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LB8 Order Fulfilment and Customer Service
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SESSION METHODOLOGY
 PRACTICE EXAM
 8 Learning Blocks
 20 Questions per Learning Block
 20 QUESTIONS
 One question per LB learning objective
 Each Learning Objective linked to a Concept in a Paper
 UNDERSTANDING THE LEARNING OBJECTIVE

 Correct answer
 Revisit the Paper
 Tips and Tricks in the questions
LB8 – Customer Service and Order Fulfilment

PAPERS
LB-8: ORDER FULFILMENT AND CUSTOMER SERVICE
1. Supply Chain Management: A Logistics Perspective, 8th Edition (book)

Order Management and Customer Service
2. Supply Chain Logistics Management, 3rd Edition (book)

Customer Accommodation

Chapter 8, Order Management and Customer Service,
Introduction
topic on pages 268-270.
• Supply Chain Profile:
– Tradeoffs between delivery service & business costs
– Business challenge: Understand the real cost of company service. Cost To Serve
• Introduction:
– Execution comes after planning.
– Order Management (OM): Receive an order  fill it  deliver it
A - INFLUENCING THE ORDER

How company influence or change the manner in which customers place orders
B - ORDER EXECUTION
Customer Service: Anything that touches the customer
• Include all activities that impact information, product and cash flows between the
company and its customer.
• It can be defined as:
1- Philosophy
2- Performance Measures
3- Activity (all tasks needed)

Introduction

Influencing the Order, CRM
Phase A: Influencing the Order – CRM
CRM: Art & Science of strategically positioning customers to

improve the profitability of the organization & enhance its
relationships with its customer base
• Traditionally and widely used in B2C while not that much in

B2B (ie: hotels & airlines)
• B2B realized that how, what, how much and when, customers
order, impact on cost of executing the order; so determines
each customers profitability.
• CRM allows to identify, and reward, those customers.

4 Steps of CRM Implementation in B2B
S1 – Segment the customer base by profitability

– Develop a cost-to-serve model (CTS) x customer. (ie: A-B-C
technique)
S2 – Identify the Product/Service Package for each

Customer Segment
– Determine what each customer segment values in its
relationship
– “Same coffee for all” is easier for the supplier (and the mode
widely adapted) but may not match all customer segments
requirements

4 Steps of CRM Implementation in B2B
S3 – Develop & Execute the best processes

– Many times companies fail in delivering promises; because of
not doing the needed process re-engineering
– Higher customer expectations; means higher dissatisfaction
when not delivered
S4 – Measure performance & continuously improve

– CRM´s goal is to better serve the different customer segments
– Align supplier resources with customers to increase customer
satisfaction and supplier profit
Activity-Based Costing and Customer Profitability
Traditional cost accounting is well suited to situations where an output and an
allocation process are highly correlated, such as if product is received, stored,
picked and shipped in pallets.
This approach assigns resources to department cost centers (e.g., warehouse labor
is assigned to the warehousing department), then allocates a particular cost to a
product (e.g., labor dollars per pallet).
ABC is a methodology that measures the cost and performance of activities,

resources and cost objects. ABC assigns resources to an activity (e.g., labor cost
for picking product), identifies the cost drivers (e.g., labor cost for picking a pallet
versus picking an inner-pack), and then allocates those costs to products,
customers, markets or business units. For example, if product is received and
stored in pallets but picked and shipped in case, inner-pack and pallet quantities.
ABC more accurately reflects the actual cost of performing an activity than does
traditional cost accounting. ABC is more accurate for logistics costs because
multiple different activities from different cost centers are often represented within a
single shipment.

ABC more
accurately reflects
the actual cost of
performing an
activity than does
traditional cost
accounting.
ABC is more
accurate for
logistics costs
because multiple
different activities
from different cost
centers are often
represented within
a single shipment.

• Assign more costs to activities that absorb more resources (Space and/or
Labour) (ie: unit picking vs pallets)
• This methodology can be used to determine the cost of the various customer
ordering policies and may be used to influence how the customer orders.
Customer
Segmentation Matrix

Executing the Order – OM and Order Fulfilment
Effective Order Management is key to operational efficiency &

customer satisfaction and leads to a better internal coordination.
Order cycle , when referring to all those activities that occur

from when an order is received by a seller until the product is
received by the buyer.
– OTC (Order to Cash) is all those activities included in the order
cycle plus the flow of funds back to the seller based on the
invoice.
Replenishment cycle is used more frequently when referring to

the acquisition of additional inventory (materials management)

Length and Variability of the Order to Cash Cycle
It is important to note that the

time and variability associated
with order management affects
not only customer satisfaction
but also a customer’s
inventories.
These costs and services

implications of order
management are critical to a
seller’s competitive advantage in
the marketplace.
Increase in variability impacts in

Safety Stock increases.

E-Commerce Order Fulfillment Strategies
E-Commerce allowed the faster collection of cash by the seller.
"sell-buy-make" business model
• Orders received are placed through its Web site. Once the order is
received and confirmed (sell), the company processes the buyer's
payment to begin the flow of funds before it owns the components
that will go into building the customer's order.
• Originally, Dell, now how many?
E-Commerce  Omni-channel

Application of the Internet technology to the order management

process allowed:
• Organizations take time out of the process

– Reduction of Inventories
– Reduction of Cost
– Increase Customer Satisfaction
• increase the velocity of cash back to the selling organization.

Customer Service, Introduction
Customer Service is:

• an activity
• a set of performance measures
• a philosophy
• a core benefit
• a tangible product (physical product or service itself)
• an augmented product (include all secondary benefits)
It focuses on how a seller interacts with its customers on

– information flows,
– product flows,
– cash flows.

Elements of Customer Service
Every incremental improvement in service (e.g., on-time delivery) will

require some incremental level of investment from the supplier.
• Faster and more reliable transportation
• Additional inventories.
An assumption is that for every incremental improvement in service there

is an incremental increase in revenue for the supplier from the customer.
With the cost and revenue parameters identified, a return on investment
(ROI) can be calculated.
Generally, the ROI from service improvement increases at a decreasing

rate. In other words, as service continues to improve, the marginal cost
of providing the improved service increases, while the marginal
increase in revenue decreases.

Elements of Customer Service
At some point, the cost of service

will far outweigh the incremental
revenue gained from that service,
providing a negative ROI. This is
why it is impractical for most
organizations to provide 100
percent service levels. Therefore,
suppliers must recognize the
importance of balancing the
tradeoffs between service and
cost.

Customer Service Performance Measures
• Orders received on time

• Orders received complete
• Orders received damage-
free
• Orders filled accurately
• Orders billed accurately
• Also SCOR metrics
examples (i.e. Perfect
Order Fullfilment)

Expected Cost of Stockouts
A stockout occurs when desired quantities of finished goods are not available
when or where a customer needs them. When a seller is unable to satisfy demand
with available inventory, one of four possible events may occur:
1. The buyer waits until the product is available

2. The buyer back-orders the product
3. The seller loses current revenue
4. The seller loses a buyer and future revenue
A back-order occurs when a seller has only a portion of the products ordered by
the buyer. The back-order is created to secure the portion of the inventory that is
currently not available.
It is critical to evaluate potential lost sales to define the best inventory policy.
For a lost customer it is very difficult to estimate the future units the customer
would buy and therefore, the revenue we could get.

Order Management Influences on Customer Service
Linking Order Management outputs

Product Availability
• TOP of the Order Management (OM) outputs
• Basic output of an organization OM and Logistics Systems
• Ultimate measure of SC performance
• Influence both sellers & buyers inventories
• It is key to know where in the SC is being measured (ie:
Impulse buy)
• Determine product stock level to maintain service level
(depending substitutability)
• Metrics:
– Internal: ITEM FILL RATE; LINE FILL RATE (Efficiency)
– External: ORDER FILL RATE; PERFECT ORDER (Satisfaction)

• Item fill rate is the percent of total items filled complete. An "item"
might be a case of product, an inner-pack or an "each" on an order.
• Line fill rate is the percent of total lines filled complete on a multiple
line order. A "line" represents a single product on a multiple product
order.
• Order fill rate is the percent of orders filled complete.
• Perfect order rate is the percent of orders filled completely,
received on time, billed accurately, etc. The nature and number of
items in the perfect order are determined by the organization that is
measuring it.

For the probability of product availability on the store shelf, the

availability factors at all of the supply chain points are multiplied
together.
For the probability of retail stockout, the probability of product

availability is subtracted from 100 percent.
Not all products require the same level of availability to the buyer.
If a product has a high level of substitutability and, therefore a high
stockout cost, inventory levels must be adequate to provide high levels
of availability, and vice versa.

Fill Rate & Inventory Investment

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 Orders Back Ordered x Invoice Deduction per Order)

LOGISTIC OPERATIONS RESPONSIVENESS

• LOR examines how a seller can respond to a buyer’s needs.
– How a seller can customize its service
• Good/Bad
– How a seller can respond to a sudden change (in buying pattern)
• Quick/Slow
• Add Value
• Metrics :
– Capacity to adapt to higher or lower demand
• Upside deliver flexibility
• Downside deliver adaptability
• Upside deliver adaptability
– Flexibility of process for customization
• Time to offer a new adapted package

LOGISTIC SYSTEM INFORMATION

• LSI critical in the OTC (Order To Cash)
– Timely and Accurate Information can reduce inventories
– Barcodes, RFID, Radio Frequency, EDI, internet are tools that helps the supply as
long as the firm determine how to use them and the goal of improvement
– Pre-transaction : information needed by seller and buyer before placing an order /
PLANNING
– Transaction : information required to place the order / EXECUTION
– Post-transaction : information needed after the order is delivered / EVALUATION
• Metrics :
– Forecast Accuracy
– Inventory Accuracy
– Data Integrity
– EDI compliance
• Financial Impact :
– Usually is not measured though the results are impressive

LOGISTIC SYSTEM INFORMATION
Pre-transaction Transaction
• purchase order information, • shipment status.
• equipment availability,
• bill of lading, Post-transaction
• pickup/delivery times • freight bill,
• advance shipping notification. • carrier performance,
• proof of delivery,
• payment and
• claim information.

POST-SALE LOGISTIC SUPPORT for returns management is the

management of product returns from the customer to the supplier. Suppliers must
consider not only the initial product delivery but also the efficient return of unwanted
product
• PLS can be a competitive advantage:

– Management of returns (key on e-commerce)
– Product support (spare parts)
• Metrics:
– ease in which a customer can return a product
• Spare parts
– Critical in the very competitive heavy equipment industry & military.
– Same KPI than selling products
– Large stockout costs to the customer for a disabled piece of equipment

SERVICE RECOVERY
No matter how well an organization plans to provide excellent service, mistakes will
occur. Even in a Six Sigma statistical environment, 100 percent performance will not
happen. Basically, service recovery requires an organization to realize that
mistakes will occur and to have plans in place to fix them.
• Measure the costs of poor service is critical for an organization because it dictates
investment in resources, such as inventories.
• Anticipate the needs for recovery is critical for knowing where service failures might
occur and developing plans to mitigate those failures, subject to the cost of failure.
• Act fast to fix service failures is critical because the longer a dissatisfied customer waits
for a problem to be solved; the higher the level of dissatisfaction will grow.
• Train and empower employees to take actions to satisfy the customer is critical
because it is very frustrating to a dissatisfied customer to wait for resolution while recovery
actions are being discussed through multiple echelons of an organization's management
structure.

When would an activity-based costing approach be

preferable to a traditional cost accounting approach in
the assignment of logistics costs?
Answer 1 When resource costs can be allocated to each product based on the
number of units moved
Answer 2 When resources are assigned to department cost centers and then a
particular cost is allocated to a product
Answer 3 When the causal relationships of cost drivers to activities cannot be

identified
Answer 4 When the output is not highly correlated with the allocation base
QUESTION 1 LB8 – Customer Service and Order Fulfilment

When would an activity-based costing approach be

preferable to a traditional cost accounting approach in
the assignment of logistics costs?
Answer 1 When resource costs can be allocated to each product based on the
number of units moved
Answer 2 When resources are assigned to department cost centers and then a
particular cost is allocated to a product
Answer 3 When the causal relationships of cost drivers to activities cannot be

identified
Answer 4 When the output is not highly correlated with the allocation base

When would an activity-based costing approach be preferable to a traditional
cost accounting approach in the assignment of logistics costs?
An activity-based costing (ABC) approach would provide a more accurate

assignment of costs than a traditional cost accounting approach when the output
is not highly correlated with the allocation base. For example, if product is
received and stored in pallets but picked and shipped in case, inner-pack and pallet
quantities.
The traditional cost accounting approach could be used when resource costs can
be allocated to each product based on the number of units moved.
The traditional cost accounting approach assigns resources to department cost

centers and then allocates a particular cost to a product.
In the ABC approach resources are assigned to activities and then activities are
assigned to cost objects based on their use - thus, it recognizes the causal
relationships of cost drivers to activities.

If a seller has inventory on hand to fill a customer's

order, what concept would it utilize to establish a
delivery date for the order?
Answer 1 Available to deliver

Answer 2 Available to promise
Answer 3 Available to reserve
Answer 4 Available to schedule

If a seller has inventory on hand to fill a customer's

order, what concept would it utilize to establish a
delivery date for the order?
Answer 1 Available to deliver

Answer 2 Available to promise
Answer 3 Available to reserve
Answer 4 Available to schedule

If a seller has inventory on hand to fill a customer's order,

what concept would it utilize to establish a delivery date for
the order?
If a seller has inventory on hand to fill a customer's order, it would

utilize available to deliver (ATD) to establish a delivery date for the order. This
means that the seller has the inventory and can promise a delivery date.
Available to promise (ATP) is utilized when the seller does not have the
inventory but knows when it will be produced internally or delivered from a
supplier to the seller's distribution centers. This means that even though the
seller does not have physical possession of the inventory to fill the order, it can
still promise a delivery date.
Available to reserve and available to schedule are not standard terms

utilized in order processing.

When customer orders are consolidated, what are the

cost efficiency opportunities for the seller?
Answer 1 Batch warehouse picking schedules and delivery cycle time
Answer 2 Batch warehouse picking schedules and freight consolidation
Answer 3 Delivery cycle time and freight consolidation
Answer 4 Freight consolidation and order capture cycle time


Answer 1 Batch warehouse picking schedules and delivery cycle time
Answer 2 Batch warehouse picking schedules and freight consolidation
Answer 3 Delivery cycle time and freight consolidation
Answer 4 Freight consolidation and order capture cycle time


When customer orders are consolidated, the cost efficiency

opportunities for the seller are batch warehouse picking schedules
and freight consolidation.
Order consolidation will normally add time to the delivery cycle of the
order to the customer.
Order capture occurs prior to the consolidate order step, so the order
capture cycle time would not be affected by consolidation.

A supplier has a 10-day average order cycle time with a variability

of +/- 3 days for a product. A buyer has demand for this product of
5 units per day.
How many units of demand inventory and how many units of
safety stock should the buyer have on hand to avoid stockouts?
Answer 1 30 units of demand inventory and 5 units of safety stock


A supplier has a 10-day average order cycle time with a variability

of +/- 3 days for a product. A buyer has demand for this product of
5 units per day.
How many units of demand inventory and how many units of
safety stock should the buyer have on hand to avoid stockouts?


A supplier has a 10-day average order cycle time with a variability of +/- 3
days for a product. A buyer has demand for this product of 5 units per day.
How many units of demand inventory and how many units of safety stock
should the buyer have on hand to avoid stockouts?
The buyer should have 50 units of demand inventory and 15 units of safety
stock on hand to avoid stockouts.
Demand Inventory:
For 5 units of daily demand, the buyer would need 50 units of demand inventory,
which is the 10-day average order cycle X 5 units per day.
Safety Stock:
The 10-day average order cycle and variability of +/- 3 days produces an order
cycle range of 7-13 days or 6 days of variability (13 - 7 days). For 5 units of daily
demand, the buyer would need 15 units of safety stock, which is the maximum
range of 13 days X 5 units per day - 50 units of demand inventory.

A supplier reduced the absolute length of its order fulfillment

cycle time for a product by 2 days from 10 days to 8 days. What is
the most likely benefit to a buyer of this supplier's product?
Answer 1 Buyer could change the available to deliver date to its

customers to 2 days earlier
Answer 2 Buyer could decrease its demand inventory level by number

of units of daily demand multiplied by 2 days
Answer 3 Buyer could decrease its economic order quantity by

number of units of daily demand multiplied by 2 days
Answer 4 Buyer could decrease its safety stock level by number of

units of daily demand multiplied by 2 days

A supplier reduced the absolute length of its order fulfillment

cycle time for a product by 2 days from 10 days to 8 days. What is
the most likely benefit to a buyer of this supplier's product?
Answer 1 Buyer could change the available to deliver date to its

customers to 2 days earlier
Answer 2 Buyer could decrease its demand inventory level by number

of units of daily demand multiplied by 2 days
Answer 3 Buyer could decrease its economic order quantity by

number of units of daily demand multiplied by 2 days
Answer 4 Buyer could decrease its safety stock level by number of

units of daily demand multiplied by 2 days

A supplier reduced the absolute length of its order fulfillment cycle time for a
product by 2 days from 10 days to 8 days. What is the most likely benefit to a
buyer of this supplier's product?
If a supplier reduced the absolute length of its order fulfillment cycle time for a
product by 2 days, a buyer could most likely decrease its demand inventory level
by number of units of daily demand multiplied by 2 days.
The available to deliver date would not be affected since the available to deliver
concept applies to products already in a seller's distribution network.
A buyer could most likely decrease its reorder point, instead of the economic
order quantity, by number of units of daily demand multiplied by 2 days.
A buyer's safety stock level would be affected by the variability, instead of the
absolute length, of the order fulfillment cycle time.

What is a key benefit that can result from applying e-commerce

order fulfillment strategies to a "sell-buy-make" business model,
such as the business model utilized by Dell?
Answer 1 The seller can capture an order and reserve finished goods
inventory for the order simultaneously
Answer 2 The seller can collect cash from the buyer before it
has to pay its suppliers for raw materials or components
Answer 3 The seller can decrease both the variability of its
order cycle time and its operating cash flow
Answer 4 The seller can hold cash paid by the buyer for a
longer time period and decrease the velocity of cash flow

What is a key benefit that can result from applying e-commerce

order fulfillment strategies to a "sell-buy-make" business model,
such as the business model utilized by Dell?
Answer 1 The seller can capture an order and reserve finished goods
inventory for the order simultaneously
Answer 2 The seller can collect cash from the buyer before it
has to pay its suppliers for raw materials or components
Answer 3 The seller can decrease both the variability of its
order cycle time and its operating cash flow
Answer 4 The seller can hold cash paid by the buyer for a
longer time period and decrease the velocity of cash flow

What is a key benefit that can result from applying e-commerce order fulfillment
strategies to a "sell-buy-make" business model, such as the business model
utilized by Dell?
A key benefit that can result from applying e-commerce order fulfillment strategies to a
"sell-buy-make" business model is that the seller can collect cash from the buyer
before it has to pay its suppliers for raw materials. If Internet technology is utilized to
capture orders, the order can be confirmed and payment processed against the buyer's
credit card before the seller even owns the raw materials or components for the final
product.
The seller could capture an order and reserve finished goods inventory for the
order simultaneously in a "buy-make-sell" business model, instead of a "sell-buy-make"
model.
The seller could be more likely to reduce the total time, instead of variability, of its
order cycle time and this would increase, instead of decrease, its operating cash flow.
The seller could hold cash paid by the buyer for a longer time period but this would
increase, instead of decrease, the velocity of cash flow.

Customer Service topic on pages 286-292.
What is the general relationship between service levels, cost and

revenue in terms of the service levels and the cost of providing
that service?
Answer 1 As service continues to improve, the marginal cost of providing the improved
service decreases, while the marginal increase in revenue decreases
service increases, while the marginal decrease in revenue decreases
service increases, while the marginal decrease in revenue increases
service increases, while the marginal increase in revenue decreases


that service?
service decreases, while the marginal increase in revenue decreases
service increases, while the marginal decrease in revenue decreases
service increases, while the marginal decrease in revenue increases
service increases, while the marginal increase in revenue decreases


that service?
The general relationship between service levels, cost and revenue indicate that as
service continues to improve, the marginal cost of providing the improved service
increases, while the marginal increase in revenue decreases.
The outcome is that the return on investment from service improvements increases at a
decreasing rate.

Product Availability topic on pages 297-300.
A potato farmer makes raw potatoes available to a potato chip manufacturer 95

percent of the time; the potato chip manufacturer makes a 1-ounce bag of
packaged potato chips available to its distribution center 85 percent of the time;
the distribution center makes the 1-ounce bag available to the retailer's
distribution center 90 percent of the time; and the retailer's distribution center
makes the 1-ounce bag available to the retail store 80 percent of the time.
Assuming statistical normality, what is the probability of the retail store having the
1-ounce bag of potato chips on the store shelf?
Answer 1 41.9%
Answer 2 58.1%
Answer 3 72.7%
Answer 4 80.0%


Answer 1 41.9%
Answer 2 58.1%
Answer 3 72.7%
Answer 4 80.0%


The probability of the retail store having the 1-ounce bag of potato chips on the store
shelf is only 58.1%, which is 95% X 85% X 90% X 80%. This is because the potential
occurrence of any one failure must be combined with any other failure in calculating the
probability.
This would result in a probability of retail stockout and lost sale 41.9% of the time,
which is 100% - 58.1%

Typically, for the following metrics, in what order would you

expect a company's performance to be ranked from the highest
(best performance) to lowest (worst performance): perfect order
rate, item fill rate, order fill rate and line fill rate?
Answer 1 Item fill rate, line fill rate, order fill rate and perfect order rate
Answer 2 Line fill rate, item fill rate, perfect order rate and order fill rate
Answer 3 Order fill rate, perfect order rate, item fill rate and line fill rate
Answer 4 Perfect order rate, order fill rate, line fill rate and item fill rate


Answer 1 Item fill rate, line fill rate, order fill rate and perfect order rate
Answer 2 Line fill rate, item fill rate, perfect order rate and order fill rate
Answer 3 Order fill rate, perfect order rate, item fill rate and line fill rate
Answer 4 Perfect order rate, order fill rate, line fill rate and item fill rate


Typically, the metrics would be ranked from highest to lowest in terms of their
performance as item fill rate, line fill rate, order fill rate and perfect order
rate.
Typically, the item fill rate is higher than the line fill rate, which is higher than
the order fill rate, which is greater than the perfect order rate.
Whenever the item fill or the line fill is less than 100 percent, the order fill and
perfect order rates will be zero.

Logistics System Information topic on pages 307-310.
A logistics information system (LIS) provides visibility to all

trading partners and operates in real-time. Considering the
information provided by the LIS to execute and manage a
shipment, when would the intended receiver of the shipment have
information on the delivery time?
Answer 1 After the shipment is delivered

Answer 2 Prior to the shipment
Answer 3 When the shipment is picked up
Answer 4 While the shipment is in transit

A logistics information system (LIS) provides visibility to all

trading partners and operates in real-time. Considering the
information provided by the LIS to execute and manage a
shipment, when would the intended receiver of the shipment have
information on the delivery time?
Answer 1 After the shipment is delivered

Answer 2 Prior to the shipment
Answer 3 When the shipment is picked up
Answer 4 While the shipment is in transit

A logistics information system (LIS) provides visibility to all trading partners

and operates in real-time. Considering the information provided by the LIS to
execute and manage a shipment, when would the intended receiver of the
shipment have information on the delivery time?
The intended receiver of the shipment would have information on the delivery
time prior to the shipment, since the LIS provides information to all trading
partners and operates in real-time. This type of information would be classified as
pretransaction information and would be used for planning purposes.
After the shipment has been picked up and while the shipment is in
transit would be classified as transaction information.
This type of information is used for execution purposes. After the shipment has
been delivered would be classified as post-transaction information. This type of
information is used for evaluation purposes.

Postsale Logistics Support topic on pages 310-312.
What metric would most likely be utilized to measure the

performance of postsale logistics support for returns
management?
Answer 1 Ease in which a customer can return a product to the

seller
Answer 2 Level of dissatisfaction a customer had with a
product that was returned
Answer 3 Total elapsed time for a customer to return a product
to the seller
Answer 4 Total number of days postsale that a customer has to
return a product

What metric would most likely be utilized to measure the

performance of postsale logistics support for returns
management?
Answer 1 Ease in which a customer can return a product to the

seller
Answer 2 Level of dissatisfaction a customer had with a
product that was returned
Answer 3 Total elapsed time for a customer to return a product
to the seller
Answer 4 Total number of days postsale that a customer has to
return a product

What metric would most likely be utilized to measure the performance

of postsale logistics support for returns management?
The metric that would most likely be utilized to measure the performance of postsale logistics
support for returns management is the ease in which a customer can return a product to
the seller. Since a product return usually involves some level of dissatisfaction by a customer
for a seller's product, making it easy for a customer to return a product is a critical metric.
The level of dissatisfaction a customer had with a product that was returned is a factor in
measuring the ease in returning products, not a metric itself that is measured.
The total elapsed time for a customer to return a product to the seller is usually not
important to a customer.
The total number of days postsale that a customer has to return a product is a component
of the seller's return policy, not a metric that is measured.

Service Recovery topic on pages 313-314.
A seller does not have 50 units of a product in inventory to fulfill a

customer order. The seller calls the buyer immediately to say the
item is out of stock but the 50 units will be in stock and shipped to
the customer three days later to completely fill the order.
What aspect of service recovery does this situation best

represent?
Answer 1 Act fast to fix service failures

Answer 2 Anticipate the needs for recovery
Answer 3 Measure the costs of poor service
Answer 4 Train and empower employees to take actions to satisfy the customer

A seller does not have 50 units of a product in inventory to fulfill a

customer order. The seller calls the buyer immediately to say the
item is out of stock but the 50 units will be in stock and shipped to
the customer three days later to completely fill the order.
What aspect of service recovery does this situation best

represent?
Answer 1 Act fast to fix service failures

Answer 2 Anticipate the needs for recovery
Answer 3 Measure the costs of poor service
Answer 4 Train and empower employees to take actions to satisfy the customer

A seller does not have 50 units of a product in inventory to fulfill a customer

order. The seller calls the buyer immediately to say the item is out of stock
but the 50 units will be in stock and shipped to the customer three days later
to completely fill the order.
What aspect of service recovery does this situation best represent?
This situation best represents the act fast to fix service failures aspect of service recovery. This
aspect includes knowing where a failure is likely to occur, having plans in place to fix them and
communicating to the customer how and when the failure will be fixed.
The anticipate the needs for recovery aspect includes identifying areas with higher than normal
opportunities for failures to occur and having corrective action plans developed before the error
occurs.
The measure the costs of poor service aspect includes measuring the costs of things such as back
orders, lost sales and/or lost revenue.
The train and empower employees to take actions to satisfy the customer aspect includes giving
customer contact personnel the authority to handle service failures quickly and appropriately
considering the cost of a service failure

Chapter 3, Customer Accommodation,
Introduction topic on pages 47-48.
Logistics contributes to an organization’s success by

accommodating customers’ delivery and inventory availability
expectations and requirements.
• We need to focus on who the customer is.

– From the perspective of the total supply chain, the ultimate
customer is the end user for the product or service.
• The intermediate organization that exist between a firm and
an end user is also a customer.
• For logistics the delivery location could also be a customer.
• The customer being served is the focal point and driving
force in establishing logistical performance requirement.
Customer Focused Marketing
The focal point of a business’ strategy must be the

customers it intends to serve. It must be more effective
than competitors in identifying specific customer needs.
• Customer needs and requirements are more complex
than basic products or services
• Different Customers have different needs and
requirements
• Products and services become meaningful only when
available and positioned from the customer’s perspective
• Volume is secondary to profit

• Customer needs and requirements are more complex

than basic products or services
– Fully understanding what drives market opportunities
– In-depth study of customers to identify product and services
requirement
– Adapt the offer to the needs
– There is no single market for any given product or service.
– Effective market segmentation requires a clear identification of
the segments and selection of specific targets.
– A company can’t operate in all the segments in a profitably way
– Careful matching of capabilities with specific segments is an
essential aspect of the marketing concept

Transactional versus Relationship Marketing
• Transactional :
– Focus on obtaining successful exchanges or transactions to
drive increases in revenue and profit
– Orientation to short-term interactions
• Relationship :
– Developing long-term relations with key supply chain participants
– Orientation to develop and retain long-term preference and
loyalty
• Micromarketing or 1to1 marketing
– Recognize that each individual may have unique requirements
Organizations must overcome three discrepancies.
Discrepancy in space is the location of production and consumption are

seldom the same.
• An example is furniture that is manufactured in Vietnam but has customer demand
worldwide. This difference between the locations is a fundamental transportation
challenge that must be overcome to accomplish exchange.
Discrepancy in time is the difference in timing between production and

consumption.
• An example is agricultural commodities that are produced during short time periods
but are demanded by customers continuously. Cash flow and inventories affected.
Discrepancy in quantity and assortment is the production of large

quantities of a limited variety of items but demand is for small quantities of
numerous items.
• This difference must somehow be reconciled to deliver the required product variety
and assortment to customers. Supply and Inventory planning
Customer Service
Main goal is to accommodate customer requirements in a

cost-effective manner. That’s the Logistics’ role in fulfilling
the marketing concept
– Identify and prioritize the activities required to

accommodate customer’s logistical requirement, as well or
better tan competitors
– Identify standards of performance
– Does the cost associated with achieving specified service

performance represent a sound investment?

Customer Service
Availability Capacity to have inventory when desired by a customer

Stock in anticipation – based on forecasted demand –
stock parameters (popularity – profitability – value)
Measures :
• Stock-out frequency is the probability that an organization will not have inventory
available to meet a customer order. A stock-out does not occur until a customer
desires a product. It is the starting point in thinking about inventory availability.
• Fill rate performance can be evaluated for a specific customer, product or any
combination of customers, products or business segments. It can be used to
differentiate the level of service to be offered on specific products.
• Orders shipped complete is the most exacting measure of performance in product

availability. Failure to provide even one item on a customer's order results in that
order being recorded as zero in terms of complete shipment.

Customer Service
Service Reliability Ability to perform all order-related activities

as well as provide customers with critical information
Additionally: Capacity and willingness to provide accurate

information to customers regarding operations and order status.

Customer Service
Operational Performance Time required to deliver a customer’s

order
Measures :
• Speed: Time elapsed from when a customer establishes a need to
order until the product is delivered and is ready for customer use.
• Consistency: Number of times that actual cycles meet the time
planned for completion.
• Flexibility: Ability to accommodate special situations and unusual or
unexpected customer request.
• Malfunction recovery: Ability to plan contingency plans to
accomplish recovery in case of malfunctions in the service to a
customer

Customer Satisfaction topic on pages 58-63
Why do firms fail to satisfy their customers?
• Gap 1: Knowledge reflects management's lack of knowledge or

understanding of customers.
• Gap 2: Standards: when internal performance standards do not adequately
or accurately reflect customer expectations.
• Gap 3: Performance: is the difference between standard and actual
performance. (i.e. standard of 98% versus 96% achieved).
• Gap 4: Communications: is when there is a gap between what an
organization is capable of doing and what customers are told about those
capabilities.
• Gap 5: Perception: is when customers perceive performance to be lower
or higher than actually achieved. (“We are only as good as the last order”)
• Gap 6: Satisfaction/quality: The existence of any of the above gaps leads
to customer perception that performance is not as good as expected. When
building a platform for delivering customer satisfaction, an organization must
ensure that these gaps do not exist.

Customer Satisfaction topic on pages 58-63.
Customer Satisfaction
Has long been a fundamental concept in marketing and business strategy.
But was does it mean to say that a customer is satisfied?
Expectancy disconfirmation
If a customer’s expectation of a supplier’s performance are met or
exceeded, the customer will be satisfied.
If perceived performance is less than expected, the customer will be
dissatisfied.
In order to build a customer service platform, we need to ask ourselves:

What do they expect? How do they form these expectations? What is the
relationship between customer satisfaction and perception? Why do we fail
to satisfy them? Is it enough to satisfy the customer?

Limitations of Customer Satisfaction

Difference between expectation and happiness:
Expectation
LO MED HI
HI Very Satisfied Very Satisfied Satistied
Performance MED Very Satisfied Satistied Dissatisfied
LO Satisfied Dissatisfied Dissatisfied

Customer service is at the basic level.

• To be competitive, an organization 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.
Customer satisfaction is the next level.

• It focuses on customers, their expectations and their perceptions of
supplier performance.
• An organization can provide service equal to or greater than
competitors' but still have dissatisfied customers.
• This can arise from lack of knowledge about customer expectations,
improper standards of performance, performance failure, poor
communication or incorrect customer perception of performance.
Customer success is the highest level.
• It focuses on customer needs and requirements, which are

frequently different from customer expectations.
• It requires a commitment by the service provider to enhance a

customer's ability to compete more successfully in the marketplace.
– Commit on a long-term business relationships
• Look into the customer’s customer. End-to-End Approach
• Providing value-added services is one way to contribute to

customer success.
– Requires significant amount of information exchange
Philosophy Focus
Customer Service Meet internal standards
Customer Satisfaction Meet expectations
Customer Success Meet Customer Requirements

Developing Customer Accommodation Strategy
Different approaches and strategies for customers

accommodation
• Framework for Strategic Choice
• Customer Relationship Management

FRAMEWORK FOR STRATEGIC CHOICE classifies customers as A, B, C or D
based on profitability and classifies products 1, 2, 3 or 4 on the same basis.
For example, A customers are extremely profitable, B customers are very profitable,
C customers are somewhat profitable and D customers are unprofitable. Product
categories 1, 2, 3 and 4 exhibit similar profitability characteristics.

CUSTOMER RELATIONSHIP MANAGEMENT (CRM)
Definition:
• Many companies used to describe the software that gathers data from
numerous sources to gain greater insight into customer buying
behavior.
• In others, not only describes technology, but also all forms of
communication and information sharing that lead to development of
the appropriate relationships with customers.
The goal is to develop a customer-centered organization

• Enables better understanding and anticipations of the customer’s
needs.
• X-functional transparency.
– Logistics has primary responsibility for many of the process that drive value
and customer success

Supply Chain Service Outputs topic on pages 50-52.
Which type of economic discrepancy occurs when

products are manufactured in anticipation of future
customer demand and products must be held in
inventory and warehousing until the products are
demanded?
Answer 1 Discrepancy in assortment

Answer 2 Discrepancy in quantity
Answer 3 Discrepancy in space
Answer 4 Discrepancy in time

Which type of economic discrepancy occurs when

products are manufactured in anticipation of future
customer demand and products must be held in
inventory and warehousing until the products are
demanded?
Answer 1 Discrepancy in assortment

Answer 2 Discrepancy in quantity
Answer 3 Discrepancy in space
Answer 4 Discrepancy in time

Which type of economic discrepancy occurs when products are

manufactured in anticipation of future customer demand and
products must be held in inventory and warehousing until the
products are demanded?
The type of economic discrepancy that occurs when products are

manufactured in anticipation of future customer demand and products must be
held in inventory and warehousing until the products are demanded
is discrepancy in time. Discrepancy in time refers to the difference in timing
between production and consumption.
Discrepancy in quantity and assortment refers to manufacturing

organizations that typically specialize in producing large quantities of a limited
variety of items while customers typically demand small quantities of numerous
items.
Discrepancy in space refers to the location of production activities and the

location of consumption are seldom the same.

Availability topic on pages 53-54.
What performance measure best provides an indication

of how well an organization is positioned to provide
basic service commitments in inventory availability?
Answer 1 Item fill rate

Answer 2 Line fill rate
Answer 3 Orders shipped complete
Answer 4 Stockouts aggregated across all products

What performance measure best provides an indication

of how well an organization is positioned to provide
basic service commitments in inventory availability?
Answer 1 Item fill rate

Answer 2 Line fill rate
Answer 4 Stockouts aggregated across all products

What performance measure best provides an indication of

how well an organization is positioned to provide basic
service commitments in inventory availability?
The performance measure that best provides an indication of how well an

organization is positioned to provide basic service commitments in
inventory availability is stockouts aggregated across all products. A
stockout occurs when an organization has no product available to fulfill
customer demand.
Fill rates, such as item fill rate and line fill rate, measure the magnitude
or impact of stockouts over time.
Orders shipped complete measures having everything that a customer

ordered as the standard of acceptable performance.

The Perfect Order topic on pages 56-57.
What term is typically defined as being delivered

complete, delivered on time, at the right location, in
perfect condition, with complete and accurate
documentation?
Answer 1 Customer relationship management

Answer 2 Expectancy disconfirmation
Answer 4 Perfect order

What term is typically defined as being delivered

complete, delivered on time, at the right location, in
perfect condition, with complete and accurate
documentation?
Answer 1 Customer relationship management

Answer 2 Expectancy disconfirmation
Answer 4 Perfect order

What term is typically defined as being delivered complete, delivered on time,

at the right location, in perfect condition, with complete and accurate
documentation?
Perfect order is typically defined as being delivered complete, delivered on time, at the
right location, in perfect condition, with complete and accurate documentation.
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.
Expectancy disconfirmation is a concept for defining customer satisfaction. It states if a

customer's expectations of a supplier's performance are met or exceeded, the customer
will be satisfied. Conversely, if perceived performance is less than what the customer
expected, then the customer is dissatisfied.
Orders shipped complete is a performance metric that measures having everything that
a customer ordered as the standard of acceptable performance

A customer expects a supplier over time to have a fill rate of 90

percent, late deliveries 5 percent of the time and damage 5 percent of
the time for the customer's orders. The customer perceives that the
supplier has provided this level of customer service, and the
customer is satisfied with the supplier's performance.
This is an example of what type of limitation of the customer

satisfaction emphasis?
Answer 1 Expectations are not the same as needs or requirements

Answer 2 Satisfied customers are not necessarily loyal customers
Answer 3 Satisfaction is not the same as happiness
Answer 4 Satisfaction lies in the expectations and perceptions of
individual customers

A customer expects a supplier over time to have a fill rate of 90

percent, late deliveries 5 percent of the time and damage 5 percent of
the time for the customer's orders. The customer perceives that the
supplier has provided this level of customer service, and the
customer is satisfied with the supplier's performance.
This is an example of what type of limitation of the customer

satisfaction emphasis?
Answer 1 Expectations are not the same as needs or requirements

Answer 2 Satisfied customers are not necessarily loyal customers
Answer 3 Satisfaction is not the same as happiness
Answer 4 Satisfaction lies in the expectations and perceptions of
individual customers

A customer expects a supplier over time to have a fill rate of 90 percent, late deliveries 5
percent of the time and damage 5 percent of the time for the customer's orders. The
customer perceives that the supplier has provided this level of customer service, and
the customer is satisfied with the supplier's performance.
This is an example of what type of limitation of the customer satisfaction emphasis?
This is an example of satisfaction is not the same as happiness type of limitation of the customer
satisfaction emphasis. This limitation is based on the fact that customers who are satisfied with a
supplier's performance may or may not be happy with the supplier's performance.
Expectations are not the same as needs or requirements limitation is based on the fact that a
supplier's performance that is higher than expected, while satisfying customers, may or may not result
in happiness.
Satisfied customers are not necessarily loyal customers is based on the fact that satisfied
customers may choose to do business with competitors.
Satisfaction lies in the expectations and perceptions of individual customers is based on the
tendency to aggregate expectations across customers and neglect the basic tenets of marketing
strategy related to differences among customer segments as well as individual customers.

A company recognizes that customers have expectations

regarding performance and the only way to ensure that customers
are satisfied is to assess their perceptions of performance relative
to those expectations. The company's goal is to meet or exceed
customers' expectations.
What is this company's customer accommodation strategy?
Answer 1 Customer perception

Answer 2 Customer satisfaction
Answer 3 Basic Customer service
Answer 4 Customer success

A company recognizes that customers have expectations

regarding performance and the only way to ensure that customers
are satisfied is to assess their perceptions of performance relative
to those expectations. The company's goal is to meet or exceed


A company recognizes that customers have expectations regarding performance and

the only way to ensure that customers are satisfied is to assess their perceptions of
performance relative to those expectations. The company's goal is to meet or exceed
The company's customer accommodation strategy is customer satisfaction, which is based

on expectancy disconfirmation. If a customer's expectations of a supplier's performance are
met or exceeded, the customer will be satisfied. Conversely, if perceived performance is less
than what the customer expected, then the customer is dissatisfied.
The basic customer service accommodation strategy is focused on meeting internal

standards and providing basic customer service. It is the lowest of the accommodation
strategies.
The customer success strategy is focused on meeting the customer's real requirements. It is
the highest of the accommodation strategies.
Customer perception is not an accommodation strategy per se but is a subset of the

accommodation strategies.

A hardware store has been a customer of a local distributor for seven years.
During that time, the distributor always achieved a 100% damage-free
shipment, which was the performance expected by hardware store personnel.
However, yesterday for the first time one of the distributor's deliveries arrived
on a broken shipping pallet and 25 percent of the products were damaged and
not sellable. As a result of this delivery, hardware store personnel were
extremely dissatisfied with the distributor and were considering changing to
one of its competitors.
This is an example of which type of gap the distributor's would need to

overcome to satisfy the customers?
Answer 1 Communication gap

Answer 2 Knowledge gap
Answer 3 Perception gap
Answer 4 Performance gap

A hardware store has been a customer of a local distributor for seven years.
During that time, the distributor always achieved a 100% damage-free
shipment, which was the performance expected by hardware store personnel.
However, yesterday for the first time one of the distributor's deliveries arrived
on a broken shipping pallet and 25 percent of the products were damaged and
not sellable. As a result of this delivery, hardware store personnel were
extremely dissatisfied with the distributor and were considering changing to
one of its competitors.
This is an example of which type of gap the distributor's would need to

overcome to satisfy the customers?
Answer 1 Communication gap

Answer 2 Knowledge gap
Answer 3 Perception gap
Answer 4 Performance gap

A hardware store has been a customer of a local distributor for seven years. During that time, the
distributor always achieved a 100% damage-free shipment, which was the performance expected by
hardware store personnel. However, yesterday for the first time one of the distributor's deliveries
arrived on a broken shipping pallet and 25 percent of the products were damaged and not sellable. As
a result of this delivery, hardware store personnel were extremely dissatisfied with the distributor and
were considering changing to one of its competitors.
This is an example of which type of gap the distributor's would need to overcome to satisfy the
customers?
This is an example of a perception gap in the distributor's customer satisfaction. Customers sometimes
perceive performance to be lower or higher than actually achieved. Thus, although performance over a long
time period has been very good, a late or incomplete or otherwise subpar delivery may result in a customer's
expression of extreme dissatisfaction.
A communication gap is when there is a gap between what an organization is capable of doing and what
customers are told about those capabilities.
A knowledge gap reflects management's lack of knowledge or understanding of customers. It is the first and
most fundamental gap that may exist between customers' real expectations and managers' perception of
those expectations.
A performance gap is the difference between standard and actual performance. If the standard is a fill rate of
98 percent, based on research with customers regarding their expectations, and the actual fill rate is 97
percent, a performance gap exists

Customer Success topic on pages 58-63
A national chain of retail stores requires different quantities of a specific

product in each store to maintain in-stock performance with minimum
inventory commitment. A third-party logistics provider developed a unique
palletization alternative to support the retailer's cross-dock activities and to
meet the unique product requirements of the individual store units.
What is the customer accommodation strategy of the third-party logistics
provider?


A national chain of retail stores requires different quantities of a specific

product in each store to maintain in-stock performance with minimum
inventory commitment. A third-party logistics provider developed a unique
palletization alternative to support the retailer's cross-dock activities and to
meet the unique product requirements of the individual store units.
What is the customer accommodation strategy of the third-party logistics
provider?


A national chain of retail stores requires different quantities of a specific product in each
store to maintain in-stock performance with minimum inventory commitment. A third-
party logistics provider developed a unique palletization alternative to support the
retailer's cross-dock activities and to meet the unique product requirements of the
individual store units.
What is the customer accommodation strategy of the third-party logistics provider?
The third-party logistics provider's customer accommodation strategy is customer

success and it is providing value-added services to the retailer. The customer success
strategy is focused on meeting the customer's real requirements and on understanding how an
organization can utilize its own capabilities to enhance customer performance. Providing value-
added service is a significant development in the evolution to customer success.
The customer satisfaction accommodation strategy is based on expectancy disconfirmation.

If a customer's expectations of a supplier's performance are met or exceeded, the customer will
be satisfied. Conversely, if perceived performance is less than what the customer expected,
then the customer is dissatisfied.
The customer service accommodation strategy is focused on meeting internal standards and
providing basic customer service. It is the lowest of the accommodation strategies.
Customer perception is not an accommodation strategy per se but is a subset of the
accommodation strategies.

In which situation would an organization be most likely

to maintain a customer success strategy across an
entire product range?
Answer 1 To convert an existing customer from limited profitability to

extremely high profitability
Answer 2 To meet the needs of a new customer
Answer 3 To meet the needs of a small but rapidly growing customer
Answer 4 To meet the needs of an A customer

In which situation would an organization be most likely

to maintain a customer success strategy across an
entire product range?
Answer 1 To convert an existing customer from limited profitability to

extremely high profitability
Answer 2 To meet the needs of a new customer
Answer 3 To meet the needs of a small but rapidly growing customer
Answer 4 To meet the needs of an A customer

In which situation would an organization be most likely to maintain a

customer success strategy across an entire product range?
An organization is most likely to maintain a customer success strategy across

an entire product range to meet the needs of an A customer. A customers are
those who are extremely profitable.
An organization would most likely consider providing customer success

service to convert an existing customer from limited profitability to
extremely high profitability for selected product categories, instead of the
entire product range.
An organization would most likely be deciding whether to provide basic service

or stop doing business with a customer to meet the needs of a new customer
and to meet the needs of a small but rapidly growing customer. In some
instances, there may be good reasons to continue these relationships.

Iker Lopategi
LB8 Order Fulfilment and Customer Service
THANK YOU
http://cscmpcertification.org

603 SCPro LB08 MAD - Telepresence

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Iker Lopategi

LB8 Order Fulfilment and Customer Service

Become a Supply Chain Superstar

 UNDERSTANDING THE LEARNING OBJECTIVE

LB8 – Customer Service and Order Fulfilment

1. Supply Chain Management: A Logistics Perspective, 8th Edition (book)

2. Supply Chain Logistics Management, 3rd Edition (book)

LB8 – Customer Service and Order Fulfilment

A - INFLUENCING THE ORDER

LB8 – Customer Service and Order Fulfilment

LB8 – Customer Service and Order Fulfilment

Phase A: Influencing the Order – CRM

CRM: Art & Science of strategically positioning customers to

• Traditionally and widely used in B2C while not that much in

LB8 – Customer Service and Order Fulfilment

4 Steps of CRM Implementation in B2B

S1 – Segment the customer base by profitability

S2 – Identify the Product/Service Package for each

LB8 – Customer Service and Order Fulfilment

4 Steps of CRM Implementation in B2B

S3 – Develop & Execute the best processes

S4 – Measure performance & continuously improve

ABC is a methodology that measures the cost and performance of activities,

LB8 – Customer Service and Order Fulfilment

LB8 – Customer Service and Order Fulfilment

LB8 – Customer Service and Order Fulfilment

Effective Order Management is key to operational efficiency &

Order cycle , when referring to all those activities that occur

Replenishment cycle is used more frequently when referring to

LB8 – Customer Service and Order Fulfilment

It is important to note that the

These costs and services

Increase in variability impacts in

LB8 – Customer Service and Order Fulfilment

E-Commerce allowed the faster collection of cash by the seller.

"sell-buy-make" business model

LB8 – Customer Service and Order Fulfilment

Application of the Internet technology to the order management

• Organizations take time out of the process

• increase the velocity of cash back to the selling organization.

LB8 – Customer Service and Order Fulfilment

Customer Service is:

It focuses on how a seller interacts with its customers on

LB8 – Customer Service and Order Fulfilment

Every incremental improvement in service (e.g., on-time delivery) will

An assumption is that for every incremental improvement in service there

Generally, the ROI from service improvement increases at a decreasing

LB8 – Customer Service and Order Fulfilment

At some point, the cost of service

LB8 – Customer Service and Order Fulfilment

• Orders received on time

LB8 – Customer Service and Order Fulfilment

1. The buyer waits until the product is available

LB8 – Customer Service and Order Fulfilment

Linking Order Management outputs

LB8 – Customer Service and Order Fulfilment

LB8 – Customer Service and Order Fulfilment

LB8 – Customer Service and Order Fulfilment

For the probability of product availability on the store shelf, the

For the probability of retail stockout, the probability of product

LB8 – Customer Service and Order Fulfilment

Fill Rate & Inventory Investment

LB8 – Customer Service and Order Fulfilment