Chapter 8 ORDER MANAGEMENT AND CUSTOMER SERVICE Learning

Chapter 8 ORDER MANAGEMENT AND CUSTOMER SERVICE

Learning Objectives 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. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2

Learning Objectives, continued ● Identify the various activities in the SCOR process D 1 (deliver stocked product) and how it relates to the order-to-cash cycle. ● 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. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3

Learning Objectives, continued ● Be familiar with the concept of service recovery and how it is being implemented in organizations today. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4

Order Management vs. Customer Service (Figure 8. 1) Source: Robert A. Novak, Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5

Introduction ● Influencing the Order • This is the phase where an organization attempts to change the manner by which its customers place orders. ● Executing the Order • This occurs when the order is received. ● Serving a Customer • Anything that touches the customer. This includes all activities that impact information flow, product flow, and cash flow between the organization and its customers. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Influencing the Order – Customer Relationship Management ● Customer relationship management: • Is the art and science of strategically positioning customers to enhance its relationships with its customer base an improve the profitability of the organization. • 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 ○ how customers order ○ how much customers order ○ what customers order ○ when customers place an order © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Influencing the Order – Customer Relationship Management, continued ● 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. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8

Step 1: Customer Segmentation Matrix (Figure 8. 5) Source: Robert A. Novak, Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9

Influencing the Order – Customer Relationship Management, continued ● Classifying 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: § Change customer interaction with firm so the customer can move to another segment § charge the customer the actual cost of doing business § 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. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10

Step 2: Hypothetical Product/Service Offerings for Different Customer Segment (Table 8. 1) Source: Robert A. Novak, Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11

Influencing the Order – Customer Relationship Management, continued ● 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. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12

Figure 8. 2 Traditional vs. Activity Based Costing - ABC application to a DC Operations Source: Robert A. Novak, Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13

Figure 8. 3 Distribution Center Process Flow Chart Source: Robert A. Novak, Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14

Figure 8. 4 Flow-Through Costing for a Distribution Center Source: Robert A. Novak, Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15

Executing the Order – Order Management & Fulfillment ● Order-To-Cash (OTC) and Replenishment Cycles • 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 • Order to cash (OTC) process ○ Thirteen activities (in SCOR D 1) (See Figure 8. 6): ¨ ¨ ¨ D 1. 1 through D 1. 7 represent ordering process flows D 1. 8 through D 1. 12 represent product handling flows D 1. 13 represents cash flow (invoice & payment) © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Executing the Order – Order Management & Fulfillment, continued ● Length and Variability of the Order-to-Cash Cycle • Absolute length of time is important, variability is more important. • Recent attention has centered on the variability or consistency of this process. • A driving force is safety stock, as absolute length of the order cycle will influence demand inventory. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17

Figure 8. 7 Order Cycle Length and Variability Source: Adapted from Lambert & Stock, “Using advanced order processing systems to improve profitability”, Business (April-June 1982) 26 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18

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. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Customer Service ● 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. ● Defining Customer service • Three perspectives: ○ philosophy ○ as a set of performance measures ○ as an activity © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Figure 8. 8 Traditional Logistics/Marketing Interface Source: Adapted from Lambert, “The development of an inventory costing methodology: A study of the costs associated with holding inventory”, National Council of Physical Distribution (1976) 7 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21

Customer Service, continued ● Elements of Customer Service • Time • Dependability ○ Cycle time ○ Safe delivery ○ Correct orders • Communications • Convenience ● Performance Measures for Customer Service • Stated from the customer’s perspective ○ Orders received on time ○ Orders received complete ○ Orders received damage free © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22

Figure 8. 9 Customer Service and ROI Source: Robert A. Novak, Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23

Figure 8. 10 Lead Time Frequency Distribution Example Source: Robert A. Novak, Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24

Figure 8. 11 SCOR Model: Process D 1 Metrics Source: Adapted from Supply Chain Council (2011) © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25

Expected Cost of Stockouts ● 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. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Expected cost of Stockouts, continued ● 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 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27

Five Outputs of Order Management that influence Customer Service (Figure 8. 12) Source: Robert A. Novak, Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28

Order Management Influences on Customer Service ● Product Availability • Did I get what I wanted, when I wanted it, in the quantity I wanted? • Internal Metrics ○ Item fill rate ○ Line fill rate • External Metrics ○ Order fill rate ○ Perfect order ● Financial Impact • Improving fill rates improves financial performance. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Order Management Influences on Customer Service, continued ● Financial Impact, continued 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) © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30

Table 8. 7 Cash Flow and Inventory Investment Source: Robert A. Novak, Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 31

Figure 8. 13 Fill Rate and Inventory Investment Source: Robert A. Novak, Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 32

Figure 8. 14 Cash Flow Lost / Inventory Investment Tradeoff Source: Robert A. Novak, Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 33

Order Management Influences on Customer Service, continued ● Order Cycle Time • The time that elapses from when a buyer places an order until receipt of the order. • Absolute length and reliability of order cycle time influences both firm’s inventories, resulting in impacts on both revenues and profits for both organizations. • Metrics ○ Customer wait time • Financial impact ○ Order cycle time impacts safety stock and cycle stock © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 34

Customer Wait Time for a maintenance Service (Figure 8. 15) Source: Robert A. Novak, Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 35

Order Management Influences on Customer Service, continued ● Logistics Operations Responsiveness (LOR) • Examines how well a seller can respond to a buyer’s needs. • This “response” can take two forms ○ LOR can be how well a seller can customize its service offerings to the unique requirements of a buyer ○ LOR can be how quickly a seller can respond to a sudden change in a buyer’s demand pattern © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 36

Order Management Influences on Customer Service, continued ● Logistics System Information • Is critical to the logistics and order management processes. • Underlies ability to provide logistic support for (quality) product availability, order cycle time, logistics operations responsiveness, and post-sales. • Timely and accurate information can reduce inventories in the supply chain and improve cash flow to all supply chain partners. Cast Flow Increase = Invoice Value x (Cost of Capital/365) x Difference in Days in the Order-to-Cash Cycle © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 37

Table 8. 9 Information Needed to Support the Transportation Process Source: Robert A. Novak, Ph. D. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 38

Order Management Influences on Customer Service, continued ● Postsale Logistics Support (PLS) • 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 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 39

Order Management Influences on Customer Service, continued ● Service Recovery • Recovery of a sales or a customer • Ability of identify a service failure area and take the actions to satisfy the customer. • Act fast, as the longer it waits, the higher dissatisfaction it grows. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 40

Summary ● Order management and customer service are not mutually exclusive; there is a critical relationship between the two. ● The 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. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 41

Summary, continued ● 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. ● Customer service is considered the interface between logistics and marketing in seller organizations. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 42

Summary, continued ● 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. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 43

Summary, continued ● 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. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 44