Chapter 8 Order Management and Customer Service

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Nov 20, 2013 (3 years and 6 months ago)

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Chapter 8 Order Management and Customer
Service

Learning Objectives


After reading this chapter, you should be able to do the
following:


Understand the relationships between order management and
customer service.


Appreciate how organizations influence customers’ ordering
patterns as well as how they execute customers’ orders.


Realize that activity
-
based costing (ABC) plays a critical role in
order management and customer service.


Identify the various activities in the SCOR process D1 (deliver
stocked product) and how it relates to the order
-
to
-
cash cycle.


Learning Objectives (cont.)


After reading this chapter, you should be able to do the
following:


Know the various elements of customer service and how they
impact both buyers and sellers.


Calculate the cost of a stockout.


Understand the major outputs of order management, how they
are measured, and how their financial impacts on buyers and
sellers are calculated.


Be familiar with the concept of service recovery and how it is
being implemented in organizations today.

Influencing the Order


This is the phase where an organization attempts to change the
manner by which its customers place orders.


Order Execution


This occurs when the order is received.

Customer service
:


is anything that touches the customer. This
includes all activities that impact information
flow, product flow, and cash flow between the
organization and its customers
.


Philosophy


Philosophy elevates customer service to an
organization
-
wide commitment to providing
customer satisfaction through superior
customer service.

Customer service
:



Performance


emphasizes customer service as specific performance
measures that pervade all three definitions of customer
service and address strategic, tactical, and operational
aspects of order management.



Activity


treats customer service as a particular task that an
organization must perform to satisfy a customer’s order
requirements.


Customer relationship management
:


is the art and science of strategically positioning customers to
improve the profitability of the organization and enhance its
relationships with its customer base
.


is not a new concept used by service industries.


has not been widely used in the business
-
to business
environment until lately.



Customer action affects firm’s cost


how customers order


how much customers order


what customers order


when customers order an order

Four basic steps in the implementation of the CRM



Step 1: Segment the Customer Base by Profitability



Step 2: Identify the Product/Service Package for Each Customer
Segment



Step 3: Develop and Execute the Best Processes



Step 4: Measure Performance and Continuously Improve


Activity
-
Based Costing



ABC measures the cost and performance of activities, resources,
and cost objects. Resources are assigned to activities, then
activities are assigned to cost objects based on their use



Traditional cost accounting is well suited to situations where an
output and an allocation process are highly correlated.



Traditional cost accounting is not very effective in situations
where the output is not correlated with the allocation base.

The Management of Business Logistics Chapter 8


One method to classify customers by profitability.



Protect Zone


Those customers who fall into the “Protect” segment are the most profitable.



Danger Zone


Customers in the “Danger Zone” segment are the least profitable and incur a
loss.



The firm has has three alternatives for danger zone customers:


(1) change customer interaction with firm so the customer can move to
another segment


(2) charge the customer the actual cost of doing business


(3) switch the customer to an alternative distribution channel



Build Zone


These customers have a low cost to serve and a low net sales value, so the firm
should maintain the cost to serve and build net sales value to help drive the
customer into the “Protect” segment.

Order Management



This system represents the principle means by which buyers and
sellers communicate information regarding orders.



Effective order management is key to operational efficiency and
customer satisfaction.



Logistics needs timely and accurate information relating to
orders so many firms place order management in the logistics
area.

Order to cash


Thirteen principle activities constitute the OTC cycle:


D1.1 through D1.7 represent information flows


D1.8 through D1.12 represent product flows


D1.13 represents cash flow

Order cycle



all activities that occur from when an order is received until the
product is received


Replenishment cycle


refers to acquisition of additional inventory


one firm’s order cycle is another’s replenishment cycle


Order To Cash cycle:



recent attention has centered on the variability or
consistency of this process



absolute length of time is important, variability is more
important



a driving force is safety stock, as absolute length of
the order cycle will influence demand inventory

E
-
Commerce Order Fulfillment Strategies



Many firms use Internet technology to capture order
information for fulfillment systems for picking,
packing, and shipping.



Internet allows faster collection of cash by the seller.

The Logistics/Marketing Interface



Customer service is the key link between logistics and marketing
within an organization.



Manufacturing can produce a quality product at the right cost and
marketing can sell it, but if logistics does not deliver it when and
where promised, the customer will not be satisfied.

Three different perspectives on customer service:


Three different perspectives on customer service




philosophy



as a set of performance measures



as an activity


Customer service needs to be put into perspective as
including anything that touches the customer

Three levels of a product



(1) the core benefit or service, which constitutes what the buyer
is really buying




(2) the tangible product, or the physical product or service itself



(3) the augmented product, which includes benefits, adds value
for the customer

Four distinct dimensions of customer service:



Time


cycle time


safe delivery


correct orders



Dependability


more important than the absolute length of lead time



Communications


pretransaction


transaction


posttransaction



Convenience


service level must be flexible

Customer Service Performance Measures from buyer’s
view



Orders received on time



Orders received complete



Orders received damage



Orders filled accurately



Orders billed accurately

Expected Cost of Stockouts:


Stockout occurs when desired quantities are not
available


Four possible events:



the buyer waits until the product is available



the buyer back
-
orders the product



the seller loses current revenue



the seller loses a buyer and future revenue

Back Orders
:


occurs when a seller has only a portion of the
products ordered by the buyer


are created to secure the portion of the inventory that
is currently not available

Lost Sales
:


some customers will turn to alternative supply
sources

Lost Customers
:


customer permanently switches to another supplier

Determining the Expected Cost of Stockouts


back order



lost sale



lost customer


identify potential consequences


calculate each result’s expense or lost profit

Product availability from customer perspective:




Did I get what I wanted?



When I wanted it?



In the quantity I wanted?


Product availability is the ultimate measure of
logistics and supply chain performance.

Metrics



four are widely used across multiple industries
:


internal metrics


item fill rate


line fill rate


external metrics


order fill rate


perfect order

Calculation for lost cash flow:

Cash Flow Lost =

(Number of Incomplete Orders Back
-



Ordered x Back Order Cost per Order)



+ (Number of Incomplete Orders




Cancelled x Lost Pretax Profit per



Order) + (Number of Incomplete Back
-



Ordered x Invoice Deduction per




Order)

Order Cycle Time:



the time that elapses from when a buyer places an order
until receipt of the order



absolute length and reliability of order cycle time
influences both firm’s inventories, resulting in impacts on
both revenues and profits for both organizations

Two inventory cost reduction calculations


reduced standard deviation of order cycle time on
safety stocks



Safety Stock =

{Demand per Day x [OCT + (z x





Standard Deviation of OCT)]}







(Demand per Day x OCT)



determine the impact of the reduction of absolute
order cycle time on demand inventories


Demand Inventory Cost Reduction = Difference in Absolute OCT





x Demand per Day x Cost per





Unit x Inventory Carrying Cost





Percent


Logistics operations responsiveness (LOR)


Examines how well a seller can respond to a buyer’s
needs.



This “response” can take two forms:




LOR can be how well a seller can customize its service
offerings to the unique requirements of a buyer



LOR can be how quickly a seller can respond to a sudden
change in a buyer’s demand pattern.

Logistics System Information:



is critical to the logistics and order management
processes



underlies ability to provide quality product availability,
order cycle time, logistics operations responsiveness,
and post
-
sale logistics support



timely and accurate information can reduce
inventories in the supply chain and improve cash flow
to all supply chain partners

Financial Impact


The calculation used to measure the result on cash
flow for decreasing the order
-
to
-
cash cycle is as
follows:


Cast Flow Increase = Invoice Value x (Cost of





Capital/365) x Difference in




Days in the Order
-
to
-
Cash





Cycle


Postsale logistics support (PLS) can take two forms:



PLS can be the management of product returns from the
customer to the supplier.



The second form of PLS is product support through the delivery
and installation of spare parts.



Calculation to determine the spare part service cost is as follows:


Service Cost =

Penalty Cost + Lost Purchase Margin + Lost



Support Margin


Service Recovery



No matter how well an organization plans to provide
excellent service, mistakes will occur.



Recovery requires a firm to realize that mistakes will
occur and have plans in place to fix them.

Summary


Order management and customer service are not mutually exclusive;
there is a direct and critical relationship between these two concepts.


There are two distinct, yet related, aspects of order management:
influencing the customer’s order and executing the customer’s order.


Customer relationship management (CRM) is a concept being used
today by organizations to help them better understand their customers’
requirements and understand how these requirements integrate back
into their internal operations processes.


Activity
-
based costing (ABC) is being used today to help organizations
develop customer profitability profiles which allow for customer
segmentation strategies.


Order management, or order execution, is the interface between buyers
and sellers in the market and directly influences customer service.


Order management can be measured in various ways. Traditionally,
however, buyers will assess the effectiveness of order management
using order cycle time and dependability as the metric, while sellers will
use the order
-
to
-
cash cycle as their metric.

Summary (cont.)


Customer service is considered the interface between logistics and
marketing in seller organizations.


The three definitions of customer service are: (1) as an activity, (2) as a
set of performance metrics, and (3) as a philosophy.


The major elements of customer service are time, dependability,
communications, and convenience.


Stockout costs can be calculated as back order costs, the cost of lost
sales, and/or the cost of a lost customer.


The five outputs from order management that influence customer
service, customer satisfaction, and profitability are: (1) product
availability, (2) order cycle time, (3) logistics operations responsiveness,
(4) logistics system information, and (5) postsale logistics support.


The concept of service recovery is being used by organizations today to
help identify service failure areas in their order management process
and to develop plans to address them quickly and accurately.