1. MANAGING SUPPLY CHAINS A LOGISTICS APPROACH 9e COYLE | LANGLEY | NOVACK | GIBSON Chapter 8 ORDER MANAGEMENT AND CUSTOMER SERVICE ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

2.  Know the various elements of customer service and how they impact both buyers and sellers.  Calculate the cost of a stockout.  Understand the major outputs of order management, how they are measured, and how their financial impacts on buyers and sellers are calculated.  Be familiar with the concept of service recovery and how it is being implemented in organizations today. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objectives After reading this chapter, you should be able to do the following:

3. Influencing the Order  This is the phase where an organization attempts to change the manner by which its customers place orders. Order Execution  This occurs when the order is received. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

4.  is anything that touches the customer. This includes all activities that impact information flow, product flow, and cash flow between the organization and its customers. Philosophy  Philosophy elevates customer service to an organization-wide commitment to providing customer satisfaction through superior customer service. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Customer Service:

5. Performance  emphasizes customer service as specific performance measures that pervade all three definitions of customer service and address strategic, tactical, and operational aspects of order management. Activity  treats customer service as a particular task that an organization must perform to satisfy a customer’s order requirements. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Customer Service:

6. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-1 Relationship Between Order Management and Customer Service

7.  is the art and science of strategically positioning customers to improve the profitability of the organization and enhance its relationships with its customer base.  is not a new concept used by service industries.  has not been widely used in the business-to business environment until lately.  Customer action affects firm’s cost how customers order how much customers order what customers order when customers order an order ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Customer Relationship Management

8.  Step 1: Segment the Customer Base by Profitability  Step 2: Identify the Product/Service Package for Each Customer Segment  Step 3: Develop and Execute the Best Processes  Step 4: Measure Performance and Continuously Improve ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Four Basic Steps in the Implementation of the CRM

9. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 8-1 Hypothetical Product/Service Offerings

10. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-1 Relationship Between Order Management and Customer Service

11.  ABC measures the cost and performance of activities, resources, and cost objects. Resources are assigned to activities, then activities are assigned to cost objects based on their use  Traditional cost accounting is well suited to situations where an output and an allocation process are highly correlated.  Traditional cost accounting is not very effective in situations where the output is not correlated with the allocation base. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Activity-Based Costing

12. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-2 Traditional Accounting versus Activity- Based Costing

13. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 8-3 Distribution Center Process Flow Chart

14. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 8-3 Distribution Center Space Allocation

15. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 8-4 Distribution Center Labor Allocation

16. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-4 Flow-Through Costing for a Distribution Center

17. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 8-5 Customer Profitability Analysis

18. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-5 Customer Profitability Analysis-cont.

19. Protect Zone  Those customers who fall into the “Protect” segment are the most profitable. Danger Zone  Customers in the “Danger Zone” segment are the least profitable and incur a loss.  The firm has has three alternatives for danger zone customers: (1) change customer interaction with firm so the customer can move to another segment (2) charge the customer the actual cost of doing business (3) switch the customer to an alternative distribution channel Build Zone  These customers have a low cost to serve and a low net sales value, so the firm should maintain the cost to serve and build net sales value to help drive the customer into the “Protect” segment. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. One Method to Classify Customers by Profitability

20. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-5 Customer Segmentation Matrix

21.  This system represents the principle means by which buyers and sellers communicate information regarding orders.  Effective order management is key to operational efficiency and customer satisfaction.  Logistics needs timely and accurate information relating to orders so many firms place order management in the logistics area. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Order Management

22. Order to cash  Thirteen principle activities constitute the OTC cycle: D1.1 through D1.7 represent information flows D1.8 through D1.12 represent product flows D1.13 represents cash flow Order cycle  all activities that occur from when an order is received until the product is received Replenishment cycle  refers to acquisition of additional inventory  one firm’s order cycle is another’s replenishment cycle ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

23.  recent attention has centered on the variability or consistency of this process  absolute length of time is important, variability is more important  a driving force is safety stock, as absolute length of the order cycle will influence demand inventory ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Order To Cash Cycle:

24.  Many firms use Internet technology to capture order information for fulfillment systems for picking, packing, and shipping.  Internet allows faster collection of cash by the seller. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. E-Commerce Order Fulfillment Strategies

25. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-7 Order Cycle Length and Variability

26.  Customer service is the key link between logistics and marketing within an organization.  Manufacturing can produce a quality product at the right cost and marketing can sell it, but if logistics does not deliver it when and where promised, the customer will not be satisfied. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Logistics/Marketing Interface

27. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-8 The Traditional Logistics/Marketing Interface

28.  Three different perspectives on customer service philosophy as a set of performance measures as an activity Customer service needs to be put into perspective as including anything that touches the customer ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Three different perspectives on customer service:

29.  (1) the core benefit or service, which constitutes what the buyer is really buying  (2) the tangible product, or the physical product or service itself  (3) the augmented product, which includes benefits, adds value for the customer ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Three levels of a product

30. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-9 Relationship Between Customer Service and ROI

31.  Time cycle time safe delivery correct orders  Dependability more important than the absolute length of lead time  Communications pretransaction transaction posttransaction  Convenience service level must be flexible ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Four distinct dimensions of customer service:

32. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-10 Example of the Frequency Distribution of Lead Time

33.  Orders received on time  Orders received complete  Orders received damage  Orders filled accurately  Orders billed accurately ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Customer Service Performance Measures from buyer’s view

34. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-6 Elements and Measurement of Customer Service

35. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-11 SCOR Process Model D1: Performance Metrics

36. Stockout occurs when desired quantities are not available Four possible events:  the buyer waits until the product is available  the buyer back-orders the product  the seller loses current revenue  the seller loses a buyer and future revenue ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Expected Cost of Stockouts:

37. Back Orders :  occurs when a seller has only a portion of the products ordered by the buyer  are created to secure the portion of the inventory that is currently not available Lost Sales :  some customers will turn to alternative supply sources Lost Customers :  customer permanently switches to another supplier ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

38.  back order  lost sale  lost customer identify potential consequences calculate each result’s expense or lost profit ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Determining the Expected Cost of Stockouts

39. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-12 Linking Order Management Outputs

40.  Did I get what I wanted?  When I wanted it?  In the quantity I wanted? Product availability is the ultimate measure of logistics and supply chain performance. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Product availability from customer perspective:

41.  four are widely used across multiple industries : internal metrics  item fill rate  line fill rate external metrics  order fill rate  perfect order ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Metrics

42. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 8-7 Multiple Line Order

43. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-13 Fill Rate and Inventory Investment

44. Cash Flow Lost = (Number of Incomplete Orders Back- Ordered x Back Order Cost per Order) + (Number of Incomplete Orders Cancelled x Lost Pretax Profit per Order) + (Number of Incomplete Back- Ordered x Invoice Deduction per Order) ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Calculation for lost cash flow:

45. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 8-8 Cash Flow Lost and Inventory Investment

46. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-14 Cash Flow Lost/Inventory Investment Tradeoff

47. the time that elapses from when a buyer places an order until receipt of the order absolute length and reliability of order cycle time influences both firm’s inventories, resulting in impacts on both revenues and profits for both organizations ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Order Cycle Time:

48. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-15 Customer Wait Time (CWT)

49.  reduced standard deviation of order cycle time on safety stocks Safety Stock = {Demand per Day x [OCT + (z x Standard Deviation of OCT)]} – (Demand per Day x OCT)  determine the impact of the reduction of absolute order cycle time on demand inventories Demand Inventory Cost Reduction = Difference in Absolute OCT x Demand per Day x Cost per Unit x Inventory Carrying Cost Percent Two inventory cost reduction calculations ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

50.  Examines how well a seller can respond to a buyer’s needs.  This “response” can take two forms: LOR can be how well a seller can customize its service offerings to the unique requirements of a buyer LOR can be how quickly a seller can respond to a sudden change in a buyer’s demand pattern. Logistics operations responsiveness (LOR) ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

51.  is critical to the logistics and order management processes  underlies ability to provide quality product availability, order cycle time, logistics operations responsiveness, and post-sale logistics support  timely and accurate information can reduce inventories in the supply chain and improve cash flow to all supply chain partners ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Logistics System Information:

52. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 8-10 Information Needed to Manage the Transportation Process

53.  The calculation used to measure the result on cash flow for decreasing the order-to-cash cycle is as follows: Cast Flow Increase = Invoice Value x (Cost of Capital/365) x Difference in Days in the Order-to-Cash Cycle ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Financial Impact

54.  PLS can be the management of product returns from the customer to the supplier.  The second form of PLS is product support through the delivery and installation of spare parts.  Calculation to determine the spare part service cost is as follows: Service Cost = Penalty Cost + Lost Purchase Margin + Lost Support Margin ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Postsale logistics support (PLS) can take two forms:

55. No matter how well an organization plans to provide excellent service, mistakes will occur. Recovery requires a firm to realize that mistakes will occur and have plans in place to fix them. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Service Recovery

56.  Order management and customer service are not mutually exclusive; there is a direct and critical relationship between these two concepts.  There are two distinct, yet related, aspects of order management: influencing the customer’s order and executing the customer’s order.  Customer relationship management (CRM) is a concept being used today by organizations to help them better understand their customers’ requirements and understand how these requirements integrate back into their internal operations processes.  Activity-based costing (ABC) is being used today to help organizations develop customer profitability profiles which allow for customer segmentation strategies.  Order management, or order execution, is the interface between buyers and sellers in the market and directly influences customer service.  Order management can be measured in various ways. Traditionally, however, buyers will assess the effectiveness of order management using order cycle time and dependability as the metric, while sellers will use the order-to-cash cycle as their metric. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Summary

57.  Customer service is considered the interface between logistics and marketing in seller organizations.  The three definitions of customer service are: (1) as an activity, (2) as a set of performance metrics, and (3) as a philosophy.  The major elements of customer service are time, dependability, communications, and convenience.  Stockout costs can be calculated as back order costs, the cost of lost sales, and/or the cost of a lost customer.  The five outputs from order management that influence customer service, customer satisfaction, and profitability are: (1) product availability, (2) order cycle time, (3) logistics operations responsiveness, (4) logistics system information, and (5) postsale logistics support.  The concept of service recovery is being used by organizations today to help identify service failure areas in their order management process and to develop plans to address them quickly and accurately. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Summary, continued