SBP 6d: Mass Alliances

This principle occurs because the production for individual customers is for their own consumption, not for the consumption of others. This is different from a traditional make-to-stock manufacturing processes, where production output usually goes to distributors or wholesalers who in turn sell to retailers or end consumers (individuals and/or businesses). Make-to-stock manufacturers thus typically deal with many fewer immediate customers than a typical service provider. Service providers usually work with actual consumers of the services, because each consumer needs to provide their own inputs to the service provider (according to the Unified Services Theory). With make-to-stock manufacturing, having few distributors and wholesalers simplifies establishing a close alliance with those distributors and wholesalers. With services, having many customers who each purchase a small amount spreads the potential for alliances very thin.

The idea of “supply base reduction” does not make sense with services where customers are the chief suppliers: Reducing customer-suppliers means reducing the number of customers! So, in fact, the service provider's objective is to increase the number of customer-suppliers. (A “customer-supplier” is a customer that supplies inputs to the production process.)

The inability, or unwillingness, to reduce the supply base makes it prohibitively costly to establish personalized alliances. Therefore, service providers may seek to establish mass alliances.

This Service Business Principle alludes to the fact that some industrial services are exceptions to the mass-alliance requirement. In fact, some industrial services have relatively few customers, allowing the close, personalized alliance relationships sought in manufacturing. For example, some consulting firms have only a small number of clients for a given office. Also, corporate accounting firms often assign accountant employees to only a few major customers. On a different scale, a custom home builder may only have a few customers at any given time, allowing a personalized “alliance” with those customers.

Given that it is impractical to form close working alliances with the large number of customer-suppliers, the service provider might need to decide on an alternate strategy: mass alliances.

A mass alliance is a more cost-effective surrogate for supplier alliances. Such an alliance requires establishing a relationship with the customer-supplier that provides mutual benefit for the supplier and the customer. An example is a membership relationship in which the supplier-customer assists the service provider in the service delivery process, and in return receives a benefit. An example is the Savings Club cards that are offered by some grocery stores. The customer is given a card that is scanned at the register at each purchase. This helps the grocery store by providing an accurate profile of specific customer purchases over time. (That data is useful in planning promotions and product offerings.) In return, the customer is given a special price on selected items–customers who do not use the card pay the regular price.

In prior Service Business Principles we discussed membership relationships, such as frequent purchase clubs. The membership relationships described in this Service Business Principle are of a particular type: the relationship requires that the customer do something to assist the service delivery process, in exchange for a benefit from the service provider.

Such membership relationships can be considered “alliances” that require less personalization and fewer resources to maintain than traditional alliances, thus being more cost-effective.

Sometimes it may still be impractical to have mass alliances with all of the customers who are supplying their inputs. In such cases, “ABC analysis” can be used to select those customers who provide the largest volume of demand for the service. The “A” customers might be the small group (perhaps 20 percent) who supply much (perhaps 80 percent) of the business. (The “Pareto Principle” indicates that 20 percent of a firm's customers will typically drive 80 percent of its sales.) The “C” customers are those individuals who provide very little business each. And the “B” customers are somewhere in between. In some cases, personalized alliances can be maintained with the “A” group, and mass alliances with the other customers. In other cases, mass alliances are set up with the “A” group, with no alliance with the others.

A medical office has many customers. The primary supplier is patients who supply their illnesses and injuries. “Alliances” come in the form of membership relationships such as Health Maintenance Organizations (HMOs) or Preferred Provider Organizations (PPOs). With HMOs and PPOs, the customer-supplier agrees to only see certain physicians and never see a specialist without first consulting a less-expensive primary care physician. In return, the HMO or PPO provides health care “insurance” to the patient (or to the patient's employer) at a lower cost.

An airline has many customers, who supply themselves and their baggage. One form of membership relationship is frequent flier clubs. However, these are not really “alliances,” since the customer doesn't agree to do anything different to assist the airline in the transportation production process.

One alliance strategy some airlines use is to form relationships with corporate clients who have large travel requirements (the “A” clients). The airline helps the client in planning her travel needs, avoiding last-minute booking of flights where possible. The airline might also help the client identify typically underutilized flights, to take advantage of potential discounts. This helps the airline in planning and capacity management, and helps the customer control her travel expenses.

With manufacturing, there are often relatively few supplied parts that represent a large portion of cost of goods sold. Manufactures may implement “supply base reduction” programs to narrow the number of suppliers, making it reasonable to maintain personalized alliances with each one. For example, Xerox was able to reduce suppliers in its worldwide copier division from over 5,000 to about 450. ¹⁾ By reducing the number of suppliers, manufacturers are able to devote the resources to maintain more intimate alliances with each supplier, including shared quality initiatives and certification. With consumer goods, the direct customers are often a distributers, of which there are relatively few. Manufacturers typically maintain a close relationship with these direct customers, but simply mass-market to end customers.

1. How many suppliers are there to the service production process over the course of a year, including customers who supply their inputs? Is it practical to establish a close “alliance” with each one? If not, why not?
2. What types of membership relationships are there between customers and the company?
3. Are there customer-company relationships that require the customer to do something to help the company deliver the service? What benefit is there to the customer? What benefit is there to the service provider?

Consider where your company fits on the following continuum.

If you have more than a few customer-suppliers, how might ABC analysis be used to target alliances? Devise a strategy for identifying “A” customers. Is there something that the “A” customers could do that would help your company in the service delivery process? Is there a way that you could modify the service process for the “A” customers for mutual benefit? How would an “alliance” be established with these customers? Would it be practical to establish mass alliances with all of the company's customers?