Module 8

Demand Management
and
Customer Service
Contents
Outbound-to-Customer Logistics Systems
Demand Management
Traditional Forecasting
Collaborative Planning, Forecasting and
Replenishment (CPFR)
Customer Service
Stock-Outs
Channels of Distribution
Outbound-to-Customer Logistics Systems
To increase levels of customer service,
significant emphasis is placed on
Outbound-to-Customer logistics systems

Outbound-to-Customer Logistics Systems refer
to the set of processes, systems and
capabilities that enhance the companys ability to
serve its customers

This area plays a major role in the companys
revenues, profits and overall image
Demand Management
Demand Management is defined as focused
efforts to estimate and manage customers
demand with the intention of using this
information to form operating decisions
Demand Management strives to reduce total
costs for a company and its supply chain

Demand Management must be a collaborative
process involving all departments



Demand Management Objectives
Gathering and analyzing knowledge from all
possible sources about consumers, their
problems and their needs
Sharing with other functions the knowledge about
consumers, available technology and logistical
challenges
Coordinate with other functions in developing the
best products and services
Ensuring the distribution of products and services
to consumers in the desired format
Develop and execute contingency plans with other
functions to allow modification of short-term
schedules when necessary


Issues in Demand Management
Lack of communication between departments results in
little or no coordinated response to demand
information

Too much emphasis is often placed on individual demand
forecasts with little attention paid to collaborative efforts
and strategic and operational plans that need to be
developed from the forecasts

Demand information is often used more for tactical and
operations purposes than for strategic purposes
o Example of Apple:

In the 1990s, Apple had several problems in
forecasting demand
Many components were sourced from 1 supplier
therefore accurate forecasts were critical
Over $1 billion in un-fulfilled orders during the crucial
holiday season resulted in the CEO (Spindler) getting
ousted a few months later
Traditional Forecasting
A major component of demand management is
forecasting the amount of product that will be
purchased by consumers or end users
Involves around how a firm integrates information
about its customers into the Production Planning and
Control Systems
In the integrated supply chain, all other demand will be
derived from the Primary Demand
As forecast horizon increases, accuracy decreases
o Example of IBM:
Badly misjudged the demand for its PC business
Went from highly profitable to a loss of $200 million
Finally had to sell off the PC business to Lenovo


Traditional Forecasting continued
An example of integrating Sales Forecasting
with Production is illustrated on the next
page

Points to note are:
Long-term (more than three years),
Midrange (one to three years) and Short-
term (less than 1 year) forecasting are all
important contributors to the forecasting
process
Integration of Sales Forecasting and
Production
Collaborative Planning, Forecasting and
Replenishment (CPFR)
CPFR is recognized as a breakthrough
business model for Planning, Forecasting and
Replenishment

Uses available Internet-based technologies to
collaborate from Operational Planning to
Execution

Emphasizes a sharing of Consumer
Purchasing data between supply chain
partners

Creates a direct link between the consumer
and the supply chain

Collaborative Planning, Forecasting and
Replenishment (CPFR) continued
The Plans and Forecasts are input by Suppliers
and Buyers into an Internet accessible system

Within established parameters, any of the
participating partners is empowered to change
the forecast

Collaborative planning improves the demand
accuracy for the entire supply chain through a
constant exchange of information from one end
to the other

Example: Sears & Michelin Tyres


Major Components of the Order Cycle
Customer Service
Customer service is the key link between logistics and
marketing
Customer Service continued
Defining Customer Service:
In terms of levels of product - Core, Basic, Expected,
Augmented, Potential
In terms of types of customer support/service - Technical,
Non-Technical
In terms of levels of involvement
In terms of complexity of customer service

Elements of Customer Service:
Communication
Dependability
Correct orders
Cycle time
Safe delivery
Convenience

Customer Service: Performance
Measures

New measures:
Orders filled
accurately
Orders received on
time
Orders received
complete (OTIF)
Orders received
damage free
Orders billed
accurately
Traditional measures:
Availability in units
Speed, accuracy and
consistency
Response time to
special
requests
Response and
recovery
time requirements
Quality of response
Customer Service: Takeaways
If the basics of customer service are not in
place, nothing else matters !

Customers may define service differently

All customer accounts are not the same

Relationships are not one dimensional

Partnerships and continuous value additions
immensely help to retain customers

Stockouts
A Stockout is a situation in which the demand or requirement for a
product cannot be fulfilled from the current inventory.
Stockouts happen due to unexpected demand, ineffective inventory
management, production delays or information issues.
While stockouts can occur along any supply chain, the most visible
kind are in the Fast Moving Consumer Goods (FMCG)
industry.
Research findings show that a retailer loses about 4 percent of
sales annually due to stockouts.

Possible outcomes from a Stockout:
Back orders - A customer order that cannot be filled immediately
and for which the customer is prepared to wait for
some time.
Lost sales
Unhappy customers
Diminished store loyalty
Obstruct Sales and Marketing plans
Expected Costs of Stockouts
Cost of Stockouts consist of:
External costs (loss of profit from current lost
sales & loss of future profit due to loss of
goodwill)
Internal costs (delays, labour time wastage, lost
production)

Event Probability Costs

Expected
Costs
Back Order 70% $ 6.00 $ 4.20
Lost Sale 20% $20.00 $ 4.00
Lost
Customer 10% $200.00 $ 20.00
Total
Estimated
Cost per
Stockout 100% $226 $ 28.20
Channels of Distribution
A Distribution Channel or Trade Channel is
defined as the route along which products move
from manufacturers to end consumers

This channel consists of various middlemen like
Wholesalers, Stockists, Agents and Retailers
who intermediate between the producers and
consumers

The channel serves to bridge the gap between
the point of production and the point of
consumption thereby creating time, place and
possession utilities (value additions)

Distribution Channel Separation
Example of Distribution Channel for the Food
Products Manufacturing Industry
Benefits Offered by Channel Members
Cost Savings in Specialization - Members of the
distribution channel are specialists in what they
do
Reduce Exchange Time - They often perform their job
more rapidly resulting in faster product delivery
Customers Want to Conveniently Shop for Variety
Assortments at a single location
Resellers sell Smaller Quantities
Create Sales Opportunities - Encourage sales of the
product through their own advertising efforts and
using other promotional means such as special
product displays
Offer Financial Support - Purchase on credit; purchase
using a payment plan; delay the start of payments; and
allowing trade-in or exchange options
Growth and Importance of Distribution
Channels
Retail channels showing dramatic growth

Successful retailers base efficiency on logistics
systems

Mass merchandisers such as Wal-Mart, Carrefour,
Sears and Target constricting growth of smaller
retailers

Nature of logistics changing to accommodate
customized systems


Buy
Sell
Buy
Store
Move
Make
Sell
Store
Move
Sell
Make
Make
Move
Move
Buy