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LECTURE OBJECTIVES
Know and understand what is Customer Service. Know and understand the components of customer
service. Know and understand the importance of logistics in
satisfying customers. Know and understand what are customer service
priorities and how they are set. Know and understand what are customer service
standards and how they are set. Know and understand how the Pareto rule can be
used in managing customer service.
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INTRODUCTION
The ultimate purpose of any logistics system is to satisfy customers.
The objective should be to establish a chain of customers that links people at all levels in the organization directly or indirectly to the market.
WHAT IS CUSTOMER SERVICE?
There are several definitions of customer service as can be shown by a study that was done by LaLonde and Zinszer (1976).
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Some of these definitions are as below:
‘All activities required to accept, process, deliver and bill customer orders and to follow up on any activity that erred.’
‘Timeliness and reliability of getting materials to customers in accordance with the customer’s expectation.’
‘A complex set of activities involving all areas of the business which combine to deliver and invoice the company’s products in a fashion that is perceived as satisfactory by the customer and which advance our company’s objectives.’
Total order entry, all communications with customers, all shipping, all freight, all invoicing and total control of repair of
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of products.’
‘Timely and accurate delivery of products ordered by customers with accurate follow-up and inquiry response, including timely delivery of invoice.’
What can be seen here is that there is no value in the product or service until it is in the hands of the customer or consumer in a timely and accurate fashion.
Customer service is the measure of how well the logistics system is performing in providing time and place utility for a product or service.
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‘‘A process which takes place between the buyer, seller, and third party…which results in a value added to the product or service exchanged….the value added might be short term (single transaction) or long term contractual relationship….the value added is shared….all parties benefit at the end of the service process….Customer service is a process for providing significant value added benefits to the supply chain in a cost effective way.’’
Customer service can be examined or broken down for analysis under three [3] headings, being: pre-transaction elements, transaction elements, and post-transaction elements.
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Transacting here can be understood to mean the process of negotiating exchange of be it either goods or services.
The pre-transaction elements of customer service relate to corporate policy or programs, e.g. written statements of service policy, adequacy of organizational structure and system flexibility. Can have significant impact on customer’s perceptions of the organization and their overall satisfaction.
The actual transaction elements are those customer service variables directly involved in performing the physical distribution function of the product and service delivery reliability.
The post-transaction elements of customer service are generally supportive of the product while in use, for instance
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product warranty, parts and repair service, procedures for customer complaints and product replacement.
The tables below indicates some of the many elements of customer service under these three headings.
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The components of Customer Service:
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SERVICE-DRIVEN LOGISTICS SYSTEMS:
The role of logistics can be seen as the provision of systems and the supporting coordination processes to ensure that customer service goals are met.
This is the idea of the service-driven logistics system-a system that is designed to meet defined service goals.
So often we find that organizations design and manage systems which have internally-focused objectives rather than external goals.
For example many companies with a strong production-
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-orientation have developed ‘mega-plants’ which can produce world volumes of product with great economies of scale-yet paradoxically this strategy could reduce flexibility and lengthen lead-times because of greater distance from markets.
A far more effective starting point for logistics system design is the market place; in other words we must fully understand the service needs of the various markets that we address and then seek to develop low cost logistics solutions.
Ideally all logistics strategies and systems should be devised in the following sequence:
1. Identify customers’ service needs through market research: then
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2. Define customer service objectives: And it should be borne in mind that the primary objective of any customer service strategy should be expressed very simply-and this is to reduce the customer’s costs of ownership.
There are many ways of achieving this depending on the customer service needs, an example could be reducing the customers travelling time, or waiting time to obtain the goods/service they want.
3. Design the logistics system. This should be very much closely aligned with the customer service needs and the primary objective of the customer service strategy.
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THE COST BENEFIT OF CUSTOMER SERVICE:
All companies have to face a basic fact: there will be significant differences in profitability between customers.
Not only do different customers buy different quantities of different products, but the cost to service these customers will typically vary considerably.
Thus the 80/20 rule will often be found to hold: That is 80% of the profits of the business come from 20% of the customers.
Furthermore, 80% of the total costs to service will be generated from 20% of the customers (but probably not the same 20%!)
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Whilst the proportion may not be exactly 80/20 it will generally be in that region. (This is the so called Pareto Law, named after a 19th century Italian economist).
A typical graph of the distribution of customer profitability might be as shown below:
Pareto diagrams similar to this can be powerful graphical tools that can easily show which are the 20% customers that provide 80% of the profits.
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The challenge to customer service management therefore is:
Firstly to identify the real profitability of customers and then..
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Secondly to develop strategies for service that will improve the profitability of all customers.
The nature of the cost/benefit trade-off in service level decisions can be depicted by this graph below:
Basically what the graph tells us is that as the service level increases, the difference between the costs expended to provide that service and the revenues obtained increases until a certain point where the difference becomes small due to the law of diminishing returns.
That is the more costs we incur do not necessarily increase the profits as much and the profit curve slows down and actually declines.
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SETTING CUSTOMER SERVICE PRIORITIES:
Due to resource constraints, the objective of the logistics system which should be to provide customers with the level of service they need, should consider that resources are finite.
A typical company might find its profits varying by customer and by product as shown in the Pareto diagram below.
It can be seen here that the curve is traditionally divided into three categories by profitability, and this is one of the main factors to be considered when designing the logistics system.
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How to use the ABC categorization?
1. Classic inventory control (stock holding policy): It goes
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without saying that it makes much business sense to provide the highest level of service (as represented by safety stock) for ‘A’ products, then a slightly lower for ‘B’ products and lower still for ‘C’.
Differentiate stock holding by holding the ‘A’ items as close as possible to the customer, and the ‘B’ and ‘C’ items further back up the supply chain.
Perhaps the best way to manage product service levels is to take into account both the profit contribution and individual product stock turn.
Stock-turn is measured as:
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The matrix below gives a graphical depiction of how decisions using the profit/product stock turn service levels can be determined.
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Quadrant 1: Seek Cost Reductions
Because these products have high stock-turn it would suggest that they are in frequent demand.
However they are also low in profit contribution and the priority should be to re-examine their inventory costs to see if there is any scope for enhancing profit.
Quadrant 2: Provide High Availability
These products are frequently demanded and they are more profitable.
We should offer the highest level of service on these items by holding them as close to the customer as possible and with
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high availability (e.g. 99% plus). Because there will be relatively few of these items
we can afford to follow such a strategy.
Quadrant 3: Review
Products in this category should be regularly appraised with a view to deletion from the range.
They do not contribute to profits (or at least only marginally) and they are slow movers from a sales point of view.
Unless they play a strategic role in the product portfolio of the firm then there is probably a strong case for dropping them.
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Quadrant 4: J.I.T. Delivery
Because these products are highly profitable but only sell at a relatively slow rate they are candidates for J.I.T delivery.
In other words they should be kept in some central location, as far back up the supply chain as possible in order to reduce the total inventory investment, and then shipped by express transport direct to customers.
SETTING CUSTOMER SERVICE STANDARDS:
Obviously if service performance is to be controlled then it must be against pre-determined standards.
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One thing to bear in mind is that these standards or targets should be well aligned and agreed between the customer expectations and the capabilities of the supplier.
But what are the customer service elements for which standards should be set?
Firstly there are internal service standards. And in many respects these should be mirroring the standards that our external customers place upon us.
And these external standards it goes without saying that they should be defined by the customers themselves.
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As has been discussed before to obtain these external customer standards will require customer service research, and ideally competitive benchmarking studies so that an objective definition of customer service for each market segment may be identified.
Typical customer service elements for which standards can be or should be set can include the following:
Order cycle time; Stock availability; Order-size constraints; Ordering convenience; Frequency of delivery; Delivery reliability; Documentation quality; Claims procedure; Order completeness; Technical support; and Order status information.
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While all these elements of customer service are of potential importance, two in particular are increasingly seen as being crucial to winning and keeping customers: delivery reliability and order completeness.
These two elements can be combined into a single performance measure: on-time order fill.
This measure can be expressed as:
On-time order fill =
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It must also be recognized that from the customer’s perspective there are only two levels of service-either 100% or 0%.
In other words either the customer gets exactly what he/she ordered at the time and place required or they don’t.
It must also be remembered that 100% order fill rates are extremely difficult to achieve-the laws of probability see to that!
E.g.: If there are 10 items on a particular order and each item is carried in stock at the 95% level of availability then the probability that the complete order can be filled is which is 0.599.
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In other words, just over a 50/50 chance that we can satisfy the complete order.
Therefore it might be actually wiser to carry at least always 100% availability.
Ideally organizations should establish standards and monitor performance across a range of customer service measures.
For example using the pre-transaction, transaction and post transaction framework, the following measures can provide valuable indicators of performance.
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Other customer service measures not capture above include:
Pre-transaction: Response times to queries
Post-transaction: First call fix rate Customer complaints Service parts availability
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LECTURE TUTORIAL
1. Define customer service.
2. List the three [3] components of customer service elements?
3. State two examples of customer service elements per category of customer service element.
4. Briefly discuss why designing logistics systems that have internally focused objectives as opposed to externally focused can be detrimental to an organization.
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LECTURE TUTORIAL CONTI….
5. List and explain the three [3] ideal strategic steps in designing a logistics system.
6. Explain how the Pareto (80/20) rule can help in managing the cost/benefit ratio in customer service.
7. With the aid of a diagram explain the cost/benefit trade-off in service level decisions.
8. With an aid of a diagram explain how the Pareto rule can help in setting customer service priorities.
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LECTURE TUTORIAL CONTI….
9. How can you use the profit contribution and individual product stock turn to manage product service levels. Explain this using the two by two matrix (the four quadrants).
10. Why are customer service standards important?
11. How are customer service standards defined?
12. How can organization go about obtaining customer service standards that can inform the internal standards of the organization?
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LECTURE TUTORIAL CONTI….
9. List two [2] measures per category of customer service elements that an organization may need to monitor in order to manage effectively its customer service.
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