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CHAPTER 3 Customer Service
Cost trade-offs in Marketing and Logistics Price
Order processing and information costs
LOGISTICS
Place/customer service levels Inventory carrying costs
MARKETING
Product
3-2
Transportation costs
Lot quantity costs
Warehousing costs Order processing and information costs
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Elements of Customer Service
Pretransaction elements • Written statement of policy • Customer receipt of policy statement • Organization structure
Transaction elements • Stockout levels • Order information • Elements of order cycle • Expedited shipments
• System flexibility
• Transshipment
• Management services
• System accuracy • Order convenience
3-3
Posttransaction elements • Installation, warranty, alterations, repairs, parts • Product tracing • Customer claims, complaints, returns • Temporary replacement of products
• Product substitution McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Methods of Establishing a Customer Service Strategy
3-4
• Determining channel service levels based on knowledge of consumer reactions to stockouts • Analyzing cost/revenue trade-offs • Using ABC analysis of customer service • Conducting a customer service audit
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Model of Consumer Reaction to a Repeated Stockout
3-5
1 Higher Yes Yes No Customer
Switch stores ? Yes
Substitute ? No
Switch brand ? No
Switch price ?
2 Same
3 Lower 4 Other size 5 Special order 6 Ask here again
Substitute ?
Yes
No Another store McGraw-Hill/Irwin
Source: Clyde K. Walter, “An Empirical Analysis of Two Stockout Models,” unpublished Ph. D.
Copyright 2001 byUniversity, The McGraw-Hill Companies, Inc. All rights reserved. Dissertation,© Ohio State 1971.
Relationship Between Customer Service and Inventory Investment
3-6
600 500 400 300 200 100 0 75
McGraw-Hill/Irwin
80
85
90
95
100
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Stages of the Customer Service Audit Internal Audit
3-7
External Audit
Evaluate Customer Perceptions
Differentiate Channel Levels & Market Segments
Identify Opportunities
Determine Marketing Services Mix & Levels
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
3-8
Overall Importance Compared To Selected Performance Of Major Manufacturers Evaluated By Dealers Overall Impt. All Dealers
Dealer Evaluations of Manufacturers Mfr. 1
Description
M.
SD
M.
SD
M.
SD
M.
SD
M.
SD
M.
SD
M.
SD
Ability of manufacturer to meet promised delivery date (on-time shipments) Accuracy in filling orders (correct product is shipped) Competitiveness of price Advance notice on shipping delays Special pricing discounts available on contract/project quotes Overall manufacturing and design quality of product relative to the price and range involved Updated and current price data, specifications and promotion materials provided by manufacturer Timely response to requests for assistance from manufacturer's sales representative Order cycle consistency (small variability in promised versus actual delivery, i.e., vendor consistency meets expected date). Length of promised order cycle (lead) times (from order submission to delivery) for base line/in-stock ("quick ship") product Accuracy of manufacturer in forecasting and committing to estimated shipping dates on contract/project orders Completeness of order (% of line items eventually shipped complete) -- made to order product (contract orders)
6.4
0.8
5.9
1.0
4.1
1.6
4.7
1.6
6.6
0.6
3.7
1.8
3.3
1.6
6.4 6.3 6.1 6.1 6.0
0.8 1.0 0.9 1.1 0.9
5.6 5.1 4.6 5.4 6.0
1.1 1.2 1.9 1.3 1.0
4.7 4.9 3.0 4.0 5.3
1.4 1.4 1.6 1.7 1.3
5.0 4.5 3.7 4.1 5.1
1.3 1.5 1.7 1.6 1.2
5.8 5.4 5.1 6.0 6.5
1.1 1.3 1.7 1.2 0.8
5.1 4.4 3.0 4.7 5.2
1.2 1.5 1.7 1.5 1.3
4.4 3.6 3.1 4.5 4.8
1.5 1.8 1.7 1.8 1.5
6.0
0.9
5.7
1.3
4.1
1.5
4.8
1.4
6.3
0.9
4.9
1.7
4.3
1.9
6.0
0.9
5.2
1.7
4.6
1.6
4.4
1.6
5.4
1.6
4.2
2.0
4.3
1.7
6.0
0.9
5.8
1.0
4.1
1.5
4.8
1.4
6.3
0.9
3.6
1.7
4.4
1.7
6.0
1.0
6.1
1.1
4.5
1.4
4.9
1.5
6.2
1.1
4.3
1.7
3.7
2.0
6.0
1.0
5.5
1.2
4.0
1.6
4.3
1.4
6.3
1.1
3.8
1.7
3.5
1.6
6.0
1.0
5.5
1.2
4.3
1.2
4.7
1.3
6.0
1.1
4.4
1.4
4.0
1.6
Mfr. 2
Mfr. 3
Mfr. 4
Mfr. 5
Mfr. 6
Rank
Var. Num
1
9
2 3 4 5 6
39 90 40 94 3
7
16
8
47
9
14
10
4b
11
54
12
49a
50
33a
Price range of product line offering (e;g., low, medium, high price levels) for major vendor
5.0
1.3
4.4
1.5
4.6
1.6
5.1
1.5
5.2
1.4
4.3
1.6
3.9
1.6
101
77
Store layout planning assistance from manufacturer
2.9
1.6
4.2
1.7
3.0
1.5
3.4
1.6
4.7
1.6
3.0
1.4
3.4
1.2
Note: Mean (average score) based on a scale of 1 (not important) through 7 (very important).
McGraw-Hill/Irwin
Copyright © 2001 by TheService McGraw-Hill Companies, Inc. AllAll rights Source: Douglas M. Lambert and Jay U. Sterling, “Developing Customer Strategy,” unpublished manuscript. Rightsreserved. reserved.
Internal Audit Questions
3-9a 3-9
• How is customer service currently measured? • What are the units of measurement? • What are the performance standards? • What is the current level of attainment?
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Internal Audit Questions cont.
3-10b 3-9
• How are these measures derived from corporate information flows and the order processing system? • What is the internal customer service reporting system? • How do the functional areas of the business perceive customer service? • What is the relation between these functional areas in terms of communication and control? McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Importance And Performance Evaluations For Selected Customer Service Attributes
3-11 3-9 c
Performance Evaluation No. 1 2 3 4 5 6 7 8 9 10
Attribute Accuracy in filling orders Ability to expedite emergency orders in a fast, responsive manner Action on complaints (e.g., order servicing, shipping, product, etc.) Accuracy of supplier in forecasting and committing to shipping date for custom-made products Completeness rate (percentage of order eventually shipped) Rapid adjustment of billing and shipping errors Availability of blanket orders Frequency of deliveries (supplier consolidates multiple/split shipments into one larger, less frequent shipment) Order processing personnel located in your market area Computer-to-computer order entry
Relative Performance
Importance
Company A
Company B
6.42 6.25
5.54 4.98
5.65 5.23
-0.11 -0.25
6.07
4.82
5.18
-0.36*
5.92
4.53
4.73
-0.20
5.69
5.29
5.27
+0.02
5.34
4.64
4.90
-0.24
4.55 4.29
5.03 5.07
4.15 5.03
3.58
5.33
5.21
+0.12
2.30
4.07
3.53
+0.54**
+0.88** +0.04
* Performance evaluations of A and B are significantly different at p < 0.05. ** Performance evaluations of A and B are significantly different at p < 0.01.
McGraw-Hill/Irwin
Source: Douglas M. Lambert and Arun Sharma, “A Customer-Based Competitive Analysis for Logistics 2001 of byPhysical The McGraw-Hill Inc. All20, rights reserved. Decisions,”Copyright International© Journal Distribution andCompanies, Logistics Management no.1 (1990), p.18.
Competitive Position Matrix Competitive disadvantage 7
Competitive parity
Competitive advantage
Major weakness
Major strength 5*
2* 3* 4*
5
HIGH
1* 6*
8*
MEDIUM
IMPORTANCE
3-12 3-10
7*
9* 3 10*
Minor weakness -3.0
McGraw-Hill/Irwin
LOW
1
Minor strength -1.0
+1.0
Relative performance
+3.0
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
3-13 3-11
Performance Evaluation Matrix Definitely improve
Improve
5*
Maintain
Reduce/maintain
MEDIUM
Improve
1*
2* 3* 4*
6*
5
Maintain/improve
HIGH
IMPORTANCE
7
7* 8* 9* 3
Maintain
Reduce/maintain
Reduce/maintain
LOW
10* 1 1
3
5
7
Performance evaluation McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Strategic Opportunities For A Competitive Advantage Competitive disadvantage
7
Competitive advantage
Competitive parity
Major weakness
Major strength H I G H
1*
2* 3* 4* I M P O R T A N C E
3-14 3-12
6* 5*
5
*7
M E D I U M
*8 *9
3 *10
L O W
1
Minor weakness
-3.0
Minor strength
-1.0
Relative performance
+1.0
+3.0
* denotes attribute number indicates desired shift in relative performance indicates potential opportunities that may be revealed within specific customer segments
McGraw-Hill/Irwin
Source: Douglas M. Lambert and Arun Sharma, “A Customer-Based Competitive Analysis for Logistics Decisions,” © 2001 by The McGraw-Hill Companies, Inc.p.23. All rights reserved. International Journal Copyright of Physical Distribution and Logistics Management 20, no.1 (1990),
Measuring and Controlling Customer Service Performance
3-15 3-13
• Establish quantitative standards of performance for each service element. • Measure actual performance for each service element. • Analyze variance between actual service provided and standard. • Take corrective action as needed to bring actual performance into line. McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Customer Service Standards
3-16 3-14
• Reflect the customer’s point of view. • Provide an operational and objective measure of service performance. • Provide management with cues for corrective action.
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Cost trade-offs in Marketing and Logistics Price
Order processing and information costs
LOGISTICS
Place/customer service levels Inventory carrying costs
MARKETING
Product
3-2
Transportation costs
Lot quantity costs
Warehousing costs Order processing and information costs
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Elements of Customer Service
Pretransaction elements • Written statement of policy • Customer receipt of policy statement • Organization structure
Transaction elements • Stockout levels • Order information • Elements of order cycle • Expedited shipments
• System flexibility
• Transshipment
• Management services
• System accuracy • Order convenience
3-3
Posttransaction elements • Installation, warranty, alterations, repairs, parts • Product tracing • Customer claims, complaints, returns • Temporary replacement of products
• Product substitution McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Methods of Establishing a Customer Service Strategy
3-4
• Determining channel service levels based on knowledge of consumer reactions to stockouts • Analyzing cost/revenue trade-offs • Using ABC analysis of customer service • Conducting a customer service audit
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Model of Consumer Reaction to a Repeated Stockout
3-5
1 Higher Yes Yes No Customer
Switch stores ? Yes
Substitute ? No
Switch brand ? No
Switch price ?
2 Same
3 Lower 4 Other size 5 Special order 6 Ask here again
Substitute ?
Yes
No Another store McGraw-Hill/Irwin
Source: Clyde K. Walter, “An Empirical Analysis of Two Stockout Models,” unpublished Ph. D.
Copyright 2001 byUniversity, The McGraw-Hill Companies, Inc. All rights reserved. Dissertation,© Ohio State 1971.
Relationship Between Customer Service and Inventory Investment
3-6
600 500 400 300 200 100 0 75
McGraw-Hill/Irwin
80
85
90
95
100
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Stages of the Customer Service Audit Internal Audit
3-7
External Audit
Evaluate Customer Perceptions
Differentiate Channel Levels & Market Segments
Identify Opportunities
Determine Marketing Services Mix & Levels
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
3-8
Overall Importance Compared To Selected Performance Of Major Manufacturers Evaluated By Dealers Overall Impt. All Dealers
Dealer Evaluations of Manufacturers Mfr. 1
Description
M.
SD
M.
SD
M.
SD
M.
SD
M.
SD
M.
SD
M.
SD
Ability of manufacturer to meet promised delivery date (on-time shipments) Accuracy in filling orders (correct product is shipped) Competitiveness of price Advance notice on shipping delays Special pricing discounts available on contract/project quotes Overall manufacturing and design quality of product relative to the price and range involved Updated and current price data, specifications and promotion materials provided by manufacturer Timely response to requests for assistance from manufacturer's sales representative Order cycle consistency (small variability in promised versus actual delivery, i.e., vendor consistency meets expected date). Length of promised order cycle (lead) times (from order submission to delivery) for base line/in-stock ("quick ship") product Accuracy of manufacturer in forecasting and committing to estimated shipping dates on contract/project orders Completeness of order (% of line items eventually shipped complete) -- made to order product (contract orders)
6.4
0.8
5.9
1.0
4.1
1.6
4.7
1.6
6.6
0.6
3.7
1.8
3.3
1.6
6.4 6.3 6.1 6.1 6.0
0.8 1.0 0.9 1.1 0.9
5.6 5.1 4.6 5.4 6.0
1.1 1.2 1.9 1.3 1.0
4.7 4.9 3.0 4.0 5.3
1.4 1.4 1.6 1.7 1.3
5.0 4.5 3.7 4.1 5.1
1.3 1.5 1.7 1.6 1.2
5.8 5.4 5.1 6.0 6.5
1.1 1.3 1.7 1.2 0.8
5.1 4.4 3.0 4.7 5.2
1.2 1.5 1.7 1.5 1.3
4.4 3.6 3.1 4.5 4.8
1.5 1.8 1.7 1.8 1.5
6.0
0.9
5.7
1.3
4.1
1.5
4.8
1.4
6.3
0.9
4.9
1.7
4.3
1.9
6.0
0.9
5.2
1.7
4.6
1.6
4.4
1.6
5.4
1.6
4.2
2.0
4.3
1.7
6.0
0.9
5.8
1.0
4.1
1.5
4.8
1.4
6.3
0.9
3.6
1.7
4.4
1.7
6.0
1.0
6.1
1.1
4.5
1.4
4.9
1.5
6.2
1.1
4.3
1.7
3.7
2.0
6.0
1.0
5.5
1.2
4.0
1.6
4.3
1.4
6.3
1.1
3.8
1.7
3.5
1.6
6.0
1.0
5.5
1.2
4.3
1.2
4.7
1.3
6.0
1.1
4.4
1.4
4.0
1.6
Mfr. 2
Mfr. 3
Mfr. 4
Mfr. 5
Mfr. 6
Rank
Var. Num
1
9
2 3 4 5 6
39 90 40 94 3
7
16
8
47
9
14
10
4b
11
54
12
49a
50
33a
Price range of product line offering (e;g., low, medium, high price levels) for major vendor
5.0
1.3
4.4
1.5
4.6
1.6
5.1
1.5
5.2
1.4
4.3
1.6
3.9
1.6
101
77
Store layout planning assistance from manufacturer
2.9
1.6
4.2
1.7
3.0
1.5
3.4
1.6
4.7
1.6
3.0
1.4
3.4
1.2
Note: Mean (average score) based on a scale of 1 (not important) through 7 (very important).
McGraw-Hill/Irwin
Copyright © 2001 by TheService McGraw-Hill Companies, Inc. AllAll rights Source: Douglas M. Lambert and Jay U. Sterling, “Developing Customer Strategy,” unpublished manuscript. Rightsreserved. reserved.
Internal Audit Questions
3-9a 3-9
• How is customer service currently measured? • What are the units of measurement? • What are the performance standards? • What is the current level of attainment?
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Internal Audit Questions cont.
3-10b 3-9
• How are these measures derived from corporate information flows and the order processing system? • What is the internal customer service reporting system? • How do the functional areas of the business perceive customer service? • What is the relation between these functional areas in terms of communication and control? McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Importance And Performance Evaluations For Selected Customer Service Attributes
3-11 3-9 c
Performance Evaluation No. 1 2 3 4 5 6 7 8 9 10
Attribute Accuracy in filling orders Ability to expedite emergency orders in a fast, responsive manner Action on complaints (e.g., order servicing, shipping, product, etc.) Accuracy of supplier in forecasting and committing to shipping date for custom-made products Completeness rate (percentage of order eventually shipped) Rapid adjustment of billing and shipping errors Availability of blanket orders Frequency of deliveries (supplier consolidates multiple/split shipments into one larger, less frequent shipment) Order processing personnel located in your market area Computer-to-computer order entry
Relative Performance
Importance
Company A
Company B
6.42 6.25
5.54 4.98
5.65 5.23
-0.11 -0.25
6.07
4.82
5.18
-0.36*
5.92
4.53
4.73
-0.20
5.69
5.29
5.27
+0.02
5.34
4.64
4.90
-0.24
4.55 4.29
5.03 5.07
4.15 5.03
3.58
5.33
5.21
+0.12
2.30
4.07
3.53
+0.54**
+0.88** +0.04
* Performance evaluations of A and B are significantly different at p < 0.05. ** Performance evaluations of A and B are significantly different at p < 0.01.
McGraw-Hill/Irwin
Source: Douglas M. Lambert and Arun Sharma, “A Customer-Based Competitive Analysis for Logistics 2001 of byPhysical The McGraw-Hill Inc. All20, rights reserved. Decisions,”Copyright International© Journal Distribution andCompanies, Logistics Management no.1 (1990), p.18.
Competitive Position Matrix Competitive disadvantage 7
Competitive parity
Competitive advantage
Major weakness
Major strength 5*
2* 3* 4*
5
HIGH
1* 6*
8*
MEDIUM
IMPORTANCE
3-12 3-10
7*
9* 3 10*
Minor weakness -3.0
McGraw-Hill/Irwin
LOW
1
Minor strength -1.0
+1.0
Relative performance
+3.0
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
3-13 3-11
Performance Evaluation Matrix Definitely improve
Improve
5*
Maintain
Reduce/maintain
MEDIUM
Improve
1*
2* 3* 4*
6*
5
Maintain/improve
HIGH
IMPORTANCE
7
7* 8* 9* 3
Maintain
Reduce/maintain
Reduce/maintain
LOW
10* 1 1
3
5
7
Performance evaluation McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Strategic Opportunities For A Competitive Advantage Competitive disadvantage
7
Competitive advantage
Competitive parity
Major weakness
Major strength H I G H
1*
2* 3* 4* I M P O R T A N C E
3-14 3-12
6* 5*
5
*7
M E D I U M
*8 *9
3 *10
L O W
1
Minor weakness
-3.0
Minor strength
-1.0
Relative performance
+1.0
+3.0
* denotes attribute number indicates desired shift in relative performance indicates potential opportunities that may be revealed within specific customer segments
McGraw-Hill/Irwin
Source: Douglas M. Lambert and Arun Sharma, “A Customer-Based Competitive Analysis for Logistics Decisions,” © 2001 by The McGraw-Hill Companies, Inc.p.23. All rights reserved. International Journal Copyright of Physical Distribution and Logistics Management 20, no.1 (1990),
Measuring and Controlling Customer Service Performance
3-15 3-13
• Establish quantitative standards of performance for each service element. • Measure actual performance for each service element. • Analyze variance between actual service provided and standard. • Take corrective action as needed to bring actual performance into line. McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Customer Service Standards
3-16 3-14
• Reflect the customer’s point of view. • Provide an operational and objective measure of service performance. • Provide management with cues for corrective action.
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
