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DEMAND MANAGEMENT AND

CUSTOMER SERVICE

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Demand Management And

Customer ServiceLearning Objectives

After reading this chapter, you should be able to: Understand the meaning of demand management and customer service.

Discuss the performance measures for customer service.

Discuss the demand management process and the problems in demand

management.

Describe the basic approach to demand forecasting and the forecastingmethods or techniques.

Understand how toestablish a customer service strategy.

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Demand management may be thought of as focused efforts toestimate and manage customersdemand, with the intention of using

this information to shape operating decisions.

2.1.1 Relationship between Customer Service and

Demand Management

Customer service is the measure of how well the logistics

system is performing in providing time and place utilityto a product

or service. Customer serviceand customer satisfactiondo not mean

one and the same. Customer satisfaction represents the customers

overall assessment of all elements of the marketing mix: product,

price, promotion and place (or distribution) whereas customer serviceis a part of customer satisfaction. Customer service is definedas:

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(i) An activity or function to be managed, such as order processing or

handling of customer complaints.

(ii) Actual performance on parameters such as ability to ship orders

within a certain period.

(iii) Part of an overall corporate philosophy.

2.1.2 Demand Forecasting :

Demand forecasting refers to the estimation of the amount ofproduct that will be purchased by the consumers or end users.

2.1.3 Customer Service :

Customer service can be defined as a process which takes

place between the buyer, seller and third party. The process results

in a value addition to the product or service exchanged.

Customer service is really the fuel that drives the logistics

supply chain.

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2.1.4 The Logistics/Marketing Interface :

Successful implementation of the marketing concept requires that

companies both win and retain customers. emphasise is on winning

new customers and gaining new accounts. The objective of a firm is

still to make a profit, but not without establishing service policies and

programs that will satisfy customersneeds and deliver them in a cost-

efficient manner. This approach is referred to as customer service.

Customer service is often the link between logistics and marketing. If

the logistics system, particularly outbound logistics fails to function

properly and a customer does not receive a delivery as promised, the

company could lose future sales.

2.1.5 Customer Service and Levels of ProductThree levels of product are (i) core benefit or service, (ii)tangibleproduct and (iii)augmented product

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Customer service can be thought of as something a firm provides to those

who purchase its products or services. According to marketers there arethree levels of product: (i) the core benefit or service which constitutes

what the buyer is really buying, (ii) the tangible productor the physical

product or service itself and (iii) the augmented productwhich includes

benefits that are secondary to it but an integral enhancement to the tangible

product the customer is purchasing.

Customer service is a concept whose importance reaches far beyond the

logistics area.

2.1.6 Levels of Customer Service Involvement :

Three levels of customer service involvement are :

(i) customer service as an activity,

(ii) customer service as performance measure and

(iii) customer service as a philosophy.

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2.1.7 Dimensions or Elements of Customer Service

From the point of view of logistics function, customer servicecan be viewed as having four dimensions: (i) time, (ii)dependability,

(iii)communicationand (iv)convenience. These dimensions are briefly

discussed in the following paragraphs.

1. Time :The time factor is usually order cycle timefrom the perspective

of seller looking at customer service.2. Dependability : Some customers consider dependability as more

important than lead time.

3. Communications :The two logistics activities vital to order filling are

the communication of customer order information to the order-filling

area and the actual process of picking out of the inventory, the itemsordered.

4. Convenience :This means, logistics service level must be flexible.

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2.1.8 Performance Measures for Customer Service

Box 2.1lists the elements and measurement of customer service in

logistics management.

Box 2.1 : Elements and Measurements of Customer Service

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2.1.9 Implementing Customer Service Standards

The keys for successfully developing and implementing customer

service standards are:

(i) To be wary of adopting easily achievable performance standards. But

setting standards at unrealistically low levels will not help to establish a

competitive advantage.

(ii) Emphasis on total quali tyor on creation of the perfectorderare very

critical to any acceptable quality level set below 100 per cent.

(iii) The firm should develop customer service policies and standards through

customer consultation.

(vii)The firm should develop procedures to measure, monitor and control the

customer service quality called for by the firms performance measures

and standards.

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2.1.10 The Perfect Order :

Perfect order refers to an order where all customer requirements aremet upon delivery of the order (i.e., right time, right place, right quantity,

right condition and rig

2.1.11Improving Customer Service Performance:

The levels of customer service a firm achieves often can be improvedthrough one or more of the following actions: (i) thoroughly researching

customer needs, (ii) setting service levels that make realistic trade-offs

between revenues and expenses, (iii)making use of the latest technology in

order processing systems and (iv) measuring and evaluating the

performance of individual logistic activities.

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2.2 Demand ManagementDemand management enhances the ability of firms throughout the

supply chain, especially manufacturing through the customer with the end

result of creating greater customer value. Demand management holds the

key to an effective supply chain management process.

2.2.1Demand Management Process:

2.2.2 Problems in Demand Management

(i) Lack of co-ordination between departments (for example,finance, sales and

marketing, manufacturing, distribution and customer service) which

function as autonomous business units.

(ii) To much emphasis is based on forecasts of demand, with less attention on

the collaborative efforts and the strategic and operational plans that need tobe developed from the forecasts.

(iii) Demand information is mainly used to develop tactical and operational

plans rather than to develop strategic plans.

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(iv) The conflicting and contradicting interests of departmental managers

in achieving their departmental goals rather than contributing to the

achievement of the companysoverall business objectives/goals.

2.2.3 Demand Forecasting:

Forecasting demand is a necessary part of business planning and

demand management. Demand forecasting estimates the amount of

product that will be purchased by consumers and end users based on

which decisions regarding how much product the company should sell

and how much the company need to produce.

Integrating Forecasting and Production

The steps involved in integrating the sales forecasting with

production scheduling activities are listed below:

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(i) To develop an annual forecast demand

(ii) Review of the forecast arrived

(iii)To develop aggregate production schedules

(iv)To schedule production on a short-term basis

2.2.4 The Role of Forecasting in a Supply Chain

All strategic and operating decisions in a supply chain are based onthe forecast of future demand. The amount of product produced per periodof time and the production capacity that must be made available are all

based on the forecast of customer demand for the period underconsideration

Some of the important decisions taken in some functional areas basedon demand forecasts are:

(i) Production :Scheduling, inventory planning and control, and aggregateplanning.

(ii) Marketing : Sales force allocation, sales promotions and new productlaunching.

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(iii) Finance:Capital investment in plant and equipments, budgeting etc.

(iv) Human Resource:Manpower Planning, hiring, lay off etc.

2.2.5 Types of Forecasting/Forecasts

Three different approaches to demand forecasting are :

(i)Long term forecasting

(ii)Intermediate term or Midrange or medium term forecasting and

(iii) Short term forecasting.Long term forecasting results in long-term forecasts which usually cover

a period of three or more than three years.

Intermediate term or midrange or medium term forecasts have a

planning horizon of one to three years. They address issues related to

budgeting and sales plans.Short term forecasts are more important for planning the logistics

operations. The forecast of demand is for short intervals of time

(monthly) for several months ahead, usually for a planning horizon up to

one year.

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Customer Service2.2.6 Purpose of Forecasting

Some of the reasons for engaging in forecasting are :

(i) To increase customer satisfaction.(ii) To reduce stock-outs.

(iii) To schedule production more efficiently.

(iv) To lower safety stock requirements.

(v) To reduce product obsolescence costs.

(vi) To manage shipping (transportation)better.

(vii)To improve pricing and promotion management.

(viii)To negotiate better terms with suppliers.

(ix) To make more informed pricing decisions.

The essence of forecasting is to assist in logistics decision making.

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(i) Qualitative Forecasting Methods :Qualitative methods are thosethat use judgment (subjective), intuition, surveys, or comparativetechniques to produce quantitative estimates about the futuredemand.

(ii) Historical Projection or Time Series Forecasting Methods :These methods use historical demand data to make a forecast ofdemand into the future.

(iii)Causal Methods : Causal forecasting methods involve theassumption that the demand forecast is highly correlated withcertain factors in the environment such as economic status, interestrates etc., which are independent variables on which the demanddepends.

(iv)Simulation Methods :Simulation forecasting methods imitate the

choices of consumers which give rise to demand so that theforecast can be estimated.

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2.2.10 Usefulness of Forecasting Techniques for Logistics Executives

Generally logistics managers and executives are not directly

involved in forecasting techniques. Sales forecasting is the function ofmarketing or planning departments. Forecasts of medium or long-term

periods usually are provided to logistics personnel. But logisticspersonnel usually use short-term forecasts for inventory control,shipment scheduling, warehouse planning etc.

Basic Approach to Demand ForecastingThe various steps involved in the basic approach to forecasting are :

(i) Understanding the objective of forecasting.

(ii)Integrating demand planning and forecasting.

(iii)Identifying the major factors that influence the demand forecast.

(iv) Understanding and identifying the customer segments.(v)Determining the appropriate sales forecasting method or technique.

(vi)Establishing measures of performance and error for the forecast.

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Customer Service2.3 Forecasting methods or Techniques

The two general approaches to forecasting are : (i) Qualitative and (ii)

Quantitative. Qualitative methods consist mainly of subjective inputs, often

of non-numerical description. Quantitative methods involve either

projection of historical data or the development of association models which

attempt to use causal variables to arrive at the forecasts.

2.3.1Overview of Qualitative Methods

1.Jury of Executive Opinion : Jury of executive opinion method uses the

opinions of a small group of high level executives (managers) to arrive at

a group estimate of demand as forecast.

2.Sales Composite Method : Sales composite method pools the opinion of

each sales person into estimates at district and national levels to arrive at

the overall forecast.

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3.Market Research Method (or Consumer Survey Method) :Market

research method determines consumer interest in a product or service by

conducting a consumer survey on a sample basis.

4.Other Judgemental Methods : Delphi Method :In Delphi method,

managers and staff complete a series of questionnaires, each developedfrom the previous one, to arrive at a consensus forecast.

2.3.2 Overview of Quantitative Methods

There are five quantitative forecasting methods, all of which use

historical data. They fall into two categories.

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Time series models predict on the assumption that the future is a

projection of the past. They look at what has happened over a period of time

and use a series of past data to make a forecast for the future.

Causal (or association) modelssuch as linear regression, incorporate

the variable or factors that might influence the quantity being forecast. The

demand or sales forecast is a dependent variable and other factors that affect

demand are independent variables (causal variables).

Time Series Forecasting MethodsTime series is a time-orderedsequence of observations taken at regular intervals.

Decomposition of a Time SeriesTrend is a long-term upward or

downward movement in data.

Seasonality is a short-term regular variation.

Cycle is a wavelike variation lasting more than one year.

Random variations are residual variations after all other behaviours are

taken into account.

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Techniques for Averaging

(i) Naive forecasts or Naive approach, (ii) Moving averages (Simple and

weighted) and (iii) Exponential smoothing.

1.Naive Approach :Naive forecast is the forecast for any period which

equals the previousperiodsactual value (demand).

2.Moving Averages Method :Moving averages method is a technique that

averages a number of recent actual values, updated as new values become

available. In the weighted moving average method, more recent values in

a series are given more weight in computing a forecast.

3.Exponential Smoothing Method :Exponential smoothing is a weighted

moving average method based on previous forecast plus a percentage of

the forecast error.

Regression Analysis

Regression analysis is a technique used for fitting a line to a set of points.

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2.3.3 Econometric Model Building and Simulation

Econometric model building method is the most accurate method toforecast sales because it considers the interaction of independent

variables which bear logical and measurable relationships to sales. It uses

regression analysis technique to quantity these relationships.

Focus Forecasting:

Focus forecasting method uses several rules which seem logical andeasy to understand to project past data into the future. Each of these rules

is used in a computer simulation program to actually project demand and

then measure how well that rule performed when compared to what

actually happened. Two components (i)several simple forecasting rules

and (ii) computer simulation of these rules on past data, make up thefocus forecasting method.

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2.3.4 Collaborative Planning, Forecasting and Replenishment (CPFR)

Collaborative planning, forecasting and replenishment (CPFR) seeks to

enhance vendor managed inventory and continuous replenishment through a

more proactive means of information sharing between supply chain partners.

2.3.5 Steps involved in the CPFR approach are :

(i) Creating a front-end partnership agreement

(ii) Joint business planning(iii) Developing demand forecasts

(iv) Sharing forecasts and

(v) Replenishing inventory

2.3.6 The Pitfalls of Managing a Supply-Chain without Demand Based

Management

Supply Chain management has traditionally assumed that the demand

pattern is exogenous. Hence the demand for products or services is viewed

as the key input to supply chainmanagement.

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2.3.7 Logistics as a Core Strategic Competency

A firms marketing strategy is built around its marketing mix

elements viz.,product, price, promotion and place (or distribution). The

key to formulating an effective mix strategy is to integrate resources

committed to these activities into an effort that maximizes customer

impact. Logistics is the process that satisfies the broad requirements of

time and place utility. Logistics ensures that customer requirements

involved in timing and location of inventory are satisfactorily met. Thusthe output of logistical performance is customer service.

2.3.8 How to Establish a Customer Service Strategy

Customer service policies should focus on meeting customer

requirements while at the same time should be cost effective and

contributing to the overall profitability of the firm.

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Four methods suggested for establishing customer service strategies are :

(i) Determining customer service levels based on customer reactions to stockouts at retail level.

(ii) Cost/revenue trade-off

(iii)ABC analysis of customer service

(iv)Customer service audits.

(i) Customer Reactions to StockoutsKnowledge of consumers response to stock-outs is important

to establish the desired level of customer service at the retail level.

(ii) Cost/Revenue Trade Offs

Exhibit 2.1illustrates the cost trade-offs and considerations required to

implement an integrated logistics management concept.The objective of cost/revenue trade-offs is to provide the firm with the

lowest logistics costs for a given specific customer service level.

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Exhibit 2.1 : Cost Trade-offs Required for a Logistics System

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(iii) ABC Analysis/Paretos Law

ABC analysis is the classification of items in an inventory according

to importance defined in terms of criteria such as sales volume, annualconsumption value of purchase volume.

4. The Customer Service Audit

Customer service audit is a means to evaluate the level of service a

firm is providing to its customers.The objectiveof customer audit are:

(a)To identify customers service elements which are critical for achieving

customer satisfaction.

(b)To identify how performance of those elements is controlled and

(c) To asses the quality and capabilities of the internal information system.

Four district stages of the customer service audit are :

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(ii) Internal customer service audit.

(iii) Identification of opportunities and methods for improvement.(iv) Establishment of customer service levels.

1. The External Customer Service Audit :

The objectives of external audit are :

(i) To identify the elements of customer service which customers

believe are important in their purchasing decisions.

(ii) To determine the customersperception of the service being

offered by the firm and each of the major competitors.

2. The Internal Customer Service Audit :

3.Identifying Opportunities and Methods for Improvement :The firm can use competitive bench marking to optimize its profitability

by suitably developing its customer service and marketing strategies

based on the information obtained from both external and internal

customer service audits.

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Customer Service4.Establishing Customer Service Levels :

Target service levels are set by the management of the firm for

segments based on factors such as the type of customer, geographical area,

channel of distribution and product line.

Periodically, the management should review its customer service

standards and policies to ensure that the service policies and programs

reflect the current customer needs.

2.3.9Measuring Logistics Customer Service

The best single measures of customer service could be total order

cycleand its variability

Customer service may also be measured in terms of each logistics

activity. Some common measures of logistics performance include thefollowing:

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(i) Order Entry :

(ii) Accuracy of Order Documentation:

(iii)Transportation:

(iv)Inventory and Product Availability :

(v) Product Damage:

(vi)Production/Warehousing Processing Time:

2.3.10 Development of Customer Service StandardsAfter determining which elements of customer service are most

important, a firm must develop standards of performance.

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Exhibit 2.4 : Examples of Customer Service Standards

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CUSTOMER SERVICE

DIMENSION

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Learning Objectives

After reading this chapter, you should be able to:

Discuss customer service as a competitive weapon.

Discuss customer service and customer retention.

Discuss the various elements of customer service.Discuss the relationship between customer service and sales.

Describe service driven logistics systems.

Discuss the concepts - customer satisfaction and success and time

based logistics.

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Customer Service3.1The Marketing and Logistics Interface

Place(or distribution) is one element of the marketing mix, on

which much emphasis has not been placed earlier as in the case of other

elements viz.,product, price and promotion. What we mean by place

is having the right product in the right place at the right time.

However this element of marketing mix is now being given more

importance as the power of customer service as a potential means of

differentiationis increasingly recognised.

Customer service is the measure of how well the logistics system is

performing in providing timeand place utility to a product or service.

Customer service and customer satisfaction do not mean one and the

same. Customer satisfaction represents the customers overall

assessment of all elements of the marketing mix i.e., product, price,promotion and place whereas customer service is a part of customer

satisfaction.

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3.2 Customer Service as a Competitive Weapon

3.3 Customer service and Customer retention

3.3.1Customer Service

Customer service is an output of the logistics system and is a key to gain

competitive advantage.

3.3.2Customer Service Defined

Customer service includes all activities between the buyer and seller that

enhance or facilitate the sale or use of the sellersproduct or services.

We can view customer service as a part of the total product or service

concept. According to marketers, three levels of a product are(i) The core product or service, which constitutes what the buyer is really

buying

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(ii)Thetangible productor the physical product or service itself, whichincludes the design, physical features, size, shape, weight, volume etc.,

of the product. And(iii)Theaugmented product, which includes benefits enhancing the valueof the tangible product the customer is purchasing.

3.3.3 Logistical customer service

can be thought-of as a feature of the augmented product. But the

customer service is a concept whose importance reaches far beyond thelogistics area. It affects every area of operation of the firm by attemptingto ensure customer satisfactionthrough providing aid or service to thecustomer.

3.3.4 Elements of Customer Service

Three categories of elements of customer service are :

(i) Pretransaction elements,

(ii) Transaction elements and

(iii) Post-transaction elements.

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Pretransaction elements of customer service tend to be

related to a firmscustomer service policy. Pretransaction elements

include the following:

(i) A Written Statement of Customer Service Policy:

(ii) Customers Provided With a Written Statement of Policy:

Exhibit 3.1 : Elements of Customer Service

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(iii)Organisation Structure:(iv) System Flexibility:

(v) Technical and Management Services:

II. Transaction Elements

These are the elements, which are normally considered to

be associated with customer service. They include the following:

(i) Stock Out Level:(ii) Order Information Availability:

(iii) System Accuracy:

(iv) Consistency of Order Cycle:

(v) Special Handling of Shipments:(vi) Transshipment:

(vii) Order Convenience:

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III. Post-transaction Elements

These elements of customer service support the product orservice after the customer has received it. Post transaction elements

include :

i. Installation, Warranty, Repair and Service Parts:

ii. Product Tracking:

iii. Customer Complaints, Claims and Returns:

iv. Product Replacement:

3.3.5 Importance of Logistics/Supply Chain Customer Service

(i) Effects of Customer Service on Sales:

(ii) Effects of Customer Service on Customer Loyalty:

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Customer retention is crucial because getting a new customer is five

times as costly as retaining an existing customer.

3.5 Service Driven Logistics Systems

Service driven logistics system is a system that is designed to meet

the defined service goals of the organisation.

Logistics system designideally starts with the full understanding of

the service needs of the various markets served and then developing the

low cost logistics solutions.

Ideally all logistics strategies and systems are designed in the

following sequence:

(i) Identifying customersservice needs

(ii) Defining customer service objectives

(iii) Designing the logistics systems

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3.6 Basic Service CapabilityBasic logistical service is measured in terms of (a) availability, (b)

operational performanceand (c) service reliabi l i ty.(a) Availability :Availability means having inventory to meet customers

requirements of materials or products consistently without fail.

(b) Operational Performance :Operational performance is concerned with theelapsed time from order receiptto order delivery. It involves delivery speedand consistency.

(c) Service Reliability: Service reliability is concerned with quality attributesof logistics. The key to quality is how accurately availability andoperational performance can be measured.

3.7 Value Added ServicesValue added services refer to unique or specific activities that firms can

together workout to augment their efficiency, effectiveness and relevancy.Customer service has a proactive, value-adding role in the logistics supplychain.

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Customer satisfaction results when the customers expectations of a

suppliersperformances are met or exceeded.

3.8.1Customer Expectations :

3.8.2 Customer Success :

Commitment to customer success helps a supplier firm to gain truecompetitive advantage through logistical performance.

3.9 Time Based LogisticsTime based logistics is based on two basic concepts :(i) postponement and

(ii) consolidation which facilitate timely performance and reduce totalcosts.

Time-based competition refers to the ways of taking time out of

operations in the supply chain. It could entail reducing the order cycle time,reducing order placement time or introducing new products to markets morerapidly.

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Time based logistics recognises the direct impact of information

technology on the performance of the supply chain and improvement

in the firms competitiveness based on time. The availability of low-

cost information has created time-based competition. Information is

increasingly being shared by managers in the supply chain to improve

both the speed and accuracy of supply chain logistics

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CHAPTER 4

LOGISTICS PLANNING AND

STRATEGY

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After reading this chapter, you should be able to:

Discuss the organisational planning process and the strategic logisticsplan.

Discuss the logistics mission and objectives.

Describe the various logistics strategies that can provide competitiveadvantages to the firm.

Describe the various generic logistics strategies.

Discuss how logistics strategy is formulated.

Discuss the approach to logistical system design.

Learning Objectives

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Customer Service4.1 Why Corporate Strategy is Important to

Logistics?

A clear understanding of corporate strategy by logistics managerswill enable them to take decisions that are in the best interest of theorganisation. The logistics strategy must be based on the corporatestrategy and the knowledge of the corporate strategy will help thelogistics personnel to know how to value various alternatives in makingdecisions about trade-off between logistics costs and customer service.

4.2 The hierarchy of planning

Organisational planning is usually carried out in a hierarchy (a)Strategic planning, (b) Tactical planning and (c) Operational planning.Strategic planningis done at the highest level of management for a long

term and the resulting plan is known asstrategic plan

. The planninghorizon for strategic planning may vary from 5 to 10 years.

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Tactical planning is done at the middle management level and

generally having a planning horizon of one to five years. The resulting

plan is a medium range plan called a tactical plan.

Operational planningis carried out in more detail on yearly basis,

broken down to quarterly or monthly plans. The resulting plan is called

operating plan which breaks down revenues, expenses and associated

cash flows and activity by month for a one year period.

4.2.1Relationship Between Logistics Strategy and Corporate Strategy

Logistics strategic planning can be defined as: A unified,

comprehensive and integrated planning process to achieve competitive

advantage through increased value and customer service, which result in

superior customer satisfaction, by anticipating future demand for

logistics services and managing the resources of the entire supply chain.

This planning is done within the context of the overall corporate goals

and plan.

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Logistics strategy can be best formulated only by understanding the

corporate strategy. Majority of logistics managers believed that the

logistics plan was critical to the firmscorporate strategic plan.

Logistics can contribute to and support an organisations strategic

planning process in a number of ways. Six specific ways that show

how logistics supports corporate strategy in Intelare as follows:

(i) Increased planning capability and reduced inventory as a resultof reliable delivery time.

(ii) Increased profit margin and improved customer service

(iii)Reduced inventory levels through shorter cycle time

(iv)Increased marketing advantage from consistent, shorter order cycles

(v) Uninterrupted supply of in-bound materials

(vi)Reduced total costs by incorporating logistics into the corporate

planning process.

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Exhibit 4.1 : Environmental Influences in Organisational Planning

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The corporate strategic planning process has the following major steps:

(i) Evaluation of consumer and/or industrial customer needs

(ii) Identification of possible target markets(iii) Evaluation of target markets

(iv) Selection of target markets

(v) Formulation of channel objectives and channel strategy

(vi) Identification and evaluation of channel structure alternatives

(vii) Selection of the channel structure and

(viii) Development of the strategic logistics plan.

4.4 The Strategic Logistics Plan

Strategic logistics plan depends on a number of inputs from various

functional areas. They are: (i) marketing, (ii) manufacturing, (iii)finance/accountingand (iv)logistics.

Marketingis closely related to logistics and hence provides the keyinputs to logistics.

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Customer service policiesare critical to logistics strategy.

i)Order placement methods, (ii) Order entry, (iii)Target cycle, (iv)Order cycle variability, (v)Desired fill-rate or in-stock levels.

Manufacturingprovides some key informations to logistics strategicplan.These are: (i) locations of current and planned production facilitiesand (ii)planned volume and product mix for each location.

Finance/accounting provides forecasts of costs related to inflationrates and growth assumption to project future costs. It provides the costdata required to perform cost trade-off analysis.

Logistics provide data and analysis related to the existing logisticsnetwork to the other functions, including current storage and distributionfacilities owned and rented, both at manufacturing locations and in the

field, equipment capacity and capabilities at each location, and currenttransportation arrangements between various channel members.

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Customer Service4.4.1Developing a Strategic Logistics Plan :

The requirements of a strategic logistics plan are:

(i) a thorough grasp and support of corporate strategy and supporting

marketing plans in order to optimize cost-service trade-offs

(ii) thorough understanding of the customersview regarding the importance of

various customer service elements and the performance of the firm

compared with its competitors.

(iii)A knowledge of the cost and profitability of channel alternatives.4.4.2 Logistics Audit :

The logistics audit should be conducted on a routine basis and it

involves a review of how logistics is performing with respect to its

objectives. The logistics audit complements and supports the strategic

planning process.Logistics audit is formally conducted over a year to help align the

efforts of the logistics function and to focus the strategic planning process.

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Customer Service4.4.3 Developing Logistics Strategy :

Development of logistics strategy requires the knowledge of theorganization's overall strategy and the key trade-offs in the organization.

4.4.4 The Logistics Plan :

Once the logistics strategy has been formulated, a logistics plan mustbe developed to support that strategy. The logistics plan includes thespecific activities required to be undertaken by the logistics function toachieve its objectives. The logistics decisions are made in a hierarchical

manner as illustrated inExhibit 4.2.The logistics plan covers a variety of issues and requires inputs from

people participating in each of the logistics activities.

4.5 Logistics PlanningLogistics planning takes place at three levels :

(i )strategic,(ii)tactical and

(iii)organisational.

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Strategic planning is a long-range planning having a planning

horizon of more than one year. Tactical planning involves an intermediate

time horizon, usually less than a year. Operational planning is short-range planning involving decisions frequently made on an hourly or daily

basis.

Logistics planning is concerned with how to move the product

efficiently and effectively through the logistics channel which is planned

strategically.Exhibit 4.2 : Logistics Decisions in a Hierarchy

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Customer Service4.5.1 Logistics Mission and Objectives

The mission of logistics is to create customer value at the lowest total

cost.4.5.2 Logistics Mission Statement

The mission statement provides a foundation upon which a company

develops objectives, strategies, plans and tactics. It defines the basic purpose

ofan organisation and identifies the parameters under which the firm will

operate.4.5.3 Logistical Objectives

There are six different operational objectives which must be achieved

by the firm in terms of logistical system design and management. These

operational objectives which primarily determine the logistical performance

include : (i) rapid response, (ii) minimum variance, (iii) minimum inventory,(iv) movement consolidation, (v) quality and (vi) life-cycle support. Each of

these objective is briefly discussed.

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(i) Rapid Response : This objective is concerned with a firms ability tosatisfy customer service requirements in time.

(ii) Minimum Variance :Any unexpected event which disrupts theperformance of a system is termed as variance.Any aspect of logisticaloperation may cause variance.

(iii)Minimum Inventory :This inventory involves commitment of assets andrelative turn velocity. The total commitment is the financial value ofinventory deployed throughout the logistical system. The objective is toreduce inventory deployed to the lowest level consistent with customerservice goals so that the overall total logistics cost is kept at the lowestlevel.

(iv)Movement Consolidation : Transportation cost is one of the mostsignificant logistical costs. Therefore it is desirable to achieve movement

consolidationto reduce transportation cost. Generally, the larger the overallshipment and the longer the distance it is transported, the lower thetransportation cost per unit. Hence, the size of overall shipment can beincreased by consolidation of small shipments for transportation.

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(v) Quality : Total quality management (TQM) has become a major

commitment throughout all facets of industry. Hence logistics also seeks to

contribute to continuous quali ty improvement. Logistics can add value by

avoiding defects in products and by keeping customer service promises.

(vi) Life-cycle Support :Many products are sold with some guarantee that the

products will perform as advertised over a specific period. In such cases, if

defects are observed in the products sold, product recall becomes necessary

and the normal value added inventory flows toward customers must be

reversed. Further, increasing number of laws prohibiting waste disposal and

need for recycling waste or scrap materials (such as glass bottles, plastic

containers, packaging materials etc.) will necessitate reverse logistics.

Hence, reverse logistical requirements have become part of sound logistical

strategy. This kind of customer service support logistics extended over theentire life-cycle of a product is known as life-cycle support.

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4.6 The changing logistics environment

Business environments change constantly. Four forces drive business

environment change: the market, competi tion, technological evolution and

government regulation.

These challenges are briefly discussed in the following paragraphs:

The most pressing challenges faced by managers in the logistics area are

: (i)the customer service explosion, (ii)time compression,(iii)globalization of industry and(iv)organizational integration.

(i) The Customer Service Explosion :Customer in todaysmarket is more

demanding, not just of product quality, but also of quality service.

Companies giving high priority for their logistics performance can

achieve recognition for service excellence and thus establish adifferential advantage over their competition

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(ii) Time Compression :Time has become a key issue in management today

because of the following reasons:

(a) Product life cycles are shorter than ever.

(b) Industrial customers and distributors require just-in-time deliveries.

(c) End users are more willing to accept a substitute product if their

choice is not readily available.

(d)New product introduction to the market should be done in the minimumpossible lead time.

(iii) Globalisation of Industry :In the current era of globalisation, changes in

customersexpectations or geographical locations continually transform the

nature of markets and in turn, generate constraints that modify the flows of

goods within companies.

(iv) Organisational Integration :In traditional organisations functional

departments such as materials management, production, marketing etc.,

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4.7 LOGISTICS STRATEGIES

Three major objectivesof a logistics strategy are (i) cost reduction, (ii)

capital reduction and (iii) service improvement.

a) Cost reduction strategyaims at minimizing the variable costs associated with

movement and storage.

b) Capital reduction strategy is directed toward minimizing the level of

investment in the logistics system. This strategy has the motive of maximising

return on logistics assets.

c) Service improvement strategies recognise the relationship between revenues

and the level of logistics service provided.

Aproactive logistics strategy usually begins with the determination of

business goals and customer service requirements. Proactive strategies are

referred to asattackstrategies to meet competition.

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4.7.1 Generic Logistics Strategies

Three generic logistics strategies are : (i )process-based strategy,

(ii)market-based strategy and

(iii)channel-based strategy.

a) Process-based strategy is concerned with the management of a broad

group of logistics activities as a value added chain. This strategy

emphasises the achievement of efficiency from managing the activities of

purchasing, manufacturing, scheduling and physical distribution as an

integrated system.

b)Market-based strategyis concerned with the management of small group

of logistics activities across multi division business or across multiple

business units.

c) Channel-based strategyfocuses on the management of logistics activities

performed jointly in combination with dealers and distributors.

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Customer Service4.7.2 Triangle of Logistics Decision Making

Four problem areas involved in logistics planning are: (i)

customer services levels, (ii) facility location decisions, (iii)

inventory decisions and (iv)transportation decisions.The three logistics decision areas are illustrated inExhibit 4.3

Exhibit 4.3 : The Triangle of Logistics Decision Making

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4.7.3 Relationship Between Operations Strategy and Logistics Strategy

Operations and logistics strategy has the following characteristics:

is a coherent, unifying and integrative pattern of decisions(i) determines and reveals the purpose of operations and logistics of the

firm (in terms of the firmslong-term objectives, action programs andresource allocation priorities)

(ii) attempts to support or achieve long-term sustainable advantage for the

firm by responding properly to the opportunities and threats existing inthe environment of the firm.

Twelve decision categories involved in a comprehensive operations andlogistics strategy are:

(i) Structure of facilities networks.

(ii) Choice of operations process technology.(iii) Choice of logistics process technology.

(iv) Vertical integration of the supply chain.

(v) Work force.

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Customer Service4.8 Formulating Logistical strategy

Guidelines for Strategy Formulation

The various guidelines for formulation of logistics strategy are:(i) When to plan the logistics network.

(ii) Appraisal and audit of logistics network in five key areas of demand,customer service, product characteristics, logistics costs and pricing

policy.

(iii)Total cost concept.(iv)Differentiated distribution concept.

(v) Mixed strategy concept.

(vi) The principle of postponement.

(vii)The concept of consolidation.

(viii)Standardisation in production and reduction of product variety.These guidelines are briefly discussed in the following paragraphs:

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(i) When to Plan :If no logistics system currently exists (as in the case of a

new firm) there arises a need for planning a new logistics network. In

cases where a logistics network already exists, a decision must be made to

modify the existing network if necessary.

(ii) Appraisal and Audit of Logistics Network : General guide lines for

network appraisal and audit can be offered in the five key areas of

demand, customer service, product characteristics, logistics cost and

pricing policy.

(iii)Total Cost Concept :Total cost concept is the key to manage logistics

process effectively. The total cost of logistics activities should be reduced

rather than merely focussing on each activity in isolation for cost

reduction.

(iv)Differentiated Distribution Concept :Differential distribution conceptstates that different products require different service requirements, have

different characteristics and sales volumes and hence require different

distribution strategies.

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(v) Mixed Strategy Concept :. A mixed strategy establishes an optimal

strategy for separate product groups and often has lower costs than a

single strategy for all product groups

(vi) The Principle of Postponement :This principle is stated ad below:

Thetime of shipment and the location of the final product processing in

the distribution of a product should be delayed until a customer order is

received.(vii) The Concept of Consolidation :Consolidation refers to collecting

smaller shipments to form a larger quantity in order to realise lower

transportation rates.

(viii) Standardisation :Product standardisation (i.e., reducing product

varieties) provide customers a variety of products without significantlyincreasing logistics costs.

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4.9 DESIGNING THE LOGISTICAL SYSTEM

In general the approach to logistical system design consists of thefollowing steps:

(i) Determining a least-total-cost system design.

(ii) Measuring availability and capability of the service associated with theleast-total-cost system design.

(iii) Conducting a sensitivity analysis related to incremental service and cost

directly associated with generation of revenue.(iv) Finalising the logistical strategy.

The logic underlying the formulation of a service-oriented logisticalstrategy is discussed in the following paragraphs:

(i ) The Least-Total-Cost System Design : A strategy of least total cost

seeks a logistical system design with the lowest fixed and variableexpenses. The level of customer service associated

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with a least cost logistical system design results from safety stockpolicies and the locational proximity of warehouses to customers.

(ii) Threshold Service :The overall level of customer service associated withany least-total-cost system is referred to as threshold service level. Toestablish a threshold service level, the logistics system has to bereengineered with policies regarding desired inventory availability andcapabilityperformance for the logistics system.

(iii) Services Sensitivity Analysis :Sensitivity analysis is conducted based onthe threshold service resulting from the least-total-cost logistical design.The basic service capabilities of a logistical system can be varied by avariety of methods such as (a)variation in the number of warehouses in thesystem, (b)change in one or more performance cycles to increase speed orconsistency of operations and/or (c)change in safety stock policy.

iv)Finalising Logistical Strategy :The final step in establishing a logisticalstrategy is to evaluate the cost of incremental service in terms of generating

offsetting revenue. While, marketing management expects customer servicelevel to be as high as possible, logistical management is faced with acritical strategic consideration. Accepting or rejecting the proposal ofmarketing management for increased customer services in a choice ofstrategic positioning.

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In addition to the lowest total cost, the other strategies available are : (a)

maximum service strategy, (b) prof i t maximisation strategy, (c) maximumcompetitive advantages strategy and (d) maximum assets developmentstrategy.

Each of these strategies requires unique logistical system design. Thesestrategy alternatives are briefly discussed below:

(a) Maximum Service Strategy :This strategy is rarely implemented. Logistics

systems designed to provide maximum customer service attempts toconsistently deliver products on a two to four hour basis.

(b) Profit Maximisation Strategy :Most firms set the objective of maximisingprofit in the design of logistical systems.

(c) Maximum Competitive Strategy :This strategy may be the most desirablestrategy to guide logistical system design to seek maximum competitive

advantage. Two ways in which logistics systems can be modified to gainmaximum competitive advantage are:

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(i) selective service programs and

(ii) justified high-cost location

(d) Minimal Asset Deployment Strategy :This strategy is motivated

by a desire to minimise assets deployed for the logistics system.

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END OF WEEK 2

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Ch2 Week 2