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“Education in Pursuit of
Supply Chain Leadership”
dp&c Chapter 10
Chapter 10
Customer Management
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Learning Objectives (cont.)
• Understanding today’s customer dynamics
• Identifying the customer
• Understanding customer wants and needs
• Marketing to today’s customer
• Creating lifetime customers
• Dimensions of customer values
• Creating the customer-centric organization
• Defining customer relationship management (CRM)
• Components of CRM
• The range of CRM functions
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Learning Objectives
•
•
•
•
•
•
•
Charting customer order management attributes
Working with the order management process
Working with the order management cycle
Creating the perfect order
Aligning order and fulfillment supply channels
Defining customer service management
Defining the elements of effective service management
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Chapter 10
Customer Management
Inventory
The Revolution in
Management
Basics
Customer
Management
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Understanding Today’s Customer
The relationship of power between the customer and the business
have dramatically changed and will continue to evolve into radically
new forms presenting exciting new challenges
Today’s customers are exerting an ever-expanding influence over
product development, the way content concerning product and
service is communicated, and the terms of order management
The power of the customer has been heightened by their ability to
use networking technologies to source their products and services
from a range of delivery mediums, providing access to potential
suppliers from anywhere, at any time on the earth
Customers increasingly feel that the individualized buying
experience, whether online or in person, should be as value-packed
and fulfilling as the product or service received itself
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Defining the Customer
Goal of Customer Management
Retaining and making more profitable existing customers and
utilizing whatever means possible to acquire new customers
Definition of the Customer
A person or organization receiving a good, service, or
information
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Types of Customers
Product/Service Flow
Supplier
Integrator
Internal
Customer
Distributor
EndCustomer
Retailer
Jobber/
Broker
Cybermediary
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Customer Groups
Business Customers
Consists of supply chain participants—suppliers, integrators,
distributors, and retailers. For the most part, these customers
are characterized as consumers of goods and services for the
purpose of value-added processing or movement to the endcustomer
End-Use Customers
Consists of individual consumers resident at the termination of
the supply chain process who use goods and services for their
personal use
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Supply Chain Customer Strategies
Vertically
integrated
Producer performs all customer value-satisfying
activities, beginning with receipt of customer
demand, continuing with product configuration,
pricing, delivery promising, discounting, and
other services, and concluding with product
delivery and after sales services
Third-party
delegated
The producer relies on channel partners to
perform all customer delivery functions. In this
model the producer rarely has direct contact with
the end-customer
Hybrid
selling model
The producer selectively performs some of the
customer management functions while
surrendering control of the remaining activities to
sell-side channel partners
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Customer Wants and Needs
What do Customers Want?
Complete solutions to their wants and needs that create
superior value at the lowest cost attained with the minimum in
effort and time expended
What is Customer Value?
• Value arises in the transfer of possession of the physical
“worth” or “usefulness” of a good or service for the
comparable “worth” or “usefulness” found in another good or
service
• The transfer of the value found in a physical good or service
for the acquisition of abstract value, such as status, want,
perceived need, or caprice, deemed desirable by the buyer
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Customer’s Role in Value Creation
Instead of a passive recipient of standardized
goods and services, today’s customer has
become an active driver in the structuring of the
exchange event itself as well as in the design,
manufacture, and distribution of products and
services. The customer is increasingly demanding
a say in issues relating to pricing, the use of
technology, order management, delivery, reverse
logistics, and what brands they will or will not give
their loyalty
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Value of Lifetime Customers
Lowering the
total cost of
marketing
Since the majority of the cost in customer
management occurs in customer acquisition, the
greater the proportion of lifetime customers, the less
the long-term total costs of marketing and sales
Facilitating
satisfying
customer
experiences
The longer customers do business with a supplier, the
easier it is for marketers to create unique product,
pricing, discounting, and other offerings targeted at
individual customers
Increased
revenue and
profit
opportunities
As lifetime customers increase their purchase of
company products and services, revenue grows, the
cost of customer maintenance declines, and profits
and margins increases
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Customer Management Metrics
Life-time customer value (LCV)
A prediction of the net present value of the future profits
attributed to the entire future relationship with a customer
Customer Profitability Analysis
When developing markets, planners must be careful to
measure customer profitability. In every customer base there
are "stars" that provide the bulk of the firm's sales, a broad
mass of customers whose revenue contribution varies from
good to fair, and a group of "dogs" that are not only a severe
drain on resources but also divert effort away from servicing
the "stars" and expose them to be lost to competitors
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Operating Profit Contribution
Simple Equation
Gross profit (12 months) - [Invoices (12 months) x Average Cost
Per Invoice]
Ranking Customers
• Customers in top 10 percent provide 90 percent of the profits
• Customers in top 20 percent provide 130 percent of the profits
• Customers in top 40 percent provide 140 percent of the profits
• Customers in bottom 60 percent provide (- 40 percent) of the
profits
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Dimensions of Customer Value
Value
Dimension
Relationships
Customer
Value
Peace of
Mind
Smart
Technologies
Buying
Experience
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Forms of Customer Value
Economic
Value
Solution
Value
Psychological
Customers receive economic value when they
leverage a product or service to generate
additional value beyond the initial cost
The acquisition of a product or service can provide
benefit to the customer by providing access to
certain functions, features, or attributes that
provide a level of desired performance or capability
Psychological preferences are often subliminal
(e.g. brand loyalty or image), and lead customers
to believe they are receiving value beyond direct
economic or solution-driven benefits
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Factors of Customer “Pease of Mind”
Product and Service Conformance
How effectively the product or service consistently matches the
expected specifications without the customer continuously verifying the
contents of the goods or measuring the results once applied to the
want or need
•
•
•
•
•
Performance or the capability of the product or service to consistently
perform as it has in the past or will perform according to new features
Reliability or the capability of the product or service to always perform
within a previously identified and acceptable range without failure
Durability or the expectation that a product or service will continue to
provide value in terms of both its technical and economic dimensions
Aesthetics or how the physical appearance or the harmonious
complexity of a product awakens a sense of pleasure in the customer
Value/price tradeoff or whether the customer feels the price of a product
or service is worth the value received
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Factors of Customer “Peace of Mind”
Product and Service Assurance
Assurance is focused more on the confidence or trust, often subliminal,
that dealing with a tried-and-true product or supplier brings to a
transaction
•
•
•
•
Acceptability of risk or freedom from worry about the efficacy of the
value or usefulness of a product or service
Tangibles or the image of quality (state-of-the-art or availability of highly
qualified personnel) or permanence (facilities or a strong history) a
customer receives from a supplier
Responsiveness or the consistency and promptness with which
customers expect their post-transaction service needs will be meet
Competence or the knowledge that the supplier possesses the required
skills and knowledge that extends from the design of the product or
service through post-sales support
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Factors of Customer “Peace of Mind” (cont.)
Product and Service Assurance
•
•
•
•
Courtesy or the level of politeness, respect, consideration, and
professionalism customers have consistently come to expect from their
top suppliers
Credibility or the high standards of honesty, trustworthiness, and
believability customers feel when dealing with their best suppliers
Security or the knowledge that sensitive data customers share with their
suppliers will be kept in confidence and will not be compromised
Access or the degree of ease by which customers can order and
communicate with their suppliers and receive their purchases within a
desired time limit
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Customer Experience management (CEM)
The customer’s perception of interactions with
a brand, from marketing communications to
sales and service processes to the use of the
product or service. CEM is about
understanding the content of and effectively
managing customer interactions while building
brand equity and long-term profitability
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Principles of Lean Consumption
1. Customers want suppliers to provide them with a complete
solution to their problems. A partial solution is no solution
2. The solution should be attained and implemented with as little
cost, time, and effort on the part of the customer as possible
3. All of the components necessary to provide the solution need to
be available exactly when they are needed
4. Suppliers need to provide a complete solution where the
customer expects to find it without having to merge disconnected
sources
5. The components of the solution must be available when the
customer wants it
6. Bundle products and services so that the solution can be
acquired by the customer with a minimum number of decisions
and with ease of effort
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Smart Technologies
Customercentric value
chains
Every node in the supply chain be capable of linking in real
time with every channel resource to provide the best and
fastest solution to their needs
Agile and
scalable
suppliers
Nimble supply chains that can quickly adapt to provide
unique product and service solutions that are low-cost
and capable of rapid change as the needs of the
customer evolve through time
Fast flow
fulfillment
Today’s customer expects products and services to be
delivered as quickly and completely as possible
Networking
Digitizing
sourcing
Networking enables buyer and supplier can now
communicate information directly without regard to
system architectures
The Internet has enabled customers to utilize
applications that provide simple, self-directed tools for
browsing and locating solutions to product and service
needs from anywhere on the globe
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Creating the Customer-Centric Organization
Establish a customer-centric organization. Literally every
customer touch point needs to be oriented around how each
business function can continuously delight the customer with
an exception experience and world-class service
Determine existing customer positioning. The goal is to unearth
what each individual customer values and to design the
products, services, and communication infrastructure that will
drive increasing customer loyalty
Devise a map of customer segments. The qualitative and
quantitative data arising from step 2 should provide a clear
geography of the customer base and illuminate key drivers,
such as convenience, price, reliability, and so on, of loyalty,
value, and satisfaction
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Creating the Customer-Centric Organization
Develop and implement the solution. An effective customer
management program should enable meaningful marketplace
initiatives, promotions, and supply chain points of customer
contact that improve company visibility, confirm customer value
expectations, and cement loyalties is the next step in the
process of generating a customer-centric organization
Monitor, Measure, and Refine. The driver of customer
management review is the metrics arising out of the record of
customer contact and exchange. Marketers must be careful to
continuously research and document what is working and what
is not by utilizing the analytical tools. These technologies
provide continuous quantitative tracking of buying patterns,
customer attitudes, and degrees of satisfaction for all market
segments and points of contact
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Chapter 10
Customer Management
Inventory
Customer
Management
Basics
Relationship
Management
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Defining CRM
CRM is a complete system that (1) provides a means and method
to enhance the experience of the individual customers so that they
will remain customers for life, (2) provides both technological and
functional means of identifying, capturing, and retaining customers,
and (3) provides a unified view of the customer across an
enterprise
Paul Greenberg, CRM at the Speed of Light
A marketing philosophy based on putting the customer first. The
collection and analysis of information designed for sales and
marketing decision support to understand and support existing and
potential customer needs. It includes account management, catalog
and order entry, payment processing, credits and adjustments, and
other functions
APICS Dictionary
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Key Elements of CRM
CRM is both a management concept and a software technology.
As a management concept, CRM is a philosophy that requires
companies to migrate to a customer-driven way of doing
business. As a technology, CRM describes a set of software
applications used to manage and analyze marketplace sales,
promotion, pricing, and shipment history to gain greater insight
and intimacy into customer buying habits
CRM is a strategic management tool. CRM is a strategic
technology focused on increasing profitability, enhancing the
marketing plan, and expanding competitiveness by
understanding and growing the customer
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Key Elements of CRM (cont.)
CRM is focused on facilitating the customer service process.
Being more responsive to the customer requires that sales and
service be able to make effective customer management
decisions and design superior responsiveness based on their
capability to identify what brings value to the customer
CRM is focused on optimizing the customer’s experience. CRM
enables companies to continually win customers through an
array of objectives from providing a level of personalized service
and customized products to utilizing advertising, ease in ordering
a product, or ensuring a service call-back that will positively
influence a customer’s perception of the buying experience
CRM provides a window into the customer. CRM functions
ensure that all service nodes along the supply chain that can
enhance the customer experience are provided with critical
information about the customer, what that customer values the
most, and how they can ensure the customer has a positive
buying experience each and every time
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Key Elements of CRM (cont.)
CRM assists suppliers to measure customer profitability. CRM
enables companies to determine which customer segments are
profitable and which are not, what product and service values
drive profitability for each customer, and how marketers can
architect processes that consistently deliver to each customer
the values they desire the most
CRM is about partnership management. CRM is about nurturing
mutually beneficial, long-term relationships intimate enough to
provide improvement opportunities and tailored solutions
CRM is a major facilitator of supply chain collaboration. Firms
that create integrated, synchronized processes that satisfy the
customer seamlessly across the supply channel network will be
the ones that will have the most loyal customers, are the most
attractive to new customers, have the deepest collaborative
relationships, generate the highest revenues, and have
sustainable competitive advantage
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CRM Major Functions
relationship building, creating
company branding, identifying the
customer, selecting
product/service offerings, and
designing promotions, advertising,
and pricing
Service
customer support, call-center
management, and customer
communication
Marketing
selling and distribution
of products
CRM
Performance
Analytics
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Sales
database inquiry and
reporting tools
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Range of CRP Application Functions
Relationship
Building
CRM
Marketing
Analytics
Partner
Relationship
Management
(PRM)
Customer
Relationship
Management
(CRM)
Customer
Experience
Management
(CEM)
Sales Force
Automation
(SFA)
Customer
Service
Management
(CSM)
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CRM Relationship Building – Toolsets
• Real-time updates on contacts, accounts, opportunities and
documents
• Ability to consolidate account history, customer communications,
and contacts
• Social media insight
• Integrated reporting, analytics, data mining, list management,
segmentation, campaign management, and closed-loop reporting
• Create business connections across CRM activities and entities
• Measure performance of organizations, business units, teams,
and individuals
• Central application where all departments of a company can share
necessary information to collaborate and provide detailed
communication with customers
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CRM Marketing Automation – Toolsets
• Customer intelligence and data extraction
• Integrated reporting, analytics, data mining, list management,
segmentation, and closed-loop reporting
• Campaign definition, planning and program launch
• Scheduling of activities and continuous performance
measurement
• Manage and track campaigns across multiple channels
• Collaborative communications via the customer's preferred
method of contact
• Drive customer loyalty and demand through targeted,
personalized e-marketing campaigns
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CRM Sales Force Automation – Toolsets
• Contact management. The basic function of the software is to
enable the organization and management of prospect and
customer data
• Account Management. This application is designed to provide
detail information regarding account data and sales activity that
can be accessed on-demand
• Sales Process/Activity Management. Applications providing
imbedded, customizable sales process methodologies designed
to serve as a road map guiding sales activity management
• Opportunity Management. Also known as pipeline management,
this aspect of SFA is concerned with applications that assist in
converting leads into sales
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CRM Sales Force Automation – Toolsets (cont.)
• Quotation Management. SFA systems can assist in the
development of quotations for complex orders requiring product
configuration and pricing
• Knowledge Management.
Applications providing sources of
information and documentation such as policy handbooks,
sales/marketing presentation materials, standardized forms and
templates for contracts and estimating, historical sales and
marketing reporting, and industry and competitor analysis
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CRM Customer Service – Toolsets
• Case management. Technologies to cut service costs and
improve workflow management by automating processes
associated with customer support case assignment, management,
and escalation
• Case history knowledge base. Technologies to build and
comprehensive online knowledge base to provide customers with
24/7 access to case knowledge repositories
• Customer portal. Technologies enabling customers to enter
problem tickets online; customer real-time access to order status,
order status tracking, and returns authorization; and the ability to
create one-to-one marketing campaigns targeted at specific
prospects, customers, or market groups
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CRM Customer Service – Toolsets (cont.)
• Time tracking. Technologies to automate and streamline the timetracking process, consolidating it with reporting and billing in the
CRM system; enable complete visibility into how service and
support teams are apportioning their time; and track time more
accurately and use real-time metrics to improve time management
practices
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CRM Customer Experience Management –
Toolsets
• ERP system backbone. ERP acts as a transaction engine and
information repository for the establishment of critical customer
database information
• Demand sensing. Demand sensing tools illuminating customer
experiences with products, services, and information constitute a
critical CRM component
• Operations optimization. Once repositories of customer
information are available, marketers can network their business
system backbones to streamline pipeline supply and delivery
processes that exactly match customer requirements
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CRM Customer Experience Management –
Toolsets (cont.)
• Demand shaping. As intelligence about actual demand arising
from customer buying events is broadcast through the supply
chain, order management and pricing software can be used to
open new opportunities for cross-selling and up-selling
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CRM Partner Relationship Management –
Toolsets
• Partner recruitment, development, and profiling. Technologies
providing the ability assist in the recruitment and qualification of
potential channel partners
• Lead and marketing management. Technologies concerned with
communicating marketplace opportunities to the partner network.
Lead generation enables parent companies to match customer
leads with partners based on their capability profiles
• Sales management. Technologies enabling team selling, catalog
management, needs analysis, commission management, and
partner-driven order management and tracking. Other toolsets
provide for quotation management and configuration capabilities
that can activate interactive selling tools to customize partner and
marketplace needs
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CRM Partner Relationship Management –
Toolsets (cont.)
• Services management. Technologies providing for the on-going
training and certification of partners and activation of support
capabilities
• PRM collaboration. PRM systems should also facilitate the codevelop marketing programs and joint business plans among
channel partners
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CRM Analytics – Toolsets
• Real-time CRM dashboards. Applications providing real-time
dashboards for sales, customer service, marketing, and
executives providing information such as actual sales vs. sales
forecasts, call volumes and tends, and financial measurements
such as bookings and billing, sales pipeline, measures, and
customer service performance
• Daily activities. Applications providing sales, service, and
marketing teams with the latest information to manage their dayto-day activities, whether viewing opportunities, closing business,
or closing customer tickets
• Ad hoc reporting. Applications enabling customer-facing teams to
create custom reports and manage their performance without
waiting for IT to develop the needed reports or depending on
spreadsheets
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CRM Analytics – Technical Architecture
CRM
Applications
CRM
Reporting
Operational
CRM
Data
Marketing
Data
Warehouse
CRM
Analytical
Engine
Marketing
Actions
ERP
Transaction
Database
Customers
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Chapter 10
Customer Management
Inventory
Customer Order
Management
Basics
Management
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Order Management, Fulfillment and
Distribution Issues
Fulfilling more orders, faster, and at
lower costs
Increasing profitability/reducing cost
on a per-order basis
Improving customer service
43%
39%
37%
Real-time visibility of inventory at all
stages of the supply chain
35%
Simplifying order management
processes
34%
Reducing errors in order
processing/improving order
accuracy
34%
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Customer Order Management Attributes
Cycle time
Inventory
availability
Customer
Order
Attributes
Convenience
Dependability
Performance
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Exercise 10-1 Financial Impact of Cycle Time
Reduction
Product Family Data
Data
Average order cycle time
Standard deviation
Demand per day (units)
Service level
Unit cost
Carrying cost
Current/days
$
13
4
250
98.0%
350.00 $
21%
Proposed/days
6
2
250
98.0%
350.00
21%
z-value
2.05
Step 1: Calculate current and proposed safety stocks
Formula:
SS = [((Demand per day x ((OCT + (z x standard deviation of
OCT))] - (Demand per day x OCT)
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Exercise 10-1 Financial Impact of Cycle Time
Reduction (cont.)
Current SS = [((250 x ((13 + (2.05 x 4))] - (250 x 13) = 2,050 units
Proposed SS = [((250 x ((6 + (2.05 x 2) - (250 x 6) = 1,025 units
Step 2: Calculate value of the proposed safety stock reduction
1,025 units x US$350 x 21% = US$75,337.50
Step 3: Calculate absolute order cycle time
(13 days - 6 days = 7 days) x 250 x US$350 x 21% = US$128,625
Step 4: Calculate improvement in cash flow
US$75,337.50 + US$128,625 = US$203,962.50
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Order Management Process
Demand Plan
Data Base
Maintenance
Order
processing
Cycles
Data OK?
Orders OK?
Performance OK?
Order
Monitoring
Priorities OK?
Performance
Measurement
Order Close
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Benefits of World-Class Order Processing
Continuous decline in average order cycle lead times. This is the
span of time from the moment an order arrives until it delivered
and accepted by the customer
Improved customer relations. Effective order processing
provides customer service with critical information necessary to
service the customer in as expeditious a manner as possible
Increased order accuracy. Online data validation and system
record defaults not only improve accuracy order entry activities
but also speed up the entire order processing cycle
Decrease in operating costs. With the ability to process orders
quickly and accurately, order processing systems eliminate
internal costs associated with order review and expediting
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Benefits of World-Class Order Processing
(cont.)
Timely invoicing and accounting. Effective order processing
systems accelerate the transfer of accounts receivable,
discounting, and other financial data resulting from order
shipment. Improvements in order shipment accuracy decrease
the occurrences of invoice errors and improve on receivables
collection
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Subprocesses of a Perfect Order
PreTransaction
Phase
Transaction
Phase
Order Management
Experience
Perfect
Order
PostTransaction
Phase
Order Financial
Settlement
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Pre-Transaction Phase – Elements
Written customer service policy. A clear and concise definition of
customer service objectives provides a formalized approach to
guide all customer service activities
Service policy communication. Once a detailed service policy
has been devised, it must be communicated to the customer. A
formal service policy enables customers to define the
boundaries of the expectations they have as to the level of
service performance as well as to detail the proper channels to
communicate with company services if specific performance
standards are not being met.
Organization structure. The identity of the management and staff
of the service organization must be communicated to the
customer base, as well as the means by which they can be
contacted
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Pre-Transaction Phase – Elements
Organizational flexibility. The design of the service organization
must be flexible enough to enable response to customer
requirements regardless of environmental factors
Management services. Availability of supplier training and
printed materials to assist customers in performing their own
product problem-solving diagnostics. Education courses, training
seminars, and training manuals are key components of
management services.
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Transaction Phase – Elements
Stock out level. The availability of products in the right quantity
and at the right place is at the core of effective order
management. Customer serviceability levels are the key
performance measurement for this element
Order information. Ability of order management to respond
quickly and accurately to customer inquiries during order
placement
Elements of order cycle time. Defined as the time that transpires
between the moment a order is placed until the date it is
delivered
Expedite shipments. Expediting through the order processing
cycle those customer orders that are to receive special handling
and when a customer backorder occurs
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Transaction Phase – Elements (cont.)
Transshipments. The transfer of inventory between stocking
points in the distribution channel necessary to meet customer
demand
System accuracy. Order processing inaccuracies, such as
incorrect items, prices, quantities, shipping information, due
dates, and billing
Order convenience. Refers to the degree of ease by which
customers can place orders and have access to open order
information
Product substitution. The ability to offer product substitutes can
have a dramatic impact on total inventory investment as well as
the level of attained customer service
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Post-Transaction Phase – Elements
Installation, warranty, alterations, repairs, and service parts.
These post-sales elements are value-added to the product and
are part of the reason why customers will choose to purchase
from a specific firm
Product tracing. Many products such as food, pharmaceuticals,
medical supplies, and large-ticket items require maintenance of
lot and/or serial number tracing
Customer claims, complaints, and returns. These services must
be rigorously followed if the firm's reliability, responsiveness, and
credibility is to be maintained.
Product replacement. In some cases, products that are required
but are not in stock or that must be repaired require the firm to
offer a temporary replacement
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Chapter 10
Customer Management
Inventory
Customer
Management
ServiceBasics
Management
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Customer Service Elements
Tangibles
The appearance a firm's service functions project to the
customer such as new facilities, state-of-the-art
technology, highly qualified personnel, and the latest
equipment
Reliability
Service must continually perform the promised service
dependably and accurately each and every time
Responsiveness
The ability of a supply chain to respond to customer
needs quickly and concisely lets customers know that
their time and costs are important
Competence
Customers need to feel assured that the supplier
possesses the required skills and knowledge to assist
them when product or support issues arise
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Customer Service Elements (cont.)
Courtesy
Companies who do not respond to their customers with
politeness, respect, consideration, and professionalism
are destined to lose them to competitors who do
Credibility
Service leaders base their success on high standards
of honesty, trustworthiness, and believability
Security
Security frees customers from doubts and provides
"peace of mind" for the products and accompanying
services they purchase
Access
Access is the degree of ease by which customers can
purchase products or contact sales and service
functions. Access can also refer to the availability of
goods and services within a time limit generally
accepted by the industry
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Customer Service Elements (cont.)
Communication
Availability of services to respond quickly and
intelligently to customer questions concerning
products, services, account status, and the status of
open orders
Understand
the
Customer
Unearthing and responding to the needs, desires, and
expectations of the customer is the first element in
effective sales and service
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Elements of CSM
9
CSM performance measurement
8
Implement
7
Identify CSM technologies
6
Determine service/cost relationship
5
Identify gaps to be eliminated
4
Determine industry benchmarks
Identify and measure customer requirements and expectations
3
2
Measure current performance
Incorporate continuous improvement philosophy
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Customer Buying Criteria
Product quality
and reliability
• Repeatability
• Improvement
• Serviceability
Customer service
• Delivery
• Response
• Lead time
• Packaging
Product features
and options
• Compatibility
• Expandability
• Migration
Service
Buying Criteria
Availability
• Inventory
• Delivery
• Value-added
services
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Price
• Discounting
• Promotions
• Financial terms
dp&c Chapter 10
Exercise 10-2 Service Factor and Fill Rates for
a Safety Stock Policy
Data
Data
Customer service level (CSL)
Yearly sales/units
Unit cost
Lot size/units
Carrying cost
98.5%
6,300
$ 235.00
25
21%
Formula
Cost = (Carrying cost x unit cost) x standard lot / (1 – CSL) x
average demand per year
(21% x US$235) x 25 / (1 - .985) x 6,300 = $13.06
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CSM Attribute Matrix
High
Competitive
Vulnerability
Importance
To Customer
Competitive
Strengths
Grey Zone
Relative
Importance
Irrelevant
Superiority
Low
Low
Performance
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High
dp&c Chapter 10
Service Quality Model
Customer
Requirements
Customer
Expectations
Marketplace
Reputation
Gap 5
Service Expectations
Perceived Service
Gap 1
Gap 4
Customer
Expectations
Marketplace
Reputation
Marketplace
Perception
Gap 3
Conversion of Perception
into Quality Specifications
Gap 2
Management Perception of
Customer Expectations
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Charting the Cost of Service Levels
Optimum Service
Level
Cost
Sales
Sales
and
Costs
Facilities
Inventory Carrying Costs
Transportation
Administration/Overhead
Information Technology
Operations costs
Service Level
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dp&c Chapter 10
Exercise 10-3 Service Factor and Fill Rates for
a Safety Stock Policy
Data
Average demand/unit per week
Lead time/weeks
Mean demand during lead time/units
SD of demand per week
SD of demand during lead time
Replenishment lot size/units
Customer service percent
Replenishment Cycle Shortage/units
Unit cost
1,500
2
3,000
350
495.0
5,000
96.5%
0
$ 50.00
Step 1: Calculate safety stock and reorder point
a. Demand (D) during the lead time (L) = 1,500 units x 2 weeks =
3,000 units.
b. Safety stock = CSL safety factor x s L = NORMSINV(.965) x 495 =
896.9 units.
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Exercise 10-3 Service Factor and Fill Rates for
a Safety Stock Policy (cont.)
Step 1: Calculate safety stock and reorder point
c. Reorder point = DL + SS = 3,000 + 896.9 = 3,896.9 units.
d. Safety stock cost = Unit cost x SS = US$50 x 896.9 units =
US$44,842.50.
Step 2: Calculate the fill rate
Formula:
Order qty – replenishment cycle shortage / order qty
5,000 units – 7 units / 5,000 units = .9986 = 99.86 % fill rate
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Exercise 10-3 Service Factor and Fill Rates for
a Safety Stock Policy (cont.)
Step 3: Calculate safety stock for 99% service rate
NORMSINV(.99) x 495 = 1,151.5
Step 4: Calculate replenishment cycle shortage for 99% rate
1,151.5[1 - NORMDIST(1,151,5/495, 0,1,1)] + 495 NORMDIST
(1,151.5/495, 0, 1, 0) = 1.68 shortages
Step 5: Calculate cost of 99% service rate
a. 96.5% service rate cost = 896.9 x US$50 = US$44,842.5
b. 99% service rate cost = 1,151.5 x US$50 = US$57,574.17
c. Total cost = US$57,574.17 – US$44,842.5 = US$12,731.67
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CSM Technologies
Automatic call distribution (ACD). This technology provides for
the automatic routing of incoming customer calls to the proper
service resources based on call content
Interactive voice response (IVR). This toolsets enables 24/7/365
service access by typing the appropriate keys on a telephone.
The goal is to provide access to service information or to qualify
and route a call without human interaction
Internet call management. The use of Web-based self-service
has enabled customers to escape from the tedious entry of data
characteristic of IVR systems. The advantage of Web-activated
service is that customers can enjoy a significant level of selfdriven interaction with the service system
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CSM Technologies (cont.)
Service cyberagents, bots, and avatars. While mostly futuristic,
the use of intelligent agents capable of performing automated
service tasks is expected to expand dramatically
Call center analytics. While CRM analytics focus on tracking the
marketing side of the customer, the capability to record and
analyze the vast amount of service-related data from each
customer will be essential for CSM leadership
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Supply Chain Service Groups
Customer
Shareholder
Enterprise
Supply
Chain
Employee
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Service Strategy Questions
Customer/channel relationship. What are the current levels of
communications and expectations between the customer and
the supply chain? Have customer product and service
requirements been clearly communicated, and what
mechanisms are in place to ensure effective and timely
feedback?
Product strategy. Is the product unique or is it interchangeable?
Is the supply chain offering standard or customized products or a
combination of both?
Services strategy. What services are to accompany the product
in the presales and post-sales cycles? What are the response
and mean time to resolution performance targets? What are the
return, warranty, and field service policies?
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Service Strategy Questions (cont.)
Merchandising strategy. How are products to be marketed to the
customer? Is the focus to be on a direct sales force, catalogs,
and so on. How are marketing tools such as promotions, deals,
and special pricing to be communicated to the customer?
Delivery and order requirements. What are the standards for
order response times (hours, days, weeks)?
Material handling. What are the handling and storage
requirements of the product?
Stocking requirements. What should be the scope and structure
of the distribution channel? Are products and services to be
delivered from a central facility, clustered in specific
geographical areas, or scattered to leverage logistics
economies?
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CSM Performance Measurements
Measurement
Description
Order fill rate (by item)
Rate at which order lines are filled at point of sale
Order accuracy (by order)
Rate at which order items are accurately filled and delivered to
the customer
On-time delivery
Rate at which orders are delivered to the customer at the
committed time based on customer’s expectations
Total order cycle time
Elapsed time from order receipt to product delivery based on
customer’s expectations
Response to emergency
requirements
Time required to respond to and satisfy unplanned and
unforeseen customer needs
Damaged goods
Level of damaged to delivered products during transit or
installation
Inventory distance to
customer
Geographical proximity of the supplier to the customer in time
and distance driving speed of response and on-time delivery
Inventory availability
On-demand availability of inventory for immediate orders
Order completeness (line
items and quantities)
Degree to which delivery to the customer satisfies order
requirements of time and item quantity.
Customer access to
inventory/order status
Ability of the customer to view supplier’s inventory and/or
order status
Response to customer
complaints/issues
Quality and time response required to recover adequately
from complaint to satisfaction
Packaging convenience
Function, features, information, and quantities of packaging
needed for ease of shipment, receipt, storage, and use
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“Education in Pursuit of
Supply Chain Leadership”
dp&c Chapter 10
Chapter 10
End of Session
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