Logistics/Supply Chain Customer Service - mindran.com

1 14-1 Logistics/Supply Chain Customer Service logistics is no longer the last frontier of cost reduction, it s the new frontier of demand generation. 4-2 Customer Servicein Planning TrianglePLANNINGORGANIZINGCONTROLLINGT ransport Strategy Transport fundamentals Transport decisionsCustomer Service goals The product logistics Service Ord. proc. & info. Strategy Forecasting Inventory decisions Purchasing and supply scheduling decisions Storage fundamentals Storage decisionsLocation Strategy Location decisions The network planning processPLANNINGORGANIZINGCONTROLLINGT ransport Strategy Transport fundamentals Transport decisionsCustomer Service goals The product logistics Service Ord.

2 Proc. & info. Strategy Forecasting Inventory decisions Purchasing and supply scheduling decisions Storage fundamentals Storage decisionsLocation Strategy Location decisions The network planning process24-3 Customer Service Defined Customer Service is generally presumed to be a means by whichcompanies attempt to differentiate their product, keep customersloyal, increase sales, and improve profits. Its elements are: Price Product quality Service It is an integral part of the marketing mix of: Price Product Promotion Physical Distribution Relative importance of Service elements Physical distribution variables dominate price, product.

3 Andpromotional considerations as Customer Service considerations Product availabilityand order cycle timeare dominant physicaldistribution variablesCustomer Service hereCustomer Service ElementsCustomer servicePretransactionelements Written statement of policy Statement in hands of Customer Organizational structure System flexibility Technical servicesTransactionelementsStockout level Ability to back order Elements of order cycle Time Transship System accuracy Order conveniences Product substitutionPosttransactionelements Installation, warranty alterations, repairs, parts Product tracking Customer claims, complaints Product packaging Temporary replacement of product during repairs4-434-5 Common Customer Service Complaints12% Damagedgoods31%Product or qualitymistakes7%Other6%Frequently cutitems44% Late delivery4-6 Penalties for Customer Service FailuresCR (2004)

4 Prentice Hall, Reduced the volume of business2% Refused to support promotion16% Discontinued items26% Called in salesman or manager9% Refused to purchase new items18% Stopped all purchases with supplier44-7 Most Important Customer Service Elements On-time delivery Order fill rate Product condition Accurate documentation4-8 Appraise This Measureof logistics Customer ServicePercent of Customer orders shipped by Customer request dateParker-Hannifin Order cycle time contains the basic elements of Customer Service where logistics Customer Service is defined as.

5 The time elapsed between when a Customer order, purchase order, or Service request is placed by a Customer and when it is received by that Customer . Order cycle elements - Transport time - Order transmittal time - Order processing and assembly time - Production time - Stock availability Order cycle time is expressed as a bimodal frequency distribution Constraints on order cycle time - Order processing priorities - Order condition standards ( , damage and filling accuracy) - Order constraints ( , size minimum and placement schedule)

6 Order Cycle TimeCUSTOMERR etail outletCustomer order transmittalTransmittal of backorder itemsOrder deliveryExpress order deliveryFACTORYO rder processing, assembly from stock, or production if no stockWAREHOUSEO rder processing and assemblyComponents of a Customer Order Cycle4-1064-11 Importance of logistics Customer Service Service affects sales - From a GTE/Sylvania study: ..distribution, when it provides the proper levels of Service to meet Customer needs, can lead directly to increased sales, increased market share, and ultimately to increased profit contribution and growth.

7 - Service differences have been shown to account for 5 to 6% variation in supplier sales Service affects Customer patronage - Service plays a critical role in maintaining the Customer base: On the average it is approximately 6 times more expensive to develop a new Customer than it is to keep a current one. 4-12 Service Observations The dominant Customer Service elements are logistical in nature Late delivery is the most common Service complaint and speed of delivery is the most important Service element The penalty for Service failure is primarily reduced patronage.

8 Lost sales The logistics Customer Service effect on sales is difficult to determine74-13 Modeling a Sales- Service Relationship A mathematical expression of the level of Service provided and the revenue generated It is needed to find the optimal Service level A theoretical basis for the relationship Methods for determining the curve in practice - Two-points method - Before-after experiments - Game playing - Buyer surveys Remember Revenuein ROLA4-14 Sales- Service Relationship by the Two-Points MethodLogistics Customer Service levelSales00 Approximation bytwo-points method8 Increasing logistics Customer Service level of a supplier to the best of its competitionSales00 ThresholdDiminishing returnsDeclineRange of transitionRange of transitionSales- Service Relationship4-154-16 Determining Optimum Service Levels Cost vs.

9 Service Theory Optimum profit is the point where profit contribution equals marginal cost Practice For a constant rate, P= trading margin sales response rate annual sales C = annual carrying cost standard product cost demand standard deviation over replenishment lead-time zSet P= C and find z corresponding to a specific Service level9 Profit maximizationRevenueLogistics costsImproved logistics Customer service00 Costs or salesGeneralized Cost-Revenue Tradeoffs4-174-18 Determining Optimum Service Levels(Cont d) Example - Given the following data for a particular product Sales response rate = change in revenue for a 1% change in the Service level (fill rate) Trading margin = $ per case Carrying cost = 25% per year Annual sales through the warehouse = 80,000 cases Standard product cost = $ Demand standard deviation = 500 cases over LT Lead time = 1 week104-19 Determining Optimum Service Levels(Cont d)

10 Find P P= 80,000= $ per yearFind C C= 500 z= 1250 zSet P = Cand solve for z, , = z z = the change in zfound in a normal distribution table, the optimal in-stock probability during the lead time (SL*) is about 92%.4-20 SL (%)U L z87-86 = = = = = = = = 95-94 = = = = = SLLevels in % for Various zValues*Developed from entries in a normal distribution tablezU zL=114-2105010015020025030035087-86 88-87 89-88 90-89 91-90 92-91 93-92 94-93 95-94 96-95 97-96 98-97 99-98 Probability of being in stock during replenishment lead time, %$/yearChange in gross profit, P Change insafetystock cost.