SCM 560 Chapter 3 Lecture

CHAPTER 3

Customer Service

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

3-2Customer Service and Logistics

• As noted earlier, customer service is where logistics and marketing interface.

• Customer service often referred to as the output of logistics.

• Concept of the “augmented product”


3-3Elements of Customer Service

Transaction elements

• Written statement of policy

• Customer receipt of policy statement

• Organization structure

• System flexibility

• Management services

• Installation, warranty, alterations, repairs, parts

• Product tracing

• Customer claims, complaints, returns

• Temporary replacement of products

• Stockout levels

• Order information

• Elements of order cycle (comm., entry, process., pick/pack, delivery)

• Expedited shipments

• Transshipment

• System accuracy

• Order convenience

• Product substitution

Posttransaction elements

Pretransactionelements


3-4Measures of Customer Service Performance

Pre-Transaction ElementsInventory AvailabilityTarget Delivery DatesInformation Capability

Post-Transaction ElementsInvoice AccuracyDamageActual Delivery DatesReturns/AdjustmentsInstallationProduct Replacement

Transaction ElementsConvenience of placing ordersOrder Cycle TimeOrder Cycle ConsistencyOrder Fill RateOrder StatusOrder TracingBack-Order StatusShipment shortagesShipment DelaysProduct SubstitutionsRouting Change


3-5Examples of Customer Service Standards

In-Stock PercentageBy product or product groupBy stocking-point locationBy customer or class of customerBy time periodBy order completeness

Transit TimeBy mode of shipmentBy stocking-point locationBy customer or class of customerBy time periodBy size of order

Order Cycle ConsistencyBy on-time deliveriesBy stocking-point locationBy customer of class of customerBy size of order


3-6The Perfect Order

• Each element of the service package has been performed to customer specifications.

• On-time; complete; error-free• Very difficult to achieve.• Order service level is product of service

level for composite elements:– On-time delivery = 90%– 80% complete– 70% error and damage free– (.9) (.8) (.7) = 50% service level


3-7Methods of Establishing a Customer Service Strategy

• Determining channel service levels based on knowledge of consumer reactions to stockouts

• Analyzing cost/revenue trade-offs• Using ABC analysis of customer service• Conducting a customer service audit


3-8Model of Consumer Reaction to a Repeated Stockout

Source: Clyde K. Walter, “An Empirical Analysis of Two Stockout Models,” unpublished Ph. D. Dissertation, Ohio State University, 1971.

Customer

3Lower

4Other size

2Same

1Higher

Anotherstore

6Ask here

again

5Specialorder

Switch stores

?

Substitute?

Switch brand

?

Substitute?

Switch price

?

No

No

Yes

Yes

Yes

Yes

No

No


3-9Determining Cost of a Lost Sale

• Branding strategy and lost sales

• Different channel members will have different cost of a lost sale (example of baby formula)


3-10Relationship Between Customer Service and Inventory Investment

0

100

200

300

400

500

600

75 80 85 90 95 100


3-11ABC Analysis

• All customers are not equal.

• Need to adjust customer service levels on basis of relative importance (i.e., profit contribution) of customers and products.

• Customer-Product Contribution Matrix (Table 3-1 and 3-2)


3-12

Internal Audit External Audit

Evaluate Customer Perceptions

Differentiate Channel Levels & Market Segments

Identify Opportunities

Determine Marketing Services Mix & Levels

Stages of the Customer Service Audit


3-13Overall Importance Compared To Selected Performance Of Major Manufacturers Evaluated

By Dealers

Source: Douglas M. Lambert and Jay U. Sterling, “Developing Customer Service Strategy,” unpublished manuscript. All Rights reserved.

OverallImpt. -

Dealer Evaluationsof Manufacturers

AllDealers Mfr. 1 Mfr. 2 Mfr. 3 Mfr. 4 Mfr. 5 Mfr. 6

RankVar.Num Description M. SD M. SD M. SD M. SD M. SD M. SD M. SD

1 9 Ability of manufacturer to meet promised delivery date (on-timeshipments)

6.4 0.8 5.9 1.0 4.1 1.6 4.7 1.6 6.6 0.6 3.7 1.8 3.3 1.6

2 39 Accuracy in filling orders (correct product is shipped) 6.4 0.8 5.6 1.1 4.7 1.4 5.0 1.3 5.8 1.1 5.1 1.2 4.4 1.53 90 Competitiveness of price 6.3 1.0 5.1 1.2 4.9 1.4 4.5 1.5 5.4 1.3 4.4 1.5 3.6 1.84 40 Advance notice on shipping delays 6.1 0.9 4.6 1.9 3.0 1.6 3.7 1.7 5.1 1.7 3.0 1.7 3.1 1.75 94 Special pricing discounts available on contract/project quotes 6.1 1.1 5.4 1.3 4.0 1.7 4.1 1.6 6.0 1.2 4.7 1.5 4.5 1.86 3 Overall manufacturing and design quality of product relative to

the price and range involved6.0 0.9 6.0 1.0 5.3 1.3 5.1 1.2 6.5 0.8 5.2 1.3 4.8 1.5

7 16 Updated and current price data, specifications and promotionmaterials provided by manufacturer

6.0 0.9 5.7 1.3 4.1 1.5 4.8 1.4 6.3 0.9 4.9 1.7 4.3 1.9

8 47 Timely response to requests for assistance from manufacturer'ssales representative

6.0 0.9 5.2 1.7 4.6 1.6 4.4 1.6 5.4 1.6 4.2 2.0 4.3 1.7

9 14 Order cycle consistency (small variability in promised versusactual delivery, i.e., vendor consistency meets expected date).

6.0 0.9 5.8 1.0 4.1 1.5 4.8 1.4 6.3 0.9 3.6 1.7 4.4 1.7

10 4b Length of promised order cycle (lead) times (from ordersubmission to delivery) for base line/in-stock ("quick ship")product

6.0 1.0 6.1 1.1 4.5 1.4 4.9 1.5 6.2 1.1 4.3 1.7 3.7 2.0

11 54 Accuracy of manufacturer in forecasting and committing toestimated shipping dates on contract/project orders

6.0 1.0 5.5 1.2 4.0 1.6 4.3 1.4 6.3 1.1 3.8 1.7 3.5 1.6

12 49a Completeness of order (% of line items eventually shippedcomplete) -- made to order product (contract orders)

6.0 1.0 5.5 1.2 4.3 1.2 4.7 1.3 6.0 1.1 4.4 1.4 4.0 1.6

50 33a Price range of product line offering (e;g., low, medium, highprice levels) for major vendor

5.0 1.3 4.4 1.5 4.6 1.6 5.1 1.5 5.2 1.4 4.3 1.6 3.9 1.6

101 77 Store layout planning assistance from manufacturer 2.9 1.6 4.2 1.7 3.0 1.5 3.4 1.6 4.7 1.6 3.0 1.4 3.4 1.2

Note: Mean (average score) based on a scale of 1 (not important) through 7 (very important).


3-14Internal Audit Questions

• How is customer service currently measured?

• What are the units of measurement?

• What are the performance standards?

• What is the current level of attainment?

3-9 a


3-15Internal Audit Questions cont.

• How are these measures derived from corporate information flows and the order processing system?

• What is the internal customer service reporting system?

• How do the functional areas of the business perceive customer service?

• What is the relation between these functional areas in terms of communication and control?

3-9 b


3-16Customer Satisfaction

• Many researchers have argued that customer satisfaction comes down to:

Satisfaction = [Perception of service performance] – [Expectations of the service]• Failure to match performance and

expectations results in “service gaps”• There are, in essence, six potential causes

for customer service gaps.


3-17Customer Service Gaps Gap 1

Gap 5 Gap 6

Gap 2 Gap 3

Gap 4

Source: Thomas Goldsby, Transportation Trends, Vol. 1, No. 1, Feb. 1999.

Supplier’s Expectations

of Service

Customer’s Expectations

of Service

Supplier’s Perceptionof Service

Performance

Customer’s Perceptionof Service

Performance

Actual Service

Performance


3-18Importance And Performance Evaluations For Selected Customer Service Attributes

RelativePerformance

-0.36*

* Performance evaluations of A and B are significantly different at p < 0.05.

12

3

4

5

6

78

9

Performance EvaluationImportance Company A Company BNo. Attribute

Accuracy in filling ordersAbility to expedite emergency orders in a fast, responsive mannerAction on complaints (e.g., order servicing,

shipping, product, etc.)Accuracy of supplier in forecasting and

committing to shipping date for custom-made products

Completeness rate (percentage of ordereventually shipped)Rapid adjustment of billing and shipping

errorsAvailability of blanket ordersFrequency of deliveries (supplier

consolidates multiple/split shipments into one larger, less frequent shipment)

Order processing personnel located in your market area

Computer-to-computer order entry

6.426.25

6.07

5.92

5.69

5.34

4.554.29

3.58

2.30

5.544.98

4.82

4.53

5.29

4.64

5.035.07

5.33

4.07

5.655.23

5.18

4.73

5.27

4.90

4.155.03

5.21

3.53

-0.11-0.25

-0.20

+0.02

-0.24

+0.04

+0.12

10 +0.54**

+0.88**

** Performance evaluations of A and B are significantly different at p < 0.01.

Source: Douglas M. Lambert and Arun Sharma, “A Customer-Based Competitive Analysis for Logistics Decisions,” International Journal of Physical Distribution and Logistics Management 20, no.1 (1990), p.18.

3-9 c


3-19Competitive Position MatrixIM

POR

TA

NC

EH

IGH

ME

DIU

ML

OW

Minor weakness Minor strength

Major weakness Major strength

Competitive disadvantage

Competitive parity

Competitive advantage

Relative performance

1

3

5

7

-3.0 -1.0 +1.0 +3.0

1*2*

4*3*6*

5*

7*8*

9*

10*

3-10


3-20Performance Evaluation Matrix

Performance evaluation

IMPO

RT

AN

CE

HIG

HM

ED

IUM

LO

W

Maintain

Definitely improve Maintain/improve

1

3

5

7

1 3 5 7

1*2*

4*3*

6*5*

7*8*

9*

10*

Maintain Reduce/maintain

Reduce/maintain Reduce/maintain

Improve

Improve

3-11


3-21Strategic Opportunities For A Competitive Advantage

* denotes attribute numberindicates desired shift in relative performanceindicates potential opportunities that may be revealed within specific customer segments

Competitivedisadvantage

Competitiveparity

Competitiveadvantage

Major weakness

Minor weakness

Major strength

Minor strength

Relative performance

IMPORTANCE

HIGH

MEDIUM

LOW

7

5

3

1-3.0 -1.0 +1.0 +3.0

1*2*

3*4*5*6*

*8

*9

*10

*7

Source: Douglas M. Lambert and Arun Sharma, “A Customer-Based Competitive Analysis for Logistics Decisions,” International Journal of Physical Distribution and Logistics Management 20, no.1 (1990), p.23.

3-12


3-22Measuring and Controlling Customer Service Performance

• Establish quantitative standards of performance for each service element.

• Measure actual performance for each service element.

• Analyze variance between actual service provided and standard.

• Take corrective action as needed to bring actual performance into line.

3-13


3-23Customer Service Standards

• Reflect the customer’s point of view.• Provide an operational and objective

measure of service performance.• Provide management with cues for

corrective action.

3-14

Documents

SCM 560 Chapter 3 Lecture