Chapter 4: Logistics Customer Service

Skip: Determining Optimum Service Levels (pp. 97-100)

Skip: Service as a Loss Function (pp. 100-101)

• Definition and Measurement.

• Fundamental Tradeoff– Sales-Service and Cost-Service relationships.

• Service as a Constraint.

• Contingencies.

Customer Service

• Customer service is the result of logistics activities.

– Create and foster customer loyalty through good service.

• Hard to define & hard to measure comprehensively.

– Includes:

• Pre-transaction customer information about delivery options, return policy, warranty, billing information.

• Post-transaction support after the sale, installation, repair, returns, recall.

• Employee training affects all areas of customer service.

• Not all customers should have same level of service.

Customer Service Measures

• Availability– % of demand filled from stock– Example: 95% availability means 5% of demand is

backordered.

• Order Cycle Time– Time between placing and receiving an order.– Includes:

• Order transmittal (consider role of e-commerce).• Order processing (document prep., credit check, etc.).• Order assembly (may need to produce if out-of-stock).• Delivery.

Customer Service Measures

• Availability and Order Cycle Time address time a customer waits.

• Customers point of view:– When will I receive it?– Is it correct?

• Want on-time delivery and high quality.– Delivery reliability often more important than speed.– Correct, undamaged order expected.

Fundamental Question

• What level of service should be offered?

• Hard to answer!

• Consider tradeoffs.

Fundamental Tradeoff

• High level of customer service creates:– Higher sales and revenues.– Higher costs.

• Lower level of customer service creates:– Lower costs.– Lower sales and lost customers.– Examples:

• 5% decrease in service level = 24% drop in purchases.• 6 times more expensive to develop new customers than

keep old customers.

Sales-Service Relationship

• Increasing service increases cost and revenue.

$

Customer Service Level

Revenue

Cost

Sales-Service Relationship

• Want to maximize Profit = Revenue - Cost.

$

Customer Service Level

Profit

Revenue

Cost

Sales-Service Relationship

• Optimum service level = Maximum Profit

$

Optimum Customer Service Level

Profit

Revenue

Cost

Determining Optimum Service Level

• Optimum service level = Maximum profit.– Not maximum sales.

• Cost as a function of service can be estimated.– Cost of better transportation and storage is known.

• Sales (revenues) as a function of service is very hard to determine.– Can vary service levels and measure sales - Dangerous!

– Easy to survey customers, but may not be reliable.

Service as a Constraint

• Select several alternative logistics systems with different levels of service.– Evaluate cost of corresponding transportation and

storage options.

• Ask “Will expected increase in revenues will exceed estimated costs?”– Easier than “What is best level of service to offer?”

• See Table 4-3 p. 102

Service as a Constraint

Alternative Logistics Cost Service Level*

Water transport $5,000,000/yr 80%Low inventory

Rail transport. $7,000,000/yr 85%Medium inventory

Truck + air transport. $11,0000,000/yr 95%High inventory

* % of customers receiving 1 day service

Will revenues from increase in service offset added costs?

Contingencies

• Breakdown/Natural Disaster:– War, riots, attack, bankruptcy, etc.– Fire, flood, earthquake, hurricane, etc.

• Strikes:– By employees, suppliers, affiliated workers.– Examples: UPS strike 1997, trucking strike 1994.

• Product Recall:– Recall from customers and from logistics pipeline.– Find, collect, and repair or replace.

Contingencies

• Prepare for:

– Loss of product or service capability.

– Loss of data (computers).

– Loss of communications.

– Loss of transportation.

• Goal: Keep customer satisfied