For executives battered by a tough economy, investment in innovation typically ranks low on the list of priorities. That’s especially true in supply chain operations, where fresh thinking too often starts and stops with new ways to cut costs, even in the best of times. But leaders who actively seek out innovation as they reengineer their supply chains can produce significant gains in revenues, profits, and market share. Innovating while competitors scramble to survive a severe economic downturn can produce immediate benefits and boost a company’s competitive position for the upturn. Innovation needn’t cost big money, but it does require executive commitment.
Consider the case of Cricket Communications Inc., a fast-growing mobile phone and services provider that offers prepaid, unlimited monthly phone service. Founded in 1999, the company was expanding rapidly but its ad hoc supply chain failed to keep pace. By the middle of 2008, Cricket was planning a major expansion that could potentially triple its subscriber base, including a move into several big-box store chains such as Wal-Mart and Dollar General. Our team, made up of consultants from Katzenbach Partners LLC (now part of Booz & Company) and Cricket management, engineered a radical overhaul of operations — which had become a near-term necessity.
Problems weren’t hard to find: Cricket’s supply chain lacked forecasting and replenishment tools, suffered data integrity issues, and used manual processes instead of modern software to extract information. As a result, top-down forecasts of customer demand were generally off by 30 percent to 40 percent, resulting in poor product allocation and serious stock shortages at retail stores.
Making matters worse, agreements with phone suppliers were loosely enforced. Late arrivals of new phones at the stores had become the norm. Repair costs, including unnecessary transportation costs, were out of control.
To address these problems, we created a cross-functional team of key executives and established forecasting as a core business process. New systems were created that significantly reduced stock-outs while rightsizing inventory. The accuracy of 30-day demand forecasts jumped to nearly 80 percent with immediate impact on the bottom line.
Improved forecasting was a major accomplishment in itself. From the start, however, we had agreed not only that our reengineering project would streamline the supply chain; we would also aggressively drive innovation inside the supply chain and wherever the supply chain touched other business functions at Cricket.
One of the biggest innovations reached all the way to the end customer. Analysis revealed huge hidden costs in Cricket’s “reverse logistics” process, through which phones are returned for replacement and repair. The main problem was a mismatch in incentives. Salespeople were rewarded for satisfactory customer transactions. If an out-of-warranty phone broke down, the sales rep found it hard to tell the customer that he or she was simply out of luck. So the rep accepted the phone for repair and the customer received a new phone free of charge, with Cricket bearing the entire cost. Absent the innovation imperative, a rules-based solution might have been devised that brought costs under control but left customers even more dissatisfied. Instead, the team came up with a more creative solution, and acted quickly to implement it.
What at first glance looked like a logistics and procedures issue was evaluated with possible sales and profit potential in mind. The result was a buyback program in which customers could trade in their broken phones for new ones at retail stores or trade in phones from competing cell carriers — a first among mobile service providers — and get a company credit of US$30 to $50. Significant costs were taken out of the system, but in ways that actually boosted customer satisfaction. Cricket customers were pleased with their new, low-cost phones and subscription numbers grew. In Philadelphia, for example, after the program began, Cricket retail locations added an average of 15 new customers a day compared with only 10 prior to the buyback plan. Some of this increase in market share occurred as new customers came in with old phones from competitors and signed up with Cricket. The program led to the transformation of post-sales operations from cost center to profit center, and energized the post-sales team to assume more of a leadership role in developing innovative programs for Cricket.