Chapter 3

Logistics Customer Service

Strategy

1
1
 Customer Service
· Customer service is generally presumed to be a means by which
companies attempt to differentiate their product, keep customers
loyal, increase sales, and improve profits.

· Its elements are:

- Price
- Product quality
- Service

· It is an integral part of the marketing mix of:

- Price
- Product Customer service
here
- Promotion
- Physical Distribution

Creating value, loyalty and satisfaction through supply chain activities

2
CR (2004) Prentice Hall, Inc.
Customer service is a process for providing
significant value added benefits to the
supply chain in a cost-effective way.

3
3
 CUSTOMER SERVICE CAN BE
DEFINED AS:
an activity or function to be managed such as
order processing or handling of customer
complaints,

actual performance on particular parameters,

such as ability to ship complete orders for 98
percent of orders received within a 24-hour
period,

part of an overall corporate philosophy, rather

than simply an activity or performance
measures. 4
Customer Service

The level of customer service provided to

customers determines whether the
organization will retain existing customers
and how many customers it will attract.

The customer service level that an

organization provides has a direct impact on
its market share, its total logistics costs and ,
ultimately , its overall profitability.

5
Customer service is the measure of
how well the logistics system is
performing in providing time and place
utility for a product or a service. This
include activities such as :
The ease of checking stock,
Placing an order, and
Post sale support of the item

6
Customer service is often confused with the
concept of customer satisfaction

“customer satisfaction represents the

customer’s overall assessment of all
elements of the marketing mix: product,
price, promotion, and place”

7
Customer Service 8

Marketing side

Logistics side

8
Elements of Customer Service

Pretransaction Transaction Posttransaction

elements elements elements

• Written statement of • Stockout levels • Installation, warranty,

policy • Order information alterations, repairs,
• Customer receipt of parts
• Elements of order
policy statement cycle • Product tracing
• Organization • Expedited shipments • Customer claims,
structure complaints, returns
• Transshipment
• System flexibility • Temporary
• System accuracy
• Management replacement of
• Order convenience products
services
• Product substitution
Customer Service 10Classifications
pre-transaction elements
written statement of customer service policy,
customers informed with a written statement of
policy
organization structure
system flexibility
management services

10
Customer Service 11Classifications
transaction elements
stock out level
order information availability
system accuracy
consistency of order cycle
special handling of shipments
transshipments
order convenience
product substitution
11
Customer Service 12Classifications
post-transaction elements
installation
warranty,
repairs,
service parts,
product tracking
customer complaints-claims
returns
product replacement
12
Kano’s Classification
13

expected type of service

attractive type of service
one-dimensional service elements

13
Kano’s Classification
expected type of service
14
The expected type of service does not create much
satisfaction, and mostly remains unnoticed; however,
lack of it causes considerable dissatisfaction.

It is important to recognize the minimum acceptable level

of expected service, because a lower level increases
dissatisfaction rapidly, and a higher service level rises
costs without corresponding compensation to the
customer value.

14
 15

As an example of an expected service element for all

these customer types is the availability of exceptional
order information, which is considered as necessary
service in case of delivery delays or other exceptional
occurrences.

15
attractive type of 16service
The attractive type of service is offered by the supplier
specially planned to exceed the customer expectations.

The value attributes under this dimension of the Kano

model, are neither explicitly demanded nor expected by the
customer but are latent.

These service elements can create satisfaction, but the

absence of them does not cause dissatisfaction, because
customers are not used to getting them.

Attractive service elements can effectively be used as

means of differentiating service offering from competitors.

16
one-dimensional 17service elements
In the case of one-dimensional service elements, both
satisfaction and dissatisfaction are possible

customer reaction depends more or less linearly on the

level of the service offered.

Order fill rate

The better the order fill rate the more satisfied the
customer, and vice versa.

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18

18
Service Failures
Service failure is a term associated with
the problematic occasions that a customer
has during the service processes

 the number and the extent of the

problems that the customers encounter in
order to get the products or services and
the recovery options offered by the
company can be performance indicators.

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 Common Customer Service
Complaints
31%
Product or quality
mistakes

12% Damaged
goods

7%
Other

6%
Frequently cut
items

44%
Late delivery
20
CR (2004) Prentice Hall, Inc.
 Penalties for Customer Service
Failures B2B 29%
Reduced the
2%
volume of
Refused to
business
support
promotion

16%
Discontinued
items

18%
Stopped all
purchases
with supplier

9% 26%
Refused to Called in
purchase new salesman or
items manager 21
CR (2004) Prentice Hall, Inc.
Penalties for Customer Service
Failures
B2C

• 71,000 consumers in 29 countries to learn how they react to stock-outs

• 11 categories ranging from personal hygiene products to snack foods

22
23
 Model of Consumer Reaction
to a Repeated Stockout 1
Higher

Yes
Switch 2
price Same
Yes Switch ?
brand
No ?
Substitute 3
? No Lower
Customer Switch
stores No
? 4
Other
Yes size

5
Special
order

6 Yes
Ask here Substitute
again ?

No
Another
store
24

Source: Clyde K. Walter, “An Empirical Analysis of Two Stockout Models,” unpublished Ph. D.
Dissertation, Ohio State University, 1971.
Reasons for stockout

25
Complaining Behavior
Complaining behavior may be viewed in terms of a set of
possible customer responses to dissatisfying purchase
experiences.

In general, complaint options include:

 seeking redress (i.e., a refund, exchange, repair, or
apology, etc.),
engaging in negative word-of-mouth (i.e., telling other
people about one’s dissatisfaction),
exiting (i.e., vowing never to repatronize the seller),
contacting third parties (e.g., writing a letter to a
newspaper, taking legal action, etc.).

26
 Before Establishing a Customer
Service Strategy;
Service policies that are based on
customer requirements are essential and
they are supportive of the overall
marketing strategy.

Competitive benchmarking.

27
 Four methods have been suggested before
establishing customer service strategies:

1. Determining customer service levels

based on customer reactions to stock
outs at the retail level
2. Cost/revenue trade-offs
3. ABC analysis of customer service
4. Customer service audits

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Cost/Revenue Trade-offs
What increase in sales volume is required
to break even on the customer service
requirements?

29
Relationship Between Customer
Service and Inventory Investment
Inventory 600
investment
($000) 500

400

300

200

100

0
75 80 85 90 95 100

% in-stock availability
Impact of incremental customer service levels
on revenues, logistics costs and profits
Incremental cost or revenue

Revenue

Maximum
incremental profit

Logistics costs

Incremental customer service

31
PARETO’s RULE
In 1906, Italian economist Vilfredo Pareto
created a mathematical formula to describe
the unequal distribution of wealth in his
country, observing that 20 percent of the
people owned 80 percent of the wealth.

In the late 1940s, Dr. Joseph M. Juran

inaccurately attributed the 80/20 Rule to
Pareto, calling it Pareto's Principle.
Adaptation of Pareto’s Rule into
Logistics : ABC Analysis
The logic behind ABC classification is that
some customers and products are
more beneficial to a firm than others…

Beneficial in terms of profitibalilty, sales

revenues, segment growth rates or
other factors deemed important by
corporate management.
Importance of customers can be
combined with the importance of products
to establish customer service levels.

34
ABC analysis
A Customer-Product Contribution Matrix

PRODUCT CATEGORY
Customer
A B C D
Category

I 1 2 6 10
II 3 4 7 12
III 5 8 13 16
IV 9 14 15 19
V 11 17 18 20

35
ABC analysis
Making the Customer-Product Contribution Matrix Operational

Order
Priority Range In-Stock Delivery Completeness
Standard Standard Standard
1-5 100.0% 48 hours 99%
6-10 97.5 72 hours 97
11-15 95.0 96 hours 95
16-20 90.0 120 hours 93

36
Pareto’s Rule-ABC Classification
(Example for Inventory Management)
ABC classification is a method for determining level of
control and frequency of review of inventory items

 A Items – typically 20% of the items accounting for 80%

of the inventory value
 B Items – typically an additional 30% of the items
accounting for 15% of the inventory value
 C Items – Typically the remaining 50% of the items
accounting for only 5% of the inventory value-

© Wiley 2010 37
ABC Analysis
 Divides inventory into three classes
based on annual dollar volume
 Class A - high annual dollar volume
 Class B - medium annual dollar
volume
 Class C - low annual dollar volume
 Used to establish policies that
focus on the few critical parts and
not the many trivial ones
© 2011 Pearson Education, Inc. publishing as
Prentice Hall
The AAU Corp. is considering doing an ABC analysis on its entire inventory
but has decided to test the technique on a small sample of 15 of its SKU’s.
The annual usage and unit cost of each item is shown below

© Wiley 2010 39
(A) First calculate the annual dollar volume
for each item

© Wiley 2010 40
B) List the items in descending order based on annual dollar volume.
(C) Calculate the cumulative annual dollar volume as a percentage of
total dollars. (D) Classify the items into groups

© Wiley 2010 41
 Graphical solution for AAU Corp showing
the ABC classification of materials
 The A items (106 and 110) account for 60.5% of the value and 13.3% of the items
 The B items (115,105,111,and 104) account for 25% of the value and 26.7% of the
items
 The C items make up the last 14.5% of the value and 60% of the items
 How might you control each item classification? Different ordering rules for each?

© Wiley 2010 42
ABC Analysis
Percent of annual dollar usage

A Items
80 –
70 –
60 –
50 –
40 –
30 –
20 – B Items
10 – C Items
0 – | | | | | | | | | |

10 20 30 40 50 60 70 80 90 100
Percent of inventory items
Figure 12.2
© 2011 Pearson Education, Inc. publishing as
Prentice Hall
Customer Service Audit
The objective of the audit are to :
 Identify critical customer service elements,
 Identify how performance of those elements is
controlled, and
 Assess the quality and capabilities of the internal
information system
The audit include 4 stages :
 External customer service audit
 Internal customer service audit
 Identifying opportunities and methods for improvements,
 Establishing customer service levels,

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 Stages of the
Customer Service Audit
Internal Audit External Audit

Evaluate Customer Perceptions

Differentiate Channel Levels & Market Segments

Identify Opportunities

Determine Marketing Services Mix & Levels

Overall Importance Compared To Selected
Performance Of Major Manufacturers Evaluated
By Dealers
Overall Dealer Evaluations
Impt. - of Manufacturers
All
Dealers Mfr. 1 Mfr. 2 Mfr. 3 Mfr. 4 Mfr. 5 Mfr. 6
Var.
Rank 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-time 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
shipments)
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 1.5
3 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 1.8
4 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 1.7
5 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 1.8
6 3 Overall manufacturing and design quality of product relative to 6.0 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
the price and range involved
7 16 Updated and current price data, specifications and promotion 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
materials provided by manufacturer
8 47 Timely response to requests for assistance from manufacturer's 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
sales representative
9 14 Order cycle consistency (small variability in promised versus 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
actual delivery, i.e., vendor consistency meets expected date).
10 4b Length of promised order cycle (lead) times (from order 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
submission to delivery) for base line/in-stock ("quick ship")
product
11 54 Accuracy of manufacturer in forecasting and committing to 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
estimated shipping dates on contract/project orders
12 49a Completeness of order (% of line items eventually shipped 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
complete) -- made to order product (contract orders)
50 33a Price range of product line offering (e;g., low, medium, high 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
price levels) for major vendor
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).

46

Source: Douglas M. Lambert and Jay U. Sterling, “Developing Customer Service Strategy,” unpublished manuscript. All Rights reserved.
External customer service audit
- overall customer audit, examining both internal
and external factors with interviews and
questionnaires focusing on the key customer
service elements

- explore customers’ expected levels of

performance on key issues

- variables that get the highest importance ratings

from the customers should be the focus of
analysis and action
 3-9 a
Internal 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?

Internal Audit Questions cont. 3-9 b

• 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 c
Importance And Performance Evaluations
For Selected Customer Service Attributes
Performance Evaluation
No. Attribute Importance Company A Company B Relative
Performance
1 Accuracy in filling orders 6.42 5.54 5.65 -0.11
2 Ability to expedite emergency orders in a 6.25 4.98 5.23 -0.25
fast, responsive manner
3 Action on complaints (e.g., order servicing, 6.07 4.82 5.18 -0.36*
shipping, product, etc.)
4 Accuracy of supplier in forecasting and 5.92 4.53 4.73 -0.20
committing to shipping date for
custom-made products
5 Completeness rate (percentage of order 5.69 5.29 5.27 +0.02
eventually shipped)
6 Rapid adjustment of billing and shipping 5.34 4.64 4.90 -0.24
errors
7 Availability of blanket orders 4.55 5.03 4.15
8 Frequency of deliveries (supplier 4.29 5.07 5.03 +0.04
consolidates multiple/split shipments +0.88**
into one larger, less frequent shipment)
9 Order processing personnel located in your 3.58 5.33 5.21 +0.12
market area
10 Computer-to-computer order entry 2.30 4.07 3.53
* Performance evaluations of A and B are significantly different at p < 0.05.
+0.54**
** Performance evaluations of A and B are significantly different at p < 0.01.

50

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.
 3-10

Competitive
Competitive Position
CompetitiveMatrix
Competitive
disadvantage parity advantage
7
Major weakness Major strength

HIGH
1*
2* 5*
3* 4*
6*
5
IMPORTANCE

MEDIUM
8* 7*

9*
3
10*

LOW
1 Minor weakness Minor strength
-3.0 -1.0 +1.0 +3.0
Relative performance
 3-11

Performance Evaluation Matrix

7
Definitely improve Improve Maintain/improve

HIGH
2* 1*
3*
4* 5*
6*
5
IMPORTANCE

Improve Maintain Reduce/maintain

MEDIUM
7*
8*
9*
3
Maintain Reduce/maintain Reduce/maintain

10*

LOW
1
1 3 5 7
Performance evaluation
Measuring and Controlling Customer 3-13

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.
How to measure customer service?
54
 Perceptual Measures: Importance and satisfaction measures
“How important service element is order cycle time?“
How valuable for your own operations or customer service would a 24 h order
cycle time be?(Grades from 1 - not valuable to 5 - very valuable).

 Service levels are unique to individual firms and product lines of

each firm.
Very few firms have formulated specific, quantifiable objectives for
handling returns at the retail level (to pick up all damaged goods
within five days, or to issue credit for returned goods within 20 days.)

 Utility measures allow a manager to evaluate the tradeoffs between

several customer services even when the services are expressed in
different units (such as dollars,time or hours).

54
 3-14

Customer 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.
2
5
Expected Performance Levels:
Key Measurements
 Frequency - Sales Calls
 Response Time From Sales Rep.
 Advance Notice - Price Changes
 Methods Used to Submit Orders
 Frequency - Order Transmission
 Normal Lead-time Requirements
 Acceptable Range - Lead-time
 Fill Rate - Required %
 Policy on Stock-outs 56