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Chapter 3

Demand Management and


Customer Service

Learning Objectives

Understand the critical importance of


outbound-to-customer logistics systems.
Appreciate the growing need for
effective demand management.
Know the types of forecasts that may be
needed, and understand how
collaboration among trading partners
will help the overall forecasting and
demand management process.
Chapter 3

Management of Business Logistics,


7th Ed.

Learning Objectives

Identify the key steps in the order


fulfillment process, and understand how
effective order management can create
value for a firm and its customers.
Realize the meaning of customer
service, and understand its importance
to logistics and supply chain
management.
Chapter 3

Management of Business Logistics,


7th Ed.

Learning Objectives

Understand the difference between


logistics and marketing channels, and
understand that goods may reach their
intended customer via a number of
alternative channels of distribution.

Chapter 3

Management of Business Logistics,


7th Ed.

Logistics Profile:
Dreyers

Instituted scan-based trading.


Manufacturer (Dreyers) is paid
based on what is actually scanned at
the checkout counter.
Customer takeaway drives
manufacturing and delivery.
Freed resources for use elsewhere.
Win-win partnership arrangement.
Chapter 3

Management of Business Logistics,


7th Ed.

Outbound-to-Customer
Logistics Systems

To increase levels of customer service,


significant emphasis is placed on outboundto-customer logistics systems.
These systems refer to the set of processes,
systems, and capabilities that enhance the
firms ability to serve its customers.
This topic also is of historical interest in the
study of physical distribution, logistics, and
supply chain management.
Chapter 3

Management of Business Logistics,


7th Ed.

Inbound-to-Operations
Logistics Systems

These systems refer to the set of processes


that precede and facilitate value-adding
activities such as manufacturing, assembly,
and so on.
This topic also is of historical interest in the
study of the supply chain and includes
materials management and physical supply.
The study of inbound-to-operations logistics
systems will be presented in the next
chapter.
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Management of Business Logistics,


7th Ed.

Demand Management

Defined as focused efforts to estimate


and manage customers demand, with
the intention of using this information to
shape operating decisions.3
Recent practice has been just the
opposite, with the manufacturer
determining the what, where, when, and
how many of the sale.
Chapter 3

Management of Business Logistics,


7th Ed.

Demand Management

It is this disconnect between


manufacturing and the demand at the
point of consumption that attracts
attention to demand management.
Any attention paid to demand
management will likely result in benefits
flowing through the supply chain.

Chapter 3

Management of Business Logistics,


7th Ed.

On the Line:
Ingram Micro

Took leadership in creating a demand


chain among its supply chain partners.
$22 billion sales of 200,000 products
from 1,500 manufacturers to 140,000
resellers in 130 countries.
Ingram Micro is using a demand chain,
rather than a supply chain, to focus on
meeting consumer demand.
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On the Line:
Ingram Micro

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Demand Management
Objectives

Gathering and analyzing knowledge


about consumers, their problems, and
their unmet needs.
Identifying partners to perform the
functions needed in the demand chain.
Moving the functions that need to be
done to the channel member that can
perform them most effectively and
efficiently.
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Demand Management
Objectives

Sharing with other supply chain members


knowledge about consumers and
customers, available technology, and
logistics challenges and opportunities.
Developing products and services that
solve customers problems.
Developing and executing the best
logistics, transportation, and distribution
methods to deliver products and services
to consumers in the desired format.
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Demand Management:
Related Issues

Lack of communication between


departments results in little or no
coordinated response to demand
information.
Too much emphasis is often placed on
forecasts of demand with little attention
paid to collaborative efforts and strategic
and operational plans that need to be
developed from the forecasts.
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Demand Management:
Related Issues

Demand information is often used more


for tactical and operations purposes than
for strategic purposes.
Primary emphasis should be on using
demand information to create likely
scenarios of the future as they relate to
product supply alternatives.
Resulting business successes will be a
outcome of the better match of demand
to product availability.
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Traditional Forecasting:
Demand Forecasting

A major component of demand management


is forecasting the amount of product that will
be purchased by consumers or end users.
In the integrated supply chain all other
demand will be derived from the primary
demand.
A key objective is to anticipate and respond
to primary demand as it occurs in the
marketplace.
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Figure 3-1
Supply-Demand Misalignment

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Table 3-1 How Demand


Management Supports Business
Strategy

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Traditional Forecasting

An example of integrating forecasting


with production is illustrated by Figure
3-2.
Long-term (more than three years),
midrange (one to three years), and
short-term forecasting are each
important contributors to the
forecasting process.
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Figure 3-2 Integration of Sales


Forecasting and Production

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Collaborative Planning,
Forecasting, and
Replenishment

CDFR is recognized as a breakthrough


business model for planning,
forecasting, and replenishment.
Uses available Internet-based
technologies to collaborate from
operational planning through execution.
Developed by Wal-Mart and WarnerLambert in 1995.

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Collaborative Planning,
Forecasting, and
Replenishment

The CDFR model is illustrated in Figure


3-3.
Emphasizes a sharing of consumer
purchasing data among and between
supply chain partners.
Creates a direct link between the
consumer and the supply chain.

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Figure 3-3
CPFR Business Model

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Collaborative Planning,
Forecasting, and
Replenishment

The plan and the forecast are entered


by suppliers and buyers into an Internet
accessible system.
Within established parameters, any of
the participating partners is empowered
to change the forecast.
Only a few CPFR initiatives have been
made public, but results are impressive.

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Supply Chain Technology:


Midwest Pharmaceuticals

Using a statistically advanced demandmanagement system the company


discovered that in one of its five 3,000
product families, 72% of the products were
in the mature phase and 14% were in
decline.
Management modified and improved its
product investment strategy.
In essence, demand management helped
make the company more profitable and
effective.
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Order Fulfillment and Order


Management

Collaborative planning improves the


quality of the demand signal for the
entire supply chain through a
constant exchange of information
from one end to the other.
Goes beyond the traditional practice.
Examine the three critical elements of
collaborative planning in Figure 3-4.
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Figure 3-4
Collaborative Planning

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Order Fulfillment and Order


Management

Order fulfillment activities differ as


a supply chain matures through
transactional to interactive to
interdependent levels.
Examine the four key stages of
order fulfillment in Figure 3-5.

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Figure 3-5
Stages of Order Fulfillment

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Order Fulfillment and Order


Management

Order-management systems represent


the principal means by which buyers
and sellers communicate information
relating to individual product orders
and is key to operational efficiency
and customer satisfaction.
Examine the characteristics of ordermanagement functions in Figure 3-6.
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Figure 3-6
Order-Management Functions

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Order Fulfillment and Order


Management

The order cycle traditionally


includes only those activities that
occur from the time an order is
placed to the time it is received by
the customer.
Examine the four principal
activities of the order cycle in
Figure 3-7.
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Figure 3-7
Major Components of the Order
Cycle

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Order Fulfillment and Order


Management

Order placement methods seem to be


changing to accommodate new
technologies.
Examine order placement trends in
Figure 3-8.

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Figure 3-8
Order-Placement Trends

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Order Fulfillment and Order


Management: Other Issues

Order processing
Order preparation
Order shipment
Length and variability of the order
cycle
Examine the order cycle time analysis
in Figure 3-9 and order cycle length
and variability in Figure 3-10.
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Figure 3-9
Example of Order Cycle Time
Analysis

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Figure 3-10
Order Cycle Length and
Variability

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Order Fulfillment and Order


Management: E-Commerce

Success is just as much about designing


and implementing the basic principles of
logistics and supply chain management as it
is about marketing the latest technologies.
According to Richer and Kalatora10, some of
the critical decisions are related to
the evaluation of multiple fulfillment
planning strategies.
What are the reasonable alternative
fulfillment strategies?
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Five Alternative Fulfillment


Strategies for E-Commerce
1.
2.
3.
4.
5.

Distributed delivery centers


Partner fulfillment operations
Dedicated Fulfillment centers
Third-party fulfillment centers
Build to order

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Customer Service:
The Logistics/Marketing
Interface

Customer service is often the key link


between logistics and marketing.
Examine the traditional logisticsmarketing interface in Figure 3-11.

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Figure 3-11 The Traditional


Logistics/Marketing Interface

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Customer Service:
The Logistics/Marketing
Interface

A new vision of the interface is


represented by National Semiconductor,
whose re-engineering of the supply chain
reduced overall logistics cost.
Required a more dynamic, proactive
approach that recognized the value-added
role of logistics supply chains in creating
and sustaining competitive advantage and
providing win-win outcomes.
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Customer Service:
The Logistics/Marketing
Interface

Becton Dickinsons commitment resulted


in the creation of a Supply Chain Services
operating division of the company.
This new perspective emphasizing valueadded is providing the basis for other
companies such as Sears, Proctor &
Gamble, Nabisco, Hershey, and Dell
Computer to improve both efficiency
and effectiveness.
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Customer Service:
The Logistics/Marketing
Interface

Defining customer service


In terms of levels of product
In terms of types of customer
support/service
In terms of levels of involvement
In terms of complexity of customer
service

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Customer Service:
The Logistics/Marketing
Interface

Elements of Customer Service


Time
Dependability

Cycle time

Safe delivery

Correct orders
Communications
Convenience
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Table 3-2 Customer Service Elements


for the Food Industry

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Figure 3-12 Example of the


Frequency Distribution of Lead
Time

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Customer Service:
Performance Measures

Traditional

% availability in base units


Speed and consistency
Response time to special
requests
Speed, accuracy, and
message detail of response
Response and recovery
time requirements
Response time, quality of
response
Chapter 3

New

Orders received on
time
Orders received
complete
Orders received
damage free
Orders filled
accurately
Orders billed
accurately

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Table 3-3 Elements and


Measurement of Customer Service

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Customer Service:
Implementation of Standards

Set standards at realistic levels.


Quality levels set below 100% can be
problematic.
Consult customers on policies and
standards.
Communicate standards to customers.
Measure, monitor, and
control customer service
standards.
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Customer Service: Overview

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 added value can lock
up customers.
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Figure 3-13
Customer Service Issues

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Stockouts

Four possible outcomes from a


stockout
Customers wait
Back orders
Lost sales
Lost customers

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Expected Costs of Stockouts


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

Estimated
cost per
stockout

100%

---

$ 28.20

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Channels of Distribution

One or more companies or individuals


who participate in the flow of goods and
services from the producer to the final
user or consumer.
Wide variety of firms comprise these
channels.
Examine Figures 3-14 & 3-15.

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Figure 3-14
Distribution Channel Separation

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Figure 3-15
Examples of Channels of Distribution for
the Food Products Manufacturing Industry

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Growth and Importance of


Channels of Distribution

Retail channels
showing dramatic
growth.
Mass
merchandisers
such as Wal-Mart,
Kmart, Sears, and
Target squeezing
smaller retailers .
Chapter 3

Nature of logistics
changing to
accommodate
customized
systems.
Successful
retailers base
efficiency on
logistics systems.

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Chapter 3:
Summary and Review
Questions
Students should review their
knowledge of the chapter by
checking out the Summary and
Study Questions for Chapter 3.
This is the last slide for
Chapter 3

60

End of Chapter 3 Slides


Demand
Management and
Customer Service
61