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“Education in Pursuit of Supply Chain Leadership” dp&c Chapter 10 Chapter 10 Customer Management 10-1 dp&c Chapter 10 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 10-2 dp&c Chapter 10 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 10-3 dp&c Chapter 10 Chapter 10 Customer Management Inventory The Revolution in Management Basics Customer Management 10-4 dp&c Chapter 10 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 10-5 dp&c Chapter 10 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 10-6 dp&c Chapter 10 Types of Customers Product/Service Flow Supplier Integrator Internal Customer Distributor EndCustomer Retailer Jobber/ Broker Cybermediary 10-7 dp&c Chapter 10 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 10-8 dp&c Chapter 10 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 10-9 dp&c Chapter 10 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 10-10 dp&c Chapter 10 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 10-11 dp&c Chapter 10 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 10-12 dp&c Chapter 10 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 10-13 dp&c Chapter 10 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 10-14 dp&c Chapter 10 Dimensions of Customer Value Value Dimension Relationships Customer Value Peace of Mind Smart Technologies Buying Experience 10-15 dp&c Chapter 10 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 10-16 dp&c Chapter 10 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 10-17 dp&c Chapter 10 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 10-18 dp&c Chapter 10 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 10-19 dp&c Chapter 10 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 10-20 dp&c Chapter 10 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 10-21 dp&c Chapter 10 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 10-22 dp&c Chapter 10 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 10-23 dp&c Chapter 10 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 10-24 dp&c Chapter 10 Chapter 10 Customer Management Inventory Customer Management Basics Relationship Management 10-25 dp&c Chapter 10 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 10-26 dp&c Chapter 10 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 10-27 dp&c Chapter 10 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 10-28 dp&c Chapter 10 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 10-29 dp&c Chapter 10 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 10-30 Sales database inquiry and reporting tools dp&c Chapter 10 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) 10-31 dp&c Chapter 10 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 10-32 dp&c Chapter 10 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 10-33 dp&c Chapter 10 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 10-34 dp&c Chapter 10 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 10-35 dp&c Chapter 10 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 10-36 dp&c Chapter 10 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 10-37 dp&c Chapter 10 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 10-38 dp&c Chapter 10 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 10-39 dp&c Chapter 10 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 10-40 dp&c Chapter 10 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 10-41 dp&c Chapter 10 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 10-42 dp&c Chapter 10 CRM Analytics – Technical Architecture CRM Applications CRM Reporting Operational CRM Data Marketing Data Warehouse CRM Analytical Engine Marketing Actions ERP Transaction Database Customers 10-43 dp&c Chapter 10 Chapter 10 Customer Management Inventory Customer Order Management Basics Management 10-44 dp&c Chapter 10 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% 10-45 dp&c Chapter 10 Customer Order Management Attributes Cycle time Inventory availability Customer Order Attributes Convenience Dependability Performance 10-46 dp&c Chapter 10 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) 10-47 dp&c Chapter 10 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 10-48 dp&c Chapter 10 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 10-49 dp&c Chapter 10 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 10-50 dp&c Chapter 10 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 10-51 dp&c Chapter 10 Subprocesses of a Perfect Order PreTransaction Phase Transaction Phase Order Management Experience Perfect Order PostTransaction Phase Order Financial Settlement 10-52 dp&c Chapter 10 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 10-53 dp&c Chapter 10 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. 10-54 dp&c Chapter 10 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 10-55 dp&c Chapter 10 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 10-56 dp&c Chapter 10 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 10-57 dp&c Chapter 10 Chapter 10 Customer Management Inventory Customer Management ServiceBasics Management 10-58 dp&c Chapter 10 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 10-59 dp&c Chapter 10 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 10-60 dp&c Chapter 10 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 10-61 dp&c Chapter 10 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 10-62 1 dp&c Chapter 10 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 10-63 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 10-64 dp&c Chapter 10 CSM Attribute Matrix High Competitive Vulnerability Importance To Customer Competitive Strengths Grey Zone Relative Importance Irrelevant Superiority Low Low Performance 10-65 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 10-66 dp&c Chapter 10 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 10-67 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. 10-68 dp&c Chapter 10 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 10-69 dp&c Chapter 10 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 10-70 dp&c Chapter 10 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 10-71 dp&c Chapter 10 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 10-72 dp&c Chapter 10 Supply Chain Service Groups Customer Shareholder Enterprise Supply Chain Employee 10-73 dp&c Chapter 10 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? 10-74 dp&c Chapter 10 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? 10-75 dp&c Chapter 10 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 10-76 dp&c Chapter 10 “Education in Pursuit of Supply Chain Leadership” dp&c Chapter 10 Chapter 10 End of Session 10-77 dp&c Chapter 10