Start grasping the net impact of new services
The combination of an increasing relevance of the online channel and the power of advanced analytics has brought new opportunities for COOs (Chief Operating Officers) to position their departments as value centers.
In this context, the concept of ‘value of service’, e.g., understanding the net impact of providing same day deliveries, emerges as a powerful tool to improve the clarity of discussions in organizations and to bridge the gap between marketing and operations. This paradigm contrasts with the traditional positioning of having operations merely satisfying marketing requirements at the lowest cost.
For years in the offline channel, the dialogue between marketing and operations was often dominated by the trade-off between in-stock rates and inventory turnovers. In the online channel, the natural extension of this organizational posture was to add speed as another performance indicator. This reactive stance hindered the fact that operations are even more central in this online world and that more value drivers (such as quality of packaging, preciseness of delivery, and flexibility of delivery slots) become as important to factor in the aforementioned dialogue. More interestingly, the rising power of advanced analytics makes it now possible to anticipate the quantitative relation between value drivers, customer lifecycle value and supply chain costs — ‘value of service’, avoiding misunderstandings and therefore, providing more alignment within the organization.
Customer expectations in the online setting have made it hard for companies to find a way to break-even. By acknowledging the ‘value of service’, it is possible to increase the pace and efficacy of testing new service models that may result in a future competitive advantage. Moreover, better service trade-offs can be attained by discussing simultaneous levers, such as supply chain costs and delivery lead-time. To apply this idea, cross disciplinary teams involving operations, marketing, and analytics members must be set up to jointly determine the value drivers to analyze, the success metrics to use and the most suitable methodologies to apply.
We have performed extensive consulting and research with online players and other companies in different retail sectors. In a particular case, after performing several econometric analyses, we ended up justifying the opening of several distribution centers, based on the increased revenues they would generate through better packaging, delivery preciseness, and improved lead times.
The work of Marshall Fischer and others (Marshall L. Fisher, Santiago Gallino, Jiaqi Xu, 'The Value of Rapid Delivery in Omnichannel Retail') was a stepping stone in terms of methodology and scope to pursue a central idea — there is a hidden opportunity of improving e-commerce businesses when understanding operations as a top-line enabler.
Written by Pedro Amorim (LTPlabs’ Co-Founder & Professor at Faculty of Engineering of the University of Porto) & Paulo Sousa (Manager at LTPlabs).