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CHAPTER 3
Customer Service
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-2Customer Service and Logistics
• As noted earlier, customer service is where logistics and marketing interface.
• Customer service often referred to as the output of logistics.
• Concept of the “augmented product”
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-3Elements of Customer Service
Transaction elements
• Written statement of policy
• Customer receipt of policy statement
• Organization structure
• System flexibility
• Management services
• Installation, warranty, alterations, repairs, parts
• Product tracing
• Customer claims, complaints, returns
• Temporary replacement of products
• Stockout levels
• Order information
• Elements of order cycle (comm., entry, process., pick/pack, delivery)
• Expedited shipments
• Transshipment
• System accuracy
• Order convenience
• Product substitution
Posttransaction elements
Pretransactionelements
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-4Measures of Customer Service Performance
Pre-Transaction ElementsInventory AvailabilityTarget Delivery DatesInformation Capability
Post-Transaction ElementsInvoice AccuracyDamageActual Delivery DatesReturns/AdjustmentsInstallationProduct Replacement
Transaction ElementsConvenience of placing ordersOrder Cycle TimeOrder Cycle ConsistencyOrder Fill RateOrder StatusOrder TracingBack-Order StatusShipment shortagesShipment DelaysProduct SubstitutionsRouting Change
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-5Examples of Customer Service Standards
In-Stock PercentageBy product or product groupBy stocking-point locationBy customer or class of customerBy time periodBy order completeness
Transit TimeBy mode of shipmentBy stocking-point locationBy customer or class of customerBy time periodBy size of order
Order Cycle ConsistencyBy on-time deliveriesBy stocking-point locationBy customer of class of customerBy size of order
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-6The Perfect Order
• Each element of the service package has been performed to customer specifications.
• On-time; complete; error-free• Very difficult to achieve.• Order service level is product of service
level for composite elements:– On-time delivery = 90%– 80% complete– 70% error and damage free– (.9) (.8) (.7) = 50% service level
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-7Methods of Establishing a Customer Service Strategy
• 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
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-8Model of Consumer Reaction to a Repeated Stockout
Source: Clyde K. Walter, “An Empirical Analysis of Two Stockout Models,” unpublished Ph. D. Dissertation, Ohio State University, 1971.
Customer
3Lower
4Other size
2Same
1Higher
Anotherstore
6Ask here
again
5Specialorder
Switch stores
?
Substitute?
Switch brand
?
Substitute?
Switch price
?
No
No
Yes
Yes
Yes
Yes
No
No
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-9Determining Cost of a Lost Sale
• Branding strategy and lost sales
• Different channel members will have different cost of a lost sale (example of baby formula)
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-10Relationship Between Customer Service and Inventory Investment
0
100
200
300
400
500
600
75 80 85 90 95 100
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-11ABC Analysis
• All customers are not equal.
• Need to adjust customer service levels on basis of relative importance (i.e., profit contribution) of customers and products.
• Customer-Product Contribution Matrix (Table 3-1 and 3-2)
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-12
Internal Audit External Audit
Evaluate Customer Perceptions
Differentiate Channel Levels & Market Segments
Identify Opportunities
Determine Marketing Services Mix & Levels
Stages of the Customer Service Audit
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-13Overall Importance Compared To Selected Performance Of Major Manufacturers Evaluated
By Dealers
Source: Douglas M. Lambert and Jay U. Sterling, “Developing Customer Service Strategy,” unpublished manuscript. All Rights reserved.
OverallImpt. -
Dealer Evaluationsof Manufacturers
AllDealers Mfr. 1 Mfr. 2 Mfr. 3 Mfr. 4 Mfr. 5 Mfr. 6
RankVar.Num Description M. SD M. SD M. SD M. SD M. SD M. SD M. SD
1 9 Ability of manufacturer to meet promised delivery date (on-timeshipments)
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
2 39 Accuracy in filling orders (correct product is shipped) 6.4 0.8 5.6 1.1 4.7 1.4 5.0 1.3 5.8 1.1 5.1 1.2 4.4 1.53 90 Competitiveness of price 6.3 1.0 5.1 1.2 4.9 1.4 4.5 1.5 5.4 1.3 4.4 1.5 3.6 1.84 40 Advance notice on shipping delays 6.1 0.9 4.6 1.9 3.0 1.6 3.7 1.7 5.1 1.7 3.0 1.7 3.1 1.75 94 Special pricing discounts available on contract/project quotes 6.1 1.1 5.4 1.3 4.0 1.7 4.1 1.6 6.0 1.2 4.7 1.5 4.5 1.86 3 Overall manufacturing and design quality of product relative to
the price and range involved6.0 0.9 6.0 1.0 5.3 1.3 5.1 1.2 6.5 0.8 5.2 1.3 4.8 1.5
7 16 Updated and current price data, specifications and promotionmaterials provided by manufacturer
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
8 47 Timely response to requests for assistance from manufacturer'ssales representative
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
9 14 Order cycle consistency (small variability in promised versusactual delivery, i.e., vendor consistency meets expected date).
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
10 4b Length of promised order cycle (lead) times (from ordersubmission to delivery) for base line/in-stock ("quick ship")product
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
11 54 Accuracy of manufacturer in forecasting and committing toestimated shipping dates on contract/project orders
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
12 49a Completeness of order (% of line items eventually shippedcomplete) -- made to order product (contract orders)
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
50 33a Price range of product line offering (e;g., low, medium, highprice 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).
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-14Internal Audit Questions
• How is customer service currently measured?
• What are the units of measurement?
• What are the performance standards?
• What is the current level of attainment?
3-9 a
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-15Internal Audit Questions cont.
• 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?
3-9 b
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-16Customer Satisfaction
• Many researchers have argued that customer satisfaction comes down to:
Satisfaction = [Perception of service performance] – [Expectations of the service]• Failure to match performance and
expectations results in “service gaps”• There are, in essence, six potential causes
for customer service gaps.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-17Customer Service Gaps Gap 1
Gap 5 Gap 6
Gap 2 Gap 3
Gap 4
Source: Thomas Goldsby, Transportation Trends, Vol. 1, No. 1, Feb. 1999.
Supplier’s Expectations
of Service
Customer’s Expectations
of Service
Supplier’s Perceptionof Service
Performance
Customer’s Perceptionof Service
Performance
Actual Service
Performance
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-18Importance And Performance Evaluations For Selected Customer Service Attributes
RelativePerformance
-0.36*
* Performance evaluations of A and B are significantly different at p < 0.05.
12
3
4
5
6
78
9
Performance EvaluationImportance Company A Company BNo. Attribute
Accuracy in filling ordersAbility to expedite emergency orders in a fast, responsive mannerAction 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 ordereventually shipped)Rapid adjustment of billing and shipping
errorsAvailability of blanket ordersFrequency 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
6.426.25
6.07
5.92
5.69
5.34
4.554.29
3.58
2.30
5.544.98
4.82
4.53
5.29
4.64
5.035.07
5.33
4.07
5.655.23
5.18
4.73
5.27
4.90
4.155.03
5.21
3.53
-0.11-0.25
-0.20
+0.02
-0.24
+0.04
+0.12
10 +0.54**
+0.88**
** Performance evaluations of A and B are significantly different at p < 0.01.
Source: Douglas M. Lambert and Arun Sharma, “A Customer-Based Competitive Analysis for Logistics Decisions,” International Journal of Physical Distribution and Logistics Management 20, no.1 (1990), p.18.
3-9 c
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-19Competitive Position MatrixIM
POR
TA
NC
EH
IGH
ME
DIU
ML
OW
Minor weakness Minor strength
Major weakness Major strength
Competitive disadvantage
Competitive parity
Competitive advantage
Relative performance
1
3
5
7
-3.0 -1.0 +1.0 +3.0
1*2*
4*3*6*
5*
7*8*
9*
10*
3-10
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-20Performance Evaluation Matrix
Performance evaluation
IMPO
RT
AN
CE
HIG
HM
ED
IUM
LO
W
Maintain
Definitely improve Maintain/improve
1
3
5
7
1 3 5 7
1*2*
4*3*
6*5*
7*8*
9*
10*
Maintain Reduce/maintain
Reduce/maintain Reduce/maintain
Improve
Improve
3-11
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-21Strategic Opportunities For A Competitive Advantage
* denotes attribute numberindicates desired shift in relative performanceindicates potential opportunities that may be revealed within specific customer segments
Competitivedisadvantage
Competitiveparity
Competitiveadvantage
Major weakness
Minor weakness
Major strength
Minor strength
Relative performance
IMPORTANCE
HIGH
MEDIUM
LOW
7
5
3
1-3.0 -1.0 +1.0 +3.0
1*2*
3*4*5*6*
*8
*9
*10
*7
Source: Douglas M. Lambert and Arun Sharma, “A Customer-Based Competitive Analysis for Logistics Decisions,” International Journal of Physical Distribution and Logistics Management 20, no.1 (1990), p.23.
3-12
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-22Measuring and Controlling Customer Service Performance
• 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.
3-13
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-23Customer Service Standards
• Reflect the customer’s point of view.• Provide an operational and objective
measure of service performance.• Provide management with cues for
corrective action.
3-14