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THE STRATEGIC CUSTOMER SERVICE MANAGEMENT PROCESS

STRATEGIC SUB PROCESS

ACTIVITIES

Define staffing needs Define deliverables Operational trigger and signals

Develop Customer Service

Management

trigger and signals Develop Customer Service Management Develop Response Produce Develop Infrastructure for

Develop Response Produce

Customer Service Management Develop Response Produce Develop Infrastructure for Implement Response Procedure •

Develop Infrastructure for Implement Response Procedure

Develop Infrastructure for Implement Response Procedure • Determine events that require response • Determine
Develop Infrastructure for Implement Response Procedure • Determine events that require response • Determine

Determine events that

require response Determine appropriate response procedure for each type of event Define internal and external

Determine coordination information

system needs Determine communication

Classify events

needs

Identify operational

problems/improvements

4-1

• Classify events needs • Identify operational problems/improvements 4-1 Develop Framework of Metrics opportunities
• Classify events needs • Identify operational problems/improvements 4-1 Develop Framework of Metrics opportunities

Develop Framework of Metrics

• Classify events needs • Identify operational problems/improvements 4-1 Develop Framework of Metrics opportunities

opportunities

THE OPERATIONAL CUSTOMER SERVICE MANAGEMENT

OPERATIONAL SUB PROCESS

ACTIVITIES

Recognize Event

SUB PROCESS A C T I V I T I E S Recognize Event • Identify

Identify event Determine nature of event

•Coordinate with functions to determine alternative actions •Decide how to respond to the event •Determine
•Coordinate with functions to determine
alternative actions
•Decide how to respond to the event
•Determine implementation steps
•Coordinate with business process
owners or function managers
processing the request
•Respond to event
managers processing the request •Respond to event • Monitor the evolution of the event • Record

Monitor the evolution of the event Record event log

Keeps customer informed

Measure performance

log • Keeps customer informed • Measure performance Evaluate Situation and Alternatives Implement Solution

Evaluate Situation and

Alternatives

customer informed • Measure performance Evaluate Situation and Alternatives Implement Solution Monitor and Report 4-2

Implement Solution

Monitor and Report

customer informed • Measure performance Evaluate Situation and Alternatives Implement Solution Monitor and Report 4-2

4-2

HOW SUPPLIER RELATIONSHIP AFFECTS ECONOMIC VALUE ADDED(EVA)

Supplier Relationship Management’s Impact

Increase product quality

Improve order fill rates

Improve manufacturing processes Reduce cost of direct material Improve plant productivity

Increase productivity

Reduce freight and indirect labor, warehouse costs Optimize physical network/facilities Reduce order management costs Reduce information system costs

Reduce human resources cost/improve effectiveness

Reduce general overhead/management /administrative costs

Sales
Sales

Cost of

Goods sold

Total Expenses
Total
Expenses

Reduce purchased goods inventories Reduce work in process inventories Reduce finished goods inventories

Improve asset utilization and rationalization(warehousing and plant) Improve investment planning and deployment

Inventory Fixed
Inventory
Fixed

Assets

and rationalization(warehousing and plant) Improve investment planning and deployment Inventory Fixed Assets 4-3

4-3

Sales

Gross Margin Profit from Operations Net Profit Cost of Total Expanses Goods Taxes EVA sold
Gross
Margin
Profit from Operations
Net Profit
Cost
of
Total Expanses
Goods
Taxes
EVA
sold
Current assets
Inventory
Capital
Total Asset Cost of
Fixed assets
%
Other current

assets

4-4

Customer Service Defined

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

- Product

- Promotion

- Physical Distribution

Customer service here
Customer service
here

Relative importance of service elements

- Physical distribution variables dominate price, product, and promotional considerations as customer service considerations

- Product availability and order cycle time are dominant physical distribution variables

CR (2004) Prentice Hall, Inc.

4-5

Customer Service Elements

 

Customer

 

service

Pretransaction elements

Transaction

 

Posttransaction

elements Stockout level

Ability to back

elements

Written statement of policy

Installation, warranty alterations, repairs,

Statement in hands

order

 

parts

of customer

Elements of order cycle

Time

Product tracking

Organizational structure

Customer claims, complaints

System flexibility

Technical services

Transship System accuracy

Order conveniences

Product packaging Temporary replacement of product during repairs

 

Product substitution

Common Customer Service Complaints

7%

Other

31%

Product or quality

mistakes

Service Complaints 7% Other 31% Product or quality mistakes 12% Damaged goods 6% Frequently cut items

12% Damaged

goods

6%

Frequently cut items

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44%

Late delivery

4-7

Penalties for Customer Service Failures

29%

Reduced the 2% volume of Refused to business support promotion 16% Discontinued items 18% Stopped
Reduced the
2%
volume of
Refused to
business
support
promotion
16%
Discontinued
items
18%
Stopped all
purchases
with supplier
9%
26%
Refused to
Called in
purchase new
salesman or
items
manager

CR (2004) Prentice Hall, Inc.

4-8

Most Important Customer

Service Elements

On-time delivery Order fill rate Product condition Accurate documentation

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4-9

Appraise This Measure of Logistics Customer Service

Percent of customer orders

shipped by customer request date

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Parker-Hannifin Corp.

4-10

Order Cycle Time

Order cycle time contains the basic elements of customer service

where logistics customer service is defined as:

the time elapsed between when a customer order, purchase order, or

service request is placed by a customer and when it is received by that

customer.

Order cycle elements

- Transport time

- Order transmittal time

- Order processing and assembly time

- Production time

- Stock availability

Order cycle time is expressed as a bimodal frequency distribution

Constraints on order cycle time

- Order processing priorities

- Order condition standards (e.g., damage and filling accuracy)

- Order constraints (e.g., size minimum and placement schedule)

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4-11

Components of a Customer Order Cycle

Components of a Customer Order Cycle WAREHOUSE Order processing and assembly Transmittal of backorder items Customer

WAREHOUSE Order processing and assembly

Order Cycle WAREHOUSE Order processing and assembly Transmittal of backorder items Customer order transmittal
Order Cycle WAREHOUSE Order processing and assembly Transmittal of backorder items Customer order transmittal
Order Cycle WAREHOUSE Order processing and assembly Transmittal of backorder items Customer order transmittal
Order Cycle WAREHOUSE Order processing and assembly Transmittal of backorder items Customer order transmittal
Order Cycle WAREHOUSE Order processing and assembly Transmittal of backorder items Customer order transmittal
Order Cycle WAREHOUSE Order processing and assembly Transmittal of backorder items Customer order transmittal

Transmittal of backorder items

Customer

order

transmittal
transmittal

CUSTOMER Retail outlet

Order delivery
Order
delivery

Express

order

delivery

Retail outlet Order delivery Express order delivery FACTORY Order processing, assembly from stock, or production

FACTORY

Order processing, assembly from stock, or production if no stock

CR (2004) Prentice Hall, Inc.

4-10

Importance of Logistics Customer Service

 Service affects sales

- From a GTE/Sylvania study:

distribution,

when it provides the proper

levels of service to meet customer needs, can

lead directly to increased sales, increased

market share, and ultimately to increased profit

contribution and growth.

- Service differences have been shown to

account for 5 to 6% variation in supplier sales

 Service affects customer patronage

- Service plays a critical role in maintaining the

customer base:

On the average it is approximately 6 times

more expensive to develop a new customer

than it is to keep a current one.

CR (2004) Prentice Hall, Inc.

4-13

Service Observations

The dominant customer service elements are logistical in nature

Late delivery is the most common service complaint and speed of delivery is the most

important service element

The penalty for service failure is primarily

reduced patronage, i.e., lost sales

The logistics customer service effect on sales is difficult to determine

CR (2004) Prentice Hall, Inc.

4-14

Modeling a Sales-Service Relationship

A mathematical expression of the level of service

provided and the revenue generated

Remember Revenue in ROLA
Remember
Revenue in
ROLA

It is needed to find the optimal service level

A theoretical basis for the relationship

Methods for determining the curve in practice

- Two-points method

- Before-after experiments

- Game playing

- Buyer surveys

CR (2004) Prentice Hall, Inc.

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Sales

Sales-Service Relationship by the Two-Points Method

0

Sales Sales-Service Relationship by the Two-Points Method 0 Approximation by two-points method 0 Logistics customer
Sales Sales-Service Relationship by the Two-Points Method 0 Approximation by two-points method 0 Logistics customer
Sales Sales-Service Relationship by the Two-Points Method 0 Approximation by two-points method 0 Logistics customer

Approximation by

two-points method

two-points method

0

Logistics customer service level

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4-16

Sales-Service Relationship

Sales

Range of

transition

Range of

transition

Relationship Sales Range of transition Range of transition Decline Threshold Diminishing returns 0 0 Increasing

Decline

Threshold
Threshold

Diminishing returns

Range of transition Decline Threshold Diminishing returns 0 0 Increasing logistics customer service level CR (2004)

0 0

Increasing logistics customer service level

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of a supplier to the best of its competition

4-15

Determining Optimum Service Levels

Cost vs. service

Theory -Optimum profit is the point where profit contribution equals marginal cost Practice -For a constant rate,

P = trading margin sales response rate annual sales

C = annual carrying cost standard product cost demand standard deviation over replenishment lead-time z Set P = C and find z corresponding to a specific service level

Generalized Cost-Revenue Tradeoffs

Revenue Profit maximization Logistics costs 0 Costs or sales
Revenue
Profit
maximization
Logistics
costs
0
Costs or sales

0

Improved logistics customer service

4-17

Determining Optimum Service Levels (Cont’d)

Example

- Given the following data for a particular product

Sales response rate = 0.15% change in revenue

for a 1% change in the

service level (fill rate)

Trading margin = $0.75 per case

Carrying cost = 25% per year

Annual sales through the warehouse = 80,000 cases

Standard product cost = $10.00

Demand standard deviation = 500 cases over LT

Lead time = 1 week

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Determining Optimum Service Levels (Cont’d)

Find P

P = 0.75 0.0015 80,000

= $90.00 per year

Find C

C = 0.25 10.00 500 z

= 1250 z

Set P = C and solve for z, i.e., 90.00/1250 = z z = 0.072

For the change in z found in a normal distribution table,

the optimal in-stock probability during the lead time (SL * ) is about 92%.

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4-21

SL Levels in % for Various z Values

SL (%)

U

L

z

U

z L

=

z

87-86

1.125-1.08 = 0.045

88-87

1.17 -1.125 = 0.045

89-88

1.23 -1.17 1.28 -1.23 1.34 -1.28

= 0.05 = 0.05 = 0.06 = 0.07

90-89

91-90

92-91

1.41 -1.34

93-92

1.48 -1.41 = 0.07

94-93

1.55 -1.48 1.65 -1.55 1.75 -1.65 1.88 -1.75 2.05 -1.88 2.33 -2.05

= 0.07 = 0.10 = 0.10 = 0.13 = 0.17 = 0.28

95-94

96-95

97-96

98-97

99-98

*Developed from entries in a normal distribution table

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4-22

Graphically Setting the Service Level

350 300 Change in safety stock cost, C 250 200 150 Change in gross profit,
350
300
Change in
safety
stock cost, C
250
200
150
Change in gross profit, P
100
50
0
$/year

87-86 88-87 89-88 90-89 91-90 92-91 93-92 94-93 95-94 96-95 97-96 98-97 99-98

Probability of being in stock during replenishment lead time, %

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4-23

Optimizing on Service Performance Variability

Setting service variability according to Taguchi

A loss function of the form

L k(y - m)

2

L = loss in $

k = a constant to be determined

y = value of the service variable

m = the target value of the service variable

Service penalty only if outside this rangeTraditional Missing target causes increasing penalty  Taguchi Cost
Service penalty only if outside this
rangeTraditional
Missing target causes
increasing penalty 
Taguchi
Cost penalty, L

Target Service variable, m

y

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4-24

Optimizing on Service Performance Variability (Cont’d)

Setting the allowable deviation from the target service level m is to optimize the sum of penalty cost for not meeting the service target and the cost of producing the service.

TC = service penalty cost + service delivery cost

service. TC = service penalty cost + service delivery cost If the service delivery cost is
service. TC = service penalty cost + service delivery cost If the service delivery cost is

If the service delivery cost is of the general form DC = A - B(y-m), then find the optimum allowed deviation from the service target.

2 TC  k ( y - m )  A - B y (
2
TC
k
(
y
-
m
)
A
-
B y
(
-
m
)
dTC
2
k
(
y
-
m
)
0
-
B
0
d
(
y
-
m
)
B
y
-
m
Marginal delivery cost =
marginal penalty cost
2 k

If m is set to 0, y is the optimal deviation allowed from target

CR (2004) Prentice Hall, Inc.

4-25

Service Variability Example

Example Pizzas are to be delivered in 30 minutes (target.)

Pizzas delivered more than 10 minutes late incur a penalty of

$3 off the pizza bill. Delivery costs are estimated at $2, but decline at the rate of $0.15 for each minute deviation from target. How much variation should be allowed in the delivery

service? Convert fixed penalty to Taguchi-style loss curve Find k 2 3 L  k
service?
Convert fixed penalty to
Taguchi-style loss curve
Find k
2
3
L
k y
(
-
m
)
2
3
k(
10
-
0
)
3
k
 0.03
2
10
30
40
and
y
if m is taken as 0
Delivery service, min
0.15
y -
0 
 2.5 minutes
2(0.03)
Cost penalty, $

No more than 2.5 minutes should be allowed from the 30- minute delivery target to minimize cost.

4-26

Setting Service Levels

Service treated as a constraint on design

Planning for service contingencies

Measuring Service Performance

Percent of sales on backorder No. of stockouts Percent of on-time deliveries No. of inaccurate orders

Most comprehensive
Most comprehensive

Order cycle time

Fill rate--% of demand met, % of orders filled complete, etc.

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Service Contingencies

System Breakdown Actions Insure the risk Plan for alternate supply sources Arrange alternate transportation Shift demand Build quick response to demand shifts Set inventories for disruptions

Product Recall Actions Establish a task force committee Trace the product Design a reverse logistics channel

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