1. Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin CHAPTER 3: Customer Relationship Management

2. 3-2 Customer-focused marketing Customer service Customer satisfaction Customer success Developing customer relationship management strategy Overview of customer relationship management

3. 3-3 From perspective of the total supply chain –End user of product in consumer market –Company is customer in business market From perspective of specific firm within a supply chain –Intermediate customer organizations exist between the firm and end users From perspective of a logistics manager –Any delivery location For example, consumer home’s, retail / wholesale businesses, receiving docks of manufacturing plants and warehouses Who is the customer?

4. 3-4 Customer needs and requirements are more basic than products and services Different customers have different needs and requirements Products and services become meaningful only when available and positioned from the customer’s perspective Profit is more important than sales volume Basic principles of the marketing concept

5. 3-5 Transactional vs. Relationship Marketing Transactional marketing is a traditional strategy with a focus on creating successful individual transactions between the company and its customers Relationship marketing is a new strategy with a focus on the development of long-term relations with key supply chain participants in an effort to develop and retain long-term preference and loyalty

6. 3-6 Micromarketing or one-to-one marketing recognizes that each individual customer may indeed have unique requirements –For example, Wal*Mart and Target are both mass merchandisers However, their requirements to interact logistically with suppliers differs significantly Relationship marketing to a segment of one One-to-one relationships can –Significantly reduce transaction costs –Better accommodate customer requirements –Move individual customer transactions into a matter of routine

7. 3-7 Discrepancy in space refers to the fact that the location of production activities and location of consumption are seldom the same Discrepancy in time refers to the difference in timing between production and consumption Discrepancy in quantity and assortment refers to the mismatch between customer demand and manufacturing supply –Customers seek small quantities and wide assortment –Firms specialize in large quantities of a limited assortment 3 discrepancies must be overcome to enable exchange of goods and services

8. 3-8 Four generic supply chain service outputs eliminate discrepancies Spatial convenience is the amount of shopping time and effort will be required on the part of the customer Lot size is the number of units to be purchased in each transaction Waiting time is the amount of time the customer must wait between ordering and receiving products Product variety and assortment differs by supply chain –Supermarkets may have over 35,000 items on the shelves –Warehouse stores generally stock 8,000 to 10,000 items with only one brand and size of an item –Convenience stores may stock only a few hundred items

9. 3-9 Supply chains provide a mix of services, both generic and custom, in order to accommodate a range of customer requirements Each service mix can be configured to achieve one of the following levels of customer accommodation –Customer service –Customer satisfaction –Customer success Three levels of customer accommodation

10. 3-10 With the right amount Of the right product At the right time And the right place In the right condition At the right price With the right information Basic customer service provides customers

11. 3-11 Basic elements of customer service Availability –Fill rates –Stockout frequency –Orders shipped complete Operational Performance –Speed –Consistency –Flexibility –Malfunction recovery Service Reliability –Damage free –Error-free invoices –Shipment matches order –Shipped to correct location –Etc.

12. 3-12 Fill rate measures the magnitude or impact of stockouts over time Stockout occurs when a firm has no product available to fulfill customer demand Orders shipped complete requires shipping everything that a customer orders to count as a complete shipment Availability is the capacity to have inventory when desired by a customer

13. 3-13 Speed of the performance cycle is the elapsed time from when a customer established a need to order until the product is delivered Consistency of the order cycle is measured by the number of times that actual cycles meet the time planned for completion Flexibility is a firm’s ability to accommodate special situations and unusual or unexpected customer requests Malfunction recovery is a firm’s ability to quickly implement contingency plans when a failure occurs in the supply chain Operational performance deals with the time required to deliver a customer’s order

14. 3-14 Service reliability involves a combination of logistics attributes beyond simply availability and operational performance. For example: – Damage free measures how many shipments arrive without damaged products – Error-free invoices measures what percentage of invoices contain no errors – Shipment matches order measures how many shipments contain the exact amount of product ordered – Shipped to correct location measures how many shipments are made to the customer’s selected location Plus a capability and willingness to provide customers with accurate information regarding operations and order status Service reliability is a firm’s ability to perform all order-related activities and provide critical info

15. 3-15 The perfect order is an order that is –Delivered complete –Delivered on time –Delivered at the right location –Delivered in perfect condition –Delivered with complete and accurate documentation This requires the total order cycle performance to be executed with zero defects The perfect order is the ultimate in logistics service levels +++

16. 3-16 Example of zero-defect performance measurement Consider an order cycle that achieves the following performance levels for shipments –97% delivered complete –97% delivered on time –97% delivered in perfect condition –97% delivered with correct documentation Probability that any order will be delivered with no defects is only 88.5% –P (zero defects) =.97 x.97 x.97 x.97 =.885 Therefore, the probability that any order has a problem is 11.5% What resources are needed to achieve a zero-defect level?

17. 3-17 The basic service platform is a commitment to perform each basic element at a given level Availability level = Medium Operational performance = High Service reliability = Above average Availability level = Low Operational performance = Medium Service reliability = Average Service platform for customer AService platform for customer B Basic Service Platform Availability Level Operational Performance Level Service Reliability Level

18. 3-18 Many firms establish their basic service platforms using two factors –Competitor or industry acceptable practice Minimum and average service performance levels have emerged in most industries –The firm’s overall marketing strategy High service levels needed to compete on basis of logistics competency Low service levels are more common when competing on the basis of price Zero-defect approach is not taken across the board for all customers Establish internal performance standards for each service component to reflect industry practice, cost and resource requirements How much basic service should the supply chain provide?

19. 3-19 Expectancy disconfirmation states if a customer’s expectations of a supplier’s performance are met or exceeded, the customer will be satisfied –If Perceived Performance > = Expectations, then Satisfaction –If Perceived Performance < Expectations, then Dissatisfaction What is customer satisfaction? “Customers will be satisfied if a supplier meets or exceeds the customer’s expectations”

20. 3-20 Customer expectations related to logistical performance from Table 3.2 Reliability Responsiveness Access Communication Credibility Security Courtesy Competency Tangibles Knowing the customer

21. 3-21 How are customer expectations created? Figure 3.1 Satisfaction and Quality Model

22. 3-22 The model identifies gaps managers must fill to help satisfy their customers Gap 1: Knowledge –Reflects management’s lack of knowledge or understanding of customers Gap 2: Standards –Exists when internal performance standards do not adequately reflect customer expectations Gap 3: Performance –The difference between standard and actual performance Gap 4: Communications –Overcommitment or promising higher levels of performance than can actually be provided Gap 5: Perception –Customers sometimes perceive performance to be higher or lower than actually achieved Gap 6: Satisfaction/Quality –When one or more gap exists customer perception is that performance does not meet expectations

23. 3-23 Performance that meets customer expectations one year may result in extreme dissatisfaction next year Competition in an industry will often raise the minimum standards that customer expect –For example, Federal Express introduced real-time tracking of shipment status In response UPS and other parcel delivery firms added this service to their platform Increasing customer expectations

24. 3-24 Satisfied customers may not be happy with the supplier’s performance –Customer satisfaction focuses on expectations - not customer’s real requirements Considerable research suggests that “satisfied” customers still are likely to defect Why customer satisfaction is not sufficient What satisfies one customer may not satisfy other, much less all, customers –There is a tendency by companies to treat all customers as being equal and identical

25. 3-25 Low expectations always result in satisfied customers Figure 3.2 Satisfaction Is Not the Same as Happiness But what if customer requirements are not met?

26. 3-26 Level 3 Focus Assess customer requirements Extend supply chain to include our customer’s customer Provide value-added services for select customers Manage performance cycles and levels to address needs of each customer segment in the extended supply chain Level 2 Focus Assess customer perceptions of satisfaction Manage performance cycle levels to keep customers satisfied Level 1 Focus Assess industry and competitor practices Achieve internal standards for performance cycles Customer Satisfaction Customer Service Customer Success 3 levels of customer focus

27. 3-27 Not all customers have the same requirements Know your customers’ processes Determine how your capabilities can enhance your customers’ performance Extend the supply chain boundaries to include next- destination customer requirements Introduce new performance metrics Develop value-added services for select customers Achieving customer success requires knowledge of individual customer requirements

28. 3-28 Customer success requires a comprehensive supply chain perspective Figure 3.3 Moving Towards Customer Success

29. 3-29 Value-added services refer to unique or specific activities that firms can jointly develop to enhance their efficiency, effectiveness and relevancy Transportation carriers, warehouse firms and other specialists may become intimately involved to make value- adding activities a reality For example, a retail customer may desire a unique palletization alternative to support its cross-dock activities for its individual stores –Each store requires different quantities of specific product to maintain in-stock performance with minimum inventory Value-added services are a first step in achieving customer success

30. 3-30 Basic principle of supply chain logistics is that customers should be segmented based on their service needs Supply chain must adapt to serve those segments Companies need –A framework for choosing the appropriate customer specific strategies –Programs for customer relationship management Developing a customer accommodation strategy

31. 3-31 Framework for choosing a customer accommodation strategy using profit categories Table 3.4 Choosing Customer Accommodation Strategy

32. 3-32 Customer relationship management (CRM) is a process for improving the overall performance of a business by better understanding and anticipating the wants and needs of customers –In practice companies and vendors use the term CRM to mean different things One CRM example – Procter & Gamble has employees who live and work in the city of its largest customer Wal*Mart Logistics has primary responsibility for many of the processes that drive value and customer success Customer relationship management has grown rapidly in recent years