CH 7 Demand Management Customer Service PDF

CHAPTER 7
Demand Management, Order

Management, and Customer Service
Copyright © 2015 Pearson Education, Inc.

Demand Management, Order
Management, and Customer Service
• Will discuss two key issues
– How organizations determine what the customer wants
– How organizations facilitate the customers want
• Demand management important – matches supply and
demand (i.e., oversupply, undersupply)
• Order management and customer service begins
where demand management ends
• Understanding customer demand and adapting
ordering process (order date, correct order) important
– (e.g., etoys.com)
© 2008 Prentice Hall 4-2

Demand Management
Demand management can be
defined as “the creation across the
supply chain and its markets of a
coordinated flow of demand.”
• Macro level as in economics –
reduce interest rate – increase
demand of a product
• Micro level as service provider –
free night and weekend use
reduce demand during pick
hours
Source: John T. Mentzer, “A Telling Fortune”, Industrial

Engineer, April 2006, 42-47.
Copyright © 2015 Pearson Education, Inc. 7-3

Demand Management
Demand (sales) forecasting

• Is a key component in demand management
• Refers to an effort to project future demand
• Is helpful in make-to-stock situations
– When finish goods are produced before receiving customer order
• Is helpful in make-to-order situations
– When finish goods are produced after receiving customer order
– Has standard and custom components
– Helpful projecting standard components (e.g., % of laptop and
desktop frame)

Demand Management
Three basic types of
demand forecasting models:
• Judgmental
• Time series
• Cause and effect
(associative)

Demand Management
Judgmental demand forecasting model:
• Involves using judgment or intuition
• Preferred in situations where there is limited or
no historical data, new product launched, new
and unique market conditions
• Techniques include surveys, analog technique,
and others (e.g., delphi method)
– Surveys used to learn about customer preferences and
intentions
– Analog (similar item to that being forecasted) is used
as the basis for demand history

Demand Management
Survey methods
• Consumers Complete Enumeration Survey
– Data collected from all customers and added up to arrive as total
expected demand (e.g. asking each dealer their purchasing prediction)
• Consumer Sample Survey
– Only a few consumers are selected and their views on probable
demand are collected (i.e., sample size, margin of error, confidence
interval)
• Sales Force Opinion Survey
– Sales persons are expected to estimate expected sales in their
respective territories
• Consumer End Use Survey
– Focus on forecasting on the demand for intermediary goods
– Milk is commodity which can be used a an intermediary good for
production of ice cream, yogurt, and others

Demand Management
Time Series
forecasting model:
Underlying assumption is
that future demand is solely
dependent on past demand
• Some techniques include:
– Simple moving averages
– Weighted moving averages

Demand Management
Simple Moving Average
Simplest time serious forecasting method
• Forecast values are estimated as the
mean previous values of time series
• The largest number (K), the better is
the standardization in random
fluctuations of the value of the
variable and smaller is the effect of
!ℎ#$# % &' (#)*+( *+( , &' +-).#$ /0 1#$&/('
the possible extremes of time series
• The forecast of the next period is
estimated from the F(t) equation by
adding to the time series the most
recent value and removing the oldest
value
Source: Outsourcing Management for Supply Chain Operations and Logistics Service by Dimitris Folinas

Demand Management
Example of application of simple
moving average
$"%& + $"%( + $"%) + $"%*
! " =
+
K= 4 , t=5
34%5 + 34%6 + 34%7 + 34%8
2 5 =
4
38 + 37 + 36 + 35
2 5 =
4
79 : 74 : 7; : 7<
2 5 = = 37.25
8
K=4, t=6
38 + 38 + 35 + 39
2 6 = = 37.5
4
K=5, t=6
38 + 38 + 35 + 39 + 37
2 6 = = 37.4
5

Demand Management
Weighted Moving Average
– Simple moving average may not adequately reflect recent upturns
and downturns in demand
– To address this shortcoming, the weighted moving average techniques
assign weight to more recent data

Demand Management
Example of application of weighted moving average
F(period-5)= 37 * 10% + 39 * 20% + 35 * 30% + 38 * 40% = 37.2
F(period-6)= 37 * 10% + 35 * 20% + 38 * 30% + 38 * 40% = 37.5

Demand Management

Demand Management
Cause-and-effect forecasting model:
• Also referred to as associative forecasting
• Assumes that one or more factors are related to
demand and that the relationship between cause
and effect can be used to estimate future
demand
• Some techniques include:
– Simple regression
– Multiple regression

Demand Management
Example of application of
time demands
simple regression (x) (y)
1 600
2 1,550
3 1,500
4 1,500
5 2,400
6 3,100
7 2,600
8 2,900
9 3,800
10 4,500
11 4,000
12 4,900

Demand Management
Example of application of simple

regression ! = $# − "&̅
– ! =y intercept ∑ &$ − '&̅ $#

– " =slope of the line "=
∑ & + − '&̅ +
– $# =arithmetic mean of all y
– &̅ =arithmetic mean of all x
– & =x-axis value of each data point
$ = ! + "&
– $ =y-axis value of each data point
– ' =number of data points
$=!+"&
Demand Management
time demands • You are the logistic manager, want to make next
(x) (y) years budget
1 600 • You already know, previous year’s demand from
one of your warehouse (assume you have only
2 1,550 one item)
3 1,500 • Using simple regression technique, find this
4 1,500 years demand forecast for time 13 and 14)
5 2,400
6 3,100 ! = $# − &(̅
7 2,600
8 2,900 ∑ ($ − *(̅ $#
9 3,800 &=
∑ ( + − *(̅ +
10 4,500
11 4,000 $,- = ! + &(
12 4,900
13 ?
$,/ = ! + &(
14 ?

Demand Management
Example of application of time
(x)
Demands
(y)
simple regression 1 600

2 1,550
– To find $ (y intercept) 3 1,500
and % (slope of the line), 4 1,500
we need 5 2,400
6 3,100
∑ " 78 7 2,600
"̅ = = = 6.5
( 12 8 2,900
9 3,800
∑ # 33350 10 4,500
#0 = = = 2779.17
( 12 11 4,000
12 4,900
∑ "= 78 ∑ #=33,350

Demand Management
time Demand
Example of application of (x)
1
(y)
600
xy
600
x^2
1
simple regression 2
3
1,550
1,500
3,100
4,500
4
9
– Once we identify #% , ",̅ sum 4 1,500 6,000 16
5 2,400 12,000 25
of multiplied x y, and sum of x 6 3,100 18,600 36
squared, we can find b and a 7 2,600 18,200 49
∑ "# − +"̅ #% 8 2,900 23,200 64
(= 9 3,800 34,200 81
∑ " $ − +"̅ $
10 4,500 45,000 100
11 4,000 44,000 121
268200 − 12 ∗ 6.5 ∗ 2779.17 12 4,900 58,800 144
(=
650 − 12 ∗ 6.5 $ ∑ " = 78 ∑ # = 33,350 ∑ "y= 268,200 ∑ " $ = 650
268200 − 12 ∗ 2779.17 8 = #% − ( "̅

( =
650 − 12 ∗ 6.5 $
51424.74 8 = 2779.17 − 359.6 ∗ 6.5 = 441.77
( = = 359.6
143

Demand Management
Example of application of simple regression
– Once we know a and b, we can forecast demand for time x.
time Demand
(x) (y)
! = # + %& 1 600
2 1,550
3 1,500
! = 441.77 + 359.6 ∗ & 4 1,500
5 2,400
6 3,100
7 2,600
!01 = 441.77 + 359.6 ∗ 13 = 5116.57 8 2,900
9 3,800
10 4,500
!02 = 441.77 + 359.6 ∗ 14 = 5476.17
11 4,000
12 4,900
13 5117
14 5476

Demand Management
Example of application of
simple regression time
(x)
Demand
(y)
1 600
2 1,550
– If we do not have data for 3 1,500

4 1,500
time (5) 5 NA
– How would you find 6 3,100

7 2,600
forecasted-demand for the 8 2,900
time 13 and 14? 9 3,800
10 4,500
11 4,000
12 4,900
13
14

Demand Management
Demand forecasting issues:
• Selection of forecasting technique(s) depends on many
factors: characteristic of situation, forecasting cost, and
accuracy of foresting techniques
• Selecting an inappropriate technique will reduce
forecast accuracy
• Forecast accuracy can have important logistical
implications (reduce inventory, negotiation power)
• Computer forecasting software unable to completely
eliminate forecast errors

Order Management
Order Management refers to Order
management of the various placement
activities associated with the

order cycle
Order
processing
Order
• Order cycle (replenishment

preparation
cycle or lead time) refers to Order

shipment /
the time from when a delivery Order Cycle
customer places an order to Order to Cash Cycle

when goods are received Invoicing
Customer
payment
• Some organizations include
order-to-cash-cycle in their Cash
order management model

application

Order Management
• Link between order management
and demand forecasting
– Firm not wait for orders to learn
what happing with respect to
demand
– Demand (sales) forecast make
possible to full fill orders in
satisfactory manners
• Link between order management
and customer service
– Organizations analyze customer
service in terms of order cycle
performance

Order Management
Four stages of the order cycle include:
• Order transmittal
• Order processing
• Order picking and assembly
• Order delivery

Order Management
Order transmittal refers to the time from when
the customer places an order until the seller
receives the order
• Methods of order transmittal
• In person
• Mail
• Telephone
• FAX
• Electronically
Order Management
Advantages/ Disadvantages of order transmittal methods
– In person, reduce potential order errors, but not practical
where supplier is distant
– Mail, convenient than in-person, but consider relatively slow
form of order transmittal
– Telephone, relatively fast and convenient, but order error may
not be detected until you receive (e.g., large peperoni pizza, vs
small mushroom pizza)
– FAX, fast and convenient, and also provides hard copy
documentation of order: fax machine can has issue, so you
might not read the order clearly
– Electronically fast, convenient and accurate but customers
might have privacy concern when they use Internet

Order Management
Order processing refers to the time from when
the seller receives an order until an appropriate
location (i.e. warehouse) is authorized to fill the
order
Order processing activities:
– Order accuracy, checking buyers ability to purchase,
entering the order into system, crediting sales
person with a sale, recording transactions, arranging
for outbound transportation

Figure 7.1: Flowchart of Order Handling (Order
Processing) System

Order Management
Order picking and assembly includes all activities
from when an appropriate location is authorized
to fill the order until goods are loaded aboard an
outbound carrier

Order Management
Order picking and assembly
• Often represents the best opportunity to improve
the effectiveness and efficiency of an order cycle
• Can account for up to 2/3 of a facility’s operating
cost and time
• Travel time accounts for between 60 to 80 percent
of pick time
– Low-cost methods to improve
• better slotting of products in the facility
• match picker to the order being picked

Order Management
Examples of Order Picking and Assembly
technology:
• Handheld barcode scanners
• Radio-frequency identification (RFID)
• Voice-based order picking
– Use of speech to guide order picking activities
• Pick-to-light
– Orders are identified by lights which is placed in
shelves

Order Management

Order Management
Order delivery is the time from when a
transportation carrier picks up the shipment until
it is received by the customer.

Order Management
Three key order delivery issues:
– Number of options in terms of transit time – next
day delivery
– A number of shippers are emphasizing both transit
time as well as transit time reliability
– Transportation carriers are adjusting their
operations to provide faster transit times to
customers (500 vs 700 hours overnight services)

Customer Service
Customer service is “the ability of
logistics management to satisfy users
in terms of time, dependability,
communication , and convenience.”
• Acquiring new customer expensive
• Customer service is much more
difficult for competitors to imitate
than other marketing mix variables
such as price and promotion
– Nordstrom – upscale fashion retailer

Customer Service
Customer Service has four dimensions, and
logistics should satisfy all
– Time
§ Refers to the period between successive events (e.g., order
cycle)
– Dependability
§ refers to the reliability of the service encounter
§ consists of three elements: consistent order cycles, safe
delivery, and complete delivery
– Communication
– Convenience

Customer Service
Customer Service, four dimensions
• Communication
§ If effective should be a two-way exchange between
seller and customer
§ Goal is to keep both parties informed
§ Requires correct parties to be involved in the
process
§ delivery address vs detail characteristic of delivery (e.g.,
floor number of building)

Customer Service
Customer Service, four dimensions
• Convenience
§ Focuses on the ease of doing business with a seller
§ Different customers have different perceptions of ease of doing
business: doing business with a bank- for student: access to
automatic teller machine vs for small business: a bank teller
who focus on commercial deposit and withdrawals
§ From business perspective some cost associated with
convenience
§ Convenience fee – no service charge for online booking vs
convenience fee when use phone booking; service charge for
delivery if location out of free delivery area

Managing Customer Service
Specific customer service managerial
considerations:
– Establishing customer service objectives
– Measuring customer service
– Customer profitability analysis (CPA)
– Service failure and recovery

Establishing goals and objectives important management
decisions
• Goals more broad, objectives more specific
– Achieving the highest level of customer satisfaction
– Reducing order picking errors from 5 to 2 % within 12 months
• Objectives for establishing customer service
– Specific
– Measurable
– Achievable
– Cost-effective

Measuring Customer Service
“you can’t manage what you can’t measure”
• Issues associated with measuring customer
services
§ Determining data sources to be used
(Internal/external sources)
§ Determining what factors to measure

Determining data sources to
be used - external
• Formed used by a Spanish
firm for surveying the
element of delivery service
• Customer is asked to
provide the invoice number,
note the date that the order
was received, and fax it
(toll-free) to shipper.

Measuring Customer
Service
Determining data sources to
be used - external 1
• Customer is asked about
(1) mistakes in quantity, 2
(2) whether correct goods
were shipped, (3)
adequacy of packing, and
(4) labeling 3
• Company provide toll-
free-fax number returning 4
the form

Determining what factors to measure

Excessive measurement can strain an

organization
§ Organizations must resist excessive
measurement
§ Relevant aggregated metric vs multiple
metrics
Customer Profitability Analysis (CPA) is the

allocation of revenues and costs to customer
segments or individual customers to calculate
the profitability of the segments or customers

Customer Profitability Analysis (CPA)
– Suggests that different customers consume differing
amounts and types of resources
– Recognizes that all customers are not the same and
some customers are more valuable than others to an
organization
– Can help to identify when an organization should
pursue different logistical approaches for different
customer groups
– Has been facilitated by the acceptance of activity-
based costing

Customer Profitability
Analysis
• Divide customers into
four groups
• High Margin/High
Volume represent the
most attractive
• Low Margin / Low
Volume represents the
least attractive

Customer profitability analysis is only works if
company has activity-based-costing
• Activity-based-costing steps
1. Identify activities
2. Determine cost of each activities
3. Determine cost drivers
4. Collect activity data
5. Calculate product cost

1. Relevant activities – order
transmittal, order
processing, etc.
2. Determine cost of each
activities – order
transmittal ($1,000) Table 7A.2 Activity Data and Product Cost Calculation
3. Determine cost drivers – Product 1 Product Product 2 Product
order transmittal > orders; Activity Cost Data 1 Cost Data 2 Cost
order processing # of Order transmittal $1,000

Order processing $3,000
3 orders $300 7 orders $700
4 activities $1,200 6 activities $1,800
processing activities, etc. Order picking and
assembly $12,000 110 box $6,600 90 box $5,400
4. Collect activity data – 3 Order Delivery
Total
$6,000 30 locations $4,500 10 locations $1,500
$12,600 $9,400
orders Product 1, 7 orders
Product 2
5. Calculate product cost

Service Failure and Service Recovery
– Situations occur where actual performance does not
meet the customer’s expected performance (i.e.
service failure)
– Service failure is relevant to the order cycle
• Lost delivery
• Late delivery
• Early delivery
• Damaged delivery
• Incorrect delivery quantity

Service Failure and Recovery
– Service recovery
§ Process for returning a customer to a state of satisfaction
after a service or product has failed to live up to
expectations
§ Is often costly
§ May lead to increases customer loyalty
§ Can result in better performing organization by learning
from failure and implementing processes and policies to
prevent reoccurrence

Copyright Notice
All rights reserved. No part of this publication may be reproduced, stored in a

retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without the prior written
permission of the publisher. Printed in the United States of America.

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CHAPTER 7

Demand Management, Order

Copyright © 2015 Pearson Education, Inc.

© 2008 Prentice Hall 4-2

Source: John T. Mentzer, “A Telling Fortune”, Industrial

Copyright © 2015 Pearson Education, Inc. 7-3

Demand (sales) forecasting

Copyright © 2015 Pearson Education, Inc. 7-4

Copyright © 2015 Pearson Education, Inc. 7-5

Copyright © 2015 Pearson Education, Inc. 7-6

© 2008 Prentice Hall 4-7

Copyright © 2015 Pearson Education, Inc. 7-8

© 2008 Prentice Hall 4-9

© 2008 Prentice Hall 4-10

© 2008 Prentice Hall 4-11

F(period-6)= 37 * 10% + 35 * 20% + 38 * 30% + 38 * 40% = 37.5

© 2008 Prentice Hall 4-12

Copyright © 2015 Pearson Education, Inc. 7-13

Copyright © 2015 Pearson Education, Inc. 7-14

© 2008 Prentice Hall 4-15

Example of application of simple

– ! =y intercept ∑ &$ − '&̅ $#

© 2008 Prentice Hall 4-17

simple regression 1 600

© 2008 Prentice Hall 4-18

268200 − 12 ∗ 2779.17 8 = #% − ( "̅

© 2008 Prentice Hall 4-19

© 2008 Prentice Hall 4-20

– If we do not have data for 3 1,500

– How would you find 6 3,100

© 2008 Prentice Hall 4-21

Copyright © 2015 Pearson Education, Inc. 7-22

management of the various placement

activities associated with the

• Order cycle (replenishment

cycle or lead time) refers to Order

customer places an order to Order to Cash Cycle

order management model

Copyright © 2015 Pearson Education, Inc. 7-23

© 2008 Prentice Hall 4-24

Copyright © 2015 Pearson Education, Inc. 7-25

© 2008 Prentice Hall 4-27

Copyright © 2015 Pearson Education, Inc. 7-28

Copyright © 2015 Pearson Education, Inc. 7-29

Copyright © 2015 Pearson Education, Inc. 7-30

Copyright © 2015 Pearson Education, Inc. 7-31

Copyright © 2015 Pearson Education, Inc. 7-32

© 2008 Prentice Hall 4-33

Copyright © 2015 Pearson Education, Inc. 7-34

Copyright © 2015 Pearson Education, Inc. 7-35

Copyright © 2015 Pearson Education, Inc. 7-36

Copyright © 2015 Pearson Education, Inc. 7-37

Copyright © 2015 Pearson Education, Inc. 7-38

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Excessive measurement can strain an

Customer Profitability Analysis (CPA) is the

Copyright © 2015 Pearson Education, Inc. 7-47