Logistics Integration for Customer

Satisfaction, Distribution Cost, Control and

Customer Service
Customer Satisfaction
Logistics Integration for
Customer Satisfaction
Leads to customer satisfaction through superior
customer service.
Organizational objectives of P [Productivity],Q
[Quality],C [Cost],D [Delivery],E [Employee Morale],F
[Flexibility],S [Safety],H [Health],E [Environment] are
set to meet customer expectations of Q,C,D.
Q, C, S, H, E are parts of must be quality that a
customer expects. Logistics addresses D, F objectives
which lead to customer satisfaction through superior
customer service
How loogistics lead to customer
satisfaction?
1. Rapid response
Logistics should ensure that the supplier is able to
respond to the change in the demand very fast. Entire
production should change from traditional push system
to pull system to facilitate rapid response.
IT helps management in producing and delivering
goods when the consumer needs them. This results into
reduction of inventory and exposes all operational
deficiencies.
2. Minimum variance
Logistics is expected to minimize events like delays due
to obstacles in information flow, traffic snarls, acts of
god, wrong dispatches, damage in transit, thereby
minimize and improve on OTD or On Time Delivery
3. Quality
If the quality of product fails logistics will have to ship
the product out of customers premises and repeat the
logistics operation again. This adds to costs and
customer dissatisfaction. Hence logistics should
contribute to TQM initiative of management.
4. Life cycle support- Logistics function is expected
to provide life cycle support to the product after
sale. This includes
a) After sales service
b) Reverse logistics or Product recall
a) After sales service: the service support needed by
the product once it is sold during its life cycle

b) Reverse logistics or Product recall as a result of

Rigid quality standards [critical in case of contaminated
products which can cause environmental hazard]
Transit damage [leaking containers containing
hazardous material]
Product expiration dating
Rigid laws prohibiting unscientific disposal of items
associated with product [packaging]
Rigid laws making recycling mandatory
Erroneous order processing by supplier
Reverse logistics is an important component of logistics
planning
 Distribution costs
Analysis of distribution cost may be made on the
following lines:

Product or Product lines

Individual customers or Group of customers
Channels of distribution
Salesmen
Geographical area or territories
Terms of sales
Order sizes
 Elements of Total cost in Physical
Distribution Systems

Total Distribution Cost

TDC = TC + FC + CC + IC + HC + PC
+ MC
TC - Transport Cost
(Substantial Fixed Cost element)
Capacity to match volumes
Centralised Distribution
Route Planning
Optimal Schedules
Use of software
Railways, Airways ,Seaway cost
FC – Facility Cost
Warehousing, capital cost and running cost
related to infrastructure and internal systems to
store and pick up stocks
Use of Information Systems, Electronic Data
Interchange
Warehouse Management System like radio
links. Reduction in wage bill – Refer to HR
CC – Communication Cost
Cost associated with EDI and other
communication through the chain. These are
administrative costs

IC – Inventory Cost

 Direct capital cost for goods purchased and
Opportunity cost for carrying inventory. These
are cost associated with maintenance and
replenishment of inventory
HC – Handling Cost
Cost associated with Damage, Pilferage,
Deterioration of stocks

PC – Packaging Cost

Repacking, shrink wrapping, pallets, boxes,
containers, tapes, labels etc
MC – Management Cost
– Cost associated Management of the chain.
Ranging from security system to storage
conditions to HR, Finance and almost
everything where managerial input is needed
Control and Customer Service
 Definition of Customer Service
Customer service is the fulfillment process, the
process to meet consumer demand as a whole.
The process includes records requests manually
or electronically, payment, selection of goods,
delivery and provision of goods, as well as
providing service to users of goods, also regulates
the handling of goods returned to the consumer
at the time of complaint.
Customer service is a process for providing
significant value added benefit to the supply chain
in a cost-effective way.
Logistics planning in customer service
THE IMPORTANCE OF CUSTOMER
SERVICE
THE IMPORTANCE OF CUSTOMER SERVICE
Effect on Service Sales

Service Improvement: Increased Increased

Improvement •Volume Market Share Profit
• Price
• Reputation

Effect on Customer Service

- Increasing customer loyalty
- Maintain good relations with customers by creating
customer satisfaction.
- The cost of maintaining existing customers is
cheaper than getting new customers (6X fold cost)
 THE COMPONENTS OF CUSTOMER SERVICE
Pre-transaction elements: customer service factors that
arise prior to the actual transaction taking place
Transaction elements: the elements directly related to
the physical transaction and are those that are most
commonly concerned with distribution and logistics.
Post-transaction elements: these involve those elements
that occur after the delivery has taken place
Pre-transaction elements
Is the determination of customer service strategies to be
implemented, provide a written record of customer service
policies. For example, specify how the item is sent after the
order is received, set the procedure returns (back order), and
method of delivery so customers know what services will be
obtained.

 written customer service policy;

 accessibility of order personnel;
 single order contact point;
 organizational structure;
 method of ordering;
 order size constraints;
 system flexibility;
 transaction elements.
Transaction elements
Is a determination concerning the implementation of the strategy
delivery of goods / products to the consumer. This element is a
direct result of the delivery of goods to customers, manage
inventory levels, and selecting means of transport.

 order cycle time (cycle time from order s / d order received)

 order preparation;
 inventory availability;
 delivery alternatives;
 delivery time;
 delivery reliability;
 delivery of complete order;
 condition of goods;
 order status information.
Post-transaction elements
Determination procedure is performed services to support
products manufactured on the market. For example, to protect
consumers from defective products, providing returns,
guarantees reinstatement, warrants, and listening to consumer
complaints.

 availability of spares;
 call-out time;
 invoicing procedures;
 invoicing accuracy;
 product tracing/warranty;
 returns policy;
 customer complaints and procedures;
 claims procedures.
MULTIFUNCTIONAL DIMENSIONS
of Customer service
1. Time – usually order fulfilment cycle time;
2. Dependability – guaranteed fixed delivery times of
accurate, undamaged orders;
3. Communications – ease of order taking, and
queries response;
4. Flexibility – the ability to recognize and respond to
a customer's changing needs.
 CONCEPTUAL MODELS OF SERVICE QUALITY
Service quality is a measure of the extent to which
the customer is experiencing the level of service that
he or she is expecting.
Service quality is that it is the match between what
the customer expects and what the customer
experiences.
Service quality = Perceived Performance x 100
Desired Expectations
 The Increased Importance of Logistics
• A Reduction in Economic Regulation
• Recognition by Prominent Non-Logisticians
• Technological Advances
• The Growing Power of Retailers
• Globalization of Trade

Three objectives of logistics strategy:

• Cost reduction (variable costs)
• Capital reduction (investment, fixed costs)
• Service Improvement (may be at odds with
the above two objectives).
Components of
logistics management : Management actions
Outputs of
Planning Implementation Control logistics
Inputs into logistics
Natural resources Marketing
(land, facilities, Logistics management orientation
and equipments) Suppliers Raw In-process Finished Customers (competitive
materials inventory goods advantage)
Time and
Human resources
Logistics Activities place utility
•Customer Service •Plant and Efficient
Financial resources •Demand forecasting warehouse site movement to
•Distribution selection customer
communications •Procurement
Information •Inventory control •Packaging
resources Proprietary
•Material handling •Return goods
asset
•Order Processing handling
•Salvage and scrap
•Parts and service
support disposal
•Traffic and
transportation
•Warehousing and
Logistics activities can be divided into three
categories:

Production
Storage
Transportation

The term “Resource” applies to all of the

factors of production, including materials
(e.g., Iron, fabric, parts), equipment (e.g.,
machines or vehicles), energy (e.g., oil,
coal, electricity) and labor.
PRODUCTION: Fundamental logistics questions are: (1) when should a
resource be produced; and (2) where should a resource be
produced.
The “when” question includes the topics of aggregate resource
planning, and production scheduling.
The “where” question includes the topics of facility location and
production allocation.
Some of the important production questions are:
(a) What outside source should be used to supply a part?
(b) Where should a new facility be built?
(c) When should a facility produce different items, taking into account:
• Seasonal demand patterns?
• Demand uncertainty?
• Cost of operating single, double, triple shifts?
• Labor costs?
(d) When should a firm use two or more sources for a part?
INVENTORY: Fundamental logistics questions are (1) when should a
resource (material, machine or labor) be put in inventory and taken
out of inventory; and (2) where should a resource be stored.

The “when” question includes the general topics of economic-order-

quantity models, safety stock models and seasonal models, and
specialized topics of fleet management, and personnel planning.

The “where” questions includes the topic of inventory echelons.

Some of the important inventory questions are:

(a) How much does it cost to store resources in inventory?

(b) How much “safety stock” should be carried in inventory to prevent
against running out of a resource?
(c) How much inventory should be carried in order to smooth out
seasonal variations in demand?
(d) Where should replacement parts be stored in multi-echelon
inventory system?
TRANSPORTATION: Fundamental logistics are: (1) where should
resources be moved to, and by what mode and route; (2) when
should resources be moved.

The “where” question includes the topics of terminal location,

vehicle routing, and shortest path methods and network flow
allocation.

The “when” question includes the topic of distribution rules.

Some of the important questions are:

(a) When should shipment be sent through terminals, and when

should shipment be sent direct?
(b) Which, and how many, terminals should shipments be sent
through?
(c) What are the best vehicle routes?
(d) When should a vehicle be dispatched over a route?
Logistics - Science of managing (controlling) the movement and
storage of goods (or people) from acquisition to consumption.

Goods: Raw Materials  Final products, and everything in between.

Logistics for services & people similar to goods logistics.
Ex. Police, fire, ambulance, passenger airlines, taxi cabs, etc.

Movement = Transportation (between locations).

Storage = Inventory, Warehousing (at locations).

Difference between acquisition and consumption is a matter of space

and time.

Focus: Best way to overcome space and time that separates acquisition
and consumption.

NOTE: Logistics does not deal with Technology of Production, such

as the design of machines and vehicles and the design of finished
products.
 Five Business Systems - Tightly Interconnected Within The
Organization
Management

}
Systems Strategic Product Process
Decisions Design Design
Decisions Decisions
Engineering
Measurement Systems

}
Decisions
Product
Decisions
Reward
Decisions Price
Decisions
Promotion
Decisions
Marketing
Systems
Place (How,

{ }
where, how
much)

Production
Inventory Capacity
Decisions Decisions

Logistics Transportation Production

Manufacturing
Scheduling
Systems Decisions
Decisions Systems

Sourcing Shop Floor

Decisions Decisions

Copyright 2000 - All Rights Reserved

 Activities and Logistics Decisions

Transportation Customer Service

rate and contract negotiation determining customer wants
mode and service selection determining customer
routing and scheduling response to service changes
Inventories Materials Handling
finished goods policies equipment selection
supply scheduling equipment replacement
short term forecasting order picking procedures
Warehousing Packaging design
private vs. public Order Processing
space determination order procedure determination
warehouse configuration
Stock layout and dock design
Production Scheduling
aggregate production
stock placement
quantities
Cross-docking
sequencing and timing of
Facility Location production runs
determining location, number
and size of facilities
allocating demand to facilities
 Logistics Planning
Decide what, when, how in three levels:
Strategic – long range > 1 year
Tactical - < 1 year horizon
Operational – frequently on hourly or daily basis

Examples of Decisions
Type Strategic Tactical Operational

Location #Facilities, size, Inventory Routing

location positioning

Transportation Mode Seasonal Service Replenishment

Mix Qty and timing

Order Processing Selecting order Priority rules for Expediting orders

(CS) entry system customers
 The Logistics (Strategic) Planning Triangle

Strategy/Control Which mode?

system? Which carrier?
How much? Which route?
Where? Shipment size and
frequency?

Where?, How
many? What size?
Allocation?
 Transport Fundamentals
Most important component of logistics cost.
Usually 1/3 - 2/3 of total cost.

Transport involves
 equipment (trucks, planes, trains, boats, pipeline),
 people (drivers, loaders & un-loaders), and
 decisions (routing, timing, quantities, equipment size,
transport mode).
When deciding the transport mode for a given product
there are several things to consider:
 Mode price
 Transit time and variability (reliability)
 Potential for loss or damage.

NOTE: In developing countries we often find it necessary to

locate production close to both markets and resources,
while in countries with developed distribution systems people
can live in places far from production and resources.
Routes of Goods
Air plane
air terminal
Goods at
shippers Container
sea terminal May Freight
vessel forwarder
sea bulk goods change
Freight mid-stream transpor- warehouse
pier
forwarder tation
land barge
warehouse modes
land
railway
Goods at
consignees
truck
 Single-mode Service Choices and Issues
Air
•Rapidly growing segment of transportation industry
•Lightweight, small items [Products: Perishable and time sensitive
goods: Flowers, produce, electronics, mail, emergency shipments,
documents, etc.]
•Quick, reliable, expensive
•Often combined with trucking operations
Rail
•Low cost, high-volume [Products: Heavy industry, minerals,
chemicals, agricultural products, autos, etc.]
•Improving flexibility
•intermodal service
Truck
•Most used mode
•Flexible, small loads [Products: Medium and light manufacturing,
food, clothing, all retail goods]
•Trucks can go door-to-door as opposed to planes and trains
Water
•One of oldest means of transport
•Low-cost, high-volume, slow
•Bulky, heavy and/or large items (Products: Nonperishable bulk
cargo - Liquids, minerals, grain, petroleum, lumber, etc )]
•Standardized shipping containers improve service
•Combined with trucking & rail for complete systems
•International trade

Pipeline
•Primarily for oil & refined oil products
•Slurry lines carry coal or kaolin
•High capital investment
•Low operating costs
•Can cross difficult terrain
•Highly reliable; Low product losses
 Transport Cost Characteristics
 Rail
 High fixed costs, low variable costs
 High volumes result in lower per unit (variable) costs
 Highway
 Lower fixed costs (don’t need to own or maintain roads)
 Higher unit costs than rail due to lower capacity per truck
 Terminal expenses and line-haul expenses
 Water
 High terminal (port) costs and high equipment costs (both fixed)
 Very low unit costs
 Air
 Substantial fixed costs
 Variable costs depend highly on distance traveled
 Pipeline
 Highest proportion of fixed cost of any mode due to pipeline ownership
and maintenance and extremely low variable costs
Vehicle Routing:
- Separate single origin and destination:
Once we have selected a transport mode and have goods that need to
go from point A to point B, we must decide how to route a vehicle
(or vehicles) from point A to point B.
Given a map of all of our route choices between A and B we can create
a network representing these choices The problem then reduces to
the problem of finding the shortest path in the network from
point A to B.
This is a well solved problem that can use Dijkstra’s Algorithm for
quick solution of small to medium (several thousand nodes) sized
problems.
Vehicle Routing:
- Multiple Origin and Destination Points
Suppose we have multiple sources and multiple destinations,
that each destination requires some integer number of truckloads,
and that none of the sources have capacity restrictions [No
Capacity Restriction].

In this case we can simply apply the transportation method of

linear programming to determine the assignment of sources to
destinations.
Sources Destinations
 Vehicle Routing:
- Coincident Origin and Destination: The TSP
If a vehicle must deliver to more than two customers,
we must decide the order in which we will visit those
customers so as to minimize the total cost of making the
delivery.
We first suppose that any time that we make a delivery to
customers we are able to make use of only a single vehicle,
i.e., that vehicle capacity of our only truck is never an issue.
In this case, we need to dispatch a single vehicle from our
depot to n - 1 customers, with the vehicle returning to the
depot following its final delivery.
This is the well-known Traveling Salesman Problem
(TSP). The TSP has been well studied and solved for
problem instances involving thousands of nodes. We can
formulate the TSP as follows:
 Questions about the TSP
Given a problem with n nodes, how many distinct feasible tours
exist?
How many arcs will the network have?
How many xij variables will we have?
How could we quantify the number of subtour elimination
constraints?
The complexity of the TSP has led to several heuristic or
approximate methods for finding good feasible solutions. The
simplest solution we might think of is that of the nearest
neighbor.
Vehicle Routing: TSP, inventory routing, and vehicle
routing
• Traveling Salesman Problem (TSP): salesman visits n cities at
minimum cost
• vehicle routing problem (VRP): m vehicles with capacity to
deliver to n customers who have volume requirement, time
windows, etc.
• Inventory Routing: m vehicle to delivery to n customer with
time windows, vehicle and storage capacity constraints, and un-
specified amount to be delivered.
• Points to remember:
1. Load points closest together on the same truck
2. Build routes starting with points farther from depot first
3. Fill the largest vehicle to capacity first
4. Routes should not cross
5. Form teardrop pattern routes.
6. Plan pickups during deliveries, not after all deliveries have
been made.
 Vehicle Routing
Find best vehicle route(s) to serve a set of orders from
customers.

Best route may be

 minimum cost,
 minimum distance, or
 minimum travel time.

Orders may be
 Delivery from depot to customer.
 Pickup at customer and return to depot.
 Pickup at one place and deliver to another place.