Global Supply Chain Management

1. Global Supply Chain Management

2. Chapter #3 Customer Service -- The focus of logistics systems

3. The Logistics Mix as a System

4. Overview • We will define and discuss some of the elements of Customer Service • We will examine Customer Service in the global logistics/business environment • We will discuss the barriers to improving customer service and consequences of poor customer service • We will address the costs of poor customer service • Finally, we will talk about internal customers

5. The Logistics System

6. Definitions • Logistics – the flow of material, information and money between consumers and suppliers

7. Definitions Customer Service (Response) – the way logistics interfaces with marketing; the output of the logistics system • Activity, something the organization provides • Performance Measure, one way we are measured • Corporate Philosophy, defines the way we will conduct our business • Competitive Advantage, a real business strategy

8. Elements of Customer Service • Good Customer Service/Response is a critical success factor for your organization because-- • 85% of dissatisfied customers tell 9 people, 13% tell 20…a satisfied customer only tells 2 • Typically 80% of your customers will leave you in the next 6 years, 65% because of something you did • 75% of the reasons given for customers changing companies have nothing to do with the product

9. Elements of Customer Service • Good Customer Service/Response is a critical success factor for your organization because-- • The longer a customer stays with you the more profit you make • A 5% increase in customer retention will raise profits 25-55% • Cost roughly 8-10 times as much to gain a new customer as to keep and old one.

10. Elements of Customer Service • Customer service strategy is designed around five key elements: • Dependability • Time • Convenience • Communications • Honesty • Right product, right time, right place, right quantity, right condition and the right price. I am sure you can find other elements, but these will do for now!

11. Elements of Customer Service • Dependability is more important to most customers than price • Product availability • On-time delivery • 100% correct order fills • 100% correct invoicing • Customer can count on us to do as we say we will

12. Elements of Customer Service • Time is always important to the customer • Order cycle • Billing • Problem resolution • Convenience • Frequency of sales calls • After-hour/emergency service and support • Technical assistance • Ease of order placement and payment

13. Elements of Customer Service • Communications • Accurate, timely answers to enquiries • Cargo tracing • Inventory visibility • Billing/invoicing system visibility • Honesty/Relationship • Keep the promises we make • Trust is built over time • Don’t overstate delivery, performance quality, etc.

14. Elements of Customer Service • Most organizations today have a formal Customer Service Policy • Many factors must be considered in the development of a policy including • Cost vs. revenue • Ability to deliver the promised level of service • Differentiation in customers and their service policies • Customer satisfaction measurement/determination • And, in a global setting, cultural and legal differentiation of services

15. Elements of Customer Service • A point that seems to escape many companies is that Customer Service does not have to be the same for all customers • Hard to differentiate service between customers in a retail setting, although some do • Costco • Personal Care industry • Ford Motor Company • Much easier to do on-line for retail • Amazon.com

16. Elements of Customer Service • It is much easier to differentiate in the higher levels of the supply chain. • There has been differentiation in this area for ages • Price reductions for quantity orders • FOB customer’s dock for standing orders • 10% net 30 for “good” customers • Etc. • The first question management must answer is how much service to offer…then to whom?

17. So…How Much Service • Certainly, before putting pen to paper and writing a customer service (response) policy, we should try and determine • What level of service the customer wants • What level of service is provided by our competitors • What level of service can we monetarily justify • It is one thing to make statements like “the customer comes first,” it is quite another to have to include in your cost the dollars to support such an open ended policy

18. Customer Service Expenditure vs. Level of Service Provided Market Limit Higher $ Expenditure on Customer Service Demand Lower Level of Service Provided Higher Lower Monetary Customer Service Expenditures

19. Customer Service Expenditure vs. Level of Service Provided • The curve in the preceding slide is typical of most product markets • Customer Service does cost real dollars • Yes, smiles are free, but the training to get that smile on your face was not free. • As with most things in life, customer service and its cost tend to follow a curve of diminishing returns. • Get lots of service increase initially for a few dollars • The last few bits of customer service however tend to be very expansive

20. Relationship Between Customer Service Cost and Demand Stimulation Higher Market Limit of Demand Demand Lower Monetary Customer Service Expenditures Lower Higher

21. Relationship Between Customer Service Cost and Demand Stimulation • Recall that Customer Service, as a component of logistics, is a tool for competitive advantage • In the preceding slide we see another typical curve of diminishing return • In this case, we expect to win more market share with higher levels of customer service. • Obviously there is a limit • Some people will never change to our product or service no matter how much additional service we offer

22. Customer Service Barriers • As we have mentioned several times, all customers are not created equal • Customer segmentation and appropriate policies for each segment will insure that • Each customer gets the service they want • Each customer segment is serviced at an appropriate minimal cost-for-return • Without segmentation, we tend to provide too much service for most customers and too little for others

23. Customer Service Barriers • Pareto’s Law – 80% of the business’ profits come from 20% of the customers (80/20 rule, also called ABC analysis) • Customer profiling & data-mining our information • Measure by Profit • SKU’s • Number of orders • Units purchased, etc • Obviously, ‘A’ class customers expect better service than ‘C’ class customers…and it is justified based on the profit their sales generate • One size does not fit all!

24. Customer Service Barriers • Pareto’s Law – 80% of the business’ profits come from 20% of the customers (80/20 rule, also called ABC analysis) • Customer profiling & data-mining our information • Measure by Profit • SKU’s • Number of orders • Units purchased, etc

25. Customer Service Barriers • Obviously, ‘A’ class customers expect better service than ‘C’ class customers…and it is justified based on the profit their sales generate • One size does not fit all! • Be careful of the pitfalls • Do not over promise customer service, e.g. better customer service promised as a sales closer • Always have your customer service terms delineated before the sale and available in writing • Never allow sales people to modify them on-the-spot without prior approval

26. Customer Service Barriers • Management must remember that all decisions can impact customer service. • Changing transportation vendors/modes to save cost can lead to delivery delays, reduced quality, etc., all affecting perceived customer service

27. Customer Service Barriers • The foundation of Customer Service is appropriate training for every member of the organization • Often the first thing cut during budget crunches • Easier to hire people with the right attitude than to train them once on board • Employee training is critical and must be part of our continuous improvement processes

28. Customer Service Barriers • Employees must be empowered to make customer service happen for individual customers under varying circumstances • There are a number of environmental factors that may appear to be beyond our control …and indeed are at times.

29. Customer Service Barriers • Customers can be their own worst enemies • True in general but particularly at the retail level • Remember we all have bad days • Customers and Employees • Since much of customer service quality is perception, interaction with other customers can impact a specific customer’s satisfaction (again, mostly at retail)

30. Customer Service Barriers • One area that we often fail to understand as customers and as service providers is called the “script” • This is the sequence of activities/behaviors required of the customer at a specific business • Denny’s vs. McDonalds • Costco vs. Kroger • Local discount used bookstore vs. Barns & Noble

31. Customer Service Barriers • “Scripts” also exist at the distributor, wholesaler, manufacturer level. • If you don’t know the script, you feel lost and often less than satisfied with your experience • That new customer you just won from your competitor may disappear rapidly if you “assume” they understand the “script” for interacting with your logistics organization

32. Improving Customer Service • The first step is to understand • What customer service means to your clients • How much of it they want, and • What they are willing to pay for it *Do not just start trying to fix “problems” • It’s easy for people to tell you what you are doing wrong • Value is achieved when the solution includes the identified customer service components ...find out what the customer really wants first!

33. Improving Customer Service • Then you have to determine • What level of service you currently provide • What it cost to provide • What you could provide • How much it would cost to provide • Finally, you can determine whether or not you should be in this business – can you afford it?

34. Customer Service Barriers • So…how do we do it? • Determine what the customer wants • Determine how you will provide it • Carry out appropriate employee training, and maybe some customer training, e.g. automated order entry systems • Monitor delivered levels of service through surveys, sales follow-up etc. • Monitor cost of service • Modify the programs as necessary

35. Improving Customer Service • Notice that we have added a monitoring function • There is no hope of controlling an activity unless you monitor it • Lots of ways to accomplish the task • Data mining, AR, invoicing accuracy, delivery times, employee surveys/interviews, etc • Customer surveys • Follow-up customer interviews by other than sales and marketing - use an outside firm • Remember, it cost more to get a new customer than to keep and old one

36. Financial Indicators Total CS cost Cost to Serve Customer Profitability Customer Lifetime Value SKU profitability Cost per Order Order profitability Productivity Indicators Orders processed per person-hour Orders shipped/day Quality Indicators Order entry accuracy Order communications accuracy Fill rate Customer satisfaction index Retention rate Response Time Indicators Call wait time Order entry time Order processing time Customer Service Measures

37. Poor Customer Service • Basically, with poor customer service, we lose the customer and often other potential customers via word-of-mouth • Stock-outs • Incorrect invoicing • Incorrect order fulfillment • Damage in shipping • Variable lead time • Customer alienation, etc.

38. Customer Service Policies • ABC customer segmentation • Service level optimization • How many orders/shipments • Fill rate, etc • Comprehensive customer service policy and service contracts • Put it in writing • Minimum order quantities • Return policies, etc

39. Development stages for a firm Ad-hoc No fixed or formal customer service policy…”do whatever the customer wants” Well defined excitement State policy, but without quantification One-size fits all Quantified but not segmented Strategic, competitive and mature Customer Service Policies

40. Internal Customers • Everything that is true for external customers is also true for our internal customers • Often neglected at additional expense to the entire system • They are part of the system and important to the delivery of end-customer quality service

41. Internal Customers • Internal customers need to know what to expect with respect to the level of service you provide them and what they need to provide to you • Many organizations use internal customer Service Level Agreements (SLA), e.g., AT&T, Boeing, etc.

42. Summary • Customer service is the objective of logistics systems and its most important component • Customer service decisions impact our customers directly • Customer service policies provide the constraints for the design of the rest of the logistics system • Challenge in a global market is to tailor the levels of service for each market and customer