Chapter 8 Order Management and Customer Service


Nov 20, 2013 (4 years and 7 months ago)


Chapter 8 Order Management and Customer

Learning Objectives

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

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
cash cycle.

Learning Objectives (cont.)

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

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

Customer service


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.


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

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

Step 3: Develop and Execute the Best Processes

Step 4: Measure Performance and Continuously Improve

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

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

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

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

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


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:


cycle time

safe delivery

correct orders


more important than the absolute length of lead time






service level must be flexible

Customer Service Performance Measures from buyer’s

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

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

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.


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 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


Logistics operations responsiveness (LOR)

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

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

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
cash cycle is as

Cast Flow Increase = Invoice Value x (Cost of

Capital/365) x Difference in

Days in the Order


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.


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.

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
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.