A Simple Soda: Penny Wise, Value Foolish

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Yesterday I flew coach on Delta Airlines from Atlanta to Chicago.  .  .  It was almost an hour into the flight when I realized that I had yet to be offered something to drink.  In trying to determine where the delay was coming from, I observed the flight attendants offering passengers drinks and I noticed that it was taking an inordinate amount of time when a passenger ordered soda.   This was because the flight attendant needed to fill a glass with ice, open the can, pour the soda into the cup of ice (the can needed to be tipped several times so that the liquid could be distributed slowly so as not to spill while filling the glass)  and then hand the cup (not the can) to the customer.  This process took twice as long (four times as long for diet soda since it “fizzes” more)as someone who simply ordered water (no bubbles to deal with) or beer, wine or other alcohol because the passenger was handed the entire container (bottle or can) to pour themselves.

Being a supply chain geek AND being somewhat obsessed by our recent focus on Value, I decided to apply our Value model.  I started with the flight attendant.  I asked her opinion of the soda process and was told that she had been instructed to pour the soda into a glass as opposed to offering the can because she can get two drinks out of one can – thereby accomplishing the “Intended Consequence” of cost savings.   If I were to guess, I would assume that this decision was made by the Controller (a key stakeholder in this case) – without consulting two other major stakeholders, the flight attendants and the customers.  Along with this strategy came a few “Unintended Consequences” such as a significant decrease in productivity, increased waiting time for passengers, decrease in the perception of the brand (Delta looks cheap) and poor customer satisfaction.  If I apply the Value model to this business problem I discover that the $.10 cost savings per can must be weighed against the destruction in Value (defined here as productivity, wait time and customer satisfaction).  Is it really worth it??? By the way, if I ask the flight attendant for the entire can of soda,  he/she will give it to me or if I ask for a second glass of soda later in the flight he/she will give it me.  So why not do it right the first time????

If you still don’t believe the Value model works try it on anything you buy – good or service and use the “Intended” and “Unintended Consequences” approach to see where Value is either enhanced or destroyed.  It really does works!   This is why we are rather vocal in explaining that taking a cost focus (traditional Strategic Sourcing), like my soda example, can actually destroy value.  In this case, the most important stakeholders, the flight attendants and the customers were not even considered. Does that sometimes happen in Strategic Sourcing?

Now let’s take this model one step further by taking a closer look at the Airline Industry as a whole. Over the last several years, the Airline’s have had a relentless focus on cost.  They have uncovered almost every possible source of cost savings imaginable and as a result have destroyed most of the convenience and/or enjoyment (VALUE) many of us experienced in flying.  In a traditional cost focused approach, which is considered “Best Practices”, I suppose next year the Airlines will be looking for at least another two cents to shave off the price of soda – isn’t that how Strategic Sourcing works?  Isn’t that how they are measured?  Is this model working for them??  Is it sustainable?  If not, perhaps it is time to move on to “Next Practices”.

In the spirit of exploring “Next Practices” I tested my theory on Value with a few of the passengers sitting around me on this flight.  I asked a number of business travelers (because these are frequent travelers) if they would be willing to pay more for a better experience (VALUE).   What I suggested was a nominal fee ($50 – $75) which could buy them early boarding (this costs the airline nothing), free drinks and WIFI (this costs the airline pennies), etc.  The response was a resounding YES – even if their company would not pick up the tab.  If what I heard was true then here is an untapped opportunity to increase revenue for the airline and VALUE for the customer.  This takes the “Best Practice” model of squeezing every last dime out the system (thereby destroying value) and turns it upside down.  Is creating VALUE for both sides sustainable?   Could it be a competitive advantage?  Could this approach be the “Next Practice” for Strategic Sourcing?  Should it? Without “Next Practices” we may find the next wave of cost cutting to include a charge for restroom use or a discount for standing as opposed to sitting during a flight!

As a side note, later in the flight, I overheard the flight attendants discussing this value idea.  They suggested that I send a note to the CEO of Delta which I intend to do.  I will keep you posted.

The debate continues around cost verses Value.  We welcome your comments and examples . . . . . . . . .

Anne

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Anne Kohler
Anne has been leading consulting and financial management organizations for over 25 years. She has extensive expertise in Strategic Sourcing, change management, contracting & contract management (both the buy side and sell side) organizational design and supply chain management. Anne has a passion for collaborating and educating her clients while helping them to uncover hidden value in their organizations. In addition, Anne has been named by Supply & Demand Chain Executive as a “Top 100 Provider Pro to Know” every year since 2007 and a 2013 Top Female Supply Chain executive.
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7 Comments

  1. nicolashummer on

    Anne,

    Some good points. What do you do if your customers are the ones demanding a low-cost approach? Before airlines were deregulated, the only way to differentiate was by service and products offered. After deregulation, it was a race to the bottom as customers demanded ever cheaper fares. Look at the popularity of low cost carriers like Southwest and JetBlue over the last two decades. The cost to fly cross-country today in coach can be as low as $300; the cost to fly cross-country 50 years ago was also $300 (roughly the price of a used car).

    Now customers are complaining that the airlines are responding to what customers think they want – the lowest cost fares without sacrificing safety or timeliness. The airlines have to make money somehow. So if you can’t raise prices or sacrifice on quality, you have to take a cost-cutting approach. What do you do when your stakeholders don’t know what they want?!

    • Nic:

      Thanks for the comment. You raise some valid points. In my opinion there are two very different sets of travelers out there – the leisure traveler and the business traveler. The low cost airlines are more geared toward the leisure traveler but I can tell you from personal experience that even for those travelers the cost cutting has gone too far. I was not joking about where the cost cutting is taking us – paying for restrooms and discounts for standing are truly under consideration. I will reiterate that cost cutting is not a sustainable strategy and is actually destroying value.

      The airlines need to talk to the customer. I am a frequent business and leisure traveler and have never been asked for my input. Business travelers are much less cost sensitive than leisure travelers but are subjected to the same ridiculous cuts. The best way to understand what your custoner values is to ASK THEM. Maybe they need to ask????

  2. As a flight attendant I can say most certainly the delay was simply with the particular flight attendants. I found it odd that it was almost an hour into the flight as the flight from Atlanta to Chicago is generally only about 1 hour and 30 minutes give or take. Anyway when I used to work on a small plane and I was the only fight attendant I would give out the complete can on longer flights. I stopped this pratice do the fact that I end up receiving better than 50% of the cans back half full, therefore it was a complete waste. When you only have 50 people on a plane and on average half are giving the cans back with beverage in it then there is no reason to give out full cans as it is a cost issue. Additionally if you have an aircraft that carriers 125 in coach and they plane is catered for a full can for each passenger each way, it would be catered at a minimum of 250 cans of beverage, and to try to accomodate different preferences it would probably need to carry about 300 to 325 cans. That is a lot of weight to be carried that is not neccessary. If you take the same plane and consider half a can each passenger that would only be 125 cans of beverage. Consider how much a twelve pack of soft drinks weighs and multiply that by the number of flights and that is an incredible amount of weight that is being carried unneccesarily. We are literally be talking in the neighborhood or 10’s of millions of dollars if not hundreds of millions in fuel savings annually for an airlinethe size of Delta. Additionally with only one exception that I am aware of all airlines in the industry offer beverage by the glass instead of an entire can. In closing, I strongly disagree that it would be more cost efficient to simply give out an entire can.

    • Jeff:

      Thanks for your comment. First, let me say that as a frequent flyer, I have the utmost respect for how difficult the flight attendant’s job can be and how each cost cutting measure the airlines take makes that job even more difficult.

      On this particular flight I am not exaggerating either the timeliness of the services (it is a process problem NOT incompetency) or my conversations with those around me. I actually did consider the weight issue – which is valid – but seems to be a convenient excuse for almost every cost cutting measure lately, including AA’s reduction in reserve fuel to save on the carrying cost associated with the extra weight.

      The point I was making is that the focus on cost alone (and I chose a simple example such as soda) can prevent a company or an industry from exploring options that actually add value (revenue)for the company as well as for the customer (a better experience). I cannot think of any recent move by an airline that added value to my experience. I can, on the other hand, find numerous examples of destruction in value for me personally. By the way, I am assuming that flight attendants have not only been impacted indirectly by this cost focus but also directly in terms of fewer workers, lower wages, etc.

      It seems to me that it could be a win all the way around (company, employees and customers) if the airlines could find a way to move away from focusing on cost and move toward value.

  3. I agree, in general, with your argument that airlines can offer additional amenities for a upcharge and many do. Nicolashummer’s point that the airlines have too many conflicting demands is a good one. Try flying some of the higher end airlines like Virgin or fly in business and pay the difference in price. That’s the choice we all have and can make. Jeff’s comments are also on point. Too many passengers want it both ways. Perhaps we should go back to a regulated industry with all fares essentially identical? Then, airlines would compete, as the used to, on the level of service, not price. And, we’d do away with the need for extra fees for checked luggage, overhead stowage, and the like. In the meantime, if more business travelers would vote with their wallets when buying tickets, the airlines would most likely respond by, perhaps, scheduling “All Business” flights with a higher fare and higher service levels. The question is, who would buy seats on those flights?

  4. Todd Snelgrove on

    Lets remember a big difference here. …. an Airline is not a Low Cost Carrier… They are a Low Price Carrier…. I hope the big airlines find way to take Costs out and increase Value and make more money…. it can happen.

  5. Andy Moorhouse on

    Back in 1987, American Airlines infamously eliminated olives from its first class salads and saved £50,000 dollars per year.

    Why don’t low price airlines stop serving fizzy drinks and only serve hard liquor – then the cups will be quicker to pour; passengers will leave the plane much happier; and the airline will carry a smaller liquid volume thus saving fuel.

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