Order Management and Customer Service: Supply Chain Management: A Logistics Perspective (10e)

CHAPTER 8
Order Management
and Customer Service
Supply Chain Management: A Logistics Perspective (10e)

Coyle, Langley, Novack, and Gibson
© 2016 Cengage Learning. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Discussion Outline
 Order management and customer service:
Concept and relationships
 Order management
 Customer Service
 Order management influences on customer
service
 Service recovery
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
or in part. 2
Order Management Concept
Two Phases of Order Management
Phase 1:
Phase 1:
Influence Phase 2: Execute the Order
Influence Phase 2: Execute the Order
the Order
the Order
Organization
attempts to
change the Order Order Order
manner by Order
receipt Order
fulfillment Order
shipments
which its receipt fulfillment shipments
customers
place orders.
Electronically Inventory policy; Transport
vs. Manually number & location mode choice
of warehouses
or in part. 3
Customer Service Concept
Customer service is anything that touches the
customer, including all activities that impact
information flow, product flow, and cash flow between
the organization and its customers.
Customer service as a philosophy

Customer service as a philosophy
Customer service as performance
Customer service as performance
Elevates customer measures
Elevates
servicecustomer
as an
measures
service as an
organization-wide Emphasizes customer Customer service
organization-wide Emphasizes customer
service as specific Customer service
commitment. service as specific as an activity
commitment. performance measures. as an activity
performance measures. Treats customer service
Treats customer task
as a particular service
that
asan
a particular task that
organization must
anperform.
organization must
perform.
or in part. 4
Relationship between Order Management and
Customer Service
Customer Provide
Order Management
Determine
Influence Relationship Pretransaction
Performance
the Order Management Order
Measures/Levels
(CRM) Information
Manage
Execute to/Measure
Service Recovery Order Execution
the Order Performance
Levels
As Philosophy As Performance As an Activity

Measures
Customer Service
Source: Figure 8.1
or in part. 5
Order Management
Influencing the Order: Executing the Order:

Customer Relationship Order Management &
Management (CRM) Order Fulfillment
Order Management: Influencing Order
Customer Relationship Management
The concept behind customer relationship
management (CRM) is simple: Align the supplier’s
resources with its customers in a manner that increases
both customer satisfaction and supplier profits.
How
Maximize the
How much efficiencies of
the shipping
What
CRM
CRM organization’s
logistics
When network
or in part. 7
Customer Relationship Management (continued)
Four basic steps in the implementation of the CRM process
Step 1 Segment the Customer Base by Profitability
 Use techniques such as activity-based costing and cost-to-serve (CTS) model
Identify the Product/Service Package for Each
Step 2 Customer Segment
 Determine what each customer segment values in its relationship with the
supplier based on feedback from customers and sales representatives
Step 3 Develop and Execute the Best Processes

 Deliver on customer expectations determined and set in Step 2
Step 4 Measure Performance and Continuously Improve

 Determining if (1) the different customer segments are satisfied and (2) the
supplier’s overall profitability has improved.
or in part. 8
Product/Service Package Examples: Option 1 (most commonly used)
Offer the same product/service offering to each customer segment, while varying
the product quality or service levels. Pro: Easy for the supplier to manage. Con:
Assumes that all customer segments value the same types of supplier offerings.
or in part. 9
Product/Service Package Examples: Option 2
Vary the service offerings for each customer segment. Pro: Meet the needs
of each segment. Con: Difficult for the supplier to manage.
CUSTOMER SEGMENT A CUSTOMER SEGMENT B
Product quality (%
defects) Less than 1%
Order fill 98% Product quality 5%–10%
Lead time 3 days (% defects)
Delivery time Within 1 hour of Less than 48

request Credit hold hours
Payment terms 4/10 net 30
Customer service support Dedicated rep Up to 10 days
Return policy after delivery
CUSTOMER SEGMENT C
Order fill 88%
Ordering process Through Web site
or in part. 10
Order Management: Influencing Order Activity-
Based Costing and Customer Profitability
Combining Activity-Based Costing (ABC), customer profitability, and
customer segmentation tools to build profitable revenue is a strategy being
utilized by an increasing number of organizations today.
Source: Figure 8.2

or in part. 11
Order Management: Influencing Order ABC and
Customer Profitability (continued)
ABC Example: Flow-Through Costing for a Distribution Center
Source: Figure 8.4

or in part. 12
Customer Profitability Analysis
Traditional Customer
Profitability Analyses Cost-to-Serve Model
 Start with gross sales  Identifies

less returns and many other
allowances (net sales) cost drivers
and subtract the cost that are
of goods sold to arrive impacted by
at a gross margin customers and
figure. how they
 interact with
Provides a general guideline for the
the shipper.
profitability of a customer, but falls
short on capturing the real costs of
serving a customer.
or in part. 13
Customer Segmentation
 Danger zone segment strategies are:
Net Sales Value of Customer
(1) Change the manner in which the

Protect customer interacts with the shipper to
High Cost
Most move the customer to another
Engineer
profitable segment; (2) Charge the customer the
actual cost of doing; or (3) Switch the
customer to an alternative distribution
Danger channel.
Zone
Low Build  Build segment strategies aim to
Least maintain the cost to serve but build
profitable net sales value to help drive the
customer into the “Protect” segment.
Low High
 Cost engineer segment strategies
Cost to Serve
aim to find more efficient ways for the
customer to interact with the shipper.
Source: Figure 8.5
or in part. 14
Order Management: Executing Order
Order-to-Cash (OTC) vs. Replenishment Cycles
OTC: Refer to outbound-to- Replenishment Cycle:

OTC: Refershipments.
customer to outbound-to-
The order Replenishment Cycle:
The term replenishment cycle is
customer
to cash (or shipments.
order cycle)The order
is all of The term
used replenishment
more cycle is
frequently when
tothe
cash (or order cycle) is all
activities that occur from of used more frequently
referring when of
to the acquisition
the activities
when an order thatisoccur fromby a
received referring to the
additional acquisition
inventory as inof
when
selleranuntil
order is product
the receivedisby a additional inventory as in
materials management.
seller untilby
received thethe
product
buyer,isplus the materials management.
received
flow of by the back
funds buyer,toplus
the the
seller
flow of funds back
based on the invoice.to the seller
based on the invoice.
Basically, one organization’s order cycle is another’s

replenishment cycle.
or in part. 15
Order-to-Cash (OTC) Cycle
Process D1: The Order to Cash (Process in a Deliver from Stock Environment)
Informa • D1.1
tion through
Flow D1.7
• D1.8
Product
Flow through
D1.14
Cash • D1.15
Flow
Illustration modified from image courtesy of CSCMP”s Supply Chain Quarterly

or in part. 16
Length and Variability of the OTC Cycle
Source: Figure 8.7
or in part. 17
Customer Service
Customer Service
The Logistics/Marketing Interface
Marketing Objective:
Allocate resources to the
marketing mix to maximize
long-term profitability of
the firm.
Logistics Objective:
Minimize total costs, given
customer service objective,
where:
Total costs =
Transportation costs +
Warehousing costs + Order
processing & Information
costs + Lot quantity costs +
Inventory carrying costs
Source: Figure 8.8
or in part. 19
Customer Service
Customer Service and ROI
100
ROI (%)
Suppliers must recognize the

Suppliers must recognize the
importance of balancing the
importance of balancing the
tradeoffs between service levels and
tradeoffs between service levels and
the cost of providing that service.
the cost of providing that service.
0 50 100
Service Level (%)
Source: Figure 8.9
or in part. 20
Customer Service
Elements of Customer Service
From the perspective of logistics, customer service can
be viewed as having four distinct dimensions.
4
Convenience Time
(flexible logistics service level) (absolute length of lead time)
1
3
Communications Dependability
(pretransaction, transaction, & (consistent lead time, safe delivery,
posttransaction) correct orders)
2
or in part. 21
Customer Service
Elements of Customer Service (continued)
Lead Time Frequency Distribution Example
Source: Figure 8.10
or in part. 22
Customer Service
Performance Measures: SCOR Metrics Level 1
Supply Chain • Order fulfillment cycle time

Responsiveness
• Upside SC flexibility
Supply Chain • Upside SC adaptability
Agility • Downside SC adaptability
• SC management costs
Supply Chain Costs • COGS
Supply Chain Asset • Cash to cash cycle time
Management • Return on SC fixed assets
Supply Chain • Perfect order
Reliability
or in part. 23
Customer Service
Stockout Issues
A stockout occurs when desired quantities of finished goods
are not available when or where a customer needs them.
As a result, one of four possible events might occur.
11
The buyer waits until the product is available.
22
The buyer back-orders the product.
Stockout
Stockout
33 The seller loses current revenue.
44 The seller loses a buyer and future revenue.
or in part. 24
Order Management
Influences on Customer
Service
Order Management Influences on Customer Service
Linking Order Management Outputs
Each of the five major outputs of order management impacts
customer service/satisfaction, and the performance of each is
determined by the seller’s order management and logistics systems.
Product
Availability
Order Postsale
Cycle Logistics
Time Support
Logistics Operations Logistics System

Responsiveness Information
Source: Figure 8.12
or in part. 26
Product Availability Metrics
Product Availability
100 Metrics
 Internal Metrics
Investment ($)
Increasing fill rates  Item fill rate

Inventory
Increasing fill rates

has a direct effect on a
has a direct effect on a  Line fill rate
seller’s inventories.
seller’s inventories.  External Metrics
 Order fill rate
 Perfect order
85 90 95 100
Fill Rate (%)
Source: Figure 8.12
or in part. 27
Product Availability Financial Impacts
Financial Impact of Order Fill Rate
Improvement in order fill results in improvement in cash flow, but might
require some type of investment in inventories and/or technology.
Cash Flow Lost vs. Inventory

Cash Flow Lost vs. Inventory
Investment Tradeoff
Investment Tradeoff
Source: Figure 8.14
or in part. 28
Order Cycle Time Metric: Customer Wait Time
Often overlooked definition of order

cycle time is customer wait time
(CWT). CWT includes not only order
cycle time but also maintenance time.
Source: Figure 8.15
or in part. 29
Logistics Operations Responsiveness
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:
 How well a seller can customize
its service offerings to the unique
requirements of a buyer
 How quickly a seller can respond
to a sudden change in a buyer’s
demand pattern.
or in part. 30
Logistics Operations Responsiveness Metrics
Metrics for LOR
Flexibility/ Customization of
Adaptability of Process Product/Service
Delivery Agility Metrics Customization Metrics

 Upside deliver adaptability The time it takes the seller to
 Downside deliver adaptability offer a new package for sale in
the retailers’ stores.
 Upside deliver flexibility
Images courtesy of ispionage.com, SPC, and alarmbiller.net
or in part. 31
Logistics System Information
LSI is critical to successful order management and customer service.
(1) Pretransaction information is used for planning,
(2) Transaction information is used for execution
(3) Posttransaction information is used for evaluation.
Source: Table 8.9
or in part. 32
Logistics System Information Metrics
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.
Examples
 Forecast accuracy (measure accuracy of
data on past consumption and predictions
on future consumption)
 Inventory accuracy (measure accuracy of
inventory counts in a distribution center)
 Data integrity (measure the
quality/accuracy of inputs to an LSI)
 EDI compliance (measure how well
trading partners are complying with EDI
standards when sharing data).
Image courtesy of brainscape.com
or in part. 33
Postsale Logistics Support and Metrics
Two Forms of Postsale Logistics Support (PLS)
The management of
The delivery and
product returns from the
installation of spare parts
customer to the supplier
 For the most part, the PLS that  Metrics for a PLS that manages
manages product returns is spare parts are the same as those
measured by the ease with which used for all products, but
a customer can return a product. availability and time are
relatively more critical for spare
parts logistics.
Images courtesy of mntcoupons.com, dreamstime.com
or in part. 34
Service Recovery
Service Recovery
Service recovery requires an organization
to realize that mistakes will occur and to
have plans in place to fix them.
Measuring the costs of poor service.
Key
Aspects Anticipating the needs for recovery.
of Service
Recovery Developing employee training and
empowerment.
Images courtesy of qainfotech.com, innorange.fi, studiotheory.net

or in part. 36
Summary
 Order management and customer service are not mutually exclusive;
there is a direct and critical relationship between these two concepts.
 Two distinct, yet related, aspects of order management are:
influencing the customer’s order and executing the customer’s order.
 Combining ABC, customer profitability, and customer
segmentation tools with CRM allows companies to differentiate
their offerings to different customer segments.
 Order execution is the buyer-seller interface in the market and
directly influences customer service (time, dependability,
communications, and convenience).
 Five outputs from order management influencing customer service,
customer satisfaction, and profitability are: (1) Product availability,
(2) Order cycle time, (3) Logistics operations responsiveness, (4)
Logistics system information, and (5) Postsale logistics support.

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CHAPTER 8

Supply Chain Management: A Logistics Perspective (10e)

Customer service as a philosophy

As Philosophy As Performance As an Activity

Influencing the Order: Executing the Order:

Step 3 Develop and Execute the Best Processes

Step 4 Measure Performance and Continuously Improve

Delivery time Within 1 hour of Less than 48

Source: Figure 8.2

Source: Figure 8.4

 Start with gross sales  Identifies

(1) Change the manner in which the

Source: Figure 8.5

OTC: Refer to outbound-to- Replenishment Cycle:

Basically, one organization’s order cycle is another’s

Illustration modified from image courtesy of CSCMP”s Supply Chain Quarterly

Source: Figure 8.7

Suppliers must recognize the

Source: Figure 8.10

Supply Chain • Order fulfillment cycle time

44 The seller loses a buyer and future revenue.

Logistics Operations Logistics System

Increasing fill rates  Item fill rate

Increasing fill rates

Cash Flow Lost vs. Inventory

Source: Figure 8.14

Often overlooked definition of order

The concept of logistics

Metrics for LOR

Delivery Agility Metrics Customization Metrics

Images courtesy of ispionage.com, SPC, and alarmbiller.net

Source: Table 8.9

Measuring the costs of poor service.

Images courtesy of qainfotech.com, innorange.fi, studiotheory.net

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