8 Chapter Order Management and Customer Service
Learning Objectives n After reading this chapter, you should be able to do the following:
Understand the relationships between order management and customer service. Appreciate how organizations influence customers ordering patterns as well as how they execute customers orders. Realize that activity-based costing (ABC) plays a critical role in order management and customer service. Identify the various activities in the SCOR process D1 (deliver stocked product) and how it relates to the order-to-cash cycle.
Learning Objectives (cont.) n After reading this chapter, you should be able to do the following:
Know the various elements of customer service and how they impact both buyers and sellers. Calculate the cost of a stockout. Understand the major outputs of order management, how they are measured, and how their financial impacts on buyers and sellers are calculated. Be familiar with the concept of service recovery and how it is being implemented in organizations today.
Influencing the Order
This is the phase where an organization attempts to change the manner by which its customers place orders.
n n n
How they receive the order; How they fill the order; and How they ship the order.
Order Execution
This occurs after the order is received.
Customer service:
is
anything that touches the customer. This includes all activities that impact information flow, product flow, and cash flow between the organization and its customers. n Philosophy
Philosophy
elevates customer service to an organization-wide commitment to providing customer satisfaction through superior customer service. ( Value Management)
Customer service:
Performance
emphasizes customer service as specific performance measures that pervade all three definitions of customer service and address strategic, tactical, and operational aspects of order management. treats customer service as a particular task that an organization must perform to satisfy a customers order requirements. (invoicing, product return, claims handling)
Activity
Chapter divided into 6 sections
1 n2 n3 n4 n5 n6
n
Customer Relationship Management Activity Based Costing Customer Segmentation Order Execution Process Customer Service Service Recovery concept
INFLUENCING THE ORDER n
Customer relationship management:
is the art and science of strategically positioning customers to improve the profitability of the organization and enhance its relationships with its customer base. is not a new concept; used by service industries such as banking, credit cards, hotels, and airline travel. (frequent flier programs) Target customers low in cost to service and very profitable. has not been widely used in the business-to business environment until lately. Customer action affects firms cost: Influence how customer orders
n n n n
how customers order how much customers order what customers order when customers order an order
Four basic steps in the implementation of the CRM
Step 1: Segment the Customer Base by Profitability Step 2: Identify the Product/Service Package for Each Customer Segment See Table 8-1 All receive same product offerings Step 3: Develop and Execute the Best Processes Step 4: Measure Performance and Continuously Improve
n n
Are the customer segments satisfied ? Has the suppliers overall profitability improved?
It is a strategic initiative by a supplier that requires changes in resource allocation, organizational structure, and market perception.
MOST Profitable ---------------------------LEAST Profitable
Table 8-2 Hypothetical Product/Service Offerings: Option B
EACH PACKAGE VALUES DIFFERENT SERVICES
ra Sto let Pal Pallet and p Shi
ge
VS
Pa pal llet St shi let a orage nd p car , ton
Activity-Based Costing
ABC measures the cost and performance of activities, resources, and cost objects. Resources are assigned to activities, then activities are assigned to cost objects based on their use Traditional cost accounting is well suited to situations where an output and an allocation process are highly correlated. Traditional cost accounting is not very effective in situations where the output is not correlated with the allocation base.
Receiving Dept
The Management of Business Logistics Chapter 8
One method to classify customers by profitability.
Protect Zone
Those customers who fall into the Protect segment are the most profitable.
Danger Zone
Customers in the Danger Zone segment are the least profitable and incur a loss. The firm has has three alternatives for danger zone customers: n (1) change customer interaction with firm so the customer can move to another segment n (2) charge the customer the actual cost of doing business n (3) switch the customer to an alternative distribution channel
Build Zone
These customers have a low cost to serve and a low net sales value, so the firm should maintain the cost to serve and build net sales value to help drive the customer into the Protect segment.
Order Management
This system represents the principle means by which buyers and sellers communicate information regarding orders. Effective order management is key to operational efficiency and customer satisfaction. Logistics needs timely and accurate information relating to orders so many firms place order management in the logistics area.
Order to cash
Thirteen principle activities constitute the OTC cycle:
n n n
D1.1 through D1.7 represent information flows D1.8 through D1.12 represent product flows D1.13 represents cash flow
Order cycle
all activities that occur from when an order is received until the product is received
Replenishment cycle
refers to acquisition of additional inventory one firms order cycle is anothers replenishment cycle
n
Order To Cash cycle:
recent
attention has centered on the variability or consistency of this process length of time is important, variability is more important driving force is safety stock, as absolute length of the order cycle will influence demand inventory
absolute
a
E-Commerce Order Fulfillment Strategies
Many
firms use Internet technology to capture order information for fulfillment systems for picking, packing, and shipping. allows faster collection of cash by the seller.
Internet
The Logistics/Marketing Interface
Customer service is the key link between logistics and marketing within an organization. Manufacturing can produce a quality product at the right cost and marketing can sell it, but if logistics does not deliver it when and where promised, the customer will not be satisfied.
Three different perspectives on customer service:
Three
n
different perspectives on customer service
philosophy as a set of performance measures as an activity
n
n
Customer service needs to be put into perspective as including anything that touches the customer
Three levels of a product
(1) the core benefit or service, which constitutes what the buyer is really buying (2) the tangible product, or the physical product or service itself (3) the augmented product, which includes benefits, adds value for the customer
Four distinct dimensions of customer service:
Time
n n n
cycle time safe delivery correct orders
Dependability
n
more important than the absolute length of lead time
Communications
n n n
pretransaction transaction posttransaction
Convenience
n
service level must be flexible
Customer Service Performance Measures from buyers view
Orders received on time Orders received complete Orders received damage Orders filled accurately Orders billed accurately
METRICS
Expected Cost of Stockouts:
n n
Stockout occurs when desired quantities are not available Four possible buyer events:
the waits until the product is available the buyer back-orders the product the seller loses current revenue the seller loses a buyer and future revenue
Back Orders:
occurs
Lost Sales:
some
when a seller has only a portion of the products ordered by the buyer are created to secure the portion of the inventory that is currently not available customers will turn to alternative supply sources permanently switches to another supplier
Lost Customers:
customer
Determining the Expected Cost of Stockouts
back lost lost
70 % of stock-outs result in back order, and back order cost is $75.00, therefore cost of backorder is $52.50.
order
sale 20 % of stock-outs result is lost sale for order and loss is $400, therefore a customer 10 % of stock-outs ultimately result in a lost customer. Average
lost sale costs company $80.00 revenue per customer is $20,000 so cost to company is $2000 per lost customer. n company can carry safety stock to cover stock-outs. Must compare if cost of carrying safety stock is more than cost of lost sales due to stock-outs. ($2000+$80+$52.50)
n n
identify potential consequences calculate each results expense or lost profit
Product availability from customer perspective:
Did
I get what I wanted? I wanted it?
When In
the quantity I wanted?
Product availability is the ultimate measure of logistics and supply chain performance.
Metrics
four are widely used across multiple industries:
n
internal metrics
item fill rate line fill rate
n
external metrics
order fill rate perfect order
Calculation for lost cash flow: Cash Flow Lost = (Number of Incomplete Orders BackOrdered x Back Order Cost per Order) + (Number of Incomplete Orders Cancelled x Lost Pretax Profit per Order) + (Number of Incomplete BackOrdered x Invoice Deduction per Order)
Point where cost of holding additional inventory exceeds cash flow loss
Trade-off between cost and service
Order Cycle Time:
n
the time that elapses from when a buyer places an order until receipt of the order absolute length and reliability of order cycle time influences both firms inventories, resulting in impacts on both revenues and profits for both organizations
n
Two inventory cost reduction calculations
reduced standard deviation of order cycle time on safety stocks Safety Stock = {Demand per Day x [OCT + (z x Standard Deviation of OCT)]} (Demand per Day x OCT)
n
Eg
Current Proposed Avgorder cycle time (OCT) 10 days 5 days Standard deviation of OCT 3 days 1 day Demand per day (units) 1377 1377 Service Level(z = 2 Stand Dev) 97.7% 97.7%
n
Current Safety Stock = (1377 x (10 + (2 x 3))) - (1377 x 10) = (1377 x 16) 13770 = 8262 units Proposed Safety Stock = (1377 x (5 + (2 x 1))) (1377 x 5) = (1377 x 7) 6885 = 2754 units
n
determine the impact of the reduction of absolute order cycle time on demand inventories and Safety Stock Use $449 cost per unit and 28 % inventory carrying cost Safety Stock Cost Reduction = Reduction in Safety Stock units x Cost per Unit x Inventory Carrying Cost or 5508 x $449 x 28 % = $692,465.76
Demand Inventory Cost Reduction = Difference in Absolute OCT x Demand per Day x Cost per Unit x Inventory Carrying Cost Percent or 5 days x 1377 units x $449 x 28% = $865,582.30 OVERALL COST AVOIDANCE AND COST REDUCTION OF @ $1.5 MILLION
Logistics operations responsiveness (LOR)
Examines
how well a seller can respond to a buyers
needs. This response can take two forms:
n
LOR can be how well a seller can customize its service offerings to the unique requirements of a buyer LOR can be how quickly a seller can respond to a sudden change in a buyers demand pattern. Seller must invest to show buyer the savings of the value added activities that are above and beyond normal offerings (New customized POS packaging
n
n
Logistics System Information:
is
critical to the logistics and order management processes ability to provide quality product availability, order cycle time, logistics operations responsiveness, and post-sale logistics support (barcodes or RFID) and accurate forecast information can reduce inventories in the supply chain and improve cash flow to all supply chain partners
underlies
timely
Financial Impact
The
calculation used to measure the result on cash flow for decreasing the order-to-cash cycle is as follows:
Cash Flow Increase = Invoice Value x (Cost of Capital/365) x Difference in Days in the Order-to-Cash Cycle
Example INV = $ 648,000 x (10% cost of capital/365) x difference in days (20) = $3550.68. Multiply this number by number of orders for that period. Use that number as comparison to costs needed to reduce the order-to cash cycle by the 20 days. (new software or equipment).
Postsale logistics support (PLS) can take two forms:
PLS can be the management of product returns from the customer to the supplier. The second form of PLS is product support through the delivery and installation of spare parts. Calculation to determine the spare part service cost is as follows: Service Cost = Penalty Cost + Lost Purchase Margin + Lost Support Margin
Service Recovery
n
No matter how well an organization plans to provide excellent service, mistakes will occur. Recovery requires a firm to realize that mistakes will occur and have plans in place to fix them.
n
n
n
n
Recovery dictates investment in resources to correct problems, such as carrying additional inventory, or investing in faster freight service. Must be able to react quickly to correct problem. Perhaps study historical or seasonal issues to anticipate a problem. Disaster Recovery Centers as a result of 9/11. Empower employees to react and correct problems (Novel idea!!!)
Summary Order management and customer service are not mutually exclusive; there is a direct and critical relationship between these two concepts. There are two distinct, yet related, aspects of order management: influencing the customers order and executing the customers order. Customer relationship management (CRM) is a concept being used today by organizations to help them better understand their customers requirements and understand how these requirements integrate back into their internal operations processes. Activity-based costing (ABC) is being used today to help organizations develop customer profitability profiles which allow for customer segmentation strategies. Order management, or order execution, is the interface between buyers and sellers in the market and directly influences customer service. Order management can be measured in various ways. Traditionally, however, buyers will assess the effectiveness of order management using order cycle time and dependability as the metric, while sellers will use the order-to-cash cycle as their metric.
Summary (cont.)
Customer service is considered the interface between logistics and marketing in seller organizations. The three definitions of customer service are: (1) as an activity, (2) as a set of performance metrics, and (3) as a philosophy. The major elements of customer service are time, dependability, communications, and convenience. Stockout costs can be calculated as back order costs, the cost of lost sales, and/or the cost of a lost customer. The five outputs from order management that influence customer service, customer satisfaction, and profitability are: (1) product availability, (2) order cycle time, (3) logistics operations responsiveness, (4) logistics system information, and (5) postsale logistics support. The concept of service recovery is being used by organizations today to help identify service failure areas in their order management process and to develop plans to address them quickly and accurately.