1. ORDER MANAGEMENT AND CUSTOMER SERVICE

2. Learning Objectives
Understand the relationships between order management and customer service.
Appreciate how organizations influence customers’ ordering patterns as well as how they execute customers’ orders.
Realize that activity-based costing (ABC) plays a critical role in order management and customer service.

3. Calculate the cost of a stockout.
Learning Objectives, continued
Identify the various activities in the SCOR process D1 (deliver stocked product) and how it relates to the order-to-cash cycle.
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.

4. Learning Objectives, continued
Be familiar with the concept of service recovery and how it is being implemented in organizations today.

5. Introduction Influencing the Order Order Execution Customer service
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.
Customer service
Anything that touches the customer. This includes all activities that impact information flow, product flow, and cash flow between the organization and its customers.

6. Figure 8.1 Relationship Between Order Management & Customer Service
Source: Robert A. Novak, Ph.D.

7. Influencing the Order – Customer Relationship Management
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

8. Step 1: Segment the Customer Base by Profitability.
Influencing the Order – Customer Relationship Management, continued
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.

9. Table 8.1 Hypothetical Product/Service Offerings
Source: Robert A. Novak, Ph.D.

10. Activity-Based Costing
Influencing the Order – Customer Relationship Management, continued
Activity-Based Costing
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.

11. Figure 8.2 Traditional vs. Activity Based Costing
Source: Robert A. Novak, Ph.D.

12. Figure 8.3 Distribution Center Process Flow Chart
Source: Robert A. Novak, Ph.D.

13. Figure 8.4 Flow-Through Costing for a Distribution Center
Source: Robert A. Novak, Ph.D.

14. Classifying customers by profitability
Influencing the Order – Customer Relationship Management, continued
Classifying customers by profitability
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 three alternatives for danger zone customers:
Change customer interaction with firm so the customer can move to another segment
charge the customer the actual cost of doing business
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.

15. Figure 8.5 Customer Segmentation Matrix
Source: Robert A. Novak, Ph.D.

16. Executing the Order – Order Management & Fulfillment
Order-To-Cash (OTC) and Replenishment Cycles
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
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

17. Length and Variability of the Order-to-Cash Cycle
Executing the Order – Order Management & Fulfillment, continued
Length and Variability of the Order-to-Cash Cycle
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.

18. Figure 8.7 Order Cycle Length and Variability
Source: Adapted from Lambert & Stock, “Using advanced order processing systems to improve profitability”, Business (April-June 1982) 26

19. E-Commerce Order Fulfillment Strategies
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.

20. Customer Service The Logistics / Marketing Interface
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.
Defining Customer service
Three perspectives:
philosophy
as a set of performance measures
as an activity

21. Figure 8.8 Traditional Logistics/Marketing Interface
Source: Adapted from Lambert, “The development of an inventory costing methodology: A study of the costs associated with holding inventory”, National Council of Physical Distribution (1976) 7

22. Elements of Customer Service
Customer Service, continued
Elements of Customer Service
Time
Dependability
Cycle time
Safe delivery
Correct orders
Communications
Convenience
Performance Measures for Customer Service
Stated from the customer’s perspective
Orders received on time
Orders received complete
Orders received damage free

23. Figure 8.9 Customer Service and ROI
Source: Robert A. Novak, Ph.D.

24. Figure 8.10 Lead Time Frequency Distribution Example
Source: Robert A. Novak, Ph.D.

25. Figure 8.11 SCOR Model: Process D1 Metrics
Source: Adapted from Supply Chain Council (2011)

26. Expected Cost of Stockouts
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.

27. Back Orders Lost Sales Lost Customers
Expected cost of Stockouts, continued
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

28. Figure 8.12 Linking Order Management Outputs
Source: Robert A. Novak, Ph.D.

29. Order Management Influences on Customer Service
Product Availability
Did I get what I wanted, when I wanted it, in the quantity I wanted?
Internal Metrics
Item fill rate
Line fill rate
External Metrics
Order fill rate
Perfect order
Financial Impact
Improving fill rates improves financial performance.

30. Financial Impact, continued
Order Management Influences on Customer Service, continued
Financial Impact, continued
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)

31. Table 8.7 Cash Flow and Inventory Investment
Source: Robert A. Novak, Ph.D.

32. Figure 8.13 Fill Rate and Inventory Investment
Source: Robert A. Novak, Ph.D.

33. Figure 8.14 Cash Flow Lost / Inventory Investment Tradeoff
Source: Robert A. Novak, Ph.D.

34. Order Management Influences on Customer Service, continued
Order Cycle Time
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.
Metrics
Customer wait time
Financial impact
Order cycle time impacts safety stock and cycle stock

35. Figure 8.15 Customer Wait Time
Source: Robert A. Novak, Ph.D.

36. Logistics Operations Responsiveness (LOR)
Order Management Influences on Customer Service, continued
Logistics Operations Responsiveness (LOR)
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

37. Logistics System Information
Order Management Influences on Customer Service, continued
Logistics System Information
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.
Cast Flow Increase =
Invoice Value x (Cost of Capital/365) x Difference in Days in the Order-to-Cash Cycle

38. Table 8.9 Information Needed to Manage the Transportation Process
Source: Robert A. Novak, Ph.D.

39. Postsale Logistics Support (PLS)
Order Management Influences on Customer Service, continued
Postsale Logistics Support (PLS)
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

40. Order Management Influences on Customer Service, continued
Service Recovery
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.

41. Summary
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.

42. Summary, continued
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.
Customer service is considered the interface between logistics and marketing in seller organizations.

43. Summary, continued
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.

44. Summary, continued
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.