INTT 356 Spring 2021 Ch08 Handouts

INTT 356 International Transportation and Logistics
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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. The concept of CRM,
however, has not been widely used in the business-to business environment
as traditionally, manufacturers and distributors are more adept at and actively
involved in order execution which involves filling and shipping what their
customers order
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To be successful, the firm must find ways to meet its customers' needs;
otherwise, just as any firm would react with a nonperforming supplier, the
customer goes elsewhere and takes years of future purchases with him.
Regardless of a firm's place in the supply chain—retailer, wholesaler,
distributor, manufacturer, or service provider—the importance of meeting and
exceeding the needs and expectations of customers cannot be understated.
In an integrated supply chain setting, the need to be a good supplier, to
adequately meet the needs of supply chain customers, is paramount to the
success of supply chains. As products make their way along the supply chain
to the end-user, close, trusting, and high-performance relationships must be
created among all of the supplier-customer pairs along the way.
Care should also be used when establishing B2B relationships. These
business customers represent suppliers' products to their customers. In these
situations, businesses have a significant influence on the brand and
reputation of their suppliers' products.
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Source: Supply Chain Management: A Balanced Approach. Wisner, Tang, Leong; Cengage
Learning.
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There are four basic steps in the implementation of the CRM process in a business-to-
business environment.
Step 1: Segment the Customer Base by Profitability
Most firms allocate direct materials, labor, and overhead costs to customers using a single
allocation criterion. However, firms today are beginning to use techniques such as activity-
based costing.
Step 2: Identify the Product/Service Package for Each Customer Segment
This step presents one of the most challenging activities in the CRM process. The goal of
this step is to determine what each customer segment values in its relationship with the
supplier. The challenge here is how to “package” the value-adding products and services
for each customer segment. One solution is to offer the same product/service offering to
each customer segment, while varying the product quality or service levels. Another
solution to this part of the CRM process is to vary the service offerings for each customer
segment.
Step 3: Develop and Execute the Best Processes
In Step 2, customer expectations were determined and set. Step 3 delivers on those
expectations. Organizations many times go through elaborate processes to determine
customer needs and set target performance levels, only to fail when it comes to executing
on those customer promises.
Step 4: Measure Performance and Continuously Improve
The goal of CRM is to better serve the different customer segments of the supplier
organization, while at the same time improving the profitability of the supplier. Once the
CRM program has been implemented, it must be evaluated to determine if (1) the different
customer segments are satisfied and (2) the supplier’s overall profitability has improved.
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The order management system represents the principal means by which

buyers and sellers communicate information relating to individual orders of
product. Effective order management is a key to operational efficiency and
customer satisfaction. To the extent that an organization conducts all activities
relating to order management in a timely, accurate, and thorough manner, it
follows that other areas of company activity can be similarly coordinated.
The logistics area needs timely and accurate information relating to individual
customer orders; thus, more and more organizations are placing the
corporate order management function within the logistics area.
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When referring to outbound-to-customer shipments, the term order to cash (or

order cycle) is typically used. The term replenishment cycle is used more
frequently when referring to the acquisition of additional inventory, as in
materials management.
Traditionally, organizations viewed order management as all of those activities
that occur from when an order is received by a seller until the product is
received by the buyer which is called the order cycle.
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Order cycle refers to outbound-to-customer shipments and replenishment

cycle refers to the acquisition of additional inventory (material management).
A firm’s order cycle is another’s replenishment cycle.
The order cycle has four elements, representing the lead-time. Each of those
is variable and has different length, but each of them contribute to the overall
performance of the order cycle:
1. Order placement (the time can vary from several weeks to being
instantaneous)
2. Order processing (involves the time spend with checking customer credit,
transferring information to sales record, preparing shipping documents)
3. Order preparation (the time with preparing orders vary with the complexity
of the product and the methods used to do it – manual or automatic), and
4. Order shipment (The shipment time extends from the moment an order is
placed on the transportation vehicle for movement until it is received and
unloaded at the buyer’s location).
Any reduction in the length of one or more order cycle components will
provide additional planning time for the manufacturer or a shortened order
cycle for the buyer.
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Thirteen principal activities constitute the OTC cycle.

D1.1: Process Inquiry and Quote. This step in the process precedes the actual placement of the order by the customer.
D1.2: Receive, Enter, and Validate Order. This step involves the placement and receipt of the order.
D1.3: Reserve Inventory and Determine Delivery Date. This step in the process has traditionally been referred to as
order processing. In the case where the seller has inventory to fill the order, the delivery date is based on the concept of
available to deliver (ATD). If 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, the delivery date is based on the concept of available to
promise (ATP).
D1.4: Consolidate Orders. This step examines customer orders to determine opportunities for both freight consolidation
as well as for batch warehouse picking schedules. Both of these consolidation opportunities offer cost efficiencies for the
seller.
D1.5: Plan and Build Loads. This step takes the freight consolidation opportunities identified in D1.4 and the delivery date
given in D1.3 and develops a transportation plan.
D1.6: Route Shipments. This step can follow or be concurrent with D1.5. Here, the “load” (usually a transportation
vehicle) is assigned to a specific route for delivery to the customer.
D1.7: Select Carriers and Rate Shipments. Following or concurrent with D1.5 and D1.6, this step will assign a specific
carrier to deliver an order or a consolidation of orders.
D1.8: Receive Product at Warehouse. This step gains importance when an ATP has been given to a customer’s order. In
this step, product is received at the distribution center and the order management system is checked to see if there are
any orders outstanding that need this particular product.
D1.9: Pick Product. This step uses the outputs from D1.3, D1.4, and D1.5 to determine the order picking schedules in the
distribution center.
D1.10: Load Vehicle, Generate Shipping Documents, Verify Credit, and Ship. Based on the output from D1.5 and D1.6,
the transportation vehicle is loaded in. Finally, this step will generate shipment documents to provide to the carrier to
execute the shipment. These documents might include bills of lading, freight bills, waybills, and manifests for domestic
shipments as well as customs clearance documents for international shipments.
D1.11: Receive and Verify Product at Customer Site. Once the shipment is delivered to the customer location, the
receiving location will determine whether or not the delivered product is what was ordered.
D1.12: Install Product. If an order involves a product that must be installed at the customer location, it is at this point in
the OTC cycle where installation takes place.
D1.13: Invoice. This step is the culmination of the OTC cycle for the buyer and seller.
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While interest has traditionally focused more on the overall length of the OTC
cycle, recent attention has been centered on the variability or consistency of
this process. Industry practices have shown that while the absolute length of
time is important, variability is more important. A driving force behind the
attention to OTC cycle variability is safety stock.
The concept of the order cycle is used here because the focus is on the
delivery of product to the buyer and not on the flow of cash to the supplier.
If the seller is concerned only with customer service prior to shipping, as per
traditional metrics, the buyer might not be satisfied and the seller might not
know it, because of problems occurring during the delivery process.
Furthermore, the seller using traditional metrics would have no basis upon
which to evaluate the extent and magnitude of the problem. The supply chain
approach, focusing on measurement at the delivery level, not only provides
the database to make an evaluation, but it also, and perhaps more
importantly, provides an early warning of problems as they are developing.
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Some common factors that increase lead times:

1. The manufacturer’s workload is a very important factor. Many shops are
job shops, which means their workload is constantly fluctuating depending on
the number of jobs they currently have. A shop’s workload could be
completely empty which would allow for a quick lead time, or completely
booked and be a month out for parts.
2. The complexity of parts is another major factor that we see quite often.
Sometimes we run into an assembly of 10 components that are hardware
assembled and have a relatively short lead time. Then there’s the assembly
with 100+ parts that need to be welded together and require tight tolerances.
Something like this should not have the same lead time expectations as the
simple assembly.
3. Occasionally, if there is special/uncommon material, hardware, or
tooling, there is a lead time associated with receiving it from the mill or
distributor.
4. Another important factor is outside/secondary processes that are done
by another shop. Some processes may be done by a different shop who
specializes in those capabilities, so their lead time is also a factor to deal with.
5. Last but not least, the shipping time to deliver parts should also be taken
into account.
There are many other different factors that can play a huge part in the lead
time of manufacturing parts, but these seem to be the most common.
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Many organizations are using Internet technology as a means to capture

order information and transmit it to their “back end” systems for picking,
packing, and shipping. What the Internet is now allowing is the faster
collection of cash by the seller organizations. As can be seen in the D1
process of the OTC cycle on Slide 22, cash is collected by the seller in the
last step of the process. This figure shows the traditional “buy-make-sell”
business model used by many organizations that produce product to
inventory to wait for an order. Obviously, the longer it takes the selling
organization to complete the order management process, the longer it takes
to collect its cash.
Applying internet technology to the order management process has allowed
organizations to take time out of the process and increase the velocity of cash
back to the seller.
E-commerce involves designing and implementing the basic principles of

logistics and supply chain management and marketing the latest
technologies. According to Ricker and Kalakota, three forces are converging
to create an explosion in consumer direct business models:
1. technology forces are making it possible
2. market forces are making it viable
3. social forces are making it inevitable
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Customer service is “the fuel” that drives the logistic supply chain engine. The
fundamental principle of logistics system is “having the right product, at the
right time, in the right quality to the right customer”, by which the importance
of customer service is recognized. Consumer awareness of the price and
quality ratio and the firm’s awareness of the consumer’s needs are very
important for keeping the business running.
Customer service is the key link between logistics and marketing, but also is
value adding.
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Customer service is an important basis for incurring logistics costs. There are
four main dimensions:
• Time is usually order cycle time, particularly from the perspective of the
seller. The buyer calls it lead time or replenishment time. Nowadays, logistics
operation has a high degree of control over the basic elements of lead-time
(order processing, order preparation, order shipment) and this can have an
impact over the efficiencies that accrue both to the customer (inventory costs)
and to the seller’s logistics system and market position.
• Dependability can often be more important then the lead-time. It refers to
delivering a customer’s order with a regular, consistent lead-time and in good
condition and at the required quality as ordered. For example, dependability
can affect customer’s inventory level and stock out costs, or even lost sales or
lost production for intermediary firms.
• Communication is critical to achieve a high level of customer service. The
communication channel should be a two way street, must be constantly open
and readily accessible to all customers, so logistics managers should be able
to provide the most efficient service. For example, the seller must be able to
transmit information about shipments and the buyer should transmit
information upon service level reductions so that operational adjustments can
be made.
• Convenience means that the logistics service levels should be flexible and
able to recognize customer’s different requirements.
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To be efficient and effective in providing and managing customer service,

companies developed the customer service policy and performance
measurement standards. Many standards have been used historically, but
current priorities are on making sure they focus on the needs of the buyer as
well as the seller.
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The performance standards are stated from the customer’s points of view, like
orders received on time or orders billed accurately. The implementation of
these standards is the key for the development of the customer service
quality. The customer service policies and standards should be openly
communicated to the customers. Also companies should develop and
implement procedures to measure, monitor and control the customers’ service
quality, in order to be able to take corrective actions or have enough feedback
for future improvements.
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The principal benefit of inventory availability and hence of customer service is

to reduce the incidence of stockouts.
A stockout occurs when desired quantities of finished goods are not available
when and where a customer needs them. There are four scenarios that may
occur:
1. The customer waits until the product is available. Theoretically this case
should cost nothing, especially where product substitutability is very low.
2. The customer back orders the product. Analyzing the additional order
processing and the additional transportation expenses can estimate the cost
for the back order.
3. The seller losses a sale. The seller’s direct loss is the loss of profit on the
items that were unavailable to deliver when the customer needed them. There
are additional losses, like the cost of the salesperson that made the initial
sale.
4. The seller losses a customer. The supplier who losses a customer losses a
future stream of income and the estimation of the loss is difficult – the
company should estimate how many units the customer may have purchased
in the future.
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We have discussed the concepts of order management and customer service

as somewhat mutually exclusive. However, at the beginning of this chapter
we explained that these two concepts are, in fact, related to one another. This
section will introduce and explain the five major outputs of order management
that influence customer service: product availability, order cycle time, logistics
operations responsiveness, logistics system information, and postsale
logistics support. Each of these outputs impacts customer
service/satisfaction, and the performance of each is determined by the seller’s
order management and logistics systems. They cannot be managed as single
outputs.
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Although not the most important, product availability is usually the most basic output of an
organization’s order management and logistics systems. This is true because product
availability can be measured by asking the simple question: Did I get what I wanted, when
I wanted it, and in the quantity I wanted?
Product availability influences both the seller’s and the buyer’s inventory levels. Sellers will
normally hold more inventory to increase product availability. Buyers will hold more
inventory to reduce stockouts, thus increasing product availability.
An important aspect of product availability is defining where in the supply chain it is being
measured. Another important aspect of product availability is determining whether or not all
products should be made available at the same level. Some organizations strive to have
100 percent product availability across all products. The cost associated with achieving this
goal would be prohibitive and unnecessary. Product availability levels for products can be
determined by examining the level of substitutability and related stockout costs for a
product as well as the demand profile for that product.
Many methods exist to measure the efficiency and effectiveness of product availability.
However, four metrics are widely used across multiple industries: item fill rate, line fill rate,
order fill rate, and perfect order. Item fill rate and line fill rate are considered internal
metrics; that is, they are designed to measure the efficiency of how well the seller is setting
its inventories to fill items or lines on an order. Order fill rates and perfect order rates are
external metrics; that is, they are designed to capture the buyer experience with product
availability. Order fill rate is the percent of orders filled complete. Finally, perfect order rate
is the percent of orders filled completely, received on time, billed accurately, etc.
A strategic profit model calculation would be required to determine the change in ROI as a
result of the improvement in order fill rate. The next step would require the seller to
determine the break-even point between order fill rates and inventory costs.
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Order cycle time is the time that elapses from when a buyer places an order with a
seller until the buyer receives the order. The absolute length and reliability of order
cycle time influences both seller and buyer inventories and will have resulting
impacts on both revenues and profits for both organizations. Normally, the shorter
the order cycle time the more inventory that must be held by the seller and the less
inventory that must be held by the buyer, and vice versa.
Order cycle time, or lead time, includes all activities and related time from when an
order is placed by a buyer until the order is received by the buyer. This definition
can be viewed as the buyer’s perception of lead time because this time ends when
the buyer receives the ordered goods. A seller might look at lead time from the
perspective of order-to-cash cycle time. This definition of lead time for the seller is
important because the receipt of payment for the shipment ends this process for
the seller. Another, often overlooked, definition of order cycle time is customer wait
time (CWT). Used in both the private and public sectors, CWT includes not only
order cycle time but also maintenance time.
Order cycle time can also have an impact on a buyer’s or seller’s financial position,
depending on who owns the inventories in the supply chain. Inventory costs have
an impact on both the balance sheet and income statement. Balance sheet impacts
reflect ownership of inventory as an asset and liability; income statement impacts
reflect the cost of holding inventory as an expense and therefore a reduction in
cash flow. Order cycle time influences two types of inventory: demand, or cycle,
stock and safety stock.
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The concept of logistics operations responsiveness (LOR) examines how well

a seller can respond to a buyer’s needs. This “response” can take two forms.
First, LOR can be how well a seller can customize its service offerings to the
unique requirements of a buyer. Second, LOR can be how quickly a seller can
respond to a sudden change in a buyer’s demand pattern.
Usually, LOR metrics will measure performance above and beyond basic on-
time delivery or order fill rates. Examples of LOR metrics can be found in
Process D1 of the SCOR model under flexibility. These three metrics are: (1)
upside deliver flexibility, (2) downside deliver adaptability, and (3) upside
deliver adaptability.
Another dimension of LOR metrics is one that addresses a seller’s ability to
customize a product or its packaging. In the consumer-packaged goods
(CPG) industry, manufacturers routinely offer special packaging of products
through the use of co-packers. So, a metric that could be used to address
customization might be one that measures the time it takes the seller to offer
a new package for sale in the retailers’ stores.
LOR activities require an investment by the seller to create a savings for the
buyer. However, both parties enjoy a favorable financial impact from this LOR
activity.
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Logistics system information (LSI) is critical to the logistics and order management
processes. It underlies an organization’s ability to provide quality product availability, order
cycle time, logistics operations responsiveness, and postsale logistics support. Timely and
accurate information can reduce inventories in the supply chain and improve cash flow to
all supply chain partners.
Three types of information that must be captured and shared to execute the order
management process: pretransaction, transaction, and posttransaction. Pretransaction
information includes all information that is needed by the buyer and seller before the order
is placed. Transaction information includes all information that is required to execute the
order. Posttransaction information includes all information that is needed after the order is
delivered.
Most metrics involved with LSI address how accurate and timely the data are to allow a
decision to be made or an activity to be performed. For example, forecast accuracy is the
result of accurate data on past consumption as well as on good predictions on future
consumption. Another example would be inventory accuracy. The accuracy of the inventory
counts in a distribution center is the result of capturing consumption data from that facility
in an accurate and timely manner. Data integrity is another metric that can be used to
measure the quality of outputs from an LSI.
As previously mentioned, LSI is usually not directly measured. What is measured are the
results of how an organization uses the information generated by an LSI. Similarly, the
financial impacts of an LSI are usually not measured but its results are.
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Many organizations focus primarily on outbound logistics, i.e., getting the

product to the customer. For some organizations, supporting a product after it
is delivered is a competitive advantage. Postsale logistics support (PLS) can
take two forms. First, PLS can be the management of product returns from
the customer to the supplier. The second form of PLS is product support
through the delivery and installation of spare parts.
For the most part, the PLS that manages product returns is measured by the
ease in which a customer can return a product. A metric such as time to
return a product to a seller is usually not important to a customer. Remember,
a product return usually involves some level of dissatisfaction by a customer
for a seller’s product. So, making it easy for a customer to return a product is
a critical metric.
Of the two types of PLS, spare parts logistics provides an easier methodology
for calculating financial impacts.
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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. High performance organizations today realize
this and are using the concept of service recovery. Basically, service recovery
requires an organization to realize that mistakes will occur and to have plans
in place to fix them.
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INTT 356 International Transportation and Logistics

Customer relationship management is the art and science of strategically

The order management system represents the principal means by which

When referring to outbound-to-customer shipments, the term order to cash (or

Order cycle refers to outbound-to-customer shipments and replenishment

Thirteen principal activities constitute the OTC cycle.

Some common factors that increase lead times:

Many organizations are using Internet technology as a means to capture

E-commerce involves designing and implementing the basic principles of

To be efficient and effective in providing and managing customer service,

The principal benefit of inventory availability and hence of customer service is

We have discussed the concepts of order management and customer service

The concept of logistics operations responsiveness (LOR) examines how well

Many organizations focus primarily on outbound logistics, i.e., getting the

No matter how well an organization plans to provide excellent service,

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