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Introduction to Business Logistics Management

78-633 Lecture 05

Logistics/Supply Chain Customer Service

Agenda

Customer Service Defined


Highlight the logistics elements

Order Cycle Time The impact of customer service Customer service level determination

A customer view of a companys offering


Price Quality Service, or customer service Each customer weighs these when making a purchasing decision.

How would you define customer service?


In a retail store:
How long must I wait in line? If I cannot find an item, can I find a clerk who is willing to help? If an item is not in stock, how long must I wait to receive it? If an item is not in stock, will I receive a call, or must I continually check back? Is the store clean, well lighted, and laid out reasonably? Do personnel treat customers with respect?
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How would you define customer service?


On a telephone order: Am I treated courteously? Must I wait on hold for 10 minutes? Do I get to speak to a human? Do I key in my customer number and then need to repeat it later? If its an automated system, are the instructions clear?

What is Customer Service?

Broad definitions:
Anything that impacts customer loyalty and retention. Begins with order entry and continues through product support. The speed and dependability with which items can be made available The entire process of filling the customers order

Customer Service Elements

Pre-transaction elements: providing a written statement of customer service policy, e.g., when goods will be delivered, return policy and procedure, methods of shipment, let customers know what to expect Transaction elements: directly related to delivery of the product (order convenience, delivery time, shipping accuracy, backorder system, etc.) Post-transaction: keeping the customer happy (warranty, support, recall, handling claims, complaints and returns, etc.)
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Ranking of Customer Service Variables


Furniture Industry Ability to meet promised delivery dates Accuracy in filling orders Overall quality relative to price Competitiveness of price Advance notice on shipping delays Action on complaints Delivery consistency Realistic, consistent pricing policy
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Ranking of Customer Service Variables


Plastics Industry Quality Sales honesty Accuracy in filling orders Competitiveness of price Product consistency Delivery consistency Ability to expedite emergency orders

Logistics Customer Service Elements


The following are considered the most important logistics customer service elements: On-time delivery Order fill rate Product condition Accurate documentation

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Order Cycle Time


The primary elements of customer service that the logistician can control are captured with the concept of order cycle time. Order cycle time is the elapsed time between when a customer order is placed and when the product is received by the customer.

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The Order Cycle Time depends largely on the Logistics System

Policies and Procedures that govern cycle time:


Inventory stock policies and levels Order picking - processing priorities Transportation mode selection Back order procedures

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Variation and Logistics


Variation in performance is worse than slow performance (why?) A simple view of the job of logistician: to reduce system variance (e.g. cycle time variance). Leads to improved performance, efficiency, customer service, etc.

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Stockouts influence order cycle time greatly

If the product is not on the shelf and has to be backordered, order cycle time increases dramatically (and variance increases too): Typical Order Cycle Time

Order Cycle Time when back order needed

Order Cycle Time


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Order Cycle Time Components


Order prep and transmittal Order reception and entry Order processing Order picking and packing Transit time Customer receipt and storage

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A Small Example
Order Prep and Transmittal Order Received and Entered
Order Processed Order Picked and Packed Transit Time Customer Receives and Stores Total

2 days 1
1 5 3 1 13 days

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A Small Example with Variability


Order Prep and Transmittal Order Received and Entered Order Processed Order Picked and Packed Transit Time
Customer Receives and Stores Total

2 days 1 1 5 3
1 13 days

+/- days +/- .5 +/- .5 +/- 4 +/- 2


+/- .5 +/- 8.5 days

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Therefore the Order Cycle is


On Average 13 days in length Minimum of 4.5 days and a Maximum of 21.5 days in length Quick refresh of knowledge of normal distribution for later purpose: Assuming order cycle time is normally distributed, and the range above represents the center 4standard deviation range All kinds of probability questions

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To improve customer service, which are the top two components that should be examined?
Order Prep and Transmittal Order Received and Entered Order Processed Order Picked and Packed Transit Time Customer Receives and Stores Total 2 days 1 1 5 3 1 13 days +/- 1 days +/- .5 +/- .5 +/- 4 +/- 2 +/- .5 +/- 8.5 days

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Logistics strategy and execution is a large part of Customer Service


If we can quantitatively connect customer service to the revenue and profit streams of our business we can begin to approach an optimal logistics design Customer service can impact our business in at least two ways:

Customer retention Sales impact

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Customer Retention and Customer Service

High levels of customer service promote customer retention One study suggests that 65% of revenues come from repeat customers This means that 35% of revenues come from new customers It costs 6 times more to attract a new customer than it does to keep an existing one. Losing a customer represents a multi year revenue loss Further it takes a long time for a new customer ordering volume to reach that of an established customer.
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Implications on Corporate Strategy and Logistics Strategy

One would prefer to increase investment in efforts aimed at increasing the percentage of repeat business (to avoid customer loss) instead of investing in new sales. Customer service increases improve customer retention Logistics is a big part of customer service Therefore it is more cost effective to invest in improved logistics systems
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Sales-Service Relationship

Does this occur?

Or this?

Sales

How can this happen?

Sales

Increasing customer service level

Increasing customer service level


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Sales-Service Relationship
Are we in the transition zone where it makes sense to increase customer service? Are we here? Sales

Increasing customer service level


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Cost vs. Service


How to solve for maximum profit?

Revenue
Sales or Costs Profit Cost of Logistics

Increasing customer service level


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Two basic approaches


You have data which define the behavior of the sales and logistics costs with respect to increased customer service You can model the sales and cost behavior as equations

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Real Data Example

We have decided to increase warehouse inventory to improve customer service. What is the optimal level for this increase? By detailed estimates and / or past trends, we find the following relationships:
SL 50 55 60 65 70 75 80 85 90 Inventory $ 500 600 725 850 990 1180 1500 1800 2300

SL 50 55 60 65 70 75 80 85 90

Revenue $ 600 745 900 1200 1350 1600 1750 1850 1925
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Profit = Revenue - Cost


SL 50 55 60 65 70 75 80 85 90 Inventory $ Revenue $ Profit $ 500 600 100 600 745 145 725 900 175 850 1200 350 990 1350 360 1180 1600 420 1500 1750 250 1800 1850 50 2300 1925 -375

What is the optimal SL?


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Modeling the Data as Equations

Excel enables you to plot the data as a scatter plot and perform basic regression analyses
Chart Title

Revenue $ and SL
2500
Revenue ($000)

Inventory Cost ($000)

2500 2000 1500 1000 500 0 40 50 60

y = 0.0234x 2 R = 0.981

2.5278

2000 1500 1000 500 0

y = 2449.2Ln(x) - 9038.2 R2 = 0.988

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Service Level

Service Level

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Analytic Models
Profit = Revenue - Cost Revenue = 2449.2Ln(SL) - 9038.2 Cost = 0.0234SL2.5278

What is the optimal SL based on the above analytic models?


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