1. CHAPTER 3 Customer Service

2. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin 3-2 Cost trade-offs in Marketing and Logistics Product Order processing and information costs Inventory carrying costs Place/customer service levels Order processing and information costs Price Lot quantity costsWarehousing costs Transportation costs LOGISTICS MARKETING

3. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin 3-3 Elements 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 Expedited shipments Transshipment System accuracy Order convenience Product substitution Posttransaction elements Pretransaction elements

4. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin 3-4 Methods 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

5. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin 3-5 Model of Consumer Reaction to a Repeated Stockout Source: Clyde K. Walter, “An Empirical Analysis of Two Stockout Models,” unpublished Ph.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 3 Lower 4 Other size 2 Same 1 Higher Another store 6 Ask here again 5 Special order Switch stores ? Substitute ? Switch brand ? Substitute ? Switch price ? No Yes No

6. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin 3-6 Relationship Between Customer Service and Inventory Investment

7. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin 3-7 Internal AuditExternal Audit Evaluate Customer Perceptions Differentiate Channel Levels & Market Segments Identify Opportunities Determine Marketing Services Mix & Levels Stages of the Customer Service Audit

8. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin 3-8 Overall 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.

9. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin 3-9 Internal 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

10. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin 3-10 Internal 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

11. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin 3-11 Importance And Performance Evaluations For Selected Customer Service Attributes Relative Performance -0.36* * Performance evaluations of A and B are significantly different at p < 0.05. 1 2 3 4 5 6 7 8 9 Performance Evaluation ImportanceCompany ACompany BNo.Attribute Accuracy in filling orders Ability to expedite emergency orders in a fast, responsive manner Action 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 order eventually shipped) Rapid adjustment of billing and shipping errors Availability of blanket orders Frequency 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 6.42 6.25 6.07 5.92 5.69 5.34 4.55 4.29 3.58 2.30 5.54 4.98 4.82 4.53 5.29 4.64 5.03 5.07 5.33 4.07 5.65 5.23 5.18 4.73 5.27 4.90 4.15 5.03 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

12. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin 3-12 Competitive Position Matrix IMPORTANCE HIGH MEDIUM LOW Minor weaknessMinor strength Major weaknessMajor strength Competitive disadvantage Competitive parity Competitive advantage Relative performance 1 3 5 7 -3.0+1.0+3.0 1* 2* 4* 3* 6* 5* 7* 8* 9* 10* 3-10

13. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin 3-13 Performance Evaluation Matrix Performance evaluation IMPORTANCE HIGH MEDIUM LOW Maintain Definitely improveMaintain/improve 1 3 5 7 1357 1* 2* 4* 3* 6* 5* 7* 8* 9* 10* MaintainReduce/maintain Improve 3-11

14. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin 3-14 Strategic Opportunities For A Competitive Advantage 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

15. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin 3-15 Measuring 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

16. Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin 3-16 Customer 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