Logistics Also Plays a Critical Role in Customer Satisfaction

(Originally published as a Customer Service column in the April 1999 issue of AFSMI's The Professional Journal.) By William K. Pollock Many services organizations make the mistake of focusing the vast majority of their customer service and satisfaction activities on external issues, often to the exclusion of key internal issues such as inventory management and logistics. However, these key internal issues can also play an important role in facilitating - or hampering - desired levels of customer service and satisfaction. This is especially true in a services environment that is becoming increasingly global in nature. In other words, when looking to support its customers, a services organization should focus not only externally, at its direct customer interface and interaction, but also internally, at its global inventory management and logistics activities as well - especially as they might impact a multinational customer base. As a result of the increasing globalization of services, many larger companies are reorganizing their inventory and logistics operations to be more homogeneous. Some utilize an organization structure where individual lines of business (LOBs) operate separately, but all come together at a senior level. Others may manage their logistics activities more on a geographically decentralized basis, rather than in an LOB-centric mode. In any case, the primarily criterion for determining what type of logistics operation to employ must ultimately be the way in which it can be expected to support customers in a global market. Economics, of course, should always be a key consideration; however, all the cost savings and economies-of-scale that may be realized through a centralized structure will not mean a thing if the customers do not believe they being supported in the manner they require. Most services providers are acutely aware that if they do not support their customers with the service, parts and attention they require, they can generally find the level of support they require - elsewhere. Further, in a truly global services environment, it has become increasingly apparent that each geography has a different range of customers, with different levels of service requirements. As a result, many organizations are trying to evolve to the point where they can respond directly to the customers' needs; be easy to do business with; command the ability to meet their customers' wants in every geography; and, whether they know it or not, meet their needs as well. In order to accomplish this, some organizations have chosen to outsource many of their non-core competency activities, such as warehousing, distribution and certain types of equipment repair, to a select group of outsource vendors. For many years, most services organizations have utilized national and international courier services to handle nearly all of their shipping needs. Over the years, many of these couriers have

expanded their portfolios to include different options for delivery (e.g., overnight, second day, same day, etc.), as well as warehousing and general inventory management. Some are now also assisting their clients in inventory planning and forecasting. As a result, many services organizations no longer believe that they need to perform these activities themselves in addition to the various manufacturing, sales and marketing, and customer service activities that they are already performing on a day-to-day basis. However, as more services organizations realize that the increasing costs of inventory management and logistics are likely to impact both their bottom lines and their ability to support customers - especially if they are presently running either an outdated or otherwise inefficient operation to begin with - they may have some strong reservations with respect to outsourcing some of these key activities. The greatest fear among most organizations is that outsourcing will almost immediately result in the lessening of customer service performance, either real or perceived, and therefore, loss of control over an historically critical component of their overall customer service and support equation. Those organizations that have already moved toward outsourcing suggest that there are still many ways in which to ensure that the organization retains control over these critical areas. It is true that some still believe that there are no outsource vendors that are truly global in terms of their inventory management and logistics capabilities - that some are good at warehousing, some are good at distribution, and some are better than others in certain geographies - but none are able to do it all globally. Still, others believe that there are only one or two superior vendors in each geography, and that it is critical to select the right ones to represent your business in each area. Where one vendor is judged to be unable to "do it all" in a single geography, some organizations may require them to enter into arrangements where they must work with other local vendors to meet the organization's specific requirements for supporting customers. Another way to get this type of "shared" scenario to work is to align the outsource vendors in each geography on the basis of their unique capabilities, and incorporate their services directly into the contract bidding process when responding to RFIs or RFPs. Most organizations using this approach believe that by lining up the appropriate partners as part of the bid process, they can both get both a marketing edge over some of their competitors, as well as avoid the risk of quoting a bid and then not being able to deliver it either satisfactorily or profitably. By lining up their vendors prior to responding to the bid, and knowing what their approximate costs and terms are going to be before even getting the sale, they believe they can protect themselves in many ways, and avoid the risk of negatively impacting customer service. The secret to success, of course, whether the organization goes it alone, or whether it utilizes the services of one or more outsource vendors in any global geography, is to ensure that all of the players involved work on a "partnership" basis. That is, that they work together as "partners" toward the common, necessary and, ultimately, profitable goal of providing customers with their desired levels of service, parts and support, ultimately keeping them satisfied.

A fundamental requirement for logistics is the need to develop customer relationships whether those customers are end users, intermediate, or even internal. The marketing concept provides the foundation for customer commitments with its fundamental focus on customer needs rather than on products or services, the requirement to view and position products and services in a customer context, identification of market segments that differ in needs, and commitment that volume is secondary to profit. Contemporary implementation of the marketing concept suggests that it is more important to focus on the development of relationships with customers than to perfect individual transactions. This interpretation focuses on the needs and requirements of individual customers as the core ingredient of relationship marketing. In a supply chain context, customer requirements related to spatial convenience, lot size, waiting time, and variety and assortment must be supported by logistical performance.

Organizations build their platform for customer relationships on three levels of increasing commitment. The first of these is basic logistics customer service. To be competitive, a firm needs a basic service capability that balances availability, operational performance, and reliability for all customers. The level of commitment to each dimension of service requires careful consideration of competitive performance and cost/benefit analysis. The highest level of commitment is perfect order performance, which requires zero defects logistics operations. Such high-level commitment is generally reserved for a firms key customers. Going beyond basic service to create customer satisfaction represents the second level of commitment. Where basic service focuses on the organizations internal operational performance, customer satisfaction focuses on customers, their expectations, and their perceptions of supplier performance. Customer expectations extend beyond typical logistical considerations and include factors related to communication, credibility,

access, responsiveness, and customer-specific knowledge as well as reliability and responsiveness of operations. A firm can provide logistics service that is equal to or even better than competitors but still have dissatisfied customers. Failure to satisfy customers can arise from lack of knowledge about customer expectations, improper standards of performance, performance failure, poor communication, or incorrect customer or firm perception of performance. As customer expectations escalate, logistics executives must continuously monitor customer satisfaction and logistics performance. The highest level of commitment is known as customer success. Where satisfaction programs seek to meet or exceed expectations, a success platform focuses on customer needs and requirements. Customer expectations are frequently different from needs and requirements. Achieving success requires intimate knowledge of customers needs and their operational requirements and a commitment by the service

provider to enhance a customers ability to compete more successfully in the marketplace. Value-added services represent one way logistics can contribute to customer success. A customer relationship strategy requires indepth knowledge of the logistical requirements of different customers. CRM technology is increasingly being used to aid in this process and to provide both the company and its customers with the information necessary for effective long-term relationships.

Every organization, whether it is a manufacturer, wholesaler, or retailer, buys materials, services, and supplies to support operations. Historically, purchasing has been perceived as a clerical or lowlevel managerial activity charged with responsibility to execute and process orders initiated elsewhere in the organization. The role of purchasing was to obtain the desired resource at

the lowest possible purchase price from a supplier. This traditional view of purchasing has changed substantially in the past several decades. The modern focus is on total cost and the development of relationships between buyers and sellers. As a result, procurement has been elevated to a strategic activity in many organizations. The increasing importance of procurement can be attributed to several factors. The most basic of these factors has been the recognition of the substantial dollar spend for purchases in a typical organization and the potential dollar savings from a viable procurement strategy. The fact is that purchased goods and services are among the largest cost elements for most firms. In the average manufacturing firm in North America, purchased goods and services account for approximately 55 cents of every sales dollar. By way of contrast, the average expense of direct labor in the manufacturing process accounts for about 10 cents of each sales dollar. While the percentage spent on purchased inputs varies considerably across

manufacturing industries, it is clear that the competitive advantage gained from strategic management of procurement can be substantial. Related to the cost of purchased inputs is a growing emphasis on outsourcing. The result is that the amount spent on procurement has increased significantly in many organizations. Firms today purchase not only raw materials and basic supplies but also complex fabricated components with very high value-added content. They spin off functions to suppliers to focus internal resources on core competencies. The result is that more managerial attention must then be focused on how the organization interfaces and effectively manages its supply base. There is also a significant trend toward outsourcing of services, particularly logistics services such as transportation and warehousing. For example, General Motors uses its first-tier supplier network and third-party logistics providers to complete subassemblies and deliver finished components as needed to their automotive assembly lines. Many of these activities

were once performed internally by the General Motors organization. Developing and coordinating these relationships represent critical aspects of an effective procurement strategy. The logistical requirements related to effective procurement strategy are identified later in the chapter.