DSM2306 Integrated Transport and Distribution Management in Shipping

6. Customer Service 6.1 Define customer service.

Customer Internal customer – distribution warehouse is an internal customer for the last production point External customer – different organization or individual which takes the ownership, undertake risks or adds value by making goods available at the place of final goods (e.g. wholesaler, distributor, dealer, etc.)

Customer Service A process which takes place between buyer, seller and third party. The process results in a value added to the product or service exchanged. This value added in the exchange process might be short as in a single transaction or longer term as in a contractual relationship. The value added is also shared, in that each of the parties to the transaction or contract is better off at the completion of the transaction than they were before the transaction took place. Thus, in a process view: Customer service is a process for providing significant value added benefits to the supply chain in a cost effective way.

Elements of Customer Service (Bernard J. La Londe and Paul Zinszer) Pre-transaction create a favorable climate for customer service: the customer service policies and programs, the organizational structure necessary to implement the customer service policy, the flexibility of the system or its ability to respond to customer needs. Written statement of policy Based on customer needs Define service standards Determine who reports the performance measurements to whom and with what frequency Be operational or capable of being implemented

Elements of Customer Service (con’t) Pre-transaction (con’t) Customer receipt of policy statement Provide customer with information on how to communicate with the firm if specified performance levels are not attained. Organization Structure Facilitate communication and cooperation among those functions involved in implementing the customer service policy Name and phone number of individual who can satisfy their need for information Individuals with appropriate responsibility and authority & rewarded

Elements of Customer Service (con’t) Pre-transaction (con’t) System flexibility Effectively respond to unplanned events, such as snowstorms, shortages of raw materials or energy, strikes Management/Technical services Training manuals, seminars designed to help customer improve inventory management, ordering or mechandising

Elements of Customer Service (con’t) Transaction established by meeting the logistic function: the availability of the product in the stock, information about the order, the order cycle duration. Stock out level A measure of product availability Offer of product substitution when it occurs Order information (ability to back-order) Order information is the ability to provide the customer with fast and accurate information about inventory status, order status, expected shipping and delivery dates, and back-order status. Back-order : a customer order that cannot be filled when presented, and for which the customer is prepared to wait for some time. Back-order capability allows the firm to identify and expedite orders that require immediate attention

Elements of Customer Service (con’t) Elements of order cycle Order cycle is the total time that elapses from customer initiation of the order until delivery to the customer Order cycle : order communication, order entry, order processing, order picking and packing, and delivery Components of a Customer Order Cycle

Elements of Customer Service (con’t) Expedited shipments (Time) Expedited shipments are those that receive special handling in order to reduce the normal order cycle time. Expediting costs more than standard handling, it may cost less than losing a customer. Transshipment Transshipment is the transporting of product between field locations to avoid stockouts. System accuracy System accuracy is the accuracy of quantities ordered, products ordered and billing

Elements of Customer Service (con’t) Order convenience Order convenience is the degree of difficulty that a customer experiences when placing an order (e.g. confusing forms) Product substitution Substitution occurs when the product a customer ordered is replaced by the same item in a different size or by another product that will perform as well or better.

Elements of Customer Service (con’t) Post-transaction support the product in use: product guarantee, maintenance service, product replacement, client complaint resolution, and product reimbursement Installation, warranty, alterations, repairs, part Assistance in seeing that the product is functioning as expected when the consumer begins using it Availability of parts and repair personnel Documentation support for the field force, and accessibility to a supply of parts An administrative function that validates warranties

Elements of Customer Service (con’t) Product tracing To avoid litigation, firms must be able to recall potentially dangerous products from the marketplace as soon as problems are identified. Customer claims, complaints, returns How to handle claims, complaints and return Temporary replacement of products While customer waiting for receipt of a purchased item or waiting for a previously purchased product to be repaired.

Common Customer Service Complaints

Importance of Logistics Customer Service Service affects sales Service differences have been shown to account for 5 to 6% variation in supplier sales Service affects market share Service affects profit contribution and growth 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.

Discussion / Exercise: Values of Customer Retention What are the values Why customer retention is important

Value of Customer Retention Customer loyalty Estimate: A 5% reduction in the number of customers lost can increase profits by 50% or more Finding: Profit generated by an average customer generally increase in each of the first 4-5 years of the vendor-customer relationship Cost of acquiring new customer is significant in most industries (cost of advertising, promotion, closing, and setup for a new customer). For example, in many industries, this customer-acquisition cost may well equal a full year’s net profit from that same customer. Margin on base purchase Opportunity to generate incremental sales Reduced operating costs referrals

6. Customer Service 6.2 The central role that customer service plays in an organization’s marketing and logistics efforts.

Roles of Customer Service Plays In An Organization’s Marketing and Logistics Efforts Customer service is the interface of logistics with marketing. The output of all logistics activity is customer service. It is a measure of the effectiveness of the logistics system in creating time and place utility for a product. The logistics can play a key role in increasing customer satisfaction and enhanced customer retention. Although customer service is the output of the logistics system, customer satisfaction results when the company performs well on all components of the marketing mix.

Components of Logistics Management

Financial Aspects of Inventory Strategy

The Relationship of Customer Service and Logistics and Marketing Activities

6. Customer Service 6.3 How to calculate cost-revenue trade-offs

Cost/Revenue Trade-Offs The sum of expenditures for logistics activities as transportation, warehousing, order processing and information systems, production setups and purchasing, and inventory management can be viewed as the company’s expenditure for customer service. In order to achieve least-cost logistics, the Company must minimize total logistics costs, given a specified level of customer service. The costs associated with improving the level of customer service can be compared to the increase in sales required to recover the additional cost.

Cost/Revenue Trade-Offs (con’t) Customer Service Level Increase Inventory investment increase

Exercise/Discussion Current: Customer Service Level (95%) at least total logistics cost Target: Customer Service Level (98%), least total logistics cost must be recalculated Assume increasing to 98% CSL, additional total logistics cost is USD2million Each dollar additional sales yields 25% contribution to profit (i.e. $1 in revenue, company incurs 75 cents in manufacturing, marketing, and logistics costs What additional sales volumes will the company need to recover the increase in costs? 2M x 100%/25% = USD8M sales required Is USD8M achievable?

6. Customer Service 6.4 Identify opportunities for improving customer service performance.

An Effective Customer Service Strategy Must Be: based on understanding of how customers define service firm’s objectives for long-range profit and return on investment

Customer Service Performance Can Be Measured and Controlled By: Establishing quantitative standards of performance for each service elements Measuring actual performance for each service element Analyzing variance between actual services provided and the standard Taking corrective action as needed to bring actual performance into line

Possible Measures of Customer Service Performance Pre-transaction Inventory availability Target delivery dates Information Capability

Possible Measures of Customer Service Performance (con’t) Transaction Convenience of placing orders Order cycle time Order cycle consistency Order fill rate Order status Order tracing Black-order status Shipment Shortages Shipment delays Product substitutions Route Change

Possible Measures of Customer Service Performance (con’t) Post-transaction Invoice accuracy Damage Actual delivery dates Returns/adjustments Installation Product replacement

Possible Measures of Customer Service Performance (con’t) Prioritization The company must place emphasis on individual elements according to what its customers believe to be important. A firm’s standards should reflect what customers need rather than what management thinks customers need.

Examples of Customer Service Standards In-stock Percentage By product or product group By stocking-point location By customer or class of customer By time period By order completeness

Examples of Customer Service Standards Transit Time By mode of shipment By stocking-point location By customer or class of customer By time period By size of order

Examples of Customer Service Standards Order Cycle Consistency By on-time deliveries By stocking-point location By customer or class of customer By size of order

Discussion / Exercise Impediments to an Effective Customer Service Strategy

Discussion / Exercise Impediments to an Effective Customer Service Strategy Failing to segment markets Salesperson often create unrealistic expectations Lack understanding the industry - Company’s customer service standards and performance expectations are affected substantially by the competitive environment and what is perceived to be traditional industry practices. Lack of study on customer service level – Many companies do not measure the cost-effectiveness of service levels and lack of an effective way of determining competitive service levels.