CHAPTER 2

DEMAND MANAGEMENT AND CUSTOMER SERVICE

Learning Objectives
• • • •

Chapter 2 Demand Management And Customer Service

After reading this chapter, you should be able to: Understand the meaning of demand management and customer service. Discuss the performance measures for customer service. Discuss the demand management process and the problems in demand management. • Describe the basic approach to demand forecasting and the forecasting methods or techniques. • Understand how to establish a customer service strategy.

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Logistics and Supply Chain Management K. Shridhara Bhat

2.1 What is Demand Management?

Chapter 2 Demand Management And Customer Service

Demand management may be thought of as “focused efforts to estimate and manage customers‟ demand, with the intention of using this information to shape operating decisions”.

2.1.1 Relationship between Customer Service and Demand Management
Customer service is the measure of how well the logistics system is performing in providing time and place utility to a product or service. Customer service and customer satisfaction do not mean one and the same. Customer satisfaction represents the customer‟s overall assessment of all elements of the marketing mix: product, price, promotion and place (or distribution) whereas customer service is a part of customer satisfaction. Customer service is defined as:

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3 Customer Service : Customer service can be defined as “a process which takes place between the buyer. (iii) Part of an overall corporate philosophy. seller and third party. (ii) Actual performance on parameters such as ability to ship orders within a certain period. 2.1. such as order processing or handling of customer complaints. Shridhara Bhat Himalaya Publishing House . 2. Customer service is really the fuel that drives the logistics supply chain.2 Demand Forecasting : Demand forecasting refers to the estimation of the amount of product that will be purchased by the consumers or end users.1. The process results in a value addition to the product or service exchanged.Chapter 2 Demand Management And Customer Service (i) An activity or function to be managed. Logistics and Supply Chain Management K.

1. emphasise is on winning new customers and gaining new accounts. This approach is referred to as customer service. Shridhara Bhat .4 The Logistics/Marketing Interface : Successful implementation of the marketing concept requires that companies both win and retain customers.Chapter 2 Demand Management And Customer Service 2. (ii) tangible product and (iii) augmented product Himalaya Publishing House Logistics and Supply Chain Management K.1. but not without establishing service policies and programs that will satisfy customers‟ needs and deliver them in a costefficient manner.5 Customer Service and Levels of Product Three levels of product are (i) core benefit or service. 2. If the logistics system. • Customer service is often the link between logistics and marketing. The objective of a firm is still to make a profit. particularly outbound logistics fails to function properly and a customer does not receive a delivery as promised. the company could lose future sales.

Shridhara Bhat Himalaya Publishing House .6 Levels of Customer Service Involvement : Three levels of customer service involvement are : (i) customer service as an activity. Customer service is a concept whose importance reaches far beyond the logistics area.Chapter 2 Demand Management And Customer Service Customer service can be thought of as something a firm provides to those who purchase its products or services. 2. (ii) the tangible product or the physical product or service itself and (iii) the augmented product which includes benefits that are secondary to it but an integral enhancement to the tangible product the customer is purchasing. (ii) customer service as performance measure and (iii) customer service as a philosophy.1. Logistics and Supply Chain Management K. According to marketers there are three levels of product: (i) the core benefit or service which constitutes what the buyer is really buying.

Time : The time factor is usually order cycle time from the perspective of seller looking at customer service. (ii) dependability. These dimensions are briefly discussed in the following paragraphs. 4. Dependability : Some customers consider dependability as more important than lead time. Communications : The two logistics activities vital to order filling are the communication of customer order information to the order-filling area and the actual process of picking out of the inventory. 3. Himalaya Publishing House Logistics and Supply Chain Management K. (iii) communication and (iv) convenience. the items ordered. 2. 1. Shridhara Bhat . logistics service level must be flexible. Convenience : This means.Chapter 2 Demand Management And Customer Service 2. customer service can be viewed as having four dimensions: (i) time.7 Dimensions or Elements of Customer Service From the point of view of logistics function.1.

8 Performance Measures for Customer Service Box 2.1 : Elements and Measurements of Customer Service Himalaya Publishing House Logistics and Supply Chain Management K.1.Chapter 2 Demand Management And Customer Service 2.1 lists the elements and measurement of customer service in logistics management. Shridhara Bhat . Box 2.

monitor and control the customer service quality called for by the firm‟s performance measures and standards. (iii) The firm should develop customer service policies and standards through customer consultation. Himalaya Publishing House Logistics and Supply Chain Management K.2.1. (ii) Emphasis on total quality or on creation of the “perfect order” are very critical to any acceptable quality level set below 100 per cent.9 Implementing Customer Service Standards Chapter 2 Demand Management And Customer Service The keys for successfully developing and implementing customer service standards are: (i) To be wary of adopting easily achievable performance standards. But setting standards at unrealistically low levels will not help to establish a competitive advantage. Shridhara Bhat . (vii)The firm should develop procedures to measure.

Chapter 2 Demand Management And Customer Service 2.e. right time. right quantity. Himalaya Publishing House Logistics and Supply Chain Management K.1. (ii) setting service levels that make realistic trade-offs between revenues and expenses.11Improving Customer Service Performance : The levels of customer service a firm achieves often can be improved through one or more of the following actions: (i) thoroughly researching customer needs.10 The Perfect Order : Perfect order refers to an order where all customer requirements are met upon delivery of the order (i.1.. Shridhara Bhat . right condition and rig 2. right place. (iii) making use of the latest technology in order processing systems and (iv) measuring and evaluating the performance of individual logistic activities.

2.2. Shridhara Bhat Himalaya Publishing House . distribution and customer service) which function as autonomous business units. 2. with less attention on the collaborative efforts and the strategic and operational plans that need to be developed from the forecasts. finance. Demand management holds the key to an effective supply chain management process. especially manufacturing through the customer with the end result of creating greater customer value. (iii) Demand information is mainly used to develop tactical and operational plans rather than to develop strategic plans.1Demand Management Process : 2. manufacturing.2. sales and marketing.2 Problems in Demand Management (i) Lack of co-ordination between departments (for example. Logistics and Supply Chain Management K. (ii) To much emphasis is based on forecasts of demand.2 Demand Management Chapter 2 Demand Management And Customer Service Demand management enhances the ability of firms throughout the supply chain.

Shridhara Bhat . 2. Integrating Forecasting and Production The steps involved in integrating the sales forecasting with production scheduling activities are listed below: Himalaya Publishing House Logistics and Supply Chain Management K.2.3 Demand Forecasting : Forecasting demand is a necessary part of business planning and demand management.Chapter 2 Demand Management And Customer Service (iv) The conflicting and contradicting interests of departmental managers in achieving their departmental goals rather than contributing to the achievement of the company‟s overall business objectives/goals. Demand forecasting estimates the amount of product that will be purchased by consumers and end users based on which decisions regarding how much product the company should sell and how much the company need to produce.

Logistics and Supply Chain Management K. sales promotions and new product launching. inventory planning and control.2. The amount of product produced per period of time and the production capacity that must be made available are all based on the forecast of customer demand for the period under consideration Some of the important decisions taken in some functional areas based on demand forecasts are: (i) Production : Scheduling.Chapter 2 Demand Management And Customer Service (i) To develop an annual forecast demand (ii) Review of the forecast arrived (iii)To develop aggregate production schedules (iv) To schedule production on a short-term basis 2.4 The Role of Forecasting in a Supply Chain All strategic and operating decisions in a supply chain are based on the forecast of future demand. and aggregate planning. (ii) Marketing : Sales force allocation. Shridhara Bhat Himalaya Publishing House .

lay off etc. They address issues related to budgeting and sales plans.2.5 Types of Forecasting/Forecasts Three different approaches to demand forecasting are : (i) Long term forecasting (ii) Intermediate term or Midrange or medium term forecasting and (iii) Short term forecasting. Shridhara Bhat . usually for a planning horizon up to one year. hiring.Chapter 2 Demand Management And Customer Service (iii) Finance : Capital investment in plant and equipments. Short term forecasts are more important for planning the logistics operations. Himalaya Publishing House Logistics and Supply Chain Management K. The forecast of demand is for short intervals of time (monthly) for several months ahead. (iv) Human Resource : Manpower Planning. Long term forecasting results in long-term forecasts which usually cover a period of three or more than three years. budgeting etc. 2. Intermediate term or midrange or medium term forecasts have a planning horizon of one to three years.

2.2. (viii) To negotiate better terms with suppliers. Chapter 2 Demand Management And Customer Service The essence of forecasting is to assist in logistics decision making. (vii) To improve pricing and promotion management. (ii) To reduce stock-outs. Himalaya Publishing House Logistics and Supply Chain Management K. (ix) To make more informed pricing decisions. (iv) To lower safety stock requirements. (v) To reduce product obsolescence costs. (iii) To schedule production more efficiently. (vi) To manage shipping (transportation)better.6 Purpose of Forecasting Some of the reasons for engaging in forecasting are : (i) To increase customer satisfaction. Shridhara Bhat .

Shridhara Bhat Himalaya Publishing House .9 Forecasting Methods : A number of standardized forecasting methods are available.7 Nature of Forecasting Forecasting demand levels is vital to the firm as it provides the basic inputs for the planning and control of all functional areas including logistics. production and finance.Chapter 2 Demand Management And Customer Service 2.2. 2. financial needs and general structure of the business. marketing.2. the extent of its variability and its degree of randomness.2. Demand levels and their timing have great impact on capacity levels. They have been classified into: (i) Qualitative methods (ii) Historical projection methods (Time series) (iii) Causal methods and (iv) Simulation methods Logistics and Supply Chain Management K.8 Logistics forecasting is concerned with the spatial (space) as well as temporal (time) nature of demand. 2.

Shridhara Bhat . (ii) Historical Projection or Time Series Forecasting Methods : These methods use historical demand data to make a forecast of demand into the future. which are independent variables on which the demand depends.Chapter 2 Demand Management And Customer Service (i) Qualitative Forecasting Methods : Qualitative methods are those that use judgment (subjective). surveys. intuition. interest rates etc. (iii) Causal Methods : Causal forecasting methods involve the assumption that the demand forecast is highly correlated with certain factors in the environment such as economic status. Himalaya Publishing House Logistics and Supply Chain Management K. or comparative techniques to produce quantitative estimates about the future demand. (iv) Simulation Methods : Simulation forecasting methods imitate the choices of consumers which give rise to demand so that the forecast can be estimated..

Basic Approach to Demand Forecasting The various steps involved in the basic approach to forecasting are : (i) Understanding the objective of forecasting. Sales forecasting is the function of marketing or planning departments. (vi) Establishing measures of performance and error for the forecast. Shridhara Bhat . (iv) Understanding and identifying the customer segments.Chapter 2 Demand Management And Customer Service 2. warehouse planning etc. Forecasts of medium or long-term periods usually are provided to logistics personnel. (iii) Identifying the major factors that influence the demand forecast.2. Himalaya Publishing House Logistics and Supply Chain Management K. shipment scheduling. (v) Determining the appropriate sales forecasting method or technique. (ii) Integrating demand planning and forecasting. But logistics personnel usually use short-term forecasts for inventory control.10 Usefulness of Forecasting Techniques for Logistics Executives Generally logistics managers and executives are not directly involved in forecasting techniques.

Jury of Executive Opinion : Jury of executive opinion method uses the opinions of a small group of high level executives (managers) to arrive at a group estimate of demand as forecast. Quantitative methods involve either projection of historical data or the development of association models which attempt to use causal variables to arrive at the forecasts. Himalaya Publishing House Logistics and Supply Chain Management K. 2.1Overview of Qualitative Methods 1.2. often of non-numerical description. Shridhara Bhat .3 Forecasting methods or Techniques Chapter 2 Demand Management And Customer Service The two general approaches to forecasting are : (i) Qualitative and (ii) Quantitative. Qualitative methods consist mainly of subjective inputs.3. Sales Composite Method : Sales composite method pools the opinion of each sales person into estimates at district and national levels to arrive at the overall forecast. 2.

to arrive at a consensus forecast. Shridhara Bhat . 2. all of which use historical data. each developed from the previous one. Other Judgemental Methods : Delphi Method :In Delphi method.2 Overview of Quantitative Methods There are five quantitative forecasting methods. They fall into two categories. Market Research Method (or Consumer Survey Method) :Market research method determines consumer interest in a product or service by conducting a consumer survey on a sample basis. Himalaya Publishing House Logistics and Supply Chain Management K.3.Chapter 2 Demand Management And Customer Service 3. 4. managers and staff complete a series of questionnaires.

Causal (or association) models such as linear regression. Seasonality is a short-term regular variation. Random variations are residual variations after all other behaviours are taken into account. incorporate the variable or factors that might influence the quantity being forecast. Time Series Forecasting MethodsTime series is a time-ordered sequence of observations taken at regular intervals. They look at what has happened over a period of time and use a series of past data to make a forecast for the future. Cycle is a wavelike variation lasting more than one year. Shridhara Bhat Himalaya Publishing House . Logistics and Supply Chain Management K. Decomposition of a Time SeriesTrend is a long-term upward or downward movement in data.Chapter 2 Demand Management And Customer Service Time series models predict on the assumption that the future is a projection of the past. The demand or sales forecast is a dependent variable and other factors that affect demand are independent variables (causal variables).

Chapter 2 Demand Management And Customer Service Techniques for Averaging (i) Naive forecasts or Naive approach. 3. updated as new values become available. Moving Averages Method :Moving averages method is a technique that averages a number of recent actual values. Exponential Smoothing Method :Exponential smoothing is a weighted moving average method based on previous forecast plus a percentage of the forecast error. more recent values in a series are given more weight in computing a forecast. Naive Approach :Naive forecast is the forecast for any period which equals the previous period‟s actual value (demand). (ii) Moving averages (Simple and weighted) and (iii) Exponential smoothing. 1. Regression Analysis Regression analysis is a technique used for fitting a line to a set of points. Himalaya Publishing House Logistics and Supply Chain Management K. In the weighted moving average method. 2. Shridhara Bhat .

Chapter 2 Demand Management And Customer Service

2.3.3 Econometric Model Building and Simulation Econometric model building method is the most accurate method to forecast sales because it considers the interaction of independent variables which bear logical and measurable relationships to sales. It uses regression analysis technique to quantity these relationships. Focus Forecasting : Focus forecasting method uses several rules which seem logical and easy to understand to project past data into the future. Each of these rules is used in a computer simulation program to actually project demand and then measure how well that rule performed when compared to what actually happened. Two components (i) several simple forecasting rules and (ii) computer simulation of these rules on past data, make up the focus forecasting method.

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Chapter 2 Demand Management And Customer Service

2.3.4 Collaborative Planning, Forecasting and Replenishment (CPFR) Collaborative planning, forecasting and replenishment (CPFR) seeks to enhance vendor managed inventory and continuous replenishment through a more proactive means of information sharing between supply chain partners. 2.3.5 Steps involved in the CPFR approach are : (i) Creating a front-end partnership agreement (ii) Joint business planning (iii) Developing demand forecasts (iv) Sharing forecasts and (v) Replenishing inventory 2.3.6 The Pitfalls of Managing a Supply-Chain without Demand Based Management Supply Chain management has traditionally assumed that the demand pattern is exogenous. Hence the demand for products or services is viewed as the key input to supply chain management.
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Chapter 2 Demand Management And Customer Service

2.3.7 Logistics as a Core Strategic Competency A firm‟s marketing strategy is built around its marketing mix elements viz., product, price, promotion and place (or distribution). The key to formulating an effective mix strategy is to integrate resources committed to these activities into an effort that maximizes customer impact. Logistics is the process that satisfies the broad requirements of time and place utility. Logistics ensures that customer requirements involved in timing and location of inventory are satisfactorily met. Thus the output of logistical performance is customer service. 2.3.8 How to Establish a Customer Service Strategy Customer service policies should focus on meeting customer requirements while at the same time should be cost effective and contributing to the overall profitability of the firm.

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Shridhara Bhat . (ii) Cost/Revenue Trade Offs Exhibit 2.1 illustrates the cost trade-offs and considerations required to implement an integrated logistics management concept.Chapter 2 Demand Management And Customer Service Four methods suggested for establishing customer service strategies are : (i) Determining customer service levels based on customer reactions to stock outs at retail level. The objective of cost/revenue trade-offs is to provide the firm with the lowest logistics costs for a given specific customer service level. (ii) Cost/revenue trade-off (iii) ABC analysis of customer service (iv) Customer service audits. (i) Customer Reactions to Stockouts Knowledge of consumer‟s response to stock-outs is important to establish the desired level of customer service at the retail level. Himalaya Publishing House Logistics and Supply Chain Management K.

Chapter 2 Demand Management And Customer Service Exhibit 2.1 : Cost Trade-offs Required for a Logistics System Himalaya Publishing House Logistics and Supply Chain Management K. Shridhara Bhat .

The Customer Service Audit Customer service audit is a means to evaluate the level of service a firm is providing to its customers. Shridhara Bhat . (b) To identify how performance of those elements is controlled and (c) To asses the quality and capabilities of the internal information system. Four district stages of the customer service audit are : Himalaya Publishing House Logistics and Supply Chain Management K. The objectiveof customer audit are: (a) To identify customers service elements which are critical for achieving customer satisfaction. 4. annual consumption value of purchase volume.Chapter 2 Demand Management And Customer Service (iii) ABC Analysis/Pareto’s Law ABC analysis is the classification of items in an inventory according to importance defined in terms of criteria such as sales volume.

(iv) Establishment of customer service levels. The Internal Customer Service Audit : 3. 2.(i) External customer service audit. 1. Shridhara Bhat . Himalaya Publishing House Chapter 2 Demand Management And Customer Service Logistics and Supply Chain Management K. (iii) Identification of opportunities and methods for improvement. Identifying Opportunities and Methods for Improvement : The firm can use competitive bench marking to optimize its profitability by suitably developing its customer service and marketing strategies based on the information obtained from both external and internal customer service audits. (ii) Internal customer service audit. (ii) To determine the customer‟s perception of the service being offered by the firm and each of the major competitors. The External Customer Service Audit : The objectives of external audit are : (i) To identify the elements of customer service which customers believe are important in their purchasing decisions.

channel of distribution and product line. 2.3.Establishing Customer Service Levels : Chapter 2 Demand Management And Customer Service Target service levels are set by the management of the firm for segments based on factors such as the type of customer.4.9Measuring Logistics Customer Service The best single measures of customer service could be “total order cycle” and its variability Customer service may also be measured in terms of each logistics activity. Periodically. Shridhara Bhat . geographical area. Some common measures of logistics performance include the following: Himalaya Publishing House Logistics and Supply Chain Management K. the management should review its customer service standards and policies to ensure that the service policies and programs reflect the current customer needs.

Chapter 2 Demand Management And Customer Service (i) Order Entry : (ii) Accuracy of Order Documentation : (iii)Transportation : (iv)Inventory and Product Availability : (v) Product Damage : (vi)Production/Warehousing Processing Time : 2.10 Development of Customer Service Standards After determining which elements of customer service are most important. Shridhara Bhat .3. a firm must develop standards of performance. Himalaya Publishing House Logistics and Supply Chain Management K.

4 : Examples of Customer Service Standards Himalaya Publishing House Logistics and Supply Chain Management K.Chapter 2 Demand Management And Customer Service Exhibit 2. Shridhara Bhat .

CHAPTER 3 CUSTOMER SERVICE DIMENSION .

Himalaya Publishing House Logistics and Supply Chain Management K.Learning Objectives • • • • • • • Chapter 2 Demand Management And Customer Service After reading this chapter. Discuss the various elements of customer service. Describe service driven logistics systems. Discuss the relationship between customer service and sales. Shridhara Bhat . Discuss “customer service” and “customer retention”. you should be able to: Discuss customer service as a competitive weapon.„customer satisfaction and success‟ and “time based logistics”. Discuss the concepts .

product. What we mean by “place” is having the right product in the right place at the right time.. Shridhara Bhat Himalaya Publishing House . product. Customer service and customer satisfaction do not mean one and the same.. price and promotion. promotion and place whereas customer service is a part of customer satisfaction. Customer satisfaction represents the customer‟s overall assessment of all elements of the marketing mix i. Customer service is the measure of how well the logistics system is performing in providing time and place utility to a product or service. However this element of marketing mix is now being given more importance as the power of customer service as a potential means of differentiation is increasingly recognised. Logistics and Supply Chain Management K.e. price. on which much emphasis has not been placed earlier as in the case of other elements viz.3.1The Marketing and Logistics Interface Chapter 2 Demand Management And Customer Service “Place” (or distribution) is one element of the marketing mix.

3.3. which constitutes what the buyer is really buying Himalaya Publishing House Logistics and Supply Chain Management K. three levels of a product are (i) The core product or service.3 Customer service and Customer retention 3. According to marketers.1Customer Service Chapter 2 Demand Management And Customer Service Customer service is an output of the logistics system and is a key to gain competitive advantage. We can view customer service as a part of the total product or service concept.2Customer Service Defined Customer service includes all activities between the buyer and seller that enhance or facilitate the sale or use of the seller‟s product or services.3. 3.2 Customer Service as a Competitive Weapon 3. Shridhara Bhat .

3.Chapter 2 Demand Management And Customer Service (ii) The tangible product or the physical product or service itself.4 Elements of Customer Service Three categories of elements of customer service are : (i) Pretransaction elements. 3. which includes benefits enhancing the value of the tangible product the customer is purchasing. physical features. It affects every area of operation of the firm by attempting to ensure customer satisfaction through providing aid or service to the customer. 3. size. Logistics and Supply Chain Management K. shape.3 Logistical customer service can be thought-of as a feature of the augmented product. of the product. And (iii)The augmented product. Shridhara Bhat Himalaya Publishing House ..3. which includes the design. But the customer service is a concept whose importance reaches far beyond the logistics area. volume etc. weight. (ii) Transaction elements and (iii) Post-transaction elements.

1 : Elements of Customer Service Chapter 2 Demand Management And Customer Service Himalaya Publishing House Logistics and Supply Chain Management K. Shridhara Bhat .I. Pretransaction Elements Pretransaction elements of customer service tend to be related to a firm’s customer service policy. Pretransaction elements include the following: (i) A Written Statement of Customer Service Policy : (ii) Customers Provided With a Written Statement of Policy : Exhibit 3.

which are normally considered to be associated with customer service. Shridhara Bhat Himalaya Publishing House .Chapter 2 Demand Management And Customer Service (iii) Organisation Structure : (iv) System Flexibility : (v) Technical and Management Services : II. They include the following: (i) Stock Out Level : (ii) Order Information Availability : (iii) System Accuracy : (iv) Consistency of Order Cycle : (v) Special Handling of Shipments : (vi) Transshipment : (vii) Order Convenience : Logistics and Supply Chain Management K. Transaction Elements These are the elements.

Chapter 2 Demand Management And Customer Service III. Repair and Service Parts : ii.5 Importance of Logistics/Supply Chain Customer Service (i) Effects of Customer Service on Sales : (ii) Effects of Customer Service on Customer Loyalty : Himalaya Publishing House Logistics and Supply Chain Management K. Shridhara Bhat . Customer Complaints. Installation. Warranty. Post-transaction Elements These elements of customer service support the product or service after the customer has received it.3. Claims and Returns : iv. Product Replacement : 3. Product Tracking : iii. Post transaction elements include : i.

Shridhara Bhat . 3.5 Service Driven Logistics Systems Service driven logistics system is a system that is designed to meet the defined service goals of the organisation.4 Customer Retention Chapter 2 Demand Management And Customer Service Customer retention is crucial because getting a new customer is five times as costly as retaining an existing customer. Logistics system design ideally starts with the full understanding of the service needs of the various markets served and then developing the low cost logistics solutions. Ideally all logistics strategies and systems are designed in the following sequence: (i) Identifying customers‟ service needs (ii) Defining customer service objectives (iii) Designing the logistics systems Himalaya Publishing House Logistics and Supply Chain Management K.3.

The key to quality is how accurately availability and operational performance can be measured. (b) operational performance and (c) service reliability. (a) Availability :Availability means having inventory to meet customers‟ requirements of materials or products consistently without fail. It involves delivery speed and consistency. Customer service has a proactive. (c) Service Reliability : Service reliability is concerned with quality attributes of logistics.6 Basic Service Capability Basic logistical service is measured in terms of (a) availability. Himalaya Publishing House Logistics and Supply Chain Management K.Chapter 2 Demand Management And Customer Service 3. Shridhara Bhat . effectiveness and relevancy.7 Value Added Services Value added services refer to unique or specific activities that firms can together workout to augment their efficiency. (b) Operational Performance :Operational performance is concerned with the elapsed time from order receipt to order delivery. 3. value-adding role in the logistics supply chain.

Time-based competition refers to the ways of “taking time out” of operations in the supply chain. It could entail reducing the order cycle time.8.1Customer Expectations : 3. Shridhara Bhat . 3. Himalaya Publishing House Logistics and Supply Chain Management K.9 Time Based Logistics Time based logistics is based on two basic concepts : (i) postponement and (ii) consolidation which facilitate timely performance and reduce total costs. reducing order placement time or introducing new products to markets more rapidly. 3.3.2 Customer Success : Commitment to customer success helps a supplier firm to gain true competitive advantage through logistical performance.8.8 Customer Satisfaction and Success Chapter 2 Demand Management And Customer Service Customer satisfaction results when the customer‟s expectations of a supplier‟s performances are met or exceeded.

The availability of lowcost information has created time-based competition.Chapter 2 Demand Management And Customer Service Time based logistics recognises the direct impact of information technology on the performance of the supply chain and improvement in the firm‟s competitiveness based on time. Shridhara Bhat . Information is increasingly being shared by managers in the supply chain to improve both the speed and accuracy of supply chain logistics Himalaya Publishing House Logistics and Supply Chain Management K.

CHAPTER 4 LOGISTICS PLANNING AND STRATEGY .

• Discuss how logistics strategy is formulated.Chapter 2 Demand Management And Customer Service Learning Objectives • After reading this chapter. • Discuss the logistics mission and objectives. Shridhara Bhat . • Describe the various logistics strategies that can provide competitive advantages to the firm. you should be able to: • Discuss the organisational planning process and the strategic logistics plan. Himalaya Publishing House Logistics and Supply Chain Management K. • Discuss the approach to logistical system design. • Describe the various generic logistics strategies.

Strategic planning is done at the highest level of management for a long term and the resulting plan is known as strategic plan.2 The hierarchy of planning Organisational planning is usually carried out in a hierarchy (a) Strategic planning. Shridhara Bhat .1 Why Corporate Strategy is Important to Logistics? Chapter 2 Demand Management And Customer Service A clear understanding of corporate strategy by logistics managers will enable them to take decisions that are in the best interest of the organisation. The logistics strategy must be based on the corporate strategy and the knowledge of the corporate strategy will help the logistics personnel to know how to value various alternatives in making decisions about trade-off between logistics costs and customer service. Himalaya Publishing House Logistics and Supply Chain Management K. (b) Tactical planning and (c) Operational planning. The planning horizon for strategic planning may vary from 5 to 10 years.4. 4.

1Relationship Between Logistics Strategy and Corporate Strategy Logistics strategic planning can be defined as: “A unified.Chapter 2 Demand Management And Customer Service Tactical planning is done at the middle management level and generally having a planning horizon of one to five years. The resulting plan is a medium range plan called a tactical plan. Shridhara Bhat Himalaya Publishing House .2. comprehensive and integrated planning process to achieve competitive advantage through increased value and customer service. which result in superior customer satisfaction.” Logistics and Supply Chain Management K. by anticipating future demand for logistics services and managing the resources of the entire supply chain. 4. broken down to quarterly or monthly plans. This planning is done within the context of the overall corporate goals and plan. Operational planning is carried out in more detail on yearly basis. The resulting plan is called operating plan which breaks down revenues. expenses and associated cash flows and activity by month for a one year period.

Logistics and Supply Chain Management K. (ii) Increased profit margin and improved customer service (iii) Reduced inventory levels through shorter cycle time (iv) Increased marketing advantage from consistent. Shridhara Bhat Himalaya Publishing House . Logistics can contribute to and support an organisation‟s strategic planning process in a number of ways. Six specific ways that show how logistics supports corporate strategy in Intel are as follows: (i) Increased planning capability and reduced inventory as a result of reliable delivery time. Majority of logistics managers believed that the logistics plan was critical to the firm‟s corporate strategic plan. shorter order cycles (v) Uninterrupted supply of in-bound materials (vi) Reduced total costs by incorporating logistics into the corporate planning process.Chapter 2 Demand Management And Customer Service Logistics strategy can be best formulated only by understanding the corporate strategy.

4. Shridhara Bhat .1 : Environmental Influences in Organisational Planning Himalaya Publishing House Logistics and Supply Chain Management K.3 The Organizational Planning Process Chapter 2 Demand Management And Customer Service Exhibit 4.

Chapter 2 Demand Management And Customer Service The corporate strategic planning process has the following major steps: (i) Evaluation of consumer and/or industrial customer needs (ii) Identification of possible target markets (iii) Evaluation of target markets (iv) Selection of target markets (v) Formulation of channel objectives and channel strategy (vi) Identification and evaluation of channel structure alternatives (vii) Selection of the channel structure and (viii) Development of the strategic logistics plan. Logistics and Supply Chain Management K. (ii) manufacturing. They are: (i) marketing. 4. (iii) finance/accounting and (iv) logistics. Shridhara Bhat Himalaya Publishing House .4 The Strategic Logistics Plan Strategic logistics plan depends on a number of inputs from various functional areas. Marketing is closely related to logistics and hence provides the key inputs to logistics.

and current transportation arrangements between various channel members.Chapter 2 Demand Management And Customer Service Customer service policies are critical to logistics strategy. (v) Desired fill-rate or in-stock levels. Finance/accounting provides forecasts of costs related to inflation rates and growth assumption to project future costs. both at manufacturing locations and in the field. Manufacturing provides some key informations to logistics strategic plan. It provides the cost data required to perform cost trade-off analysis. including current storage and distribution facilities owned and rented. (ii) Order entry. (iv) Order cycle variability. Himalaya Publishing House Logistics and Supply Chain Management K. (iii) Target cycle. Shridhara Bhat . equipment capacity and capabilities at each location. i) Order placement methods.These are: (i) locations of current and planned production facilities and (ii) planned volume and product mix for each location. Logistics provide data and analysis related to the existing logistics network to the other functions.

4. Logistics and Supply Chain Management K. The logistics audit complements and supports the strategic planning process. (iii) A knowledge of the cost and profitability of channel alternatives.4. Shridhara Bhat Himalaya Publishing House .2 Logistics Audit : The logistics audit should be conducted on a routine basis and it involves a review of how logistics is performing with respect to its objectives. Chapter 2 Demand Management And Customer Service 4.1Developing a Strategic Logistics Plan : The requirements of a strategic logistics plan are: (i) a thorough grasp and support of corporate strategy and supporting marketing plans in order to optimize cost-service trade-offs (ii) thorough understanding of the customers‟ view regarding the importance of various customer service elements and the performance of the firm compared with its competitors.4. Logistics audit is formally conducted over a year to help align the efforts of the logistics function and to focus the strategic planning process.

The logistics plan covers a variety of issues and requires inputs from people participating in each of the logistics activities.4.4. (ii) tactical and (iii) organisational.5 Logistics Planning Logistics planning takes place at three levels : (i) strategic.4. Shridhara Bhat Himalaya Publishing House . The logistics plan includes the specific activities required to be undertaken by the logistics function to achieve its objectives. a logistics plan must be developed to support that strategy. Logistics and Supply Chain Management K.4 The Logistics Plan : Once the logistics strategy has been formulated. The logistics decisions are made in a hierarchical manner as illustrated in Exhibit 4.2. 4. Chapter 2 Demand Management And Customer Service 4.3 Developing Logistics Strategy : Development of logistics strategy requires the knowledge of the organization's overall strategy and the key trade-offs in the organization.

Shridhara Bhat . Operational planning is shortrange planning involving decisions frequently made on an hourly or daily basis. Logistics planning is concerned with how to move the product efficiently and effectively through the logistics channel which is planned strategically. usually less than a year. Tactical planning involves an intermediate time horizon.Chapter 2 Demand Management And Customer Service Strategic planning is a long-range planning having a planning horizon of more than one year. Exhibit 4.2 : Logistics Decisions in a Hierarchy Himalaya Publishing House Logistics and Supply Chain Management K.

2 Logistics Mission Statement The mission statement provides a foundation upon which a company develops objectives.3 Logistical Objectives There are six different operational objectives which must be achieved by the firm in terms of logistical system design and management. It defines the basic purpose of an organisation and identifies the parameters under which the firm will operate.5. (iii) minimum inventory. Logistics and Supply Chain Management K.5. (ii) minimum variance.5. 4. 4. These operational objectives which primarily determine the logistical performance include : (i) rapid response.4. Shridhara Bhat Himalaya Publishing House . plans and tactics.1 Logistics Mission and Objectives Chapter 2 Demand Management And Customer Service The mission of logistics is to create customer value at the lowest total cost. (iv) movement consolidation. strategies. Each of these objective is briefly discussed. (v) quality and (vi) life-cycle support.

Hence. (iii)Minimum Inventory : This inventory involves commitment of assets and relative turn velocity. (ii) Minimum Variance :Any unexpected event which disrupts the performance of a system is termed as variance. the lower the transportation cost per unit. Any aspect of logistical operation may cause variance.Chapter 2 Demand Management And Customer Service (i) Rapid Response : This objective is concerned with a firm‟s ability to satisfy customer service requirements in time. (iv)Movement Consolidation : Transportation cost is one of the most significant logistical costs. Shridhara Bhat Himalaya Publishing House . The objective is to reduce inventory deployed to the lowest level consistent with customer service goals so that the overall total logistics cost is kept at the lowest level. The total commitment is the financial value of inventory deployed throughout the logistical system. Therefore it is desirable to achieve movement consolidation to reduce transportation cost. Generally. the size of overall shipment can be increased by consolidation of small shipments for transportation. Logistics and Supply Chain Management K. the larger the overall shipment and the longer the distance it is transported.

product recall becomes necessary and the normal value added inventory flows toward customers must be reversed. Hence. plastic containers. In such cases. Further. reverse logistical requirements have become part of sound logistical strategy. Logistics can add value by avoiding defects in products and by keeping customer service promises. Hence logistics also seeks to contribute to continuous quality improvement.Chapter 2 Demand Management And Customer Service (v) Quality : Total quality management (TQM) has become a major commitment throughout all facets of industry. Shridhara Bhat . (vi) Life-cycle Support : Many products are sold with some guarantee that the products will perform as advertised over a specific period. increasing number of laws prohibiting waste disposal and need for recycling waste or scrap materials (such as glass bottles. if defects are observed in the products sold.) will necessitate reverse logistics. This kind of customer service support logistics extended over the entire life-cycle of a product is known as “life-cycle support”. Himalaya Publishing House Logistics and Supply Chain Management K. packaging materials etc.

but also of quality service. competition. Shridhara Bhat .Chapter 2 Demand Management And Customer Service 4. (iii) globalization of industry and(iv) organizational integration. (i) The Customer Service Explosion : Customer in today‟s market is more demanding.6 The changing logistics environment Business environments change constantly. (ii) time compression. not just of product quality. These challenges are briefly discussed in the following paragraphs: The most pressing challenges faced by managers in the logistics area are : (i) the customer service explosion. technological evolution and government regulation. Four forces drive business environment change: the market. Companies giving high priority for their logistics performance can achieve recognition for service excellence and thus establish a differential advantage over their competition Himalaya Publishing House Logistics and Supply Chain Management K.

. (c) End users are more willing to accept a substitute product if their choice is not readily available. (d) New product introduction to the market should be done in the minimum possible lead time. marketing etc. Shridhara Bhat .Chapter 2 Demand Management And Customer Service (ii) Time Compression : Time has become a key issue in management today because of the following reasons: (a) Product life cycles are shorter than ever. (iv) Organisational Integration :In traditional organisations functional departments such as materials management. changes in customers‟ expectations or geographical locations continually transform the nature of markets and in turn. (iii) Globalisation of Industry : In the current era of globalisation. (b) Industrial customers and distributors require just-in-time deliveries. Himalaya Publishing House Logistics and Supply Chain Management K. production. generate constraints that modify the flows of goods within companies.

A proactive logistics strategy usually begins with the determination of business goals and customer service requirements. Shridhara Bhat .7 LOGISTICS STRATEGIES Three major objectives of a logistics strategy are (i) cost reduction. b) Capital reduction strategy is directed toward minimizing the level of investment in the logistics system. c) Service improvement strategies recognise the relationship between revenues and the level of logistics service provided. Himalaya Publishing House Logistics and Supply Chain Management K. (ii) capital reduction and (iii) service improvement. a) Cost reduction strategy aims at minimizing the variable costs associated with movement and storage. This strategy has the motive of maximising return on logistics assets.Chapter 2 Demand Management And Customer Service 4. Proactive strategies are referred to as “attack” strategies to meet competition.

(ii) market-based strategy and (iii) channel-based strategy. b)Market-based strategy is concerned with the management of small group of logistics activities across multi division business or across multiple business units.7. This strategy emphasises the achievement of efficiency from managing the activities of purchasing. a) Process-based strategy is concerned with the management of a broad group of logistics activities as a value added chain. scheduling and physical distribution as an integrated system. Himalaya Publishing House Logistics and Supply Chain Management K. manufacturing. Shridhara Bhat .1 Generic Logistics Strategies Three generic logistics strategies are : (i) process-based strategy. c) Channel-based strategy focuses on the management of logistics activities performed jointly in combination with dealers and distributors.Chapter 2 Demand Management And Customer Service 4.

4. Shridhara Bhat . (iii) inventory decisions and (iv) transportation decisions.7.3 Exhibit 4.2 Triangle of Logistics Decision Making Four problem areas involved in logistics planning are: (i) customer services levels. The three logistics decision areas are illustrated in Exhibit 4.3 : The Triangle of Logistics Decision Making Chapter 2 Demand Management And Customer Service Himalaya Publishing House Logistics and Supply Chain Management K. (ii) facility location decisions.

Chapter 2 Demand Management And Customer Service 4.7. (iii) Choice of logistics process technology. (v) Work force. Himalaya Publishing House Logistics and Supply Chain Management K.3 Relationship Between Operations Strategy and Logistics Strategy Operations and logistics strategy has the following characteristics: is a coherent. Twelve decision categories involved in a comprehensive operations and logistics strategy are: (i) Structure of facilities networks. Shridhara Bhat . (iv) Vertical integration of the supply chain. action programs and resource allocation priorities) (ii) attempts to support or achieve long-term sustainable advantage for the firm by responding properly to the opportunities and threats existing in the environment of the firm. unifying and integrative pattern of decisions (i) determines and reveals the purpose of operations and logistics of the firm (in terms of the firm‟s long-term objectives. (ii) Choice of operations process technology.

These guidelines are briefly discussed in the following paragraphs: Himalaya Publishing House Logistics and Supply Chain Management K. (vi) The principle of postponement. (vii) The concept of consolidation. Shridhara Bhat .4. (iv) Differentiated distribution concept. product characteristics. (iii) Total cost concept. (v) Mixed strategy concept. logistics costs and pricing policy.8 Formulating Logistical strategy Chapter 2 Demand Management And Customer Service Guidelines for Strategy Formulation The various guidelines for formulation of logistics strategy are: (i) When to plan the logistics network. (ii) Appraisal and audit of logistics network in five key areas of demand. (viii) Standardisation in production and reduction of product variety. customer service.

customer service. product characteristics. a decision must be made to modify the existing network if necessary. have different characteristics and sales volumes and hence require different distribution strategies. (ii) Appraisal and Audit of Logistics Network : General guide lines for network appraisal and audit can be offered in the five key areas of demand. logistics cost and pricing policy. Shridhara Bhat Himalaya Publishing House . Logistics and Supply Chain Management K.Chapter 2 Demand Management And Customer Service (i) When to Plan :If no logistics system currently exists (as in the case of a new firm) there arises a need for planning a new logistics network. (iii)Total Cost Concept :Total cost concept is the key to manage logistics process effectively. The total cost of logistics activities should be reduced rather than merely focussing on each activity in isolation for cost reduction. In cases where a logistics network already exists. (iv)Differentiated Distribution Concept :Differential distribution concept states that different products require different service requirements.

. (viii) Standardisation :Product standardisation (i. Himalaya Publishing House Logistics and Supply Chain Management K. A mixed strategy establishes an optimal strategy for separate product groups and often has lower costs than a single strategy for all product groups (vi) The Principle of Postponement :This principle is stated ad below: “The time of shipment and the location of the final product processing in the distribution of a product should be delayed until a customer order is received”. Shridhara Bhat . reducing product varieties) provide customers a variety of products without significantly increasing logistics costs. (vii) The Concept of Consolidation :Consolidation refers to collecting smaller shipments to form a larger quantity in order to realise lower transportation rates.Chapter 2 Demand Management And Customer Service (v) Mixed Strategy Concept :.e.

The level of customer service associated Himalaya Publishing House Logistics and Supply Chain Management K. The logic underlying the formulation of a service-oriented logistical strategy is discussed in the following paragraphs: (i) The Least-Total-Cost System Design : A strategy of least total cost seeks a logistical system design with the lowest fixed and variable expenses.Chapter 2 Demand Management And Customer Service 4. Shridhara Bhat .9 DESIGNING THE LOGISTICAL SYSTEM In general the approach to logistical system design consists of the following steps: (i) Determining a least-total-cost system design. (ii) Measuring availability and capability of the service associated with the least-total-cost system design. (iv) Finalising the logistical strategy. (iii) Conducting a sensitivity analysis related to incremental service and cost directly associated with generation of revenue.

Himalaya Publishing House Logistics and Supply Chain Management K. (b) change in one or more performance cycles to increase speed or consistency of operations and/or (c) change in safety stock policy.Chapter 2 Demand Management And Customer Service with a least cost logistical system design results from safety stock policies and the locational proximity of warehouses to customers. The basic service capabilities of a logistical system can be varied by a variety of methods such as (a) variation in the number of warehouses in the system. Shridhara Bhat . Accepting or rejecting the proposal of marketing management for increased customer services in a choice of strategic positioning. To establish a threshold service level. logistical management is faced with a critical strategic consideration. (ii) Threshold Service : The overall level of customer service associated with any least-total-cost system is referred to as threshold service level. iv) Finalising Logistical Strategy : The final step in establishing a logistical strategy is to evaluate the cost of incremental service in terms of generating offsetting revenue. the logistics system has to be reengineered with policies regarding desired inventory availability and capability performance for the logistics system. While. (iii) Services Sensitivity Analysis : Sensitivity analysis is conducted based on the threshold service resulting from the least-total-cost logistical design. marketing management expects customer service level to be as high as possible.

Logistics systems designed to provide maximum customer service attempts to consistently deliver products on a two to four hour basis. Shridhara Bhat . (c) maximum competitive advantages strategy and (d) maximum assets development strategy. (b) Profit Maximisation Strategy : Most firms set the objective of maximising profit in the design of logistical systems. These strategy alternatives are briefly discussed below: (a) Maximum Service Strategy : This strategy is rarely implemented. (b) profit maximisation strategy. (c) Maximum Competitive Strategy : This strategy may be the most desirable strategy to guide logistical system design to seek maximum competitive advantage. Each of these strategies requires unique logistical system design. Two ways in which logistics systems can be modified to gain maximum competitive advantage are: Himalaya Publishing House Logistics and Supply Chain Management K.Chapter 2 Demand Management And Customer Service In addition to the lowest total cost. the other strategies available are : (a) maximum service strategy.

Shridhara Bhat .Chapter 2 Demand Management And Customer Service (i) selective service programs and (ii) justified high-cost location (d) Minimal Asset Deployment Strategy : This strategy is motivated by a desire to minimise assets deployed for the logistics system. Himalaya Publishing House Logistics and Supply Chain Management K.

Shridhara Bhat .Chapter 2 Demand Management And Customer Service END OF WEEK 2 Himalaya Publishing House Logistics and Supply Chain Management K.