fbpx
Back

January 1, 2005

Satisfaction Guaranteed

Moving beyond basic transactions to provide higher-margin value-added services appeals to companies looking for closer ties to their customers. If CRM represents a way to break out of a business cycle driven solely by price, why has the metals industry been slow to adopt it?

If there's one clear thing that Dan McCallin has learned after more than 30 years in the metals industry, it's that competing on price is a dead-end street. The president of Timberline Steel, a Commerce City, Colorado, company that distributes steel products and handles computer-controlled profile cutting, sawing, shearing and punching, believes that developing long-term relationships with customers is all about adding value. “The right products and services along with outstanding customer service are the keys to success,” he says.

Over the last five years, Timberline has worked hard to strengthen its relationship with customers. It has located branch offices close to customers, assigned sales reps to smaller, niche territories so they can connect with customers more effectively, and developed a sophisticated customer relationship strategy to understand its customer base by size, segment and profitability. That way, Timberline can devise specific tactics—including product development, design assistance and customization—that fit the customer's specific requirements. “We can provide the service and support that each customer needs,” McCallin says, stressing that this customer focus has helped retain customers, even when times are tough.

VALUE-ADDED MINDSET
Finding new ways to ratchet up loyalty and sales has become a mission—some might say an obsession—in the corporate world. And it's not difficult to understand why. Fewer than 50% of customers say the companies they do business with deserve their loyalty, according to Frederick Reichheld, author of Loyalty Rules! (Harvard Business School Press, 2001). What's more, “typical firms lose half their customers in fewer than five years, and customers don't detect when they are really receiving superior value,” he says.

In the metals industry, customer relationship management strategies have had a mixed reception. In theory, CRM can help stabilize relationships—even during downturns and periods of intense pricing pressures—so it has an obvious appeal to companies looking to move beyond basic transactions and provide higher-margin, value-added services.

This strategy requires organizations to hone in on key issues—customer-facing business processes, how to process orders and transactions, provide engineering and design expertise to add value, and implement technology, such as CRM software, to streamline workflow and radically improve internal processes. But analysts and industry executives say that many companies in the metals industry have lagged behind the migration to CRM—especially when it comes to software and systems that support a customer relationship initiative.

For metals companies, both practical and cultural reasons can stand in the way of developing an effective CRM strategy. Too often, says Rob Desisto, a vice president of market research at consulting firm Gartner Inc., Stamford, Connecticut, companies in the metals industry do not have the IT systems and business processes in place to tap into the full power of CRM, and that's not likely to change quickly without greater investment. In MSCI's 2003 Information Technology Survey, 40% of respondents said that their companies spend less than 0.49% of annual sales revenue on IT, while 37% spent between 0.5 and 0.99%. In addition, just under 30% of those responding said their company even had an IT budget and training plan for users. Without a willingness to move beyond existing systems toward a best-fit technology, metals companies may not gain CRM's purported benefits.

What's more, some companies do not have the business processes in place to use CRM effectively, while others are reluctant to change comfortable, time-tested business practices for a technology solution that could just be this-year's buzz word.

“[The industrial sector] has a very different notion of CRM than consumer-oriented retail operations,” Desisto says. “It means allowing customers greater visibility into orders, status and scheduling. It means being more efficient and offering the right combination of services and pricing—based on a particular customer'sneeds.”

KNOW THY CUSTOMER
Timberline Steel uses activity-based costing software to identify which customers are highly profitable, moderately profitable, profitable, and unprofitable. That, in turn, has led to an examination of how best to approach these different segments. After spending a year interviewing customers to understand their needs and desires, McCallin concluded that the most important thing to focus on is high-margin services for top customers. “The best opportunity to expand our business and profitability is to expand relationships with these top-tier customers,” he says.

As a result, Timberline launched its own fabrication division and purchased appropriate equipment so it could offer more comprehensive services, such as flame/plasma cutting, sawing, shearing and first-step fabrication.

The service center also began to focus its internal resources on the top 10% of customers that fall into its most profitable segment rather than providing equal time and resources to each one. Today, the company has boosted the volume of steel shipped to top-tier customers by 30% and reduced its unprofitable customers (those that merely cover the firm's overhead) by more than 40% by converting many of them to higher margin products and services. “We continue to have relationships with all customers, but we now provide the appropriate products and services,” McCallin says.

And by shortening the cycle time for a new product or helping an organization manufacture or assemble more efficiently—something that Timberline has embraced, for example—it's possible to charge a higher price and achieve greater profits.

STRATEGIC FOCUS
Three basic levels of CRM exist, says Colin Masson, a research director at Boston-based market research and consulting firm AMR Research.

At the most basic level, companies focus on providing greater flexibility on orders. They might speed up the manufacturing and delivery of an item by two or three days or give a good customer 60 days rather than 30 days to pay a bill. While this approach can benefit the customer, it also can complicate matters for the supplier.

At the second level, the supplier begins to provide service differentiation by assisting with things like inventory controls and basic design elements. This stage helps create a value chain, Masson says. The third level involves tight integration between companies, so that engineering, design and technology support are possible. This final phase creates a tighter relationship and, usually, a higher level of profitability.

Masson says that the metals industry has lagged behind many others in adopting effective CRM strategies and practices mostly because of the transactional history of the business. “Many companies have not moved beyond the concept of competing on price,” he says.

That's changing, as companies turn to price management techniques, product design collaboration, custom configuration solutions, supply chain management services, and begin working with customers to facilitate lean manufacturing and kanban techniques (a production management system that originated in the automotive industry).

“There are a significant number of companies that recognize the value a supplier can provide and how it can help them cut costs and become more productive,” says Mike Coulson, Midwest regional manager at A.M. Castle & Co., a Franklin Park, Illinois, company that provides highly engineered materials and value-added processing to a range of industrial companies, including numerous large enterprises. He estimates that about 50% of the company's customers look for value-added services.

With more than 50 locations in North America and $543 million in 2003 sales, Castle knows that business as usual will not get the job done—particularly when dealing with companies in aerospace, automotive and other industries that require a high level of engineering expertise. Over the years, the company has focused on specialized engineering, training and logistics capabilities that move beyond a transactional sale. Now, Castle is migrating to a more sophisticated CRM system that will allow teams not only to track customers and analyze accounts, but also to share cost savings and service data about customers. “The more that salespeople, managers and others know about the business and the needs of customers, the greater the odds for success,” Coulson says.

HUMAN TOUCH
Another enterprise striving to boost its customer relationships is Marmon/Keystone Corp., a Butler, Pennsylvania, company that manufactures and distributes pipe and tubing products. Salespeople have assigned accounts and use a home-grown CRM application to track leads and customer activity. “That allows everyone to share information and maintain continuity on any given account,” says Norman E. Gottschalk Jr., president of Marmon/Keystone. “It's especially valuable if someone is out of the office on a particular day and another account rep has to take over.”

Customers want streamlined systems but also appropriate human contact, so Gottschalk has turned to an e-business platform to streamline orders. Marmon/Keystone's system can access orders directly from customer offices using electronic data interchange (EDI)—speeding the process and saving time and money. He also has tried to “uncommoditize” products as much as possible.

“If we can handle the first- and second-stage processing on our end and deliver something that fits a customer's needs, we're able to distinguish ourselves.” And that, he says, can help maintain the relationship through periods of industry volatility and turmoil.

So far, the initiative has paid dividends. Value-added sales—mostly first- and second-stage processing—now accounts for about 10% of the company's sales, and customers using these services are more loyal. In some cases, Marmon/Keystone supplies finished products rather than the raw tubing it provided in the past. “Our goal is to make it as easy as possible to do business with Marmon/Keystone,” Gottschalk says. “We want to offer systems that allow customers to place orders in any manner they desire—including direct order through electronic systems.”

The way Desisto sees it, an effective CRM initiative must evolve beyond front-end ordering and salesforce automation systems. “It's all about establishing an infrastructure and using technology and business processes to raise a company's visibility and perceived value. Within the metals industry, any manufacturer or distributor that can help its customers plan and run their businesses better is at an advantage.”

 

THE CUSTOMER VIEW

Developing an effective customer relationship management strategy is no simple task. Every customer—and relationship—is different and customizing offerings for specific clients is essential.

Bob Ivey, supply chain manager for LCN, a Princeton, Illinois, manufacturer of commercial door closers, says that his company's relationship with A.M. Castle & Co. has thrived because the focus is heavily on customization. “Value engineering is important and A.M. Castle has been willing to work with us to streamline processes and reduce costs,” he says. For example, earlier this year Castle re-evaluated bar stock sizes and suggested alternate sizes that reduced LCN's scrap.

But that's just the start. Castle delivers inventory on a just-in-time basis, and it makes sure that customer representatives are available to address customer concerns. “In today's business environment, it is essential to do business with companies that are responsive,” Ivey says.

At Rio Grande Co., a Denver, Colorado, company that distributes building materials and services to the construction industry, division manager Dave Wenman says that “a business relationship should be mutually beneficial and supported with open communication.” Timberline Steel has worked with Rio Grande Co. to introduce processes that help each company carve out greater profits.

Earlier this year, for example, a meeting between the two companies resulted in a complete reengineering of a key manufacturing process. Rio Grande Co. challenged Timberline to shorten the delivery lead time to its customers from two-day service to next day. That required Timberline to provide raw materials on a timely, predictable basis. Together, the companies devised a labeling system that identified products and simplified manufacturing.

“When a supplier understands our best interests and works with us to provide superior service, it is the basis of a solid and ongoing relationship,” Wenman says.

 

 

U.S. CRM SPENDING: TOP 5 INDUSTRIES 2005–2006 (FORECAST)
Sector 2005 2006
Manufacturing
Financial Services
Retail and Distribution
Business Services
Government and Education
$2,135
$1,597
$1,153
$594
$569
$2,338
$1,729
$1,250
$652
$620
Source: “Worldwide CRM Spending,” Aberdeen Group, June 2003

 

 

U.S. CRM SPENDING BY INDUSTRIES 2006 (FORECAST)
Business Services
Retail and Distribution
Financial Services
Manufacturing
Government and Education
Transportation and Utilities
Information Technology
Construction
Other
Health Care
Agriculture, Forestry, Fishing, Hunting and Mining
Telecommunications
7.1%
13.6%
18.8%
25.4%
6.7%
6.4%
5.5%
1.3%
4.4%
5.6%
0.4%
4.7%
Total U.S. Spending
 
$9.19 billion
Source: “Worldwide CRM Spending,” Aberdeen Group, June 2003

 

 

7 WAYS TO BOOST CRM VALUE
  1. Establish clear business goals by surveying customers and understanding their needs and requirements.
  2. Stay focused on business processes and goals rather than technology.
  3. Integrate CRM systems and make data available across the enterprise.
  4. Look for ways to enhance the value of the customer relationship. This can include adding services, such as design and supply chain integration, or collaborating on custom products.
  5. Educate and train employees about the value of a CRM initiative. If the enterprise is adding a CRM application, ensure that employees know how to use it effectively.
  6. Turn to analytics and reporting applications for key data to drive the decision-making process.
  7. Ensure that executives support the CRM initiative.

 

 

THE REAL PRICE OF TECHNOLOGY

Although overall spending for CRM technology will grow to $17.7 billion in 2006 from an estimated $13.7 billion in 2002, according to market research firm Aberdeen Group, CRM software in itself does not guarantee success.

An effective CRM strategy isn't just about technology—it's about establishing business processes and strategies that provide the right products, services and value to customers to maximize the bottom line. The end goal, Gartner Inc. Vice President of Market Research Rob Desisto says, is to have a single view of a diverse array of customers, understand which ones are the most faithful and valuable, and put together a plan to serve the various market segments effectively and profitably.

However, the impact of technology only begins with its price. In some cases, it has proven to be more trouble than it's worth. A few years ago, Timberline Steel invested in a sophisticated CRM software solution to help manage the intricacies of today's business environment. It didn't work as expected. “We found that it was too complex and time consuming and turned attention away from the core issues that managers and sales people needed to focus on,” says Timberline Steel President Dan McCallin.

While Timberline has continued to focus on building relationships, executives now use a mix of less sophisticated software tools—including a contact management system—to examine each customer's buying patterns and profitability.

 

 

GLOBAL CRM SPENDING 2005–2006
 
  2005
  2006
REGION
$US MILLIONS
PERCENT INCREASE
$US MILLIONS
PERCENT INCREASE
North America
Europe
Latin America
Asia/Pacific Rim
Middle East/Africa
$9,030
$4,490
$371
$2,094
$324
8.5%
 
7.7%
 
6.3%
 
11.2%
 
7.3%
 
$9,833
$4,811
$394
$2,318
$346
8.9%
 
7.2%
 
6.3%
 
10.7%
 
6.6%
 
Total U.S. Spending
$16,309  
$17,702
Source: “Worldwide CRM Spending,” Aberdeen Group, June 2003