Logistics/Supply Chain Customer Service

Transcription

1 Logistics/Supply Chain Customer Service Prepared by: Dr. M. S. Memon Department of Industrial Engineering and Management Mehran UET, Jamshoro, Pakistan

2 Customer Service in Planning Triangle 2

3 Customer Service Customer service is generally presumed to be a means by which companies attempt to differentiate their product, keep customers loyal, increase sales, and improve profits. Its elements are: Price Product quality Service It is an integral part of the marketing mix of: Price Product Promotion Physical Distribution Relative importance of service elements Physical distribution variables dominate price, product, and promotional considerations as customer service considerations. Product availability and order cycle time are dominant physical distribution variables. 3

4 Customer Service Elements 4

5 Common Customer Service Complaints 5

6 Most Important Customer Service Elements On-time delivery Order fill rate Product condition Accurate documentation Example of Measurement of Logistics Customer Service: % of customer orders shipped by customer request date 6

7 Order Cycle Time Order cycle time contains the basic elements of customer service where logistics customer service is defined as: the time elapsed between when a customer order, purchase order, or service request is placed by a customer and when it is received by that customer. Order cycle elements Transport time Order transmittal time Order processing and assembly time Production time checking time for Stock availability Order cycle time is expressed as a bimodal frequency distribution Constraints on order cycle time Order processing priorities Order condition standards (e.g., damage and filling accuracy) Order constraints (e.g., size minimum and placement schedule) 7

8 Components of a Customer Order Cycle 8

9 Frequency Distribution for Total Order Cycle Time When Out-of-Stock Situations Occur 9

10 Adjustments to Order Cycle time Customer service policies will distort the normal order cycle time patterns Order processing priorities Ex. Backlog processing rules Order condition standards Products ordered could arrive at the customer location in a damaged or unusable state. Standards set for package design, procedures for returning and replacing incorrect or damaged goods, and standards set for monitoring order quality will distort the normal order cycle time Order constraints Ex. Minimum order size, order receiving on fixed days, order based on fixed specification 10

11 Importance of Logistics Customer Service Service affects sales From a GTE/Sylvania study:...distribution, when it provides the proper levels of service to meet customer needs, can lead directly to increased sales, increased market share, and ultimately to increased profit contribution and growth. Service differences have been shown to account for 5 to 6% variation in supplier sales Service affects customer patronage Service plays a critical role in maintaining the customer base: On the average it is approximately 6 times more expensive to develop a new customer than it is to keep a current one. 11

12 Penalties for Customer Service Failures 12

13 Service Observations The dominant customer service elements are logistical in nature Late delivery is the most common service complaint and speed of delivery is the most important service element The penalty for service failure is primarily reduced patronage, i.e., lost sales The logistics customer service effect on sales is difficult to determine 13

14 DEFINING A SALES-SERVICE RELATIONSHIP Logistics decision making would be enhanced if we knew more precisely how sales change with changes in logistics customer service levels. We would like to express this effect mathematically as a sales-service relationship. 3 Stages: threshold, diminishing returns, decline (Fig 4-6) Each stage shows that equal increments of service improvements do not always bring equal gains in sales. 14

15 DEFINING A SALES-SERVICE RELATIONSHIP 15

16 SALES-SERVICE RELATIONSHIP When no customer service exists between a buyer and a supplier, or when service is extremely poor, little or no sales are generated. As service is increased to that approximating the offering by competition, little sales gain can be expected. Assuming that price and quality are equal, the firm is not in business until its service level approximates that of the competition. This point is the threshold service level. 16

17 SALES-SERVICE RELATIONSHIP When a firm's service level reaches this threshold, further service improvement relative to competition can show good sales stimulation. Sales are captured from competing suppliers by creating a service differential. As the service is further improved, sales continue to increase, but at a slower rate. The region from the service level at threshold to the point of sales decline is referred to as diminishing returns. It is in this region that most firms operate their supply chains 17

18 SALES-SERVICE RELATIONSHIP Why do sales increase with improvements in service? It has been observed that buyers are sensitive to the service that they receive from suppliers. Improved service generally means lower inventory costs for the buyer, assuming that product quality and acquisition price remain unaffected by the improved service offering. Buyers are then motivated to shift their patronage to the supplier offering the best service. 18

19 SALES-SERVICE RELATIONSHIP The diminishing returns results both from the buyer's inability to benefit in the same degree from higher service levels as from lower ones, and of purchase policies that require more than one source of supply. The impact that service has on buyers' costs tends to diminish with increased service. Hence, patronage is likely to follow the same pattern. Also, the common purchase policy of maintaining multiple sources of supply puts limits on the degree of sales patronage that any buyer can offer to a supplier. When the policy is to spread purchases across many buyers, the effect is to produce the taper noted in Figure

20 SALES-SERVICE RELATIONSHIP It is possible that service improvements can be carried too far, with a resulting decline in sales. Whereas improvements in inventory availability, order cycle time, and condition of delivered goods carry no negative impact on sales, such customer service factors as frequency of vendors' visits to examine buyers' stock levels and take orders, and the nature and frequency of order-progress reporting information may become excessive for some buyers. The buyers may see this as pestering and withdraw sales patronage from a supplier. 20

21 Modeling a Sales-Service Relationship A mathematical expression of the level of service provided and the revenue generated It is needed to find the optimal service level A theoretical basis for the relationship Methods for determining the curve in practice Two-points method Before-after experiments Game playing Buyer surveys Remember Revenue on ROLA 21

22 Sales-Service Relationship by the Two-Points Method 22

23 Generalized Cost-Revenue Tradeoffs 23

24 Determining Optimum Service Levels Cost vs. service is known. Determine the service level that will maximize the firm's profit contribution. Approaches Theory Practice 24

25 Determining Optimum Service Levels Theory Profit Contribution for Hypothetical Revenue and Cost Curves (Next Slide) Optimal Service level(sl*) is determined as follows: To optimize profit P with respect to SL Take the first derivative of P with respect to SL and set the result equal to zero. That is Solve for SL*. 25

26 Maximization of Profit Contribution for Hypothetical Revenue and Cost Curves 26

27 Practice Optimum profit is the point where change in revenue equals change in cost For a constant rate, Determining Optimum Service Levels P = trading margin sales response rate annual sales C = annual carrying cost standard product cost demand standard deviation over replenishment lead-time z Set P = C and find z corresponding to a specific service level. 27

28 Determining Optimum Service Levels Example Given the following data for a particular product Sales response rate = 0.15% change in revenue for a 1% change in the service level (fill rate) Trading margin = $0.75 per case Carrying cost = 25% per year Annual sales through the warehouse = 80,000 cases Standard product cost = $10.00 Demand standard deviation = 500 cases over LT Lead time = 1 week 28

29 Determining Optimum Service Levels Example Find P Find C P = ,000 = $90.00 per year C = z = 1250 z Set P = C and solve for z, i.e., 90.00/1250 = z z = For the change in z found in a normal distribution table, the optimal in-stock probability during the lead time (SL*) is about 92%. 29

30 SL Levels in % for Various z Values 30

31 Graphically Setting the Service Level 31

32 Service Variability Customer service to this point has referred to the average value of the variable representing customer service. However, variability in customer service performance is usually more important than average performance. Customers can plan for known and even marginal customer service performance, but variability in service performance is uncertainty. High degrees of service uncertainty cause the customer to incur high costs through elevated inventories, expedited transportation, and additional administrative costs. How much variability to allow is an economic issue. When variability cannot be controlled, information may be used to soften the uncertainty effects. 32

33 Optimizing on Service Performance Variability by Taguchi s loss function Setting service variability according to Taguchi s loss function. L = k(y m) 2 A loss function of the form L = loss in $ k = a constant to be determined y = value of the service variable m = the target value of the service variable 33

34 Optimizing on Service Performance Variability by Taguchi s loss function Setting the allowable deviation from the target service level m is to optimize the sum of penalty cost for not meeting the service target and the cost of producing the service. TC = service penalty cost + service delivery cost If the service delivery cost is of the general form DC = A - B(y-m), then find the optimum allowed deviation from the service target. TC = k (y m) 2 + A-B(y-m) If m is set to 0, y is the optimal deviation allowed from target. 34

35 Service Variability Example Example Pizzas are to be delivered in 30 minutes (target.) Pizzas delivered more than 10 minutes late incur a penalty of $3 off the pizza bill. Delivery costs are estimated at $2, but decline at the rate of $0.15 for each minute deviation from target. How much variation should be allowed in the delivery service? Solution Find k L = k(y-m) 2 3 = k(10-0) 2 k = 3/10 2 = 0.03 and y if m is taken as 0 y- 0 = 0.15/2(0.03) = 2.5 minutes No more than 2.5 min should be allowed from the 30 min delivery target to minimize cost. 35

36 Setting Service Levels Service treated as a constraint on design Planning for service contingencies Measuring Service Performance Percent of sales on backorder No. of stockouts Percent of on-time deliveries No. of inaccurate orders Order cycle time Fill rate: % of demand met, % of orders filled complete, etc. 36

37 Service Contingencies System Breakdown Actions Insure the risk Plan for alternate supply sources Arrange alternate transportation Shift demand Build quick response to demand shifts Set inventories for disruptions Product Recall Actions Establish a task force committee Trace the product Design a reverse logistics channel 37