Chapter 8 Order Management and Customer Service Learning

Chapter 8 Order Management and Customer Service Learning Objectives n After reading this chapter, you should be able to do the following: Understand the relationships between order management and customer service. ¨ Appreciate how organizations influence customers’ ordering patterns as well as how they execute customers’ orders. ¨ Realize that activity-based costing (ABC) plays a critical role in order management and customer service. ¨ Identify the various activities in the SCOR process D 1 (deliver stocked product) and how it relates to the order-to-cash cycle. ¨

Learning Objectives (cont. ) n After reading this chapter, you should be able to do the following: Know the various elements of customer service and how they impact both buyers and sellers. ¨ Calculate the cost of a stockout. ¨ Understand the major outputs of order management, how they are measured, and how their financial impacts on buyers and sellers are calculated. ¨ Be familiar with the concept of service recovery and how it is being implemented in organizations today. ¨

Influencing the Order ¨ This is the phase where an organization attempts to change the manner by which its customers place orders. Order Execution ¨ This occurs when the order is received.

Customer service: ¨ is anything that touches the customer. This includes all activities that impact information flow, product flow, and cash flow between the organization and its customers. n Philosophy ¨ Philosophy elevates customer service to an organization-wide commitment to providing customer satisfaction through superior customer service.

Customer service: Performance ¨ emphasizes customer service as specific performance measures that pervade all three definitions of customer service and address strategic, tactical, and operational aspects of order management. Activity ¨ treats customer service as a particular task that an organization must perform to satisfy a customer’s order requirements.

n Customer relationship management: is the art and science of strategically positioning customers to improve the profitability of the organization and enhance its relationships with its customer base. ¨ is not a new concept used by service industries. ¨ has not been widely used in the business-to business environment until lately. ¨ ¨ Customer action affects firm’s cost n n how customers order how much customers order what customers order when customers order an order

Four basic steps in the implementation of the CRM ¨ Step 1: Segment the Customer Base by Profitability ¨ Step 2: Identify the Product/Service Package for Each Customer Segment ¨ Step 3: Develop and Execute the Best Processes ¨ Step 4: Measure Performance and Continuously Improve

Activity-Based Costing ¨ ABC measures the cost and performance of activities, resources, and cost objects. Resources are assigned to activities, then activities are assigned to cost objects based on their use ¨ Traditional cost accounting is well suited to situations where an output and an allocation process are highly correlated. ¨ Traditional cost accounting is not very effective in situations where the output is not correlated with the allocation base.

The Management of Business Logistics Chapter 8

One method to classify customers by profitability. Protect Zone ¨ Those customers who fall into the “Protect” segment are the most profitable. Danger Zone ¨ Customers in the “Danger Zone” segment are the least profitable and incur a loss. ¨ The firm has three alternatives for danger zone customers: n (1) change customer interaction with firm so the customer can move to another segment n (2) charge the customer the actual cost of doing business n (3) switch the customer to an alternative distribution channel Build Zone ¨ These customers have a low cost to serve and a low net sales value, so the firm should maintain the cost to serve and build net sales value to help drive the customer into the “Protect” segment.

Order Management ¨ This system represents the principle means by which buyers and sellers communicate information regarding orders. ¨ Effective order management is key to operational efficiency and customer satisfaction. ¨ Logistics needs timely and accurate information relating to orders so many firms place order management in the logistics area.

Order to cash ¨ Thirteen principle activities constitute the OTC cycle: n n n D 1. 1 through D 1. 7 represent information flows D 1. 8 through D 1. 12 represent product flows D 1. 13 represents cash flow Order cycle ¨ all activities that occur from when an order is received until the product is received Replenishment cycle refers to acquisition of additional inventory ¨ one firm’s order cycle is another’s replenishment cycle ¨

n Order To Cash cycle: ¨ recent attention has centered on the variability or consistency of this process ¨ absolute length of time is important, variability is more important ¨a driving force is safety stock, as absolute length of the order cycle will influence demand inventory

E-Commerce Order Fulfillment Strategies ¨ Many firms use Internet technology to capture order information for fulfillment systems for picking, packing, and shipping. ¨ Internet allows faster collection of cash by the seller.

The Logistics/Marketing Interface ¨ Customer service is the key link between logistics and marketing within an organization. ¨ Manufacturing can produce a quality product at the right cost and marketing can sell it, but if logistics does not deliver it when and where promised, the customer will not be satisfied.

Three different perspectives on customer service: ¨ Three different perspectives on customer service n philosophy n as a set of performance measures n as an activity Customer service needs to be put into perspective as including anything that touches the customer

Three levels of a product ¨ (1) the core benefit or service, which constitutes what the buyer is really buying ¨ (2) the tangible product, or the physical product or service itself ¨ (3) the augmented product, which includes benefits, adds value for the customer

Four distinct dimensions of customer service: ¨ Time n n n ¨ Dependability n ¨ more important than the absolute length of lead time Communications n n n ¨ cycle time safe delivery correct orders pretransaction posttransaction Convenience n service level must be flexible

Customer Service Performance Measures from buyer’s view ¨ Orders received on time ¨ Orders received complete ¨ Orders received damage ¨ Orders filled accurately ¨ Orders billed accurately

Expected Cost of Stockouts: n n Stockout occurs when desired quantities are not available Four possible events: ¨ the buyer waits until the product is available ¨ the buyer back-orders the product ¨ the seller loses current revenue ¨ the seller loses a buyer and future revenue

Back Orders: ¨ occurs when a seller has only a portion of the products ordered by the buyer ¨ are created to secure the portion of the inventory that is currently not available Lost Sales: ¨ some customers will turn to alternative supply sources Lost Customers: ¨ customer permanently switches to another supplier

Determining the Expected Cost of Stockouts ¨ back order ¨ lost sale ¨ lost customer n n identify potential consequences calculate each result’s expense or lost profit

Product availability from customer perspective: ¨ Did I get what I wanted? ¨ When ¨ In I wanted it? the quantity I wanted? Product availability is the ultimate measure of logistics and supply chain performance.

Metrics ¨ four are widely used across multiple industries: n internal metrics item fill rate ¨ line fill rate ¨ n external metrics order fill rate ¨ perfect order ¨

Calculation for lost cash flow: Cash Flow Lost = (Number of Incomplete Orders Back. Ordered x Back Order Cost per Order) + (Number of Incomplete Orders Cancelled x Lost Pretax Profit per Order) + (Number of Incomplete Back. Ordered x Invoice Deduction per Order)

Order Cycle Time: n the time that elapses from when a buyer places an order until receipt of the order n absolute length and reliability of order cycle time influences both firm’s inventories, resulting in impacts on both revenues and profits for both organizations

Two inventory cost reduction calculations ¨ reduced standard deviation of order cycle time on safety stocks Safety Stock = {Demand per Day x [OCT + (z x Standard Deviation of OCT)]} – (Demand per Day x OCT) ¨ determine the impact of the reduction of absolute order cycle time on demand inventories Demand Inventory Cost Reduction = Difference in Absolute OCT x Demand per Day x Cost per Unit x Inventory Carrying Cost Percent

Logistics operations responsiveness (LOR) ¨ Examines how well a seller can respond to a buyer’s needs. ¨ This “response” can take two forms: n LOR can be how well a seller can customize its service offerings to the unique requirements of a buyer n LOR can be how quickly a seller can respond to a sudden change in a buyer’s demand pattern.

Logistics System Information: ¨ is critical to the logistics and order management processes ¨ underlies ability to provide quality product availability, order cycle time, logistics operations responsiveness, and post-sale logistics support ¨ timely and accurate information can reduce inventories in the supply chain and improve cash flow to all supply chain partners

Financial Impact ¨ The calculation used to measure the result on cash flow for decreasing the order-to-cash cycle is as follows: Cast Flow Increase = Invoice Value x (Cost of Capital/365) x Difference in Days in the Order-to-Cash Cycle

Postsale logistics support (PLS) can take two forms: ¨ PLS can be the management of product returns from the customer to the supplier. ¨ The second form of PLS is product support through the delivery and installation of spare parts. ¨ Calculation to determine the spare part service cost is as follows: Service Cost = Penalty Cost + Lost Purchase Margin + Lost Support Margin

Service Recovery n No matter how well an organization plans to provide excellent service, mistakes will occur. n Recovery requires a firm to realize that mistakes will occur and have plans in place to fix them.

Summary ¨ Order management and customer service are not mutually exclusive; there is a direct and critical relationship between these two concepts. ¨ There are two distinct, yet related, aspects of order management: influencing the customer’s order and executing the customer’s order. ¨ Customer relationship management (CRM) is a concept being used today by organizations to help them better understand their customers’ requirements and understand how these requirements integrate back into their internal operations processes. ¨ Activity-based costing (ABC) is being used today to help organizations develop customer profitability profiles which allow for customer segmentation strategies. ¨ Order management, or order execution, is the interface between buyers and sellers in the market and directly influences customer service. ¨ Order management can be measured in various ways. Traditionally, however, buyers will assess the effectiveness of order management using order cycle time and dependability as the metric, while sellers will use the order-to-cash cycle as their metric.

Summary (cont. ) ¨ ¨ ¨ Customer service is considered the interface between logistics and marketing in seller organizations. The three definitions of customer service are: (1) as an activity, (2) as a set of performance metrics, and (3) as a philosophy. The major elements of customer service are time, dependability, communications, and convenience. Stockout costs can be calculated as back order costs, the cost of lost sales, and/or the cost of a lost customer. The five outputs from order management that influence customer service, customer satisfaction, and profitability are: (1) product availability, (2) order cycle time, (3) logistics operations responsiveness, (4) logistics system information, and (5) postsale logistics support. The concept of service recovery is being used by organizations today to help identify service failure areas in their order management process and to develop plans to address them quickly and accurately.