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CHAPTER 3: Customer
Relationship Management
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Overview of customer relationship
Customer-focused marketing
Customer service
Customer satisfaction
Customer success
Developing customer relationship
management strategy
Who is the customer?
• From perspective of the total supply chain
– End user of product in consumer market
– Company is customer in business market
• From perspective of specific firm within a supply chain
– Intermediate customer organizations exist between the firm and
end users
• From perspective of a logistics manager
– Any delivery location
• For example, consumer home’s, retail / wholesale businesses,
receiving docks of manufacturing plants and warehouses
Basic principles of the marketing concept
• Customer needs and requirements are more basic
than products and services
• Different customers have different needs and
• Products and services become meaningful only
when available and positioned from the customer’s
• Profit is more important than sales volume
Transactional vs. Relationship
Transactional marketing is a
traditional strategy with a focus on
creating successful individual
transactions between the
company and its customers
Relationship marketing is a new
strategy with a focus on the
development of long-term
relations with key supply chain
participants in an effort to develop
and retain long-term preference
and loyalty
Relationship marketing to a segment of
• Micromarketing or one-to-one marketing recognizes that each
individual customer may indeed have unique requirements
– For example, Wal*Mart and Target are both mass merchandisers
• However, their requirements to interact logistically with suppliers differs
• One-to-one relationships can
– Significantly reduce transaction costs
– Better accommodate customer
– Move individual customer transactions
into a matter of routine
3 discrepancies must be overcome to enable
exchange of goods and services
• Discrepancy in space refers to the fact that the location of
production activities and location of consumption are
seldom the same
• Discrepancy in time refers to the difference in timing
between production and consumption
• Discrepancy in quantity and assortment refers to the
mismatch between customer demand and manufacturing
– Customers seek small quantities and wide assortment
– Firms specialize in large quantities of a limited assortment
Four generic supply chain service
outputs eliminate discrepancies
Spatial convenience is the amount of shopping time and effort
will be required on the part of the customer
Lot size is the number of units to be purchased in each
Waiting time is the amount of time the customer must wait
between ordering and receiving products
Product variety and assortment differs by supply chain
Supermarkets may have over 35,000 items on the shelves
Warehouse stores generally stock 8,000 to 10,000 items with only one
brand and size of an item
Convenience stores may stock only a few hundred items
Three levels of customer accommodation
• Supply chains provide a mix of services, both
generic and custom, in order to accommodate a
range of customer requirements
• Each service mix can be configured to achieve one
of the following levels of customer accommodation
– Customer service
– Customer satisfaction
– Customer success
Basic customer service provides customers
With the right amount
Of the right product
At the right time
And the right place
In the right condition
At the right price
With the right information
Basic elements of customer service
• Availability
– Fill rates
– Stockout frequency
– Orders shipped complete
• Operational Performance
Malfunction recovery
• Service Reliability
Damage free
Error-free invoices
Shipment matches order
Shipped to correct location
Availability is the capacity to have inventory
when desired by a customer
• Fill rate measures the
magnitude or impact of
stockouts over time
• Stockout occurs when a
firm has no product
available to fulfill customer
• Orders shipped complete
requires shipping
everything that a customer
orders to count as a
complete shipment
Operational performance deals with the time
required to deliver a customer’s order
• Speed of the performance cycle is the elapsed
time from when a customer established a need
to order until the product is delivered
• Consistency of the order cycle is measured by
the number of times that actual cycles meet the
time planned for completion
• Flexibility is a firm’s ability to accommodate
special situations and unusual or unexpected
customer requests
• Malfunction recovery is a firm’s ability to
quickly implement contingency plans when a
failure occurs in the supply chain
Service reliability is a firm’s ability to perform all
order-related activities and provide critical info
• Service reliability involves a combination of logistics
attributes beyond simply availability and operational
performance. For example:
– Damage free measures how many shipments arrive without
damaged products
– Error-free invoices measures what percentage of invoices
contain no errors
– Shipment matches order measures how many shipments
contain the exact amount of product ordered
– Shipped to correct location measures how many shipments are
made to the customer’s selected location
• Plus a capability and willingness to provide customers with
accurate information regarding operations and order status
The perfect order is the ultimate in logistics
service levels
• The perfect order is an order that is
Delivered complete
Delivered on time
Delivered at the right location
Delivered in perfect condition
Delivered with complete and accurate documentation
• This requires the total order cycle performance to be
executed with zero defects
Example of zero-defect performance
Consider an order cycle that achieves
the following performance levels for
97% delivered complete
97% delivered on time
97% delivered in perfect condition
97% delivered with correct
Therefore, the probability
that any order has a
problem is 11.5%
Probability that any order will be
delivered with no defects is only
– P (zero defects) = .97 x .97 x .97 x
.97 = .885
What resources are needed
to achieve a zero-defect
The basic service platform is a commitment to
perform each basic element at a given level
Service platform for customer A
Service platform for customer B
Availability level = Medium
Operational performance = High
Service reliability = Above average
Availability level = Low
Operational performance = Medium
Service reliability = Average
Reliability Level
How much basic service should the supply
chain provide?
• Many firms establish their basic service
platforms using two factors
– Competitor or industry acceptable practice
• Minimum and average service performance levels
have emerged in most industries
– The firm’s overall marketing strategy
• High service levels needed to compete on basis of
logistics competency
• Low service levels are more common when
competing on the basis of price
• Zero-defect approach is not taken across the
board for all customers
• Establish internal performance standards for
each service component to reflect industry
practice, cost and resource requirements
What is customer satisfaction?
• Expectancy disconfirmation
states if a customer’s
expectations of a supplier’s
performance are met or
exceeded, the customer will be
– If Perceived Performance > =
Expectations, then Satisfaction
– If Perceived Performance <
Expectations, then
“Customers will be satisfied if a supplier meets or exceeds
the customer’s expectations”
Customer expectations related to
logistical performance from Table 3.2
Knowing the customer
How are customer expectations
Figure 3.1 Satisfaction and Quality Model
The model identifies gaps managers
must fill to help satisfy their customers
• Gap 1: Knowledge
– Reflects management’s lack of
knowledge or understanding of
• Gap 2: Standards
– Exists when internal performance
standards do not adequately
reflect customer expectations
• Gap 3: Performance
– The difference between standard
and actual performance
• Gap 4: Communications
– Overcommitment or promising
higher levels of performance than
can actually be provided
• Gap 5: Perception
– Customers sometimes perceive
performance to be higher or
lower than actually achieved
• Gap 6: Satisfaction/Quality
– When one or more gap exists
customer perception is that
performance does not meet
Increasing customer expectations
• Performance that meets
customer expectations one
year may result in extreme
dissatisfaction next year
• Competition in an industry will
often raise the minimum
standards that customer expect
– For example, Federal Express
introduced real-time tracking of
shipment status
• In response UPS and other
parcel delivery firms added this
service to their platform
Why customer satisfaction is not
• Satisfied customers may not be
happy with the supplier’s
– Customer satisfaction focuses on
expectations - not customer’s
real requirements
• Considerable research
suggests that “satisfied”
customers still are likely to
• What satisfies one customer
may not satisfy other, much
less all, customers
– There is a tendency by
companies to treat all customers
as being equal and identical
Low expectations always result in
satisfied customers
But what if customer
requirements are not
Figure 3.2 Satisfaction Is Not the Same as Happiness
3 levels of customer focus
Level 3 Focus
Assess customer requirements
Extend supply chain to include our customer’s customer
Provide value-added services for select customers
Manage performance cycles and levels to address needs of
each customer segment in the extended supply chain
Level 2 Focus
Assess customer perceptions of satisfaction
Manage performance cycle levels to keep customers
Level 1 Focus
Assess industry and competitor practices
Achieve internal standards for performance cycles
Achieving customer success requires knowledge
of individual customer requirements
• Not all customers have the same
• Know your customers’ processes
• Determine how your capabilities
can enhance your customers’
• Extend the supply chain
boundaries to include nextdestination customer requirements
• Introduce new performance
• Develop value-added services for
select customers
Customer success requires a comprehensive
supply chain perspective
Figure 3.3 Moving Towards Customer Success
Value-added services are a first step in
achieving customer success
• Value-added services refer to unique or specific activities
that firms can jointly develop to enhance their efficiency,
effectiveness and relevancy
• Transportation carriers, warehouse firms and other
specialists may become intimately involved to make valueadding activities a reality
• For example, a retail customer may desire a unique
palletization alternative to support its cross-dock activities
for its individual stores
– Each store requires different quantities of specific product to
maintain in-stock performance with minimum inventory
Developing a customer accommodation
• Basic principle of supply chain
logistics is that customers
should be segmented based on
their service needs
• Supply chain must adapt to
serve those segments
• Companies need
– A framework for choosing the
appropriate customer specific
– Programs for customer
relationship management
Framework for choosing a customer
accommodation strategy using profit categories
Table 3.4 Choosing Customer Accommodation Strategy
Customer relationship management has
grown rapidly in recent years
• Customer relationship management (CRM) is a process
for improving the overall performance of a business by
better understanding and anticipating the wants and needs
of customers
– In practice companies and vendors use the term CRM to mean
different things
• One CRM example – Procter & Gamble has employees
who live and work in the city of its largest customer
• Logistics has primary responsibility for many of the
processes that drive value and customer success
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