Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

Customer Relationship Management

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• Customer-focused marketing • Customer service • Customer satisfaction • Customer success • Developing customer relationship

management strategy

Overview of customer relationship management

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• From perspective of the total supply chain – End user of product in consumer market – Company is customer in business market

• From perspective of specific firm within a supply chain

– Intermediate customer organizations exist between the firm and end users

• From perspective of a logistics manager – Any delivery location

• For example, consumer home’s, retail / wholesale businesses, receiving docks of manufacturing plants and warehouses

Who is the customer?

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• Customer needs and requirements are more basic than products and services

• Different customers have different needs and requirements

• Products and services become meaningful only when available and positioned from the customer’s perspective

• Profit is more important than sales volume

Basic principles of the marketing concept

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Transactional vs. Relationship Marketing

Transactional marketing is a traditional strategy with a focus on creating successful individual transactions between the company and its customers

Relationship marketing is a new strategy with a focus on the development of long-term relations with key supply chain participants in an effort to develop and retain long-term preference and loyalty

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• Micromarketing or one-to-one marketing recognizes that each individual customer may indeed have unique requirements – For example, Wal*Mart and Target are both mass merchandisers

• However, their requirements to interact logistically with suppliers differs significantly

Relationship marketing to a segment of one

• One-to-one relationships can – Significantly reduce transaction costs – Better accommodate customer

requirements – Move individual customer transactions

into a matter of routine

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• Discrepancy in space refers to the fact that the location of production activities and location of consumption are seldom the same

• Discrepancy in time refers to the difference in timing between production and consumption

• Discrepancy in quantity and assortment refers to the mismatch between customer demand and manufacturing supply – Customers seek small quantities and wide assortment – Firms specialize in large quantities of a limited assortment

3 discrepancies must be overcome to enable exchange of goods and services

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Four generic supply chain service outputs eliminate discrepancies

• Spatial convenience is the amount of shopping time and effort will be required on the part of the customer

• Lot size is the number of units to be purchased in each transaction

• Waiting time is the amount of time the customer must wait between ordering and receiving products

• Product variety and assortment differs by supply chain – Supermarkets may have over 35,000 items on the shelves – Warehouse stores generally stock 8,000 to 10,000 items with only one

brand and size of an item – Convenience stores may stock only a few hundred items

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• Supply chains provide a mix of services, both generic and custom, in order to accommodate a range of customer requirements

• Each service mix can be configured to achieve one of the following levels of customer accommodation – Customer service – Customer satisfaction – Customer success

Three levels of customer accommodation

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• With the right amount • Of the right product • At the right time • And the right place • In the right condition • At the right price • With the right information

Basic customer service provides customers

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Basic elements of customer service

• Availability – Fill rates – Stockout frequency – Orders shipped complete

• Operational Performance – Speed – Consistency – Flexibility – Malfunction recovery

• Service Reliability – Damage free – Error-free invoices – Shipment matches order – Shipped to correct location – Etc.

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• Fill rate measures the magnitude or impact of stockouts over time

• Stockout occurs when a firm has no product available to fulfill customer demand

• Orders shipped complete requires shipping everything that a customer orders to count as a complete shipment

Availability is the capacity to have inventory when desired by a customer

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• Speed of the performance cycle is the elapsed time from when a customer established a need to order until the product is delivered

• Consistency of the order cycle is measured by the number of times that actual cycles meet the time planned for completion

• Flexibility is a firm’s ability to accommodate special situations and unusual or unexpected customer requests

• Malfunction recovery is a firm’s ability to quickly implement contingency plans when a failure occurs in the supply chain

Operational performance deals with the time required to deliver a customer’s order

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• Service reliability involves a combination of logistics attributes beyond simply availability and operational performance. For example: – Damage free measures how many shipments arrive without

damaged products – Error-free invoices measures what percentage of invoices

contain no errors – Shipment matches order measures how many shipments

contain the exact amount of product ordered – Shipped to correct location measures how many shipments are

made to the customer’s selected location • Plus a capability and willingness to provide customers with

accurate information regarding operations and order status

Service reliability is a firm’s ability to perform all order-related activities and provide critical info

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• The perfect order is an order that is – Delivered complete – Delivered on time – Delivered at the right location – Delivered in perfect condition – Delivered with complete and accurate documentation

• This requires the total order cycle performance to be executed with zero defects

The perfect order is the ultimate in logistics service levels

+ + +

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Example of zero-defect performance measurement

• Consider an order cycle that achieves the following performance levels for shipments

– 97% delivered complete – 97% delivered on time – 97% delivered in perfect condition – 97% delivered with correct

documentation • Probability that any order will be

delivered with no defects is only 88.5%

– P (zero defects) = .97 x .97 x .97 x .97 = .885

Therefore, the probability that any order has a problem is 11.5%

What resources are needed to achieve a zero-defect level?

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The basic service platform is a commitment to perform each basic element at a given level

• Availability level = Medium • Operational performance = High • Service reliability = Above average

• Availability level = Low • Operational performance = Medium • Service reliability = Average

Service platform for customer A Service platform for customer B

Basic Service Platform

Availability Level

Operational Performance

Level

Service Reliability Level

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• Many firms establish their basic service platforms using two factors – Competitor or industry acceptable practice

• Minimum and average service performance levels have emerged in most industries

– The firm’s overall marketing strategy • High service levels needed to compete on basis of

logistics competency • Low service levels are more common when

competing on the basis of price • Zero-defect approach is not taken across the

board for all customers • Establish internal performance standards for

each service component to reflect industry practice, cost and resource requirements

How much basic service should the supply chain provide?

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• Expectancy disconfirmation states if a customer’s expectations of a supplier’s performance are met or exceeded, the customer will be satisfied – If Perceived Performance > =

Expectations, then Satisfaction – If Perceived Performance <

Expectations, then Dissatisfaction

What is customer satisfaction?

“Customers will be satisfied if a supplier meets or exceeds the customer’s expectations”

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Customer expectations related to logistical performance from Table 3.2

• Reliability • Responsiveness • Access • Communication • Credibility

• Security • Courtesy • Competency • Tangibles • Knowing the customer

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How are customer expectations created?

Figure 3.1 Satisfaction and Quality Model

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The model identifies gaps managers must fill to help satisfy their customers

• Gap 1: Knowledge – Reflects management’s lack of

knowledge or understanding of customers

• Gap 2: Standards – Exists when internal performance

standards do not adequately reflect customer expectations

• Gap 3: Performance – The difference between standard

and actual performance

• Gap 4: Communications – Overcommitment or promising

higher levels of performance than can actually be provided

• Gap 5: Perception – Customers sometimes perceive

performance to be higher or lower than actually achieved

• Gap 6: Satisfaction/Quality – When one or more gap exists

customer perception is that performance does not meet expectations

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• Performance that meets customer expectations one year may result in extreme dissatisfaction next year

• Competition in an industry will often raise the minimum standards that customer expect – For example, Federal Express

introduced real-time tracking of shipment status

• In response UPS and other parcel delivery firms added this service to their platform

Increasing customer expectations

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• Satisfied customers may not be happy with the supplier’s performance – Customer satisfaction focuses on

expectations - not customer’s real requirements

• Considerable research suggests that “satisfied” customers still are likely to defect

Why customer satisfaction is not sufficient

• What satisfies one customer may not satisfy other, much less all, customers – There is a tendency by

companies to treat all customers as being equal and identical

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Low expectations always result in satisfied customers

Figure 3.2 Satisfaction Is Not the Same as Happiness

But what if customer requirements are not met?

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Level 3 Focus • Assess customer requirements • Extend supply chain to include our customer’s customer • Provide value-added services for select customers • Manage performance cycles and levels to address needs of

each customer segment in the extended supply chain

Level 2 Focus • Assess customer perceptions of satisfaction • Manage performance cycle levels to keep customers

satisfied

Level 1 Focus • Assess industry and competitor practices • Achieve internal standards for performance cycles

Customer Satisfaction

Customer Service

Customer Success

3 levels of customer focus

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• Not all customers have the same requirements

• Know your customers’ processes • Determine how your capabilities

can enhance your customers’ performance

• Extend the supply chain boundaries to include next-destination customer requirements

• Introduce new performance metrics

• Develop value-added services for select customers

Achieving customer success requires knowledge of individual customer requirements

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Customer success requires a comprehensive supply chain perspective

Figure 3.3 Moving Towards Customer Success

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• Value-added services refer to unique or specific activities that firms can jointly develop to enhance their efficiency, effectiveness and relevancy

• Transportation carriers, warehouse firms and other specialists may become intimately involved to make value-adding activities a reality

• For example, a retail customer may desire a unique palletization alternative to support its cross-dock activities for its individual stores – Each store requires different quantities of specific product to

maintain in-stock performance with minimum inventory

Value-added services are a first step in achieving customer success

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• Basic principle of supply chain logistics is that customers should be segmented based on their service needs

• Supply chain must adapt to serve those segments

• Companies need – A framework for choosing the

appropriate customer specific strategies

– Programs for customer relationship management

Developing a customer accommodation strategy

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Framework for choosing a customer accommodation strategy using profit categories

Table 3.4 Choosing Customer Accommodation Strategy

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• Customer relationship management (CRM) is a process for improving the overall performance of a business by better understanding and anticipating the wants and needs of customers – In practice companies and vendors use the term CRM to mean

different things • One CRM example – Procter & Gamble has employees

who live and work in the city of its largest customer Wal*Mart

• Logistics has primary responsibility for many of the processes that drive value and customer success

Customer relationship management has grown rapidly in recent years