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African Journal of Hospitality, Tourism and Leisure Vol. 1 (3) - (2011)

ISSN: 2223-814X

Logistics and Customer Service in the

Hospitality Industry

Angelo NicolaidesFaculty of Human Sciences

Vaal University of Technologyand

Orestes PeristerisUniversity of [email protected]

+27 82 2670523

Abstract

This article evaluates the statement that companies may increase efficiencies and profitability bysegmenting their customer base in terms of importance, for the purpose of providing specialisedservices. We specifically refer to how customer segmentation compares to basic service as proposedby Bowersox and Closs and discuss the advantages and disadvantages of the basic service approachas well as the factors which have contributed to its success. We also discuss the background andcurrent state of the customer service environment and provide an opinion of which approach tocustomer service is preferable.

INTRODUCTION

Terminology

Customer service is defined as a process forproviding significant value-added benefits to

the supply chain in a cost-effective way(Bowersox & Closs, 1996:66).

Basic service approach to customer service isthe provision of a standardised service offeringwhich is based on a specific level ofavailability, operational performance andreliability which is provided to all customers.(Bowersox & Closs, 1996:74)

Customer segmentation in a logistics context isthe segmentation of customers into distinctgroups, which are differentiated in terms ofprofitability, for the purpose of providing the

appropriate level of service to each customerand to provide key customers with specialisedservices (Cottrill, 2007:9).

Trends in the Customer Service Environmentfrom a Supply Chain Perspective

The purpose of this section is to give anoverview of certain trends and issues thataffect customer service in practice, from alogistical perspective. These issues are beingdiscussed separate from the points to follow as

they pertain to both basic service andcustomer segmentation. An important aspectof customer service is that the organisation scustomer service strategy must be aligned with

organisational policy and goals in order to besuccessful.

There are many trends which are changing theway in which organisations are conductingtheir operations. In this section we will brieflydiscuss the main trends and changes whichare taking place. Many of these trends are theresult of the transition from an industrial to aninformation technology driven society. Thesetrends will give us insight as to how logisticsoperations are changing, and if interpretedcorrectly can result in a competitive advantagefor a firm (Bowersox, Closs & Skank, 2000:3).

Customer Service to RelationshipManagement

According to Bowersox and Closs (2000; 3);leading firms increasingly recognise thatsuccess hinges on establishing intimaterelationships with key customers. This trendemphasises a movement towards more closelylinked relationships with customers, allowingfirms to provide customised levels of customerservice. All customers do not have the same




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service expectations and do not necessarilywant or deserve the same overall level ofperformance (Bowersox et al., 2000:3). Thisstatement further emphasizes the need tomove from a transactional view of dealing withcustomers to a relationship based arrangementin order to better understand customer

requirements. This will enable the organisationto anticipate and meet specific customerrequirements as efficiently and effectively aspossible.

Adversarial to Collaborative

The conflict between buyers and sellers arisesas each party wants the best financial deal,and neither party trusts the other. This resultsin a highly inefficient supply chain.Collaboration results in a potentially vastincrease in the efficiency of the supply chain asa result of decreased work duplication and

redundancy. (Bowersox et al., 2000:4).Collaboration follows on from the previouspoint of relationship management, asrelationship management is required tomaintain supply chain collaboration.

Forecast to End cast

Many firms continue to forecast activity levelsand events that other participants in the supplychain already know. (Bowersox et al., 2000:5).This issue follows on from collaboration, in thatthrough collaboration and information sharing

this inefficiency can be avoided and an overallsupply chain policy can be developed that aimsto improve the customer service given to theend consumer.

These trends seem to indicate that there is anoverall shift from using an undifferentiatedservice approach on a transactional basis tocustomer segmentation and the use of aspecialised service approach, as the movetoward relationship management, collaborationand information sharing suggest.

Third Party Logistics Service Providers

A third party logistics provider (3PL) is a firmthat provides logistics services to companiesfor part, or sometimes all of their supply chainactivities. This process is known asoutsourcing. Third party logistics providersspecialise in integrated warehouse andtransportation services that can be scaled andcustomised to meet customer requirements interms of inventory availability, order cycle timeas well as any specialised activities which may

form part of the organisation s operations(http://en.wikipedia.org/wiki/3pl).

The question must then be asked; why would afirm consider outsourcing? Some companiessimply lack the expertise and ability to performthe logistics activities themselves. In this case

the organization would more than likely chooseto outsource its logistics functions to a 3PL.3PL s allow firms to focus on their corecompetencies as the following exampleillustrates. Phoenix Brands has decided tooutsource its transport and inventory activitiesto a 3PL, leaving their own management freeto focus on manufacturing and marketing.Phoenix Brands, a consumer goods companyis now able to maintain competitive levels oflogistics service while focusing their resourceson maintaining high levels of quality in theircore functions. 3PLs also provide EnterpriseResource Planning (ERP) systems which allow

the organisation to better collaborate andshare information with its customers, enablingthe firm to have access to relevant informationon a real time basis for planning purposes(Macdonald et al., 2007:19).

The advantage to an organisation making usea 3PL is based on two characteristics of 3PL s;(1) 3PL s specialization in there respectiveareas of expertise, and (2) from their ability toachieve economies of scale in areas were asingle firm would not have sufficient demand toachieve such scales. 3PLs are able to supportboth basic service and value-added service by

providing specialised services to organisationsaccording to their customers requirements,which results in effective customer service anda reduction in the cost of operations.

Fourth Party Logistics Service Providers

A further development in the evolution of theoutsourcing process is the fourth party logisticsservice provider (4PL). The convergence oftechnology and rapid acceleration of e-capabilities have heightened the need for aover-arching integrator for activities which spanthe entire supply chain (Kivinen & Lukka,

2000:23). This development gives rise to anew player in the supply chain, someone whohas the knowledge, experience and expertiseto oversee and coordinate the whole supplychain as one flowing unit.

Comparison of Basic Service and theCustomer Segmentation Approach

Basic Service




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Basic service addresses all aspects ofcustomer service. To implement a basicservice platform, it is necessary to specify thelevel of basic service commitment tocustomers in terms of availability, operationalperformance and reliability. The level of basicservice that needs to be provided is related to

the firm s overall marketing strategy andelements of the marketing mix which aim toachieve the organisation s long-term strategicgoals (Bowersox & Closs, 1996:74).

Basic service is the minimum level of supportprovided to all customers which stresses that afirm should not deliberately violate its programby offering unique services or limiting serviceto selected customers. The critical decision liesin selecting profitable customers and to avoidproviding a lower basic service to marginallyprofitable customers. (Bowersox & Closs,1996:74)

Basic service must be implemented at leastcost in order to increase the profitability of theorganisation s operations. If price is the maincompetitive feature in the market then firmsshould seek to differentiate themselves interms of the value and quality of the servicesthey offer and create competitive advantagethrough value creation (Bowersox & Closs,1996:74). One of many examples of how firmscould differentiate themselves from theircompetitors is through the provision of reverselogistics. Customers on average return about6% of everything they buy. Firms need to

consider this dimension of service whenestablishing a basic service level (Jayaraman,Vaidyanathan & Luo, 2007:56).

In order to be able to improve or maintain highlevels of basic service quality, measurement ofdifferent basic service elements is critical.

The first element of basic service is availabilitywhich is the ability to have inventory whenrequired by the customer. The attributes usedto measure availability include aspects such asstock-out frequency, fill rate and ordersshipped complete. Stock-out frequency is the

probability that a stock-out will occur and theamount of times that demand exceeds productavailability. Fill rates measure the impact andmagnitude of stock-outs over a period of time.Orders shipped complete refer to how manytimes all the inventory that a customer hasordered is available (Bowersox & Closs,1996:67-70).

The second element of basic service isoperational performance involving aspectssuch as speed, consistency, flexibility and

malfunctions/recoveries. Speed is the elapsedtime from when order is placed until shipmentarrival. Consistency is the firm s ability toperform at the expected delivery times overvarious performance cycles. Flexibility refers tothe firm s ability to handle extraordinarycustomer service requests. Malfunctions will

occur in the basic service program and firmswill need programs to prevent andaccommodate these special situations(Bowersox & Closs, 1996:70-71).

Reliability is the third element of basic serviceand looks at the ability to comply with levels ofplanned inventory availability and operationalperformance. The key to achieving logisticsquality is measurement. The three aspects ofmeasuring service quality includemeasurement variables, measurement unitsand measurement bases. Measurementvariables are performance activities that

represent items to be measured such as sales,orders and stock-outs measured over variousperiods. Measurement units are the selectionof unit measures such as cases, units ordollars, for example to track and report stock-outs in both numbers of units and inventorydollars. The final consideration is the selectedmeasurement base which defines howperformance reporting is aggregated.(Bowersox & Closs, 1996:71-74)

Stock & Lambert (1993:102) suggest that it isessential that a firm adopt a customer servicestrategy that is based on customer needs, is

consistent with overall marketing strategy, andadvances the organisation s long-range profitobjectives.

Cost/Revenue Trade-Offs can be use as a toolto determine how a change in customerservice level affects profitability in terms ofsales volume and cost (Stock & Lambert,1993:105).

A Customer Service Audit is a critical methodof obtaining information that firms can use totheir advantage to develop or improve theirbasic service strategy.

The External Audit identifies elementscustomers believe to be important, how theyperceive services provided by major vendorsand which service variables are most importantsuch as order cycle times, flexibility or ordersshipped complete. This information isimportant in determining the base level of thebasic service program in order to develop theprogram around customer expectations. (Stock& Lambert, 1993:110-111)




ISSN: 2223-814X

The Internal Audit will involve reviewing thefirm s current operations, by interviewingmanagers, in order to serve as a base fordetermining the firm s internal level ofperformance and comparing it to thecustomer s perception of service beingprovided. Managers will identify

inconsistencies between service performanceand customer perceptions from the obtainedinformation in order to align the firm soperational performance and customerperceptions (Stock & Lambert, 1993:117-118).

The next step of the Customer Service Auditwould be to identify potential solutions, bycomparing the firms own service performancelevels with competitors (competitivebenchmarking) and positioning the firm sservices in the market accordingly in terms ofthe relative performance and importance ofspecific operational variables (competitive

position matrix and performance evaluationmatrix). Firms must identify and takeadvantage of strategic opportunities which willbe identified through this process (Stock &Lambert, 1993:118-124).

The final step is then to establish customerservice levels which include setting standards,maintaining on-going performancemeasurements, communicating with all theemployees responsible for implementing thecustomer service program, as well asestablishing formal reporting structures to alerttop management of any deviations from the set

level of performance (Stock & Lambert,1993:124).

Dell makes use of a high performance basicservice program with an obsessive adherenceto a clearly defined strategy and unwaveringcommitment to core values. Dick Hunter, vicepresident of Dell Americas Manufacturing andDistribution Operations, views Dells supplychain efficiencies as one component of aperceptual success engine which allows themto pass savings on to customers which drivesdemand and market share and subsequentlyhelps suppliers drive their business (Hunter,

2005:34-39).

CUSTOMER SEGMENTATION

The aim of logistics is to satisfy the needs ofcustomers. Business logistics contributes to anorganisation s success by providing customerswith timely and accurate product delivery.Some argue that in order to meet that objectiveit is important to segment a firms customers.The marketing concept holds that to achieveorganisational goals depends on determining

the needs and wants of the target market andto allocate resources to meet those needsmore efficiently and effectively thancompetitors. Thus the key strategic objective ofthe marketing function is to penetrate theidentified market segments in order togenerate profitable transactions for the firm s

long term wellbeing (Linford, 2003:37-38).

The process of customer segmentation mayinvolve segmenting the market into differentindustries if the organisation s customers arespread across diverse industries, for examplethe pharmaceutical industry; the automotiveindustry and the fast moving consumer goods(FMCG) industry. Performance indicators foreach industry are then identified, for example,for the pharmaceutical industry a firm couldfocus on the following key performance areas:cold chain management for temperaturesensitive medicines; batch trace ability and

sensitive reserve logistics and disposableprocedures. If the industry segmentationapproach is followed then these industries arethen further segmented into customergroupings that are characterised by similarrequirements. Typical customer segments forthe pharmaceutical industry includewholesalers, private hospitals and pharmacies(Linford, 2003:37-38). If the industrysegmentation approach is not followed thensegmentation will take place at the customerlevel.

A useful method to segment one s customers

is the ABC analysis, which is used to classifycustomers into different categories ofprofitability. The outcome of this method is forthe firm to identify the most profitablecustomers in order to provide higher levels ofcustomer service to those customers. Theultimate aim is to encourage repeat businessfrom the customers that receive this higherlevel of commitment (Linford, 2003:37-38).

Each of these customer segments will havedifferent service requirements, which will resultin a differentiated customer service offering.These offerings will in turn enable a firm to

differentiate itself from its competitors but moreimportantly help it provide specialised or value-added services to these segments (Linford,2003:37-38).

Value-added services can be defined asadditional services which are offered over andabove the organisation s basic service offeringthat brings added value to the total customerrelationship and strengthens the revenuestream for both customer and supplier, therebyencouraging repeat sales and driving




ISSN: 2223-814X

purchases of additional products and services(Anon, 2002:16). When firms make use of thevalue-added service approach it is imperativethat they do not treat all customers the sameand therefore they must establish andunderstand the requirements of the differentcustomer segments in order to design a

service offering that matches the customer srequirements (Linford, 2003:37-38).

Five primary performance areas of value-added services that have been identifiedinclude:

Customer-Focused Value-Added Servicesoffer buyers and sellers alternative ways todistribute their products using third-partyspecialists (Bowersox & Closs, 1996:80).Northern Telecom s customers now want themto inventory products, give them visibility to seethe inventory so they can allocate against it,

pick product, merge it with other equipment,label it the way they need it to be labelled sothat it looks like its coming directly from themand also to comply with the recipients labellingrequirements. All of these are performed by athird-party logistics provider, USCO LogisticsServices Inc. (Harrington, 1998:52).

Promotion-Focused Value-Added Servicesinvolve the assembly of point-of-purchasedisplays coupled with a wide variety of otherrelated services aimed at stimulating sales(Bowersox & Closs, 1996:80). Procter andGamble holds promotions at supermarkets and

convenience stores with price incentives thattake the form of price promotions and discountcoupons distributed by mail or in store (Barret& Steinert, 2004:62).

Manufacturing-Focused Value-Added Servicesinvolve unique product assortment and deliveryto support manufacturing. Cross-Dockfacilitator services provide advanced shipmentnotification, mixed store ready pallets, andenable precise delivery times (Bowersox &Closs, 1996:80).

Time-Focused Value-Added Services involve

using specialists to sort, mix and sequenceinventory prior to delivery. Exel Distributionmixes food manufacturer products to exactassortment required by retail food stores(Bowersox & Closs, 1996:81).

Basic Services Specialists may be used toprovide day-to-day execution of all or part of afirm s customer service program. RoadwayLogistics Service functions as a third-partyservice provider for Libbey-Owens-Ford Glass(LOF). Not only does Roadway perform

transportation services and arranges for othercarriers to handle segments of LOF s freight,but it also facilitates necessary administrationand carrier payment using still anotherspecialised service provider Cass Logistics Inc.(Bowersox & Closs, 1996:82).

From the above definition and the five primaryareas it is clear that value-added services arecustomer-specific and involve the sharing ofinformation between the company and thecustomer in order to successfully satisfy thecustomer s requirements.

Once a firm has segmented its customer baseit is essential to collaborate with thosecustomers in order to work toward a mutuallybeneficial relationship. According to Wadhwa,Khanda, Bhoon & Bibhushan, 2006:28; someof the benefits associated with supply-chaincollaboration include:

· A reduction in inventory and personnelwhich results in a decrease in theassociated costs.

· Better delivery performance throughreduced cycle times.

· Increased sharing of information, ideasand technology allows the firm toincrease the speed with which its newproducts reach the market.

· Collaboration with customers canresult in a competitive advantage byallowing a firm to focus on its corecompetencies as a result of increased

information sharing, which serves tostrengthen the trust andinterdependence between a firm andits customers. All of this helps the firmto focus on working toward goals ofthe supply chain and not individualcompanies.

All of these factors allow a firm to provideimproved customer service.

Whilst the customer segmentation approachenables a firm to match service levels with itsvarious customer segments, allowing it to

allocate resources more effectively as well asmaximise profitability, there are somedisadvantages to this approach (Cottrill,2007:9).

· There may be a reluctance to shareinformation between companies in thesupply chain for strategic competitivereasons (Cottrill, 2007:9).

· Inability of the firm s managers toreach a consensus with regard to theservice levels provided to each




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customer which will inhibitcollaborative efforts (Cottrill, 2007:9).

· Providing value-added services resultsin the increased complexity ofoperations.

· The firm needs to understand and beprepared to go beyond its basic

service to create customer satisfactionand facilitate long-term success. Thisrequires a significant overallcommitment that many firms may notbe willing to take due to the associatedrisk and high investments (Bowersox &Closs, 1996: 87).

· The costs of servicing small segmentsincreases due to less opportunity toconsolidate logistical volume for costcontrol. (Bowersox & Closs, 1996:64)

Given the discussion above, it is necessary to

compare basic service to customersegmentation in-order to determine thefundamental similarities and differencesbetween them.

The basic service program is designed to meetspecific customer requirements for low-cost,high quality, high volume product provided withminimal service and customer support. Basicservice drives out cost and can improve thefirm s profit margin by allowing a firm tostandardise its products and services. Due tothis standardisation, costs can be minimised asspecialised service offerings are not offered to

individual customers. With the basic serviceapproach firms can provide a more predictablecycle time. Firms can also take advantage ofconsolidating volume, thereby reducing costs(Shulman & Allen, 2007:3-4). The customersegmentation approach is more complex thanbasic service as it is customer specific. Thisresults in higher costs related to reduced batchsizes and specialised packaging and deliverycircumstances as unique services are providedto different customers with uniquerequirements. Firms that offer value-addedservices therefore need to be flexible in termsof their operations, strategies and customer

service decisions if they wish to successfullyfulfil the objectives of the customersegmentation approach (Shulman & Allen,2007:6-7).

The similarities between the two approachesare that they both aim to increase theprofitability of the organisation by increasingthe efficiency and effectiveness of operations.Both approaches aim to structure theiroperations to provide a product offering thatmeets their customer s requirements better

than competitors in order to gain a competitiveadvantage.

Advantages and Disadvantages of the BasicService Approach

Advantages

Standardisation of the Logistics Configuration

The use of a basic service approach toformulate a customer service strategy enablesthe organisation to devise standard operatingprocedures concerning activities such astransportation, warehousing andmanufacturing. According to Dick Hunter(2005:34) vice president of Dell AmericasManufacturing and Distribution Operations,standard configurations keep costs low andenable Dell to forecast demand moreaccurately.

System-Wide Measurement and Improvementis Possible

A basic service approach requires anorganisation to have standard performancemeasures in place in order to establishperformance levels according to customerrequirements as established by the CustomerService Audit (Stock & Lambert, 2001:110).This allows for a system-wide approach tomeasuring and reporting on the level of servicebeing provided by the logistics operations ofthe firm. Being able to control performance on

a system-wide level allows for problems anddeviations from the set standards to bediscovered and rectified and for costs to becontrolled. Operational improvement initiativesas well as cost saving programs can also beimplemented system-wide as a result. Procter& Gamble has implemented multi-echeloninventory (MEI) tools that have optimisedinventory holding across their Beauty CareProducts Division, reducing their total inventoryholding by 3%-7% while maintaining inventoryavailability service levels above 99%, whichwill now be implemented across all theiroperations as a result of the MEI tools success

(Kerr, 2008:24).

Scale Efficiencies

The basic service approach allows foreconomies of scale efficiencies to be realisedas reduced service differentiation andstandardised operations optimises shippingthrough full loads which reduces cost(Schulman & Allen, 2007:4). As a result ofstandardisation greater volumes of goods can




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be moved through the distribution channelwhich also creates economies of scale.

Reduced Complexity

As the service offering is not differentiated andno value-added services are provided, the

organisation can focus on developing corecompetencies and a clearly defined logisticsstrategy which will enable the firm to develop acompetitive advantage through customerservice. According to Keith Harrison, globalproduct supply officer for P&G, Procter &Gamble have 3 priorities which theyemphasise in their supply networks;forecasting demand, actionable visibility andagility (Anon, 2007:12). Dell has reduced costsand differentiated their business by focusing onthe Direct Model as a logistics strategy, whichis based on assembling IT equipmentaccording to customer requirements and

shipping directly to customers (Hoffman,2007:12).

Disadvantages

Segmentation of Customer Base Not Possible

The use of a basic service approach does notallow for customers to be segmentedaccording to profitability and specialisedservices to be offered as part of theorganisation s product offering as a basic levelof service is provided to all the organisation scustomers (Bowersox & Closs, 1996:74). This

precludes the ability to collaborate closely withkey customers and provide specialisedservices in order to gain additional businessand customer loyalty. The basic serviceapproach also excludes marginally profitablecustomers which cannot be serviced efficientlyat the basic service level. Both theseimplications suggest that potential revenuemay be lost as a result of not offering adifferentiated service to customers based ontheir profitability to the firm.

Increasing Customer Expectations

A basic service program creates certaincustomer expectations. Focusing on providingset levels of service to all customers createsthe possibility that two firms in an industry maycompete based on logistics competency andcustomer service which will lead to increasingcustomer expectations as the firms attempt togain a competitive advantage by increasing thelevel of their basic service offering throughshorter order cycle lead times and higherlevels of inventory availability. Thisphenomenon increases logistics costs and

puts pressure on the operations of the firm,constraining profitability (Bowersox & Closs,1996:75).

Success Factors

A major factor which has determined the

success of the basic service approach is thereduced complexity of operating at a set levelof service across all the operations of theorganisation. This allows the organisation tofocus on its core competencies and develop aclearly defined customer service strategywhich can be communicated and understoodby the employees of the organisation, themembers of the organisation s supply chainand all the stakeholders involved in firm soperations. Operational employees know whatperformance levels they are expected toachieve when carrying out the firm s logisticsactivities and the marketing function and sales

staff have a clear idea of the level of servicethey can offer to potential customers as part ofthe firm s product offering. Reduced complexityalso reduces the probability of errors occurringwhen performing specialised services tospecific customers. The reduced level ofcommunication and collaboration requiredbetween the organisation and its customersmeans fewer resources are devoted todetermining customer expectations, as theseexpectations are established on a periodicbasis as apposed to continually communicatingwith customers in order to establish theirrequirements.

Another success factor of this approach isattributed to the fact that the basic service levelis applied across all the operations of theorganisation and is provided to all customers(Bowersox & Closs, 1996:74). Companies setspecific performance standards and metricswhich are measured and compiled system-wide. This allows for logistics performance tobe analyzed over time enabling seniormanagement to determine how successfullythe organisation is meeting customerexpectations as well as determining thesuccess of service improvement initiatives,

such as Procter & Gamble s implementation ofthe MEI tools. This ensures that a structuredapproach is taken when establishing andreassessing the level of service which isprovided to customers, allowing theorganisation to implement continuousimprovement over time with the resultantbenefits for the organisation and the supplychain.




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CONCLUSION

The statement that companies may increaseefficiencies and profitability by segmentingtheir customer base in terms of importance forproviding specialised services may beconsidered valid provided that the conditions

exist, which enable this approach to customerservice to succeed. These conditions arehowever, fraught with problems. The requiredlevel of collaboration and information sharingnecessary for this approach to succeed aredifficult to achieve in practice because offactors such as flawed business informationand a limited view of the entire supply chain.The lack of a common view of the customerbase, caused by the gap between themarketing and sales functions and the supplychain managers, lead to perspectives whichare different because of the inherent divisionsand lack of cross functional communication

which exists in many organisations. A lack ofadequate analytical tools and an organisationalstructure which does not facilitatecommunication constrains the ability of thecustomer segmentation approach to provideincreased efficiencies and profitability as thisapproach to customer service requires thatcustomer profitability be clearly defined andagreed upon in order to provide value-addedservices accordingly. (Cottril, 2007:9) Also theflexibility, agility and logistical competencyrequired to successfully implement thisstrategy are not present in many organisations.

Given the existence of these challenges, thebasic service approach may be a betteralternative as the reduced complexity,standardisation and system-wide application ofthis approach increases its appeal toorganisations which cannot achieve the level ofinformation sharing, collaboration and flexibilitywhich is a prerequisite for the customersegmentation approach. In the case oforganisations lacking these competencies thebasic service approach will provide greaterefficiency and profitability than the customersegmentation approach.

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