Logistics and
Customer Value
Given by
Youli Wang
PhD
[email protected]
Customer service chain
• The mission of logistics management
o Providing the means whereby customers’ service
requirements are met at lowest cost, i.e. satisfying customers
o A simple idea that is not always easy to recognize
• Internal service chain
o Everyone who works in the business understands that they
must service someone
o A chain of customers that links people at all levels in the
organization directly or indirectly to the marketplace
• Central concern of logistics management
o Managing the customer service chain through the business
and onwards
The marketing and
logistics interface
• The power of customer service as a
potential means of differentiation
o Continual increase in customer
expectations
o Slow but inexorable transition towards
‘commodity’ type markets
• Critical determinant in competition:
customer services
The right product
in the right place
at the right time
o Availability, i.e. the product in stock
o Time has become a far more critical;
short lead times
Delivering customer value
• The success any business determined by the level of
customer value that it delivers in its chosen markets
• What is customer value?
• Total cost of ownership rather than price
o Costs other than the purchase price involved
o Life-cycle costs
o Iceberg effect
Delivering customer value
• Competitive advantage
o Successful companies will generally be those that deliver
more customer value than their competitors
• Role of logistics management
Functionality,
performance
and technical
specification of
the offer
Customer’s
transaction
costs including
price and life
cycle costs
Time taken to
respond to
customer
requirements,
e.g. delivery
lead times
Availability,
support and
commitment
provided to the
customer
What is customer service?
• The role of customer service
o Provide ‘time and place utility’ in the transfer of goods and
services between buyer and seller
o There is no value in the product or service until it is in the
hands of the customer or consumer
• Factors impacting availability
o Delivery frequency and reliability, stock levels and order
cycle time
• Customer service could be examined under three
headings
o Pre-transaction, transaction, and post-transaction
What is customer service?
• Pre-transaction elements
o Relate to corporate policies or programs
• Examples
o Written customer service policy (Is it communicated
internally and externally? Is it understood? Is it specific and
quantified where possible?)
o Accessibility (Are we easy to contact/do business with? Is
there a single point of contact?)
o Organization structure (Is there a customer service
management structure in place? What level of control do
they have over their service process?)
o System flexibility (Can we adapt our service delivery
systems to meet particular customer needs?)
What is customer service?
• Transaction elements
o Those customer service variables directly involved in
performing the physical distribution function
• Examples
o Order cycle time (What is the elapsed time from order to
delivery? What is the reliability/variation?)
o Inventory availability (What percentage of demand for
each item can be met from stock?)
o Order fill rate (What proportion of orders are completely
filled within the stated lead time?)
o Order status information (How long does it take us to
respond to a query with the required information? Do we
inform the customer of problems or do they contact us?)
What is customer service?
• Post-transaction elements
o Supportive of the product while in use
• Examples
o Availability of spares (What are the in-stock levels of service
parts?)
o Call-out time (How long does it take for the engineer to
arrive and what is the ‘first call fix rate’?)
o Product tracing/warranty (Can we identify the location of
individual products once purchased? Can we
maintain/extend the warranty to customers’ expected
levels?)
o Customer complaints, claims, etc. (How promptly do we
deal with complaints and returns? Do we measure
customer satisfaction with our response?)
The impact of out-of-stock
• Pressures on purchasing source loyalty seem to be
at work
• Ever shorter delivery lead times and reliable delivery
• Delivering superior customer service
The impact of out-of-stock
• Traditionally
o Focus on the ultimate end
user or consumer
o Promote brand values
o Generate a ‘demand
pull’ in the marketplace
• Recently
o Not only end user but also
intermediate customers
o Develop the strongest
possible relations with
such intermediaries
Customer service
• People don’t buy
products, they buy
benefits
o A finished product in a
warehouse V.S a
finished product in the
hands of the customer
• Servitization
o Converting a product
into a service
Customer retention
• Not just getting customers, but also keeping
• Importance of customer retention
o Life-time value of a customer
• The longer the customer stays with an organization
the more profitable they become
o A retained customer typically costs less to sell to and to
service
o Share of wallet
o Satisfied customers tell others and thus the chance
increases that further business from new customers
Customer service and
retention
• Customer service strategy
o Winning and keeping customers
• A new focus of marketing and logistics
o Creation of relationship with customers
• Relationship marketing and logistics
o Create such a level of satisfaction with customers that they
do not feel it necessary even to consider alternative offers
or suppliers
o Develop marketing/logistics strategies to maintain and
strengthen customer loyalty
Marketing-driven supply
chain
• Traditional supply chain
o Optimize the internal operations of the supplying company
o Low cost: entail manufacturing in large batches, shipping
in large quantities and buffering the factory, both
upstream and downstream, with inventory
• Customer-centric
o Designing the supply chain around the customer needs
o From factory outwards to customer backwards
• From supply chain to demand chain management
o Turning the supply chain on its head, and taking the end
user as the organization’s point of departure and not its
final destination
Marketing-driven supply
chain
Identify
value
segments
What do our
customers
value?
Define the
value
proposition
How do we
translate
these
requirements
into an offer?
Identify the
market
winners
What does it
take to
succeed in
this market?
Develop the
supply chain
strategy
How do we
deliver
against this
proposition
Identify customers service
needs
• Service segment
o Customers will fall into groups or
‘segments’ that are characterized
by a broad similarity of service
needs
o What the service issues are that
differentiate customers
• Understanding service
segmentation
o Customer service is perceptual
o Develop a set of service criteria
that are meaningful to customers
o A three-step process
Identify customers service
needs
1. Identify the key components of customer service
o Who makes decisions
o Which elements of the vendor’s total marketing offering
have what effect upon the purchase decision
2. Establish the relative importance of customer
service components
o Discovering the importance a customer attaches to each
element of customer service by ranking or rating scale
o Qualifiers and order winners
3. Identify customer segments
o See if any similarities of preference emerge
o Cluster analysis
Marketing-driven supply
chain
Identify
value
segments
What do our
customers
value?
Define the
value
proposition
How do we
translate
these
requirements
into an offer?
Identify the
market
winners
What does it
take to
succeed in
this market?
Develop the
supply chain
strategy
How do we
deliver
against this
proposition
Define customer service
objectives
• The whole purpose of supply chain management
and logistics
o Provide customers with the level and quality of service that
they require at less cost to the total supply chain
• Appropriate customer service objective
o Perfect order: the customer’s service requirements are met
in full
o On-time, in-full, and error-free
• Cost benefit of customer service
o Significant differences in profitability between customers
o Cost to service these customers will typically vary
considerably
o Trade-off between cost and benefit
Define customer service
objectives
Define customer service
objectives
Marketing-driven supply
chain
Identify
value
segments
What do our
customers
value?
Define the
value
proposition
How do we
translate
these
requirements
into an offer?
Identify the
market
winners
What does it
take to
succeed in
this market?
Develop the
supply chain
strategy
How do we
deliver
against this
proposition
Set customer service
priorities
• Why customer service
priorities?
o Not all our customers are
equally profitable nor are
our products equally
profitable, should not the
highest service be given to
key customers and key
products?
o Money spent on service is
a scarce resource then we
should look upon the
service decision as a
resource allocation issue
Different categories,
different service
levels
Set customer service
priorities
Set customer service
priorities
Set customer service
priorities
Marketing-driven supply
chain
Identify
value
segments
What do our
customers
value?
Define the
value
proposition
How do we
translate
these
requirements
into an offer?
Identify the
market
winners
What does it
take to
succeed in
this market?
Develop the
supply chain
strategy
How do we
deliver
against this
proposition
Set service standards
• Why service standards?
o Service performance is to be controlled then it must be
against predetermined standards
o A complete match between what the customer expects
and what we are willing and able to provide
• Service standards
o To be effective these standards must be defined by the
customers themselves
o Requires customer research and competitive
benchmarking studies to be conducted
• Key areas where standards are essential
Set service standards
• Order cycle time
o The elapsed time from customer order to delivery.
Standards should be defined against the customer’s stated
requirements
• Stock availability
o The percentage of demand for a given line item (stock
keeping unit, or SKU) that can be met from available
inventory
• Order-size constraints
o The flexibility to cope with the range of customer demands
likely to be placed upon us
Set service standards
• Order convenience
o Are we accessible and easy to do business with? How are
we seen from the customers’ viewpoint?
• Frequency of delivery
o More frequent deliveries within closely specified time
windows
• Delivery reliability
o What proportion of total orders are delivered on time? It is
a reflection not just of delivery performance but also of
stock availability and order processing performance
Set service standards
• Documentation quality
o What is the error rate on invoices, delivery notes and other
customer communications? Is the documentation ‘user
friendly’?
• Claims procedure
o What is the trend in claims? What are their causes? How
quickly do we deal with complaints and claims? Do we
have procedures for ‘service recovery’?
• Order completeness
o What proportion of orders do we deliver complete, i.e. no
back orders or part shipments?
Set service standards
• Technical support
o What support do we provide customers with after the sale?
If appropriate do we have standards for call-out time and
first-time fix rate on repairs?
• Order status information
o Can we inform customers at any time on the status of their
order? Do we have ‘hotlines’ or their equivalent? Do we
have procedures for informing customers of potential
problems on stock availability or delivery?
Set service standards
• Pre-transaction
o Stock availability
o Target delivery dates
o Response times to queries
• Transaction
o
o
o
o
o
Order fill rate
On-time delivery
Back orders by age
Shipment delays
Product substitutions
• Post-transaction
o
o
o
o
o
First call fix rate
Customer complaints
Returns/claims
Invoice errors
Service parts availability
Summary
• Customer service chain
• Logistics and delivering
customer value
• What is customer service?
• Customer service and
retention
• Market-driven supply chain
• Four steps