A major change is brewing in the basic materials industry in Germany. Over the past decade, most suppliers of basic industrial products—metal, chemicals, wood, paper—have focused their strategies on cutting costs and improving quality. However, faced with flattening cost curves and virtually identical product quality, leading companies have started to take a fresh look at how best to compete. They have turned their attention to their customers—and to their customers' customers.

The new approach reflects a radical change in mentality. Manufacturers of basic materials used to see themselves as selling commodities by the ton to buyers on the opposite side of the negotiating table. Now, they are beginning to discard the notion of hard and fast boundaries between themselves and their customers. The new watchword is customer integration: viewing supplier and customer as a single entity and working closely together in order to minimize transaction costs and maximize value to the next customer in the chain. In a sense, customer integration is the process industry's smart version of business-to-business marketing.

Customer integration does not come easy. Developing a genuine partnership with customers takes time and resources. Yet this is precisely the reason why the approach works so well in the basic materials industry. Most of its manufacturers serve a limited number of large customers. By targeting perhaps 20 to 30 key customers for this new kind of close, crossfunctional collaboration, a manufacturer can reap enormous benefits while keeping efforts at a manageable level.

What are the benefits?

In this commoditized market, where lasting differentiation is generally thought impossible to achieve, customer integration can lead to a sustainable competitive advantage. Suppliers following this approach have been able both to boost profits and to promote innovation.

One medium-sized chemical producer in Germany increased its return on sales by 5 percent in two years. It approached 20 actual and potential key customers and developed 20 to 30 measures for optimizing the way business was transacted with each one. The result: the company's total turnover rose by 20 percent.

With one customer, logistics processes were completely reorganized: the chemical producer switched from sack to more cost-efficient silo delivery and eliminated redundant quality control on the customer's part. Sales with that customer went up by 50 percent. Another buyer increased its order volume by 20 percent after the producer changed a product formula to suit its needs. Joint R&D projects and joint efforts to penetrate new markets also helped cement the relationship between the two companies.

A potential customer was won over by the chemical producer's offer of technical support for a new production process that it was about to introduce at its plant. "You're the first supplier that ever used the words 'customer value,'" was the telling comment it made when placing its order.

Customer integration not only improves suppliers' profits, but pays off for buyers too. The chemical producer's introduction of the silo operation helped one customer slash its logistics costs. The new product formula enabled another to improve the quality of its own products and to reduce waste. The joint efforts in penetrating new markets not only saved this customer money, but also opened up additional sales opportunities.

How deep the cooperation can go and how beneficial the approach can be for both sides is illustrated by another example. An aluminum producer and its key customer completely redesigned the way they do business together. Before the redesign, aluminum casting alloys were produced as ingots by the supplier. These ingots were then transported to the customer, where they had to be melted down again in order to be processed into castings.

Today, the aluminum is transported to the customer in molten form in specially designed containers. The result: entire process steps have been eliminated for the supplier as well as the buyer, and transaction costs have been axed. Since aluminum can be kept liquid for only a short time, the two companies now coordinate their respective production processes very closely—the ideal basis for a long-term trust-based partnership.

Close collaboration with customers can not only improve profits, but also drive innovation. Searching for ways to expand its business, a small German producer of sheet zinc for the building trade took a close look at potential user needs by talking to architects, roofers, and final customers. On the basis of these interviews, it developed a new alloy for products such as roofing sheets and drainpipes that boasts considerable competitive advantages. The alloy is more durable than before and, thanks to pre-weathering, its color is an even dark gray that will not change—unlike traditional zinc products, which acquire a patina over time.

In addition, the zinc producer introduced special services for intermediate and end customers, including information materials and videos that not only describe the advantages of the new product but also give detailed instructions on its application. Since the launch of the new alloy, sales have soared and return on equity has steadily increased.

Excellence in customer care confers other benefits too. A side-effect not to be underestimated is the impact it can have on motivation within a company. Basic materials industries that have for years been characterized by downsizing have a hard time keeping employees motivated. Attracting and retaining the best people has become a real challenge.

By shifting its focus from cutting costs to exploiting innovation, a company can develop a much more positive identity

By shifting its focus from cutting costs to exploiting innovation and the potential for growth, a company can develop a much more positive identity that will eventually translate into an attractive and distinctive corporate image. Amid the increasingly fierce competition to lure the best talent, such an image may turn out to be an important asset.

Only the company that moves first will be able to define the rules of the new game and establish a special relationship with customers

In any attempt to realize the potential of the new market approach, time is of utmost importance. Only the company that moves first will be able to define the rules of the new game and establish a special relationship with customers. For others, the risk is high. Once a competitor has moved, the strategic window will be closed.

Consider what happened in the case of two German companies in a highly competitive market. Several years ago, the smaller of the two introduced a new way of dealing with customers. It invested a great deal of time and money in talking and listening not only to potential key customers but also to the next customers in line—the end users, in this case. Detailed questionnaires were used to find out what type of product with what kind of specification the buyers really needed. The company then tailored its products accordingly.

Within six months, market share started to climb. So the bigger competitor tried the same approach—and failed. Why? Customers were just not interested any more. They had already been locked in by the supplier that acted first. Even now, years later, this supplier is still holding on to its high market share.

The customer integration concept aims to build real partnerships by creating a genuine win-win situation

Approaching a customer proactively might be prudent for another reason. If the customer were to move first, it could opt for a totally different game, playing suppliers off against each other and forcing them to cut their prices and accept lower margins. While this Lopez game has clear winners and losers, the customer integration concept aims to build real partnerships by creating a genuine win-win situation.

Doing everything right for your customer—and its customer

In coming to grips with this new approach, a basic materials manufacturer must understand that the key to higher profits is to enable its immediate customer to serve its own customer in a superior way. What does the immediate customer need in order to be successful in its own market? To find an answer, the supplier must address the full range of individual customer requirements in a much more sophisticated and detailed way than ever before.

First, it is essential to identify the factors beyond quality and price that influence the purchasing decision. Time and again, interviews with customers reveal that salesforces typically overrate price while underrating other key buying factors, such as commercial and technical support, logistics, and waste disposal. What specific product and service elements create value for the immediate customer and for the next customer? Where are the "break points" in delivering these elements that will make the difference for the customer?

Steps can then be taken to develop optimum ways of satisfying customer requirements. "Optimum" means not just trying to be as good as the best competitor, but trying to close the gap between the current level of meeting customer needs and the ideal level—100 percent customer satisfaction.

Order processing offers a simple example. One steel supplier regularly took two days to respond to customer requests. Competitors were much faster, sending their response out within a day. Instead of merely trying to reach this benchmark, the supplier aimed for 100 percent customer satisfaction.

It reduced the number of process steps by more than half and introduced a new production planning system with an interface to the sales department. Almost all customer requests can now be answered on line, and it is even possible to give the exact time of delivery. Interviews conducted with buyers beforehand had shown that such a rapid response was a real break point, since it enabled them to react much more quickly to requests from their own customers.

In a further case, insufficient coordination between the steel supplier and another buyer sometimes led to material shortages at the latter's plant. With competitors guaranteeing delivery within 24 hours, the supplier decided to go a step further. It took over the responsibility for logistics entirely. Now, a gauge attached to the customer's silo regularly measures the amount of inventory carried. This data is transmitted via modem directly to the supplier, which can then plan delivery accordingly. If this break point—offering superior reliability and lower personnel costs for the customer—had not been found, the supplier would have lost sales volume.

In order to measure how far customer integration has progressed, organizations must adopt new criteria:

Customer penetration instead of market share. The high capital cost of basic materials industries means that tonnage has been the traditional measure of success. In order to increase their market share, companies have often tried to win as many customers as possible, sometimes at the expense of exploiting individual customers' sales potential to the full.

Customer integration takes a different approach. It looks at a supplier's penetration of its core customers. The questions to be answered include: How many customers does the supplier serve? Which customers are the important ones, and what percentage of sales do they generate? How much is known about the customer's customer? What share of the relevant purchases of a key customer has the supplier managed to secure?

Only this concentration on key customers will allow a supplier to invest the necessary resources to develop true customer integration. Moreover, such a focus is in line with the tendency of many companies in the automotive industry and elsewhere drastically to reduce the number of their suppliers.

Intensity instead of frequency of customer contact. The breadth and depth of customer contacts indicate how intense and thus how serious a collaboration is.

Breadth of customer contact. In the basic materials industries, contacts between suppliers and customers have normally been limited to day-to-day business such as order acceptance and delivery. Indeed, quite a few manufacturers still possess an R&D department that has never met a real customer.

Customer integration entails radically expanding and intensifying customer contacts. A supplier should evaluate, among other things, how many different contacts it has with a customer, how regular these contacts are, which levels of the organization are involved, and what subjects are covered. In companies striving for excellent customer care, top management will visit customers on a regular basis to talk about their needs face to face. Technology and quality issues are discussed in joint crossfunctional workshops held at least twice a year.

Depth of customer contact. The quality of customer contacts is another indication of the extent of customer integration. Do the R&D departments of both companies merely share information, or do they actually develop new products and applications together? Do supplier and customer discuss the pros and cons of delivering goods by train or truck, or do they talk about reengineering the entire logistics process to benefit both sides?

Satisfaction of individual customers instead of general customer satisfaction. Feedback loops must go beyond traditional surveys on customer satisfaction. Customer integration entails establishing regular review meetings with individual customers in order to monitor whether agreed improvements have actually been achieved. A supplier must assess its performance against all key buying factors. In which areas is it on a "100 percent right" track? In which areas is it perceived as doing better than the benchmark? In which areas does it rate the same? Finally, in which areas is improvement still needed, and what are the break points to aim for?

Appealing as this approach is, many suppliers are still hesitating. One reason is the mentality of technology-oriented basic materials manufacturers. They share a deep-seated anxiety about revealing trade secrets such as material composition or process improvements. This fear harks back to the days when a company's quality advantage had to be protected at all costs. While the risk of revealing proprietary knowledge may still be real in some cases, it is often overestimated.

Customer integration is by nature a game of give and take, with advantages for both parties

In any case, customer integration is by nature a game of give and take, with advantages for both parties. Once the seeds of partnership have been planted, strong roots will quickly grow and intertwine, making it almost impossible for competitors to break supplier and customer apart.

Enabling your organization

This new way of looking at a market has important consequences for manufacturers. In order to reap the benefits, they must realign their organization and processes according to market requirements. Traditionally, basic materials manufacturers have been organized along functional lines. In the most extreme cases, production units are still totally isolated from the market, while independent wholesalers and retailers are responsible for handling marketing.

Implementing the new approach will involve creating customer service teams that are dedicated to individual customers and that comprise representatives from sales, R&D, production planning, quality assurance, and logistics. These teams can compile technical and commercial information on customers and generate many more ideas to improve customer contact than would emerge from a marketing perspective alone. Our studies have shown that in most cases, approximately two-thirds of the potential for improvement is based on technological or logistical considerations, and only one-third on sales activities alone (such as exploiting leeway in pricing). In fact, these customer teams should see themselves as a kind of customer predevelopment lab, charged with finding ways to improve the supplier's products in order to help the customer be more successful in its own market.

Customer service teams meeting at regular intervals—perhaps even daily—to exchange information can build a consistent customer orientation and spread it throughout their companies. In this way, such teams can develop into entrepreneurial taskforces. They must be staffed with people of high caliber and provided with extensive training and coaching. Members need technical knowledge as well as a thorough understanding of the market and of the entire value chain.

Teams should hold regular workshops with individual customers, represented by their own crossfunctional teams. The goal of these workshops is to identify customer wishes, to generate and discuss ideas for improvement along the value chain, to monitor the implementation of ideas, and to measure the benefits. This latter activity is vital, helping to prevent a situation where a supplier increases its complexity without adding any real value to the chain. Although the membership of these joint teams will vary according to the customer and subject under discussion, intermediate and end customers should generally be included.

System support is a prerequisite if customer service teams are to succeed. A market/customer database should systematically capture and process all the information needed to create transparency across the whole value chain. It should also incorporate customer-specific information such as terms and conditions. Team members must be granted easy access to this information. A sales planning/management system should establish qualitative and quantitative sales objectives and strategies. Finally, success in implementation must be monitored.

Outlook: From customer integration to chain integration?

The transcending of interfaces need not stop at the interface between supplier and buyer. Seeing the enormous benefits of customer integration, buyers might want to use the concept with their own customers too. Eventually, this new kind of partnership might spread all the way down the value chain to the end customer. This virtual chain integration, triggered by the suppliers, would again make it possible to improve, shorten, or eliminate process steps, and thus to minimize total system costs as well as maximize value to the end customer. A similar development has already taken place in the automobile industry, where it was initiated by the OEMs.

Although chain integration in the basic materials industry is still a long way off, some companies are moving in this direction. One smelting plant founded a joint venture with its customer, a further processing company, for the disposal and recycling of scrap. It collects production scrap from both the processing company and its final customers, and recycles the scrap back to the smelting plant. This solution benefits all the participants in the value chain: the smelting company has broadened its raw material supply, and the intermediate and end customers can dispose of their scrap in a cost-efficient and ecologically sound manner.

This transcending of boundaries within a value chain mirrors the way that companies' organizational structures have changed over time. In Tayloristic organizations, each function had a clear and distinct task. Optimization approaches focused on individual functions, sometimes at the expense of the whole business. Nowadays, companies tend to organize themselves around core processes, deliberately cutting across traditional functions.

Customer integration could be the starting point in taking this process orientation one step further and abandoning the strict boundaries between the companies that contribute to a value-adding process. Perhaps one day, competition will take place not between individual companies, but between value chains. A whole new game could be on the horizon for the entire industry.