Chapter 4: Logistics Customer Service Skip: Determining Optimum Service Levels (pp. 97-100) Skip: Service as a Loss Function (pp. 100-101) Definition and Measurement. Fundamental Tradeoff Sales-Service and Cost-Service relationships. Service as a Constraint. Contingencies.

Customer Service Customer service is the result of logistics activities. Create and foster customer loyalty through good service. Hard to define & hard to measure comprehensively. Includes: Pre-transaction customer information about delivery options, return policy, warranty, billing information. Post-transaction support after the sale, installation, repair, returns, recall. Employee training affects all areas of customer service. Not all customers should have same level of service.

Customer Service Measures Availability % of demand filled from stock Example: 95% availability means 5% of demand is backordered. Order Cycle Time Time between placing and receiving an order. Includes: Order transmittal (consider role of e-commerce). Order processing (document prep., credit check, etc.). Order assembly (may need to produce if out-of-stock). Delivery.

Customer Service Measures Availability and Order Cycle Time address time a customer waits. Customers point of view: When will I receive it? Is it correct? Want on-time delivery and high quality. Delivery reliability often more important than speed. Correct, undamaged order expected.

Fundamental Question What level of service should be offered? Hard to answer! Consider tradeoffs.

Fundamental Tradeoff High level of customer service creates: Higher sales and revenues. Higher costs. Lower level of customer service creates: Lower costs. Lower sales and lost customers. Examples: 5% decrease in service level = 24% drop in purchases. 6 times more expensive to develop new customers than keep old customers.

Sales-Service Relationship Increasing service increases cost and revenue. Revenue $ Cost Customer Service Level

Sales-Service Relationship Want to maximize Profit = Revenue - Cost. Revenue $ Cost Profit Customer Service Level

Sales-Service Relationship Optimum service level = Maximum Profit Revenue $ Cost Profit Optimum Customer Service Level

Determining Optimum Service Level Optimum service level = Maximum profit. Not maximum sales. Cost as a function of service can be estimated. Cost of better transportation and storage is known. Sales (revenues) as a function of service is very hard to determine. Can vary service levels and measure sales - Dangerous! Easy to survey customers, but may not be reliable.

Service as a Constraint Select several alternative logistics systems with different levels of service. Evaluate cost of corresponding transportation and storage options. Ask “Will expected increase in revenues will exceed estimated costs?” Easier than “What is best level of service to offer?” See Table 4-3 p. 102

Service as a Constraint Alternative Logistics Cost Service Level* Water transport $5,000,000/yr 80% Low inventory Rail transport. $7,000,000/yr 85% Medium inventory Truck + air transport. $11,0000,000/yr 95% High inventory * % of customers receiving 1 day service Will revenues from increase in service offset added costs?

Contingencies Breakdown/Natural Disaster: Strikes: Product Recall: War, riots, attack, bankruptcy, etc. Fire, flood, earthquake, hurricane, etc. Strikes: By employees, suppliers, affiliated workers. Examples: UPS strike 1997, trucking strike 1994. Product Recall: Recall from customers and from logistics pipeline. Find, collect, and repair or replace.

Contingencies Prepare for: Loss of product or service capability. Loss of data (computers). Loss of communications. Loss of transportation. Goal: Keep customer satisfied