Chapter 3 Logistics Customer Service Strategy 1 1

Chapter 3 Logistics Customer Service Strategy 1 1

Customer Service · Customer service is generally presumed to be a means by which companies attempt to differentiate their product, keep customers loyal, increase sales, and improve profits. · Its elements are: - Price - Product quality - Service · It is an integral part of the marketing mix of: - Price Product Promotion Physical Distribution Customer service here l. Creating value, loyalty and satisfaction through supply chain activities CR (2004) Prentice Hall, Inc. 2

Customer service is a process for providing significant value added benefits to the supply chain in a cost-effective way. 3 3

CUSTOMER SERVICE CAN BE DEFINED AS: l an activity or function to be managed such as order processing or handling of customer complaints, l actual performance on particular parameters, such as ability to ship complete orders for 98 percent of orders received within a 24 -hour period, l part of an overall corporate philosophy, rather than simply an activity or performance measures. 4

Customer Service l The level of customer service provided to customers determines whether the organization will retain existing customers and how many customers it will attract. l The customer service level that an organization provides has a direct impact on its market share, its total logistics costs and , ultimately , its overall profitability. 5

l Customer service is the measure of how well the logistics system is performing in providing time and place utility for a product or a service. This include activities such as : ¡The ease of checking stock, ¡Placing an order, and ¡Post sale support of the item 6

Customer service is often confused with the concept of customer satisfaction “customer satisfaction represents the customer’s overall assessment of all elements of the marketing mix: product, price, promotion, and place” 7

Customer Service 8 l. Marketing side l. Logistics side 8

Elements of Customer Service Pretransaction elements • Written statement of policy • Customer receipt of policy statement • Organization structure Transaction elements • Stockout levels • Order information • Elements of order cycle • Expedited shipments • System flexibility • Transshipment • Management services • System accuracy • Order convenience • Product substitution Posttransaction elements • Installation, warranty, alterations, repairs, parts • Product tracing • Customer claims, complaints, returns • Temporary replacement of products

Customer Service 10 Classifications pre-transaction elements lwritten statement of customer service policy, lcustomers informed with a written statement of policy lorganization structure lsystem flexibility lmanagement services 10

Customer Service 11 Classifications transaction elements lstock out level lorder information availability lsystem accuracy lconsistency of order cycle lspecial handling of shipments ltransshipments lorder convenience lproduct substitution 11

Customer Service 12 Classifications post-transaction elements linstallation lwarranty, lrepairs, lservice parts, lproduct tracking lcustomer complaints-claims lreturns lproduct replacement 12

Kano’s Classification 13 lexpected type of service lattractive type of service lone-dimensional service elements 13

Kano’s Classification expected type of service 14 l The expected type of service does not create much satisfaction, and mostly remains unnoticed; however, lack of it causes considerable dissatisfaction. l It is important to recognize the minimum acceptable level of expected service, because a lower level increases dissatisfaction rapidly, and a higher service level rises costs without corresponding compensation to the customer value. 14

15 l As an example of an expected service element for all these customer types is the availability of exceptional order information, which is considered as necessary service in case of delivery delays or other exceptional occurrences. 15

attractive type of 16 service l The attractive type of service is offered by the supplier specially planned to exceed the customer expectations. l The value attributes under this dimension of the Kano model, are neither explicitly demanded nor expected by the customer but are latent. l These service elements can create satisfaction, but the absence of them does not cause dissatisfaction, because customers are not used to getting them. l Attractive service elements can effectively be used as means of differentiating service offering from competitors. 16

one-dimensional 17 service elements l In the case of one-dimensional service elements, both satisfaction and dissatisfaction are possible l customer reaction depends more or less linearly on the level of the service offered. l Order fill rate The better the order fill rate the more satisfied the customer, and vice versa. 17

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Service Failures l. Service failure is a term associated with the problematic occasions that a customer has during the service processes l the number and the extent of the problems that the customers encounter in order to get the products or services and the recovery options offered by the company can be performance indicators. 19

Common Customer Service Complaints 31% Product or quality mistakes 12% Damaged goods 7% Other 6% Frequently cut items 44% Late delivery CR (2004) Prentice Hall, Inc. 20

Penalties for Customer Service Failures B 2 B CR (2004) Prentice Hall, Inc. 21

Penalties for Customer Service Failures B 2 C • 71, 000 consumers in 29 countries to learn how they react to stock-outs • 11 categories ranging from personal hygiene products to snack foods 22

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Model of Consumer Reaction to a Repeated Stockout Yes No Customer Switch stores ? Yes Substitute ? No Switch brand ? No Switch price ? 1 Higher 2 Same 3 Lower 4 Other size 5 Special order 6 Ask here again Substitute ? Yes No Another store 24 Source: Clyde K. Walter, “An Empirical Analysis of Two Stockout Models, ” unpublished Ph. D. Dissertation, Ohio State University, 1971.

Reasons for stockout 25

Complaining Behavior l Complaining behavior may be viewed in terms of a set of possible customer responses to dissatisfying purchase experiences. In general, complaint options include: l seeking redress (i. e. , a refund, exchange, repair, or apology, etc. ), l engaging in negative word-of-mouth (i. e. , telling other people about one’s dissatisfaction), l exiting (i. e. , vowing never to repatronize the seller), l contacting third parties (e. g. , writing a letter to a newspaper, taking legal action, etc. ). 26

Before Establishing a Customer Service Strategy; l Service policies that are based on customer requirements are essential and they are supportive of the overall marketing strategy. l Competitive benchmarking. 27

Four methods have been suggested before establishing customer service strategies: 1. Determining customer service levels based on customer reactions to stock outs at the retail level 2. Cost/revenue trade-offs 3. ABC analysis of customer service 4. Customer service audits 28

Cost/Revenue Trade-offs l What increase in sales volume is required to break even on the customer service requirements? 29

Relationship Between Customer Service and Inventory Investment Inventory investment ($000) % in-stock availability

Incremental cost or revenue Impact of incremental customer service levels on revenues, logistics costs and profits Revenue Maximum incremental profit Logistics costs Incremental customer service 31

PARETO’s RULE l In 1906, Italian economist Vilfredo Pareto created a mathematical formula to describe the unequal distribution of wealth in his country, observing that 20 percent of the people owned 80 percent of the wealth. l In the late 1940 s, Dr. Joseph M. Juran inaccurately attributed the 80/20 Rule to Pareto, calling it Pareto's Principle.

Adaptation of Pareto’s Rule into Logistics : ABC Analysis l The logic behind ABC classification is that some customers and products are more beneficial to a firm than others… l Beneficial in terms of profitibalilty, sales revenues, segment growth rates or other factors deemed important by corporate management.

l Importance of customers can be combined with the importance of products to establish customer service levels. 34

ABC analysis A Customer-Product Contribution Matrix PRODUCT CATEGORY Customer Category A B C D I 1 2 6 10 II 3 4 7 12 III 5 8 13 16 IV 9 14 15 19 V 11 17 18 20 35

ABC analysis Making the Customer-Product Contribution Matrix Operational Priority Range In-Stock Standard Delivery Standard Order Completeness Standard 1 -5 100. 0% 48 hours 99% 6 -10 97. 5 72 hours 97 11 -15 95. 0 96 hours 95 16 -20 90. 0 120 hours 93 36

Pareto’s Rule-ABC Classification (Example for Inventory Management) ABC classification is a method for determining level of control and frequency of review of inventory items l A Items – typically 20% of the items accounting for 80% of the inventory value l B Items – typically an additional 30% of the items accounting for 15% of the inventory value l C Items – Typically the remaining 50% of the items accounting for only 5% of the inventory value- © Wiley 2010 37

ABC Analysis u Divides inventory into three classes based on annual dollar volume u Class A - high annual dollar volume u Class B - medium annual dollar volume u Class C - low annual dollar volume u Used to establish policies that focus on the few critical parts and not the many trivial ones © 2011 Pearson Education, Inc. publishing as Prentice Hall

The AAU Corp. is considering doing an ABC analysis on its entire inventory but has decided to test the technique on a small sample of 15 of its SKU’s. The annual usage and unit cost of each item is shown below © Wiley 2010 39

(A) First calculate the annual dollar volume for each item © Wiley 2010 40

B) List the items in descending order based on annual dollar volume. (C) Calculate the cumulative annual dollar volume as a percentage of total dollars. (D) Classify the items into groups © Wiley 2010 41

Graphical solution for AAU Corp showing the ABC classification of materials l The A items (106 and 110) account for 60. 5% of the value and 13. 3% of the items l The B items (115, 105, 111, and 104) account for 25% of the value and 26. 7% of the items l The C items make up the last 14. 5% of the value and 60% of the items l How might you control each item classification? Different ordering rules for each? © Wiley 2010 42

Percent of annual dollar usage ABC Analysis 80 70 60 50 40 30 20 10 0 A Items – – – – B Items – | | – 10 20 30 40 C Items | | 50 60 70 80 | | 90 100 Percent of inventory items © 2011 Pearson Education, Inc. publishing as Prentice Hall Figure 12. 2

Customer Service Audit l The objective of the audit are to : ¡ Identify critical customer service elements, ¡ Identify how performance of those elements is controlled, and ¡ Assess the quality and capabilities of the internal information system l The audit include 4 stages : ¡ External customer service audit ¡ Internal customer service audit ¡ Identifying opportunities and methods for improvements, ¡ Establishing customer service levels, 44

Stages of the Customer Service Audit Internal Audit External Audit Evaluate Customer Perceptions Differentiate Channel Levels & Market Segments Identify Opportunities Determine Marketing Services Mix & Levels

Overall Importance Compared To Selected Performance Of Major Manufacturers Evaluated By Dealers Overall Impt. All Dealers Dealer Evaluations of Manufacturers Mfr. 1 Description M. SD M. SD Ability of manufacturer to meet promised delivery date (on-time shipments) Accuracy in filling orders (correct product is shipped) Competitiveness of price Advance notice on shipping delays Special pricing discounts available on contract/project quotes Overall manufacturing and design quality of product relative to the price and range involved Updated and current price data, specifications and promotion materials provided by manufacturer Timely response to requests for assistance from manufacturer's sales representative Order cycle consistency (small variability in promised versus actual delivery, i. e. , vendor consistency meets expected date). Length of promised order cycle (lead) times (from order submission to delivery) for base line/in-stock ("quick ship") product Accuracy of manufacturer in forecasting and committing to estimated shipping dates on contract/project orders Completeness of order (% of line items eventually shipped complete) -- made to order product (contract orders) 6. 4 0. 8 5. 9 1. 0 4. 1 1. 6 4. 7 1. 6 6. 6 0. 6 3. 7 1. 8 3. 3 1. 6 6. 4 6. 3 6. 1 6. 0 0. 8 1. 0 0. 9 1. 1 0. 9 5. 6 5. 1 4. 6 5. 4 6. 0 1. 1 1. 2 1. 9 1. 3 1. 0 4. 7 4. 9 3. 0 4. 0 5. 3 1. 4 1. 6 1. 7 1. 3 5. 0 4. 5 3. 7 4. 1 5. 1 1. 3 1. 5 1. 7 1. 6 1. 2 5. 8 5. 4 5. 1 6. 0 6. 5 1. 1 1. 3 1. 7 1. 2 0. 8 5. 1 4. 4 3. 0 4. 7 5. 2 1. 5 1. 7 1. 5 1. 3 4. 4 3. 6 3. 1 4. 5 4. 8 1. 5 1. 8 1. 7 1. 8 1. 5 6. 0 0. 9 5. 7 1. 3 4. 1 1. 5 4. 8 1. 4 6. 3 0. 9 4. 9 1. 7 4. 3 1. 9 6. 0 0. 9 5. 2 1. 7 4. 6 1. 6 4. 4 1. 6 5. 4 1. 6 4. 2 2. 0 4. 3 1. 7 6. 0 0. 9 5. 8 1. 0 4. 1 1. 5 4. 8 1. 4 6. 3 0. 9 3. 6 1. 7 4. 4 1. 7 6. 0 1. 0 6. 1 1. 1 4. 5 1. 4 4. 9 1. 5 6. 2 1. 1 4. 3 1. 7 3. 7 2. 0 6. 0 1. 0 5. 5 1. 2 4. 0 1. 6 4. 3 1. 4 6. 3 1. 1 3. 8 1. 7 3. 5 1. 6 6. 0 1. 0 5. 5 1. 2 4. 3 1. 2 4. 7 1. 3 6. 0 1. 1 4. 4 1. 4 4. 0 1. 6 Mfr. 2 Mfr. 3 Mfr. 4 Mfr. 5 Mfr. 6 Rank Var. Num 1 9 2 3 4 5 6 39 90 40 94 3 7 16 8 47 9 14 10 4 b 11 54 12 49 a 50 33 a Price range of product line offering (e; g. , low, medium, high price levels) for major vendor 5. 0 1. 3 4. 4 1. 5 4. 6 1. 6 5. 1 1. 5 5. 2 1. 4 4. 3 1. 6 3. 9 1. 6 101 77 Store layout planning assistance from manufacturer 2. 9 1. 6 4. 2 1. 7 3. 0 1. 5 3. 4 1. 6 4. 7 1. 6 3. 0 1. 4 3. 4 1. 2 Note : Mean (average score) based on a scale of 1 (not important) through 7 (very important). 46 Source: Douglas M. Lambert and Jay U. Sterling, “Developing Customer Service Strategy, ” unpublished manuscript. All Rights reserved.

l External customer service audit - overall customer audit, examining both internal and external factors with interviews and questionnaires focusing on the key customer service elements - explore customers’ expected performance on key issues levels of - variables that get the highest importance ratings from the customers should be the focus of analysis and action

Internal Audit Questions • How is customer service currently measured? • What are the units of measurement? • What are the performance standards? • What is the current level of attainment? 3 -9 a

Internal Audit Questions cont. 3 -9 b • How are these measures derived from corporate information flows and the order processing system? • What is the internal customer service reporting system? • How do the functional areas of the business perceive customer service? • What is the relation between these functional areas in terms of communication and control?

Importance And Performance Evaluations For Selected Customer Service Attributes 3 -9 c Performance Evaluation No. 1 2 3 4 5 6 7 8 9 10 Attribute Accuracy in filling orders Ability to expedite emergency orders in a fast, responsive manner Action on complaints (e. g. , order servicing, shipping, product, etc. ) Accuracy of supplier in forecasting and committing to shipping date for custom-made products Completeness rate (percentage of order eventually shipped) Rapid adjustment of billing and shipping errors Availability of blanket orders Frequency of deliveries (supplier consolidates multiple/split shipments into one larger, less frequent shipment) Order processing personnel located in your market area Computer-to-computer order entry Relative Performance Importance Company A Company B 6. 42 6. 25 5. 54 4. 98 5. 65 5. 23 -0. 11 -0. 25 6. 07 4. 82 5. 18 -0. 36* 5. 92 4. 53 4. 73 -0. 20 5. 69 5. 27 +0. 02 5. 34 4. 64 4. 90 -0. 24 4. 55 4. 29 5. 03 5. 07 4. 15 5. 03 3. 58 5. 33 5. 21 +0. 12 2. 30 4. 07 3. 53 +0. 54** +0. 88** +0. 04 * Performance evaluations of A and B are significantly different at p < 0. 05. ** Performance evaluations of A and B are significantly different at p < 0. 01. 50 Source: Douglas M. Lambert and Arun Sharma, “A Customer-Based Competitive Analysis for Logistics Decisions, ” International Journal of Physical Distribution and Logistics Management 20, no. 1 (1990), p. 18.

3 -10 Competitive Position Competitive. Matrix Competitive disadvantage Major weakness Major strength HIGH 1* 5* 2* 3* 4* 6* 5 8* MEDIUM IMPORTANCE 7 parity 7* 9* 3 10* Minor weakness -3. 0 LOW 1 Minor strength -1. 0 +1. 0 Relative performance +3. 0

3 -11 Performance Evaluation Matrix Definitely improve Improve 5* Maintain Reduce/maintain MEDIUM Improve 1* 2* 3* 4* 6* 5 Maintain/improve HIGH IMPORTANCE 7 7* 8* 9* 3 Maintain Reduce/maintain LOW 10* 1 1 3 5 Performance evaluation 7

Measuring and Controlling Customer Service Performance l Establish quantitative standards of performance for each service element. l Measure actual performance for each service element. l Analyze variance between actual service provided and standard. l Take corrective action as needed to bring actual performance into line. 3 -13

How to measure customer service? 54 l Perceptual Measures: Importance and satisfaction measures “How important service element is order cycle time? “ How valuable for your own operations or customer service would a 24 h order cycle time be? (Grades from 1 - not valuable to 5 - very valuable). l Service levels are unique to individual firms and product lines of each firm. Very few firms have formulated specific, quantifiable objectives for handling returns at the retail level (to pick up all damaged goods within five days, or to issue credit for returned goods within 20 days. ) l Utility measures allow a manager to evaluate the tradeoffs between several customer services even when the services are expressed in different units (such as dollars, time or hours). 54

3 -14 Customer Service Standards l Reflect the customer’s point of view. l Provide an operational and objective measure of service performance. l Provide management with cues for corrective action.

2 5 Expected Performance Levels: Key Measurements n n n n n Frequency - Sales Calls Response Time From Sales Rep. Advance Notice - Price Changes Methods Used to Submit Orders Frequency - Order Transmission Normal Lead-time Requirements Acceptable Range - Lead-time Fill Rate - Required % Policy on Stock-outs 56