message that came though loud and clear is that customer service in general—and order management in particular—has become a pivotal competitive differentiator. With ever-expanding electronic and other alternatives available for acquiring goods and services, customers need a compelling reason to stay with a company. The best-practice organizations realize that their order-management processes can be that compelling reason.
The companies studied unanimously agreed that order management succeeded best when it was part of an integrated supply chain model. Functional silos only serve to hinder internal improvements and frustrate customers. The best-practice companies studied have moved aggressively to dismantle any remaining silos.
Finally, the benchmarking study leaves no doubt that top companies recognize the true competitive potential of order management and are working to make it a core competency. They understand that on-time delivery, consistently high-quality products at competitive prices, and strict adherence to customer specifications and desires—all hallmarks of competitive differentiation in the marketplace—start with successful order management.
One partner company summed up the message succinctly: "If our customers don't succeed, we don't succeed." World-class order management can help customers succeed.
Author's note: For information on purchasing the full order-management benchmarking study or to participate in upcoming studies, please contact the American Productivity & Quality Center at (800) 776-9676 or (713) 681-4020. Or visit the APQC web site(www.apqc.org).
| Author Information |
| Linda H. Mullinix is a benchmarking specialist for the International Benchmarking Clearinghouse, a service of the American Productivity & Quality Center in Houston. |
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