Transcript Chapter 4: Logistics Customer Service • Definition and Measurement. • Fundamental Tradeoff

Chapter 4: Logistics Customer Service
Skip: Determining Optimum Service Levels (pp. 97-100)
Skip: Service as a Loss Function (pp. 100-101)
• Definition and Measurement.
• Fundamental Tradeoff
– Sales-Service and Cost-Service relationships.
• Service as a Constraint.
• Contingencies.
Customer Service
• Customer service is the result of logistics activities.
– Create and foster customer loyalty through good service.
• Hard to define & hard to measure comprehensively.
– Includes:
• Pre-transaction customer information about delivery
options, return policy, warranty, billing information.
• Post-transaction support after the sale, installation, repair,
returns, recall.
• Employee training affects all areas of customer service.
• Not all customers should have same level of service.
Customer Service Measures
• Availability
– % of demand filled from stock
– Example: 95% availability means 5% of demand is
backordered.
• Order Cycle Time
– Time between placing and receiving an order.
– Includes:
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Order transmittal (consider role of e-commerce).
Order processing (document prep., credit check, etc.).
Order assembly (may need to produce if out-of-stock).
Delivery.
Customer Service Measures
• Availability and Order Cycle Time address
time a customer waits.
• Customers point of view:
– When will I receive it?
– Is it correct?
• Want on-time delivery and high quality.
– Delivery reliability often more important than speed.
– Correct, undamaged order expected.
Fundamental Question
• What level of service should be offered?
• Hard to answer!
• Consider tradeoffs.
Fundamental Tradeoff
• High level of customer service creates:
– Higher sales and revenues.
– Higher costs.
• Lower level of customer service creates:
– Lower costs.
– Lower sales and lost customers.
– Examples:
• 5% decrease in service level = 24% drop in purchases.
• 6 times more expensive to develop new customers than
keep old customers.
Sales-Service Relationship
• Increasing service increases cost and revenue.
Revenue
$
Cost
Customer Service Level
Sales-Service Relationship
• Want to maximize Profit = Revenue - Cost.
Revenue
$
Cost
Profit
Customer Service Level
Sales-Service Relationship
• Optimum service level = Maximum Profit
$
Revenue
Cost
Profit
Optimum Customer Service Level
Determining Optimum Service Level
• Optimum service level = Maximum profit.
– Not maximum sales.
• Cost as a function of service can be estimated.
– Cost of better transportation and storage is known.
• Sales (revenues) as a function of service is very
hard to determine.
– Can vary service levels and measure sales - Dangerous!
– Easy to survey customers, but may not be reliable.
Service as a Constraint
• Select several alternative logistics systems with
different levels of service.
– Evaluate cost of corresponding transportation and
storage options.
• Ask “Will expected increase in revenues will
exceed estimated costs?”
– Easier than “What is best level of service to offer?”
• See Table 4-3 p. 102
Service as a Constraint
Alternative
Logistics Cost
Service Level*
Water transport
Low inventory
$5,000,000/yr
80%
Rail transport.
Medium inventory
$7,000,000/yr
85%
Truck + air transport.
High inventory
$11,0000,000/yr
95%
* % of customers receiving 1 day service
Will revenues from increase in service offset added costs?
Contingencies
• Breakdown/Natural Disaster:
– War, riots, attack, bankruptcy, etc.
– Fire, flood, earthquake, hurricane, etc.
• Strikes:
– By employees, suppliers, affiliated workers.
– Examples: UPS strike 1997, trucking strike 1994.
• Product Recall:
– Recall from customers and from logistics pipeline.
– Find, collect, and repair or replace.
Contingencies
• Prepare for:
– Loss of product or service capability.
– Loss of data (computers).
– Loss of communications.
– Loss of transportation.
• Goal: Keep customer satisfied