SUPPLY CHAIN MANAGEMENT

Module 8 Demand Management and Customer Service

OUTBOUND-TO-CUSTOMER LOGISTICS SYSTEMS

To increase levels of customer service, significant emphasis is placed on Outbound-to-Customer logistics systems Outbound-to-Customer Logistics Systems refer to the set of processes, systems and capabilities that enhance the companys ability to serve its customers This area plays a major role in the companys revenues, profits and overall image

DEMAND MANAGEMENT

Demand Management can be defined as focused efforts to estimate and manage customers demand with the intention of using this information to shape operating decisions Demand Management strives to reduce total costs for a company and its supply chain Demand Management must be a collaborative process

A major driver of the recession in 2008 was the increase of error in forecasts due to which billions of dollars worth of inventories had accumulated in several supply chains

DEMAND MANAGEMENT OBJECTIVES

Gathering and analyzing knowledge from all possible sources about consumers, their problems and their unmet needs Sharing with other functions the knowledge about consumers, available technology and logistical challenges Coordinate with other functions in developing the best products and services Ensuring the distribution of products and services to consumers in the desired format Develop and execute contingency plans with other functions to allow modification of short-term schedules when necessary

ISSUES IN DEMAND MANAGEMENT

Lack of communication between departments results in little or no coordinated response to demand information Too much emphasis is often placed on forecasts of demand with little attention paid to collaborative efforts and strategic and operational plans that need to be developed from the forecasts

Demand information is often used more for tactical and operations purposes than for strategic purposes
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Example of Apple:

In the 1990s, Apple had several problems in forecasting demand Many components were sourced from 1 supplier therefore accurate forecasts were critical Over $1 billion in un-fulfilled orders during the crucial holiday season resulting in the CEO (Spindler) getting ousted a few months later
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TRADITIONAL FORECASTING

A major component of demand management is forecasting the amount of product that will be purchased by consumers or end users Involves around how a firm integrates information about its customers into the manufacturing planning and control systems In the integrated supply chain , all other demand will be derived from the primary demand As forecast horizon increases, accuracy decreases
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Example of IBM: Badly misjudged the demand for its PC business Went from highly profitable to a loss of $200 million Finally had to sell off the PC business to Lenovo
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TRADITIONAL FORECASTING CONTINUED

An example of integrating Sales Forecasting with Production is illustrated on the next page Points to note are:

Long-term (more than three years), Midrange (one to three years) and Short-term (less than 1 year) forecasting are each important contributors to the forecasting process

INTEGRATION OF SALES FORECASTING AND PRODUCTION

COLLABORATIVE PLANNING, FORECASTING AND REPLENISHMENT (CPFR)

CPFR is recognized as a breakthrough business model for planning, forecasting and replenishment Uses available Internet-based technologies to collaborate from operational planning through execution

Emphasizes a sharing of consumer purchasing data between supply chain partners

Creates a direct link between the consumer and the supply chain

COLLABORATIVE PLANNING, FORECASTING AND REPLENISHMENT (CPFR)

The plan and the forecast are input by suppliers and buyers into an Internet accessible system Within established parameters, any of the participating partners is empowered to change the forecast

Collaborative planning improves the quality of the demand for the entire supply chain through a constant exchange of information from one end to the other

Example: Wal-Mart and P&G

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MAJOR COMPONENTS OF THE ORDER CYCLE

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CUSTOMER SERVICE

Customer service is the key link between logistics and marketing

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CUSTOMER SERVICE CONTINUED

Defining customer service:

In terms of levels of product - Core, Basic, Expected, Augmented, Potential In terms of types of customer support/service - Technical, Non-Technical In terms of levels of involvement In terms of complexity of customer service

Elements of Customer Service: Time Dependability

Cycle time Safe delivery Correct orders

Communications Convenience
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CUSTOMER SERVICE: PERFORMANCE MEASURES

Traditional:

% availability in units Speed, accuracy and consistency Response time to special requests Response and recovery time requirements Quality of response

New:

Orders received on time Orders received complete (OTIF) Orders received damage free Orders filled accurately Orders billed accurately
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CUSTOMER SERVICE: TAKEAWAYS

If the basics of customer service are not in place, nothing else matters ! Customers may define service differently

All customer accounts are not the same

Relationships are not one dimensional

Partnerships and continuous value additions immensely help to retain customers

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STOCKOUTS

A Stockout is a situation in which the demand or requirement for an item cannot be fulfilled from the current inventory

While stockouts can occur along the entire supply chain, the most visible kind are in the fast moving consumer goods (FMCG) industry (e.g. Toothpastes, Soaps)
Stockouts happen due to unexpected demand, ineffective inventory management, production delays or replenishment issues

Research findings show that a retailer loses about 4 percent of sales annually due to stockouts

Possible outcomes from a Stockout:

Back orders - A customer order that cannot be filled immediately and for which the customer is prepared to wait for some time Lost sales Dissatisfied customers Diminish store loyalty Obstruct Sales and Marketing plans
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EXPECTED COSTS OF STOCKOUTS

Cost of Stockouts consist of:

Internal costs (delays, labour time wastage, lost production) External costs (loss of profit from lost sales, and loss of future profit due to loss of goodwill)

Event Back Order Lost Sale

Probability 70% 20%

Costs $ 6.00 $20.00

Expected Costs $ 4.20 $ 4.00

Lost Customer
Estimated cost per stockout

10%

$200.00

$ 20.00

100%

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$ 28.20
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CHANNELS OF DISTRIBUTION

A Distribution Channel or Trade Channel is defined as the route along which goods move from manufacturers to end consumers This channel consists of various middlemen like Wholesalers, Stockists, Agents and Retailers who intervene between the producers and consumers The channel serves to bridge the gap between the point of production and the point of consumption thereby creating time, place and possession utilities (value additions)

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DISTRIBUTION CHANNEL SEPARATION

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EXAMPLE OF DISTRIBUTION CHANNEL FOR THE FOOD PRODUCTS MANUFACTURING INDUSTRY

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BENEFITS OFFERED BY CHANNEL MEMBERS

Cost Savings in Specialization - Members of the distribution channel are

specialists in what they do

Reduce Exchange Time - They often perform their job more rapidly resulting in
faster product delivery

Customers Want to Conveniently Shop for Variety Assortments at a single

location

Resellers sell Smaller Quantities Create Sales - Encourage sales of the product through their own advertising
efforts and using other promotional means such as special product displays

Offer Financial Support - Purchase on credit; purchase using a payment plan;

delay the start of payments; and allowing trade-in or exchange options
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GROWTH AND IMPORTANCE OF DISTRIBUTION CHANNELS

Retail channels showing dramatic growth Mass merchandisers such as Wal-Mart, Carrefour, Sears and Target constricting growth of smaller retailers Nature of logistics changing to accommodate customized systems

Successful retailers base efficiency on logistics systems

Make Store Sell Buy Move Buy Move Make Sell Buy Make Sell Move Move Store

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