1. Chapter 3 Logistics Customer Service Strategy1

2. Customer Service
Customer service is generally presumed to be a means by which
companies attempt to differentiate their product, keep customers
loyal, increase sales, and improve profits.
Its elements are: -
Price -
Product quality -
Service
It is an integral part of the marketing mix of: -
Price
Customer service here -
Product -
Promotion -
Physical Distribution
Creating value, loyalty and satisfaction through supply chain activities
CR (2004) Prentice Hall, Inc.

3. Customer service is a process for providing significant value added benefits to the supply chain in a cost-effective way. 3

4. CUSTOMER SERVICE CAN BE DEFINED AS:
an activity or function to be managed such as order processing or handling of customer complaints,
actual performance on particular parameters, such as ability to ship complete orders for 98 percent of orders received within a 24-hour period,
part of an overall corporate philosophy, rather than simply an activity or performance measures.

5. Customer Service
The level of customer service provided to customers determines whether the organization will retain existing customers and how many customers it will attract.
The customer service level that an organization provides has a direct impact on its market share, its total logistics costs and , ultimately , its overall profitability.

6. Customer service is the measure of how well the logistics system is performing in providing time and place utility for a product or a service. This include activities such as :
The ease of checking stock,
Placing an order, and
Post sale support of the item

7. Customer service is often confused with the concept of customer satisfaction
“customer satisfaction represents the customer’s overall assessment of all elements of the marketing mix: product, price, promotion, and place”

8. Customer Service 8
Marketing side
Logistics side

9. 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
Pretransaction

10. Customer Service Classifications10
pre-transaction elements
written statement of customer service policy,
customers informed with a written statement of policy
organization structure
system flexibility
management services

11. Customer Service Classifications11
transaction elements
stock out level
order information availability
system accuracy
consistency of order cycle
special handling of shipments
transshipments
order convenience
product substitution

12. Customer Service Classifications12
post-transaction elements
installation
warranty,
repairs,
service parts,
product tracking
customer complaints-claims
returns
product replacement

13. Kano’s Classification13
expected type of service
attractive type of service
one-dimensional service elements

14. Kano’s Classification expected type of service14
The expected type of service does not create much satisfaction, and mostly remains unnoticed; however, lack of it causes considerable dissatisfaction.
It is important to recognize the minimum acceptable level of expected service, because a lower level increases dissatisfaction rapidly, and a higher service level rises costs without corresponding compensation to the customer value.

15. 15
As an example of an expected service element for all these customer types is the availability of exceptional order information, which is considered as necessary service in case of delivery delays or other exceptional occurrences.

16. attractive type of service16
The attractive type of service is offered by the supplier specially planned to exceed the customer expectations.
The value attributes under this dimension of the Kano model, are neither explicitly demanded nor expected by the customer but are latent.
These service elements can create satisfaction, but the absence of them does not cause dissatisfaction, because customers are not used to getting them.
Attractive service elements can effectively be used as means of differentiating service offering from competitors.

17. one-dimensional service elements17
In the case of one-dimensional service elements, both satisfaction and dissatisfaction are possible
customer reaction depends more or less linearly on the level of the service offered.
Order fill rate
The better the order fill rate the more satisfied the customer, and vice versa.

18. 18

19. Service Failures
Service failure is a term associated with the problematic occasions that a customer has during the service processes
the number and the extent of the problems that the customers encounter in order to get the products or services and the recovery options offered by the company can be performance indicators. 19

20. Common Customer Service Complaints
12% Damaged
goods
31%
Product or quality
mistakes 7%
Other 6%
Frequently cut
items
44%
Late delivery
CR (2004) Prentice Hall, Inc.

21. Penalties for Customer Service Failures B2B
CR (2004) Prentice Hall, Inc.

22. Penalties for Customer Service Failures B2C
71,000 consumers in 29 countries to learn how they react to stock-outs
11 categories ranging from personal hygiene products to snack foods

24. Model of Consumer Reaction to a Repeated Stockout
Customer 3
Lower 4
Other
size 2
Same 1
Higher
Another
store 6
Ask here
again 5
Special
order
Switch
stores ?
Substitute
brand
price No
Yes
Source: Clyde K. Walter, “An Empirical Analysis of Two Stockout Models,” unpublished Ph. D. Dissertation, Ohio State University, 1971.

25. Reasons for stockout

26. Complaining Behavior
Complaining behavior may be viewed in terms of a set of possible customer responses to dissatisfying purchase experiences.
In general, complaint options include:
seeking redress (i.e., a refund, exchange, repair, or apology, etc.),
engaging in negative word-of-mouth (i.e., telling other people about one’s dissatisfaction),
exiting (i.e., vowing never to repatronize the seller),
contacting third parties (e.g., writing a letter to a newspaper, taking legal action, etc.).

27. Before Establishing a Customer Service Strategy;
Service policies that are based on customer requirements are essential and they are supportive of the overall marketing strategy.
Competitive benchmarking.

28. Cost/revenue trade-offs ABC analysis of customer service
Four methods have been suggested before establishing customer service strategies:
Determining customer service levels based on customer reactions to stock outs at the retail level
Cost/revenue trade-offs
ABC analysis of customer service
Customer service audits

29. Cost/Revenue Trade-offs
What increase in sales volume is required to break even on the customer service requirements?

30. Relationship Between Customer Service and Inventory Investment
% in-stock availability

31. Impact of incremental customer service levels on revenues, logistics costs and profits
Incremental cost or revenue
Logistics costs
Revenue
Maximum incremental profit

32. PARETO’s RULE
In 1906, Italian economist Vilfredo Pareto created a mathematical formula to describe the unequal distribution of wealth in his country, observing that 20 percent of the people owned 80 percent of the wealth.
In the late 1940s, Dr. Joseph M. Juran inaccurately attributed the 80/20 Rule to Pareto, calling it Pareto's Principle. 

33. Adaptation of Pareto’s Rule into Logistics : ABC Analysis
The logic behind ABC classification is that some customers and products are more beneficial to a firm than others…
Beneficial in terms of profitibalilty, sales revenues, segment growth rates or other factors deemed important by corporate management.

34. Importance of customers can be combined with the importance of products to establish customer service levels.

35. ABC analysis A Customer-Product Contribution Matrix
Customer Category
PRODUCT CATEGORY A B C D I 1 2 6 10 II 3 4 7 12
III 5 8 13 16 IV 9 14 15 19 V 11 17 18 20

36. Order Completeness Standard
ABC analysis Making the Customer-Product Contribution Matrix Operational
Priority Range
In-Stock Standard
Delivery Standard
Order Completeness Standard
1-5
100.0%
48 hours
99%
6-10
97.5
72 hours 97
11-15
95.0
96 hours 95
16-20
90.0
120 hours 93

37. Pareto’s Rule-ABC Classification (Example for Inventory Management)
ABC classification is a method for determining level of control and frequency of review of inventory items
A Items – typically 20% of the items accounting for 80% of the inventory value
B Items – typically an additional 30% of the items accounting for 15% of the inventory value
C Items – Typically the remaining 50% of the items accounting for only 5% of the inventory value-
© Wiley 2010

38. ABC Analysis
Divides inventory into three classes based on annual dollar volume
Class A - high annual dollar volume
Class B - medium annual dollar volume
Class C - low annual dollar volume
Used to establish policies that focus on the few critical parts and not the many trivial ones
© 2011 Pearson Education, Inc. publishing as Prentice Hall

39. The AAU Corp. is considering doing an ABC analysis on its entire inventory but has decided to test the technique on a small sample of 15 of its SKU’s. The annual usage and unit cost of each item is shown below
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40. (A) First calculate the annual dollar volume for each item
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41. B) List the items in descending order based on annual dollar volume
B) List the items in descending order based on annual dollar volume. (C) Calculate the cumulative annual dollar volume as a percentage of total dollars. (D) Classify the items into groups
© Wiley 2010

42. Graphical solution for AAU Corp showing the ABC classification of materials
The A items (106 and 110) account for 60.5% of the value and 13.3% of the items
The B items (115,105,111,and 104) account for 25% of the value and 26.7% of the items
The C items make up the last 14.5% of the value and 60% of the items
How might you control each item classification? Different ordering rules for each?
© Wiley 2010

43. ABC Analysis A Items 80 – 70 – 60 – Percent of annual dollar usage
80 –
70 –
60 –
50 –
40 –
30 –
20 –
10 –
0 –
| | | | | | | | | |
Percent of inventory items
A Items
B Items
C Items
Figure 12.2
© 2011 Pearson Education, Inc. publishing as Prentice Hall

44. Customer Service Audit
The objective of the audit are to :
Identify critical customer service elements,
Identify how performance of those elements is controlled, and
Assess the quality and capabilities of the internal information system
The audit include 4 stages :
External customer service audit
Internal customer service audit
Identifying opportunities and methods for improvements,
Establishing customer service levels,

45. Stages of the Customer Service Audit
Internal Audit
External Audit
Evaluate Customer Perceptions
Differentiate Channel Levels & Market Segments
Identify Opportunities
Determine Marketing Services Mix & Levels

46. Overall Importance Compared To Selected Performance Of Major Manufacturers Evaluated By Dealers
Impt. -
Dealer Evaluations
of Manufacturers
All
Dealers
Mfr. 1
Mfr. 2
Mfr. 3
Mfr. 4
Mfr. 5
Mfr. 6
Rank
Var.
Num
Description M. SD 1 9
Ability of manufacturer to meet promised delivery date (on-time
shipments)
6.4
0.8
5.9
1.0
4.1
1.6
4.7
6.6
0.6
3.7
1.8
3.3 2 39
Accuracy in filling orders (correct product is shipped)
5.6
1.1
1.4
5.0
1.3
5.8
5.1
1.2
4.4
1.5 3 90
Competitiveness
of price
6.3
4.9
4.5
5.4
3.6 4 40
Advance notice on shipping delays
6.1
0.9
4.6
1.9
3.0
1.7
3.1 5 94
Special pricing discounts available on contract/project quotes
4.0
6.0 6
Overall manufacturing and design
quality
of product relative to
the price and range involved
5.3
6.5
5.2
4.8 7 16
Updated and current price data, specifications and promotion
materials provided by manufacturer
5.7
4.3 8 47
Timely
response to requests for assistance from manufacturer's
sales representative
4.2
2.0 14
Order cycle consistency (small variability in promised versus
actual delivery, i.e., vendor consistency meets expected date). 10 4b
Length of promised order cycle (lead) times (from order
submission to delivery) for base line/in-stock ("quick ship")
product
6.2 11 54
Accuracy of manufacturer in forecasting and committing to
estimated shipping dates on contract/project orders
5.5
3.8
3.5 12
49a
Completeness of order (% of line items eventually shipped
complete) -- made to order product (contract orders) 50
33a
Price
range
of product line offering (e;g., low, medium, high
price levels) for major vendor
3.9
101 77
Store layout planning assistance from manufacturer
2.9
3.4
Note
: Mean (average score) based on a scale of 1 (not important) through 7 (very important).
Source: Douglas M. Lambert and Jay U. Sterling, “Developing Customer Service Strategy,” unpublished manuscript. All Rights reserved.

47. External customer service audit
- overall customer audit, examining both internal and external factors with interviews and questionnaires focusing on the key customer service elements
- explore customers’ expected levels of performance on key issues
- variables that get the highest importance ratings from the customers should be the focus of analysis and action

48. 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?

49. Internal Audit Questions cont.
3-9 b
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?

50. 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
Importance
Company A
Company B
No.
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
5.21
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.

51. Competitive Position Matrix
3-10
Competitive Position Matrix
IMPORTANCE
HIGH
MEDIUM
LOW
Minor weakness
Minor strength
Major weakness
Major strength
Competitive disadvantage
Competitive parity
Competitive advantage
Relative performance 1 3 5 7
-3.0
-1.0
+1.0
+3.0 1* 2* 4* 3* 6* 5* 7* 8* 9*
10*

52. Performance Evaluation Matrix
3-11
Performance Evaluation Matrix
Performance evaluation
IMPORTANCE
HIGH
MEDIUM
LOW
Maintain
Definitely improve
Maintain/improve 1 3 5 7 1* 2* 4* 3* 6* 5* 7* 8* 9*
10*
Reduce/maintain
Improve

53. Measuring and Controlling Customer Service Performance
3-13
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.

54. How to measure customer service?54
Perceptual Measures: Importance and satisfaction measures
“How important service element is order cycle time?“
How valuable for your own operations or customer service would a 24 h order cycle time be?(Grades from 1 - not valuable to 5 - very valuable).
Service levels are unique to individual firms and product lines of each firm.
Very few firms have formulated specific, quantifiable objectives for handling returns at the retail level (to pick up all damaged goods within five days, or to issue credit for returned goods within 20 days.)
Utility measures allow a manager to evaluate the tradeoffs between several customer services even when the services are expressed in different units (such as dollars,time or hours).

55. Customer Service Standards
3-14
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.

56. Expected Performance Levels: Key Measurements
Frequency - Sales Calls
Response Time From Sales Rep.
Advance Notice - Price Changes
Methods Used to Submit Orders
Frequency - Order Transmission
Normal Lead-time Requirements
Acceptable Range - Lead-time
Fill Rate - Required %
Policy on Stock-outs 2 5