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CHAPTER 3

Customer Service
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
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Customer Service and Logistics
• As noted earlier, customer service is where
logistics and marketing interface.

• Customer service often referred to as the
output of logistics.

• Concept of the “augmented product”
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
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Elements of Customer Service
Transaction
elements
• Written statement of
policy
• Customer receipt of
policy statement
• Organization
structure
• System flexibility
• Management
services
• Installation, warranty,
alterations, repairs,
parts
• Product tracing
• Customer claims,
complaints, returns
• Temporary
replacement of
products
• Stockout levels
• Order information
• Elements of order
cycle (comm., entry,
process., pick/pack,
delivery)
• Expedited shipments
• Transshipment
• System accuracy
• Order convenience
• Product substitution
Posttransaction
elements
Pretransaction
elements
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
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Measures of Customer Service Performance
Pre-Transaction Elements
Inventory Availability
Target Delivery Dates
Information Capability

Post-Transaction Elements
Invoice Accuracy
Damage
Actual Delivery Dates
Returns/Adjustments
Installation
Product Replacement


Transaction Elements
Convenience of placing orders
Order Cycle Time
Order Cycle Consistency
Order Fill Rate
Order Status
Order Tracing
Back-Order Status
Shipment shortages
Shipment Delays
Product Substitutions
Routing Change
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
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Examples of Customer Service Standards
In-Stock Percentage
By product or product group
By stocking-point location
By customer or class of
customer
By time period
By order completeness
Transit Time
By mode of shipment
By stocking-point location
By customer or class of customer
By time period
By size of order

Order Cycle Consistency
By on-time deliveries
By stocking-point location
By customer of class of customer
By size of order
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
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The Perfect Order
• Each element of the service package has
been performed to customer specifications.
• On-time; complete; error-free
• Very difficult to achieve.
• Order service level is product of service
level for composite elements:
– On-time delivery = 90%
– 80% complete
– 70% error and damage free
– (.9) (.8) (.7) = 50% service level
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
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Methods of Establishing a
Customer Service Strategy
• Determining channel service levels based
on knowledge of consumer reactions to
stockouts
• Analyzing cost/revenue trade-offs
• Using ABC analysis of customer service
• Conducting a customer service audit
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
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Model of Consumer Reaction
to a Repeated Stockout
Source: Clyde K. Walter, “An Empirical Analysis of Two Stockout Models,” unpublished Ph. D.
Dissertation, Ohio State University, 1971.
Customer
3
Lower
4
Other
size
2
Same
1
Higher

Another
store

6
Ask here
again
5
Special
order

Switch
stores
?

Substitute
?

Switch
brand
?

Substitute
?

Switch
price
?
No
No
Yes
Yes
Yes
Yes
No
No
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
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Determining Cost of a Lost Sale
• Branding strategy and lost sales

• Different channel members will have
different cost of a lost sale (example of
baby formula)


Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
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Relationship Between Customer
Service and Inventory Investment
0
100
200
300
400
500
600
75 80 85 90 95 100
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
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ABC Analysis
• All customers are not equal.

• Need to adjust customer service levels on
basis of relative importance (i.e., profit
contribution) of customers and products.

• Customer-Product Contribution Matrix
(Table 3-1 and 3-2)

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
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Internal Audit External Audit
Evaluate Customer Perceptions
Differentiate Channel Levels & Market Segments
Identify Opportunities
Determine Marketing Services Mix & Levels
Stages of the
Customer Service Audit
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
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Overall Importance Compared To Selected
Performance Of Major Manufacturers Evaluated
By Dealers
Source: Douglas M. Lambert and Jay U. Sterling, “Developing Customer Service Strategy,” unpublished manuscript. All Rights reserved.
Overall
Impt. -
Dealer Evaluations
of Manufacturers
All
Dealers Mfr. 1 Mfr. 2 Mfr. 3 Mfr. 4 Mfr. 5 Mfr. 6
Rank
Var.
Num Description M. SD M. SD M. SD M. SD M. SD M. SD M. SD
1 9 Ability of manufacturer to meet promised delivery date (on-time
shipments)
6.4 0.8 5.9 1.0 4.1 1.6 4.7 1.6 6.6 0.6 3.7 1.8 3.3 1.6
2 39 Accuracy in filling orders (correct product is shipped) 6.4 0.8 5.6 1.1 4.7 1.4 5.0 1.3 5.8 1.1 5.1 1.2 4.4 1.5
3 90 Competitiveness of price 6.3 1.0 5.1 1.2 4.9 1.4 4.5 1.5 5.4 1.3 4.4 1.5 3.6 1.8
4 40 Advance notice on shipping delays 6.1 0.9 4.6 1.9 3.0 1.6 3.7 1.7 5.1 1.7 3.0 1.7 3.1 1.7
5 94 Special pricing discounts available on contract/project quotes 6.1 1.1 5.4 1.3 4.0 1.7 4.1 1.6 6.0 1.2 4.7 1.5 4.5 1.8
6 3 Overall manufacturing and design quality of product relative to
the price and range involved
6.0 0.9 6.0 1.0 5.3 1.3 5.1 1.2 6.5 0.8 5.2 1.3 4.8 1.5
7 16 Updated and current price data, specifications and promotion
materials provided by manufacturer
6.0 0.9 5.7 1.3 4.1 1.5 4.8 1.4 6.3 0.9 4.9 1.7 4.3 1.9
8 47 Timely response to requests for assistance from manufacturer's
sales representative
6.0 0.9 5.2 1.7 4.6 1.6 4.4 1.6 5.4 1.6 4.2 2.0 4.3 1.7
9 14 Order cycle consistency (small variability in promised versus
actual delivery, i.e., vendor consistency meets expected date).
6.0 0.9 5.8 1.0 4.1 1.5 4.8 1.4 6.3 0.9 3.6 1.7 4.4 1.7
10 4b Length of promised order cycle (lead) times (from order
submission to delivery) for base line/in-stock ("quick ship")
product
6.0 1.0 6.1 1.1 4.5 1.4 4.9 1.5 6.2 1.1 4.3 1.7 3.7 2.0
11 54 Accuracy of manufacturer in forecasting and committing to
estimated shipping dates on contract/project orders
6.0 1.0 5.5 1.2 4.0 1.6 4.3 1.4 6.3 1.1 3.8 1.7 3.5 1.6
12 49a Completeness of order (% of line items eventually shipped
complete) -- made to order product (contract orders)
6.0 1.0 5.5 1.2 4.3 1.2 4.7 1.3 6.0 1.1 4.4 1.4 4.0 1.6
50 33a Price range of product line offering (e;g., low, medium, high
price levels) for major vendor
5.0 1.3 4.4 1.5 4.6 1.6 5.1 1.5 5.2 1.4 4.3 1.6 3.9 1.6
101 77 Store layout planning assistance from manufacturer 2.9 1.6 4.2 1.7 3.0 1.5 3.4 1.6 4.7 1.6 3.0 1.4 3.4 1.2
Note : Mean (average score) based on a scale of 1 (not important) through 7 (very important).
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
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Internal Audit Questions
• How is customer service currently
measured?
• What are the units of measurement?
• What are the performance standards?
• What is the current level of attainment?
3-9 a
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-15
Internal Audit Questions cont.
• How are these measures derived from
corporate information flows and the order
processing system?
• What is the internal customer service
reporting system?
• How do the functional areas of the business
perceive customer service?
• What is the relation between these
functional areas in terms of communication
and control?
3-9 b
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-16
Customer Satisfaction
• Many researchers have argued that
customer satisfaction comes down to:
Satisfaction = [Perception of service
performance] – [Expectations of the
service]
• Failure to match performance and
expectations results in “service gaps”
• There are, in essence, six potential causes
for customer service gaps.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-17
Customer Service Gaps
Gap 1




Gap 5 Gap 6



Gap 2 Gap 3


Gap 4

Source: Thomas Goldsby, Transportation Trends, Vol. 1, No. 1, Feb. 1999.
Supplier’s
Expectations
of Service
Customer’s
Expectations
of Service
Supplier’s
Perception
of Service
Performance
Customer’s
Perception
of Service
Performance
Actual
Service
Performance
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-18
Importance And Performance Evaluations
For Selected Customer Service Attributes
Relative
Performance
-0.36*
* Performance evaluations of A and B are significantly different at p < 0.05.
1
2
3
4
5
6
7
8
9
Performance Evaluation
Importance Company A Company B No. Attribute
Accuracy in filling orders
Ability to expedite emergency orders in a
fast, responsive manner
Action on complaints (e.g., order servicing,
shipping, product, etc.)
Accuracy of supplier in forecasting and
committing to shipping date for
custom-made products
Completeness rate (percentage of order
eventually shipped)
Rapid adjustment of billing and shipping
errors
Availability of blanket orders
Frequency of deliveries (supplier
consolidates multiple/split shipments
into one larger, less frequent shipment)
Order processing personnel located in your
market area
Computer-to-computer order entry
6.42
6.25
6.07
5.92
5.69
5.34
4.55
4.29
3.58
2.30
5.54
4.98
4.82
4.53
5.29
4.64
5.03
5.07
5.33
4.07
5.65
5.23
5.18
4.73
5.27
4.90
4.15
5.03
5.21
3.53
-0.11
-0.25
-0.20
+0.02
-0.24
+0.04
+0.12
10 +0.54**
+0.88**
** Performance evaluations of A and B are significantly different at p < 0.01.
Source: Douglas M. Lambert and Arun Sharma, “A Customer-Based Competitive Analysis for Logistics
Decisions,” International Journal of Physical Distribution and Logistics Management 20, no.1 (1990), p.18.
3-9 c
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
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Competitive Position Matrix
Minor weakness Minor strength
Major weakness Major strength
Competitive
disadvantage
Competitive
parity
Competitive
advantage
Relative performance
1
3
5
7
-3.0 -1.0 +1.0 +3.0
1*
2*
4*
3*
6*
5*
7*
8*
9*
10*
3-10
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-20
Performance Evaluation Matrix
Performance evaluation
Maintain
Definitely improve Maintain/improve
1
3
5
7
1 3 5 7
1*
2*
4*
3*
6*
5*
7*
8*
9*
10*
Maintain Reduce/maintain
Reduce/maintain Reduce/maintain
Improve
Improve
3-11
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-21
Strategic Opportunities For A Competitive Advantage
* denotes attribute number
indicates desired shift in relative performance
indicates potential opportunities that may be revealed within specific customer segments
C o m p e t i t i v e
d i s a d v a n t a g e
C o m p e t i t i v e
p a r i t y
C o m p e t i t i v e
a d v a n t a g e
M a j o r w e a k n e s s
M i n o r w e a k n e s s
M a j o r s t r e n g t h
M i n o r s t r e n g t h
R e l a t i v e p e r f o r m a n c e
I
M
P
O
R
T
A
N
C
E
H
I
G
H
M
E
D
I
U
M
L
O
W
7
5
3
1
- 3 . 0
- 1 . 0 + 1 . 0 + 3 . 0
1 *
2 *
3 *
4 *
5 *
6 *
* 8
* 9
* 1 0
*7
Source: Douglas M. Lambert and Arun Sharma, “A Customer-Based Competitive Analysis for Logistics Decisions,”
International Journal of Physical Distribution and Logistics Management 20, no.1 (1990), p.23.
3-12
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-22
Measuring and Controlling Customer
Service Performance
• Establish quantitative standards of
performance for each service element.
• Measure actual performance for each
service element.
• Analyze variance between actual service
provided and standard.
• Take corrective action as needed to bring
actual performance into line.
3-13
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
3-23
Customer Service Standards
• Reflect the customer’s point of view.
• Provide an operational and objective
measure of service performance.
• Provide management with cues for
corrective action.
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