Logistics/Supply

Chain Customer
Service
“Logistics is no longer the ‘last frontier of cost
reduction,’ it’s the new frontier of demand
generation.”

Chapter 4
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Inc. ●4-1
 Logistics Customer Service
Customers view the offering of any company in terms of
price, quality, and services, and respond accordingly with
their patronage or lack of it.

Service, or customer service, is a broad term that may

include many elements ranging from product availability to
after-sale maintenance. From a logistics perspective,
customer service is the outcome of all logistics activities or
supply chain processes.

Therefor, the design of the logistics system sets the level of

customer service to be offered. Revenues generates from
customer sales and the costs associated with the system
design establish the profit to be realized by the firm. Deciding
the level of customer service to offer customers is essential
to meeting a firm’s profit objectives.
4-2
 Customer Service
in Planning Triangle

Inventory Strategy
• Forecasting Transport Strategy
• Inventory decisions • Transport fundamentals

CONTROLLING
ORGANIZING
• Purchasing and supply • Transport decisions
Customer

PLANNING
scheduling decisions
• Storage fundamentals service goals
• Storage decisions • The product
Logistics service
• Logistics
• Ord. proc. & info. sys.
service

Location Strategy
• Location decisions
• The network planning process

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 Customer Service Defined

∙ Customer service is generally presumed to be a means by which

companies attempt to differentiate their product, keep customers
loyal, increase sales, and improve profits.

∙ Its elements are:

− Price
− Product quality
− Service

∙ It is an integral part of the marketing mix of:

− Price
Product Customer service
− here
− Promotion
− Physical Distribution

∙ Relative importance of service elements

− Physical distribution variables dominate price, product, and
promotional considerations as customer service considerations
− Product availability and order cycle time are dominant physical
distribution variables
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Customer Service Defined
Since logistics customer service is necessarily a part
of a firm’s overall service offering, we will begin with
service from the firm’s perspective and then distill out
those elements that are specific to logistics.
Kyj and Kyj observe that…
…. Customer service, when utilized effectively, is a
prime variable that can have a significance impact
on creating demand and retaining customer loyalty.
To another customer service expert, customer service
… refers specifically to the chain of sales-satisfying
activities which usually begin with order entry and ends with
delivery of product to customers, in some cases continuing
on as equipment service or maintenance or other technical
4-5
support.
More simply, Heskett states that logistics customer service
for many firms is……
…the speed and dependability with which items
ordered (by customers) can be made available….

More recently, customer service has been referred to in

terms of fulfillment process, which has been described
as ..
….the entire process of filling the customer’s order. This process
includes the receipt of the order (either manual or electronic),
managing the payment, picking and packing the goods, shipping
the package, delivering the package, providing customer service
for the end user and handling the possible return of the goods.

4-6
 Customer Service Elements
From corporate-wide perspective, customer service has
been viewed as an essential ingredient in marketing
strategy. Marketing has often been described in terms of
an activity mix of four Ps ---- product, price,
promotion, and place. ---
A comprehensive study of customer, sponsored by the
Nasional Council of Physical Distribution Management,
identified the elements of customer service according to
when the transaction between the supplier and customer
took place. These elements are grouped into pre-
transaction, transaction, and post-transaction
categories.
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Pre-transaction elements establish a climate for good
customer service. Providing a written statement of customer
service policy, such as when goods will be delivered after an
order is placed, the procedure for handling returns and back
orders, and methods of shipment, let customers know what
kind of service to expect.

Transaction elements are those that directly result in the

delivery of the product to customer. Setting stock levels,
selecting transportation modes, and establishing order-
processing procedures are examples. These elements, in
turn, affect delivery times, accuracy of order filling,
condition of goods on receipt, and stock availability.
4-8
Post-transaction elements represent the array of services
needed to support the product in the field; to protect
consumers from defective products; to provide for the return
of packages (returnable bottles, reusable cameras, pallets,
etc.); and to handle claims, complains, and return. These
take place after the sale of the product, but they must be
planned for in the pretransaction and transaction stages.

4-9
 Customer Service
ElementsCustomer
service

Pretransaction Transaction Posttransaction

elements elements elements
• Written statement Stockout level • Installation, warranty
of policy • Ability to back alterations, repairs,
• Statement in hands order parts
of customer • Elements of order • Product tracking
• Organizational cycle • Customer claims,
structure • Time complaints
• System flexibility • Transship • Product packaging
• Technical services • System accuracy • Temporary
• Order conveniences replacement of
• Product substitution product during repairs

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 Relative Importance of Service Elements
Sterling and Lambert studied the office systems and
furniture industry and plastic industry. From a large number
of variables (99 and 112, respectively) representing product,
price, promotion, and physical distribution, they were able to
determine those that were most important to the buyers,
customers, and influencers of purchases from these
industries.

(read tables 4-1 and 4-2 p. 95-97)

4-11
Shycon Associates surveyed purchasing and distribution
executives across a large cross section of American
industry, asking them to rate their suppliers. Figure 4-2
shows what respondents felt were the most common
service failures.. Late delivery, a logistics variable,
accounted for nearly half of the mentioned service
infractions, while product quality mistakes represented
about a third. (Figure 4-2)

Jackson, Keith, and Burdick were able to show how service

elements take on different degree of importance, depending
on the product type being purchased. (Table 4-2). Again,
note the relative importance of lead-time and delivery time.

4-12
 Common Customer Service
Complaints
31%
Product or quality
mistake
s

12% Damaged
goods

7%
Othe
r
6%
Frequently cut
item
s

44%
Late
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 Penalties for Customer Service
Failures

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 Most Important Customer
Service Elements

•On-time delivery
•Order fill rate
•Product condition
•Accurate documentation

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 Appraise This Measure
of Logistics Customer Service

Percent of customer orders

shipped by customer request date

Parker-Hannifin Corp.

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 Order Cycle Time

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 Components of a Customer Order
Cycle
WAREHOUSE
Order processing
Customer and assembly
order
transmittal Transmittal of
backorder
CUSTOMER items
Retail outlet Order
delivery

FACTORY
Express Order processing,
order assembly from stock,
delivery or production if no
stock
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Importance of Logistics Customer Service

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 Service
Observations
∙ The dominant customer service elements
are logistical in nature
∙ Late delivery is the most common service
complaint and speed of delivery is the most
important service element
∙ The penalty for service failure is primarily
reduced patronage, i.e., lost sales
∙ The logistics customer service effect on
sales is difficult to determine

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 Modeling a Sales-Service
Relationship

Remember
Revenue in
ROLA

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 Sales-Service Relationship by
the Two-Points Method

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 Range of Range of
transition transition

Sales-Service
Sales

Relationship
Threshold Diminishing returns Decline

0
0 Increasing logistics customer service level
of a supplier to the best of its competition 4-15
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 Determining Optimum Service Levels
Page 110
∙ Cost vs. service
∙ Theory
−Optimum profit is the point where profit
contribution equals marginal cost
∙ Practice
−For a constant rate,
Δ P = trading margin × sales response rate ×
annual sales
Δ C = annual carrying cost × standard product
cost × demand standard deviation
over replenishment lead-time × Δ z
Set Δ P = Δ C and find Δ z corresponding to a
specific service level
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Generalized Cost-Revenue Tradeoffs

Revenue

Profit
Costs or sales

maximization

Logistics
costs

0
0 Improved logistics customer service 4-17
Determining Optimum Service Levels
(Cont’d)

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Determining Optimum Service Levels
(Cont’d)
Find Δ P
Δ P = 0.75 × 0.0015 × 80,000
= $90.00 per year
Find Δ C
Δ C = 0.25 × 10.00 × 500 × Δ z
= 1250 Δ z
Set Δ P = Δ C and solve for Δ z, i.e., 90.00/1250 = Δ z
Δ z = 0.072
For the change in z found in a normal distribution table,
the optimal in-stock probability during the lead time
(SL*) is about 92%.
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ΔSL Levels in % for Various Δz
Values
ΔSL (%) Δz zU – zL =
U L
87-86 1.125-1.08 = 0.045
88-87 1.17 -1.125 = 0.045
89-88 1.23 -1.17 = 0.05
90-89 1.28 -1.23 = 0.05
91-90 1.34 -1.28 = 0.06
92-91 1.41 -1.34 = 0.07 ⇐
93-92 1.48 -1.41 = 0.07 ⇐
94-93 1.55 -1.48 = 0.07 ⇐
95-94 1.65 -1.55 = 0.10
96-95 1.75 -1.65 = 0.10
97-96 1.88 -1.75 = 0.13
98-97 2.05 -1.88 = 0.17
99-98 2.33 -2.05 = 0.28
*Developed from entries in a normal distribution table
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 Graphically Setting the Service
Level
35
0
30 Change in
0 safety
25 stock cost, ΔC
0
$/year

20
0
15
0 Change in gross profit, ΔP
10
0
5
0
0
87- 88- 89- 90- 91- 92- 93- 94- 95- 96- 97- 98- 99-
86 87 88 89 90 91 92 93 94 95 96 97 98
Probability of being in stock during replenishment lead time, %
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 Optimizing on Service
Performance Variability
Setting service variability according to Taguchi

∙ A loss function of the form

L = loss in $
k = a constant to be determined
y = value of the service variable
m = the target value of the service variable
Service penalty only if outside this
Cost penalty, L

range⎯Traditional

Missing target causes

increasing penalty ⎯
Taguchi

Target y
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Service variable, m Inc.
 Optimizing on Service
Performance Variability (Cont’d)
∙Setting the allowable deviation from the target service level m is
to optimize the sum of penalty cost for not meeting the service
target and the cost of producing the service.
TC = service penalty cost + service delivery cost
If the service delivery cost is of the general form DC = A − B(y-
m), then find the optimum allowed deviation from the service
target.

Marginal delivery cost =

marginal penalty cost

If m is set to 0, y is the optimal deviation allowed from

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target
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 Service Variability Example
Example Pizzas are to be delivered in 30 minutes (target.)
Pizzas delivered more than 10 minutes late incur a penalty of
$3 off the pizza bill. Delivery costs are estimated at $2, but
decline at the rate of $0.15 for each minute deviation from
target. How much variation should be allowed in the delivery
service? Convert fixed penalty to
Taguchi-style loss curve

Cost penalty, $
3

30 40
Delivery service, min

No more than 2.5 minutes should be allowed from the 30-

minute delivery target to minimize cost. 4-32
 Setting Service Levels
∙Service treated as a constraint on design
∙Planning for service contingencies

Measuring Service
Performance
∙Percent of sales on backorder
∙No. of stockouts
∙Percent of on-time deliveries
∙No. of inaccurate orders
∙Order cycle time Most comprehensive
∙Fill rate--% of demand met, % of orders
filled complete, etc.
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 Service Contingencies
System Breakdown Actions
•Insure the risk
•Plan for alternate supply sources
•Arrange alternate transportation
•Shift demand
•Build quick response to demand shifts
•Set inventories for disruptions
Product Recall Actions
•Establish a task force committee
•Trace the product
•Design a reverse logistics channel

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