1. Supply Chain Management Lecture 4 – Customer Service & Logistics Costs
Alexa Kirkaldy

2. Lecture 4 - Learning Objectives
On completion you will be able to:
Explain the concept of customer service in a supply chain context
Identify the importance of both product and customer profitability
Recognise the impact of logistics management on return on investment and shareholder value
Explain the importance of total acquisition cost and total cost of ownership in relation to supply chain management

3. The Components of Customer Service
Before
During
After
Pre-transaction
Components
Post transaction
Components
Transaction
components
Written customer service policy
Accessibility
Organisation structure
System flexibility
Order cycle time
Inventory availability
Order fill rate
Order status information
Availability of spares
Call-out time
Product tracing/warranty
Customer complaints, claims etc.
Based on work by LaLonde and Zinser, cited in Christopher M., Logistics & Supply Chain Management, Pearson, 3rd edition, 2005, pp

4. The Damage of Stock-Outs
Reputation and brand allegiance
Corsten D., Gruen T., Stock-outs cause walkouts, Harvard Business Review, May 2004

5. Identifying Customer Service Needs
Identify key components of customer service as seen by customers themselves
Establish the relative importance of those service components to customers
Identify customer segments according to similarity of service preferences
Define customer service objectives
The perfect order 100% on time, 100% complete, 100% defect free
Actual performance 90% on time, 80% complete, 70% defect free
Chance of a perfect order = 90% * 80% * 70% = 50.4%

6. Venn diagrams to identify customer segments
On-time delivery
Minimum cost
Intensive technical support
Harrison, A. (2008) Putting the End-Customer First. In: Harrison, A and van Hoek, R. Logistics Management and Strategy : Competing Through the Supply Chain. 3rd ed.,: Prentice Hall Financial Times, Ch.2, p 53.

7. Translating to Shareholder Value
Revenue growth
Tax
optimisation
Shareholder
Value
Working capital efficiency
Fixed asset
efficiency
Operating cost reduction
One measure of shareholder value
Market value added = (Share price * No. of issued shares) minus
Book value of capital invested

8. Translating to Shareholder Value
Profit
Sales
Sales
Capital employed
Return On Investment = X
ROI
Profit
Sales revenue
Costs
Customer service
Logistics efficiency
Capital
employed
Cash
Debtors/
creditors
Cash-to-cash cycle time
Inventory
Just-In-Time logistics
Fixed assets
Asset utilization
Debt collection, early payment discount
Closer integration of deliveries to demand

9. Key Ratios for SCM Cash-to-Cash Cycle Time
Average settlement time for debtors
Plus
Average days of inventory
Minus
Average settlement period for creditors

10. Examples of Key Ratios for SCM
Yen
(assets- liabilities)
A B C = D

11. Where To Find Financial Data
Fame
UK firms
For large public firms look for plc
Amadeus
European & UK firms
For large firms look for plc or country equivalent of plc
Provided by same firm as Fame but uses a different format and has some different names for ratios!
Thomson Research
US and large global firms
For large firms look for entries in the fields, ‘quote/ticker’, ‘exchange’ and relevant ‘country’. You will have the plc pr parent company if there is a ‘stock price and earnings information’ report

12. The Need for Relevant Costing Information
“Strategies may be conceptually brilliant, but if they are based on faulty information about the cost of a product, they are likely to fail in the market place.
Many have!”
Kaplan & Cooper (1988)
Source: Kaplan & Cooper (1998) Measure Costs Right: Make the Right Decisions, Harvard Business Review, September – October 1988

13. Supply Management’s Impact on Net Income and the Bottom Line
Increased Sales:
Faster to Market
Improved Quality
Pricing Flexibility
Innovation
Lower Total Cost:
Acquisition Cost
Processing Cost
Quality Cost
Downtime Cost
Risk Cost
Cycle Time Cost
Conversion Cost
Non-value Added Cost
Supply Chain Cost
Post Ownership Cost
Source: Burt, Petcavage, Pinkerton ( 8th Edition, 2013, page 9)

14. Total Acquisition Cost (TAC)
Purchasing focus
Maps the costs related to the supply of products
Can identify new sourcing and cost reduction opportunities
Can support supplier selection decisions
TAC:
Procurement approach
Maps cost of acquiring goods
Identify cost improvements

15. A TAC model: A Hierarchy of costs
Total Acquisition Cost C
Part Purchase Price
Internal Acquisition Cost A B
This diagram shows a hierarchy of costs (procurement costs)
Some costs are always measured: e.g.. Purchase prices
Some costs are sometimes measured: Suppliers’ material, labour and overhead costs. General internal acquisition costs
Rarely measured: transportation costs, other internal costs, quality, materials management, inventory, etc.
Transport C
Materials Mgt Cost C
Quality Cost C
Inventory Cost C
Material Cost
Labour Cost
Overheads B B B
Always Measured
Sometimes Measured
Rarely measured to technology family/commodity group level A B C

16. A model of Total Acquisition Costs
Total Acquisition Cost Model
100%
Classification of internal acquisition costs
Execution
Execution costs :
Cost of getting goods from supplier to the business
( materials management costs )
e.g.. - transport, internal administration costs etc..
Inventory costs :
Cost of holding inventory
.e.g. - stock-holding costs, cost of redundant stock etc..
Quality costs :
Cost involved in processing the goods through the
manufacturing process
e.g.. - inspection costs, scrap costs etc..
Inventory
Internal acquisition
cost
Quality
per
annum
So if we look at the total cost per annum or a particular components, it could look like this.
It is not only the purchasing spent, but also, inventory, quality, and execution… This can add a substantial amount to the cost of the component.
Purchasing Spend
Part purchase price
( invoice price )

17. The total acquisition costs are £ 586k, representing 8.5 % in
addition to the invoice price of cable assemblies
Cost
£ 540,000
£ 31,559
£ 10,415
£ 4,000
100 %
108.5 %
Illustrative.
Quality Cost
Inventory Cost
Execution Cost
Invoice Price
Cable Assembly Example

18. Total Cost of Ownership (TCO) extends TAC …
“All costs associated with the acquisition, use & maintenance of a good or service”
Post transaction
Components
Pre-transaction
Components
Transaction
components
Investigating sources
Qualifying sources
Training / education
Price
Order placement
Transportation
Tariffs / duties
Billing / payment
Inspection
Return of parts
Follow-up and correction
Production line stoppages
Defective finished goods
Cost of maintenance
Field failures
Repair in field
Reputation
Lisa Ellram

19. TCO Model
Logistics and Supply Chain Management, Christopher, 2011, Page 29

20. Logistics – Cost factors

21. Warehouse costs UK Chartered Institute of Logistics and Transport
Survey stated that between 24% and 35% of Logistics costs relate to warehouse activity and can be between
2% and 5% of the cost of sales.
EQUIPMENT %
LABOUR 48-60%
SPACE %

22. Lecture 4, Key Points & Tips
As many products take on the characteristics of commodities as they mature delivering superior customer service via SCM and logistics is becoming increasingly important.
In reality no two customers have identical needs but similar customers can be grouped together and the supply chain designed improve increase customer satisfaction thereby encouraging customers to spend more and improving customer retention.
Logistics and SCM influences the income statement and balance sheet and is increasingly be recognised helping to improve ROI and shareholder value.
To improve profitability supply chains need to prioritise profitable products and customers and Pareto analysis is a useful tool for this. In theory as few as 4% of customer/product transactions can be responsible for 64% of profits.

23. Lecture 4, Key Points & Tips
To prioritise profitable customers and products it is vital to have good quality costing information. However, the true cost of logistics are often not fully understood.
When purchasing materials it is vital to consider the total cost of acquisition and the total cost of ownership, not just the initial purchase price.
In the assignment you could quantify your firm’s SCM performance by looking at the cash-to-cash cycle time over a number of years and/or the market value added for a listed company.

24. For next Friday Read the case study on direct product profitability
what can we tell from the analysis and the average DPPs per customer?
Read the case study on Walmart
What can we learn from Walmart and K Mart?
Read the scanned chapter ‘Putting the end customer first’
Read the paper ‘The benefits of central supply chain management: Corus and TDG’
Possible oral presentation questions
How could customer service be improved by better supply chain management?
How could stock availability in this supply chain be improved?
Using published financial information for this firm, or firms in this industry, determine whether logistics is improving and evaluate the impact on shareholder value.
Could this supply chain benefit for improved costing techniques and systems?