ITC

Unit 1 Unit 2 Unit 3 Unit 4 Unit 5 Unit 6 Unit 7

Introduction Strategic Customer Operational International Information The Future
Issues Value Issues Issues Technology

Learning Objectives

By the end of this Unit, you should be able to:

 Define the concept of customer value

 Describe the different customer service elements

 Explain the advantage of customer retention

 Explain the differences between price, cost & profit

ITC M10:U3:1
 Customer value is defined as:
the way the customer perceives the
entire company’s offerings, including
products, services & other intangibles

Customer value dimensions:

 Conformance to requirements
 Product selection
 Price and brand
 Value-added services
 Relationships & experience
ITC M10:U3:3.2-1
 Action Point 3.2-1

Your stakeholders and value

Think about your own company. Identify the key stakeholders and think
about how your different stakeholders measure value.

How do you satisfy the different stakeholders in your organisation?

ITC M10:U3:3.2-2
 Measures of Customer Value
Customer value is determined by the
customer‘s perception. It is measured by:

 Service levels

 Customer satisfaction & loyalty

 Supply chain performance

ITC M10:U3:3.2-3
 Measuring what your customers value…
Customers’
requirements
Level 5

4 Gap
Gap
3

2 Your offer

Features
Speed to
Range of
On-time
delivery

develop new
models
models

service

Quality
After-sales

(25) (20) (10) (15) (30) Weighting %

ITC M10:U3:3.2-4
 Action Point 3.2-2

Know your customer

Who are your customers? What are their characteristics?

What do your customers value? How do you provide that value?

How do you measure the customer value that you provide in your firm?

ITC M10:U3:3.2-5
 Customer service is:

 An activity which needs to be carefully

managed

 Related to performance measures that have to

be achieved

 A corporate philosophy

 A reflection of what the customer values

ITC M10:U3:3.3-1
 What is the 7 R’s Rule?
The 7 R‘s Rule describes how customer service can be
created through integrated logistics:

Having the right product

in the right quantity
in the right condition
at the right place
at the right time
for the right customer
at the right cost

Inadequate functioning of any of these areas can

result in poor customer service
ITC M10:U3:3.3-2
 Customer service is provided at three distinct stages:

 Pre-Transaction
Customer service policies set up prior to customer transaction

 Transaction
Customer service elements directly related to customer
transaction

 Post-Transaction
Customer service elements supporting the customer during the
use of the product

ITC M10:U3:3.3-3
 Action Point 3.3-1

Where does your customer service start and end?

What customer service do you offer to your customers?

Analyse your customer service in relation to the stages in which it is taken place.
Give some examples for each stage

Why is post transaction customer service so important?

ITC M10:U3:3.3-4
 Examples of Customer Service Elements
 Pre-Transaction – EXAMPLES
 Written customer service policies which are internally & externally
communicated
 The firm’s accessibility to its customers
 Ability of customer service system to adapt to customer needs

 Transaction – EXAMPLES
 Order cycle – how long after the order the product will be delivered
 Availability of inventory to meet customer’s demand
 Provision of order status information
 Response time to customer queries

 Post-Transaction – EXAMPLES
 Response time to customer complaints and claims after purchase
 Availability of service parts/spares
 Fixing customer’s problem with first call

ITC M10:U3:3.3-5
 Defining Customer Service Needs

The following three steps help identifying

similar customer segments:

Step 1: Identify key customer service components

from the customer‘s perspective
Step 2: Define the relative importance of each
component
Step 3: Group customers based on similarities in
service preferences

After defining customer needs in each segment, a strategy that

satisfies those needs in a cost-efficient & consistent manner has
to be developed
ITC M10:U3:3.3-7
 Action Point 3.3-2

Customer service components

Which are the key customer service components for the customers you
identified in Action Point 3.2-2?

How could you check your ideas about these components with your
customers?

Based on your ideas, identify the group of customers which is most

profitable for your company.

ITC M10:U3:3.3-8
 Measuring
Customer Service Performance
Setting customer service standards and comparing
them with actual achievements is essential in issues
related to:
 Order cycle time
 Stock availability
 Order size constraints
 Ordering convenience (including online ordering)
 Frequency of delivery
 Delivery reliability
 Order completeness (e.g. order fulfillment rate)
 Documentation quality
 Claims procedure
 Technical support
 Order status information
ITC M10:U3:3.3-9
 Customer Retention

Firms invest considerable efforts in attracting new

customers while often overlooking the importance &
advantage of retaining existing customers:

 Costs of winning new customers are much higher

than the cost of keeping customers
 Existing customers have tendency to buy more than
new customers
 Loyal customers will increase spending over time
 Retained customers are likely to be willing to pay a
premium

ITC M10:U3:3.3-10
 Calculating the Lifetime Value
of a Customer
Average Average Average Average
value per
purchase
X
number of
purchases
X
life of
account = ‘lifetime‘
value of a
($) (per year) (in customer
years) ($)

ITC M10:U3:3.3-11
 Measuring Customer Retention
Customer retention can be measured by
comparing the number & identity of
customers between two points in time:

How many of the customers we

had last year are still our
customers this year?

While insights are offered by looking at the

percentage of customer retention, it is also
important to look at their spending

ITC M10:U3:3.3-12
 Action Point 3.3-3

Keeping the old or finding new…

How does your organisation go about finding new customers?

Why is customer retention so important?

What does your company do about retaining customers?

ITC M10:U3:3.3-13
 Pricing ?

Price can be defined as cost plus profit

in the context of a firm’s competition

In an environment of perfect
competition, the price is set by market
mechanisms while in a monopolistic
environment the producer can set the
price freely

ITC M10:U3:3.4-1
 Price Analysis
Depending on the available data, price analysis
can be conducted by comparing prices:

 With competitors
 With regulated, catalogue or market prices
 With web-based offers
 With historical prices
 With independent cost estimates

ITC M10:U3:3.4-2
 Pricing Strategies

1) Customised pricing
Prices are based on the particular customer segment

2) Dynamic pricing
Prices are adjusted to market conditions

Note: Firms should avoid creating the

impression of treating their customers
unfairly

ITC M10:U3:3.4-3
 How to define costs ?

1) Fixed vs. Variable

2) Direct vs. Indirect

3) Engineered vs. Discretionary

ITC M10:U3:3.4-4
 Fixed vs.Variable Costs
Fixed and variable costs have different
effects depending on the volume of the Fixed & variable costs…
firm‘s activity

 Fixed costs remain constant regardless of volume.

However, as they are spread out over a company‘s total
production output, fixed costs per unit go down as
production increases.

 Total Variable costs increase when volume goes up,

but variable costs per unit remain unchanged.

Both costs taken together determine the ‘Break-Even‘

Point.
ITC M10:U3:3.4-5
 Breaking Even
Revenue/Cost Profit
($)
Sales Revenue

Break even
point Total
Cost

Loss Variable Cost

Fixed Cost

Volume of Activity

ITC M10:U3:3.4-6
 Direct vs. Indirect Costs ?

Looking at costs as direct or indirect

means looking at their allocation to a
certain product

Direct costs can be linked to a particular

product

Indirect costs cannot be directly

associated to a particular product

ITC M10:U3:3.4-7
 Engineered vs. Discretionary Costs
Looking at costs as engineered or discretionary
means looking at the relative ease of allocating
costs to a particular product

Engineered costs imply that there is

a clear input-output relationship

Discretionary costs are more difficult to

allocate as the input is easily identified, while it
is difficult to identify the actual output

ITC M10:U3:3.4-8
 Basic Cost Calculations
 Total Costs = Variable Costs + Fixed Costs

 Total Revenue = Price x Quantity Sold

 Profit: Total Revenue – Total Cost > 0

 Break Even: Total Revenue – Total Cost = 0

 Loss: Total Revenue – Total Cost < 0

ITC M10:U3:3.4-9
 Action Point 3.4-1

What are your costs?

Identify two products in your organisation and assess their cost bases
using different cost categories.

Where lies the break-even point for your products? How could you change
the location of this point?

ITC M10:U3:3.4-10
 Total Ownership Costs

This concept focuses on the many sources of

costs throughout the supply chain, rather
than emphasising on acquisition costs

Total ownership costs is the sum of:

Acquisition costs
+
Ownership costs
+
Post-ownership costs

ITC M10:U3:3.4-11
 Action Point 3.4-2

Ownership costing
Identify 3 examples of costs for each category:

1. Acquisition costs
2. Ownership costs
3. Post-ownership costs

How could you reduce the costs you just identified?

ITC M10:U3:3.4-12
 Costing the Logistics Process
 The logistics process needs to be managed as a complete
system

 The decisions taken in one cost area influence the other

areas

 Only when analysing options within the whole logistics

system, cost trade-offs can be found

 The organisation needs to focus on the output of the

logistics system

PRINCIPLES of the costing system:

 It should mirror the material flow

 It should enable separate cost and revenue analyses per
customer, supplier, segment, department
ITC M10:U3:3.4-13
 The
ThePrinciples of good
principles of Goodlogistics
Logistics Costing
costing

It should mirror the

logistics process

It should be
able to separate
costs and …type of
revenues by... supplier/ …distribution
customer channel
…supply/sales
market segment

ITC M10:U3:3.4-14
 Linking Costs to Logistics Mission
First of all, the desired outputs of the supply chain
have to be determined. Then, the costs associated with
providing those outputs should be identified.

Mission statement:

 This is the foundation from which an organisation

develops its strategies, plans and tactics

 It can be defined in terms of customers served, type

of products, or constraints of service and cost

ITC M10:U3:3.4-15
 Logistics Mission extends across
Functional Boundaries
Purchasing Sales Warehousing

Production Marketing Etc..

Logistics/supply chain O
mission A U
T
Logistics/supply chain P
mission B U
T
Logistics/supply chain
S
mission C

ITC M10:U3:3.4-16
 Logistics Mission Costing
For a logistics costing system to be effective, the total
cost of meeting desired supply chain objectives (the
‘output‘) together with the cost of the various inputs
involved have to be determined

Application of mission costing:

Step 1: Identification of activities centres
associated with a particular logistics mission
Step 2: Isolation of the incremental cost for each
activity centre

ITC M10:U3:3.4-17
 Logistics Programme
Logistics Budgeting
programme budgeting
Functional Functional Functional Functional Total
area/ area/ area/ area/
activity activity activity activity mission
centre centre centre centre cost
1 2 3 4
1. Determine
the cost of
Mission A 290 each mission
100 90 20 80

Mission B 50 70 200 20 340

70 30 50 70 220
Mission C
2. Allocate
mission costs
to individual
areas/centres
Area/ 850
centre 220 190 270 170
inputs
3. Determine the
total cost
allocated to each
area/ centre
ITC M10:U3:3.4-18
 Action Point 3.4-3

Logistics mission statement

Express in words your company’s mission statement for logistics

Can you identify any individual missions within the mission

statement that you just wrote?

ITC M10:U3:3.4-19
 Attributable Cost
Attributable cost is a cost per unit that
could be avoided, if a product or
function was discontinued entirely,
without changing the supporting
organisation structure

The focus is on determining the true

incremental cost of an activity centre
which is attributable to a specific
mission

ITC M10:U3:3.4-20
 Activity-Based Costing (ABC)
Traditionally, production was labour-intensive, & costs were
allocated on the basis of direct labour. Today, this measure
is no longer relevant due to technological advances &
differentiated products

Activity-Based Costing recognises the costs associated

with the different activities within the firm

Steps in activity-based costing:

Step 1: Identify the major processes in a firm and break them
down into individual activities
Step 2: Identify and quantify cost drivers for the individual
activities of a process to obtain the actual cost of that
activity
Step 3: Sum the cost of the individual activities to get the
process cost
ITC M10:U3:3.4-21
 Activity-Based Costing vs.
Traditional Cost Bases
Traditional $ Activity $ Cost
Cost bases 000’s Cost bases 000’s Drivers

Salaries 550 Sales order 300 Number of orders

processing
Wages 580 Holding inventory 600 Value of shipment

Depreciation 250 Picking 300 Number of order

lines
Rent/electri- 700 Packing/assembly 100 Number of order
city/telephone of orders lines

Maintenance 100 Loading 200 Weights

Fuel 200 Transportation 500 Location of

customer
Delivery at 200 Number of drops
customer
Solving problems 380 Number of order
lines
2,380 2,380

ITC M10:U3:3.4-22
 Action Point 3.4-4

Activity based costing

Complete the left part of the table with estimates of your traditional
cost bases

Traditional cost base Cost Activity cost base Cost Cost driver

To convert these costs into activity based costs, firstly identify cost
bases, then cost drivers and finally estimate the cost of each activity.
Complete the last three columns of the table.

Which are the advantages of using activity based costing?

ITC M10:U3:3.4-23
 Profit
A firm‘s profit is influenced by a number
of sources including:

 The efficiency of the organisation

 Amount of risk

 Order size

 Technical reliability

ITC M10:U3:3.4-24
 Customer Profitability
A customer profitability analysis allows the
identification of the different types of
customers in terms of their profitability to the
organisation

The analysis calculates the actual cost of the

product + the costs related to providing
services to that customer (transportation,
promotion, warehousing)

ITC M10:U3:3.4-25
 Customer Profitability Matrix
high
Sales value of customer

COST
PROTECT
ENGINEER

DANGER
BUILD
ZONE

low Cost of service high

ITC M10:U3:3.4-26
 Action Point 3.4-5

How profitable are your customers?

Draw the customer profitability matrix and place your customers

within it

Did any of the placements surprise you? Are you pursuing your
customers as suggested by their categorisation?

ITC M10:U3:3.4-27
 Direct Product Profitability
The Direct Product Profitability (DPP) method
is one of the ways to measure a product‘s true
contibution to profit

The DPP method looks at all costs that are

incurred for a particular product throughout
the supply chain

This allows the company to make adequate

decisions on product handling options,
promotion, etc

ITC M10:U3:3.4-28
 Direct Product Profit
Sales
- Cost of goods sold
= Gross margin
+ Allowances and discounts
= Adjusted gross margin
- Warehousing costs
labour (labour model – case, cube, weight)
occupancy (space & cube)
inventory (average inventory)
- Transportation costs
- Retail costs
stocking labour
front end labour
occupancy
inventory

= Direct product profit

ITC M10:U3:3.4-29
 Action Point 3.4-6

Direct Product Profitability and your firm

Calculate the Direct Product Profit for one of your company’s

prodcuts.

Are you surprised? Discuss your findings with others in your

group.

ITC M10:U3:3.4-30
 Summary of Customer Value Issues

 Value is dependent on the

perspective
 Custome servicedepends on a number
of elements
 There is no one way of defining cost
 Not all customers are porfitable for
a firm
 Performance can be measured suign a
number of different tools

ITC M10:U3:3.5-1