Lecture 3

Customer Value

353SAM International Logistics

Lecture Objectives

At the end of this session, you will be able to:

1. Understand the elements that constitute

customer value in logistics
2. Recognise what customer quality and service
is and why it is important
3. Evaluate logistics strategies to formulate
improved quality and customer service
Overview

1. Customer Value

2. Quality

3. Customer Service
Discussion

How can a firm increase

the level of customer value
in its logistics operations?
Customer Value
Customer Value

Definition

Perceptions of benefits
Customer Value =
Total cost of ownership

Product benefits

Service benefits

Brand image benefits

Source: Christopher (2011)

Customer Value

Four elements in Customer Value

Increase
these!

Decrease
these!

Source: Johansson et al. (1993)

Customer Value

Four elements in Customer Value

• Quality: The functionality, performance and technical

specification of the offer
• Service: The availability, support and commitment
provided to the customer
• Cost: The customer’s transaction costs including price
and life cycle costs
• Time: The time taken to respond to customer
requirements
Source: Christopher (2011)
Customer Value

Value to Strategy
How do we deliver
against this proposition?

Develop
How does it take to
succeed in the market?
the SC
strategy
Identify
How do we translate
the value into an offer? the market
winner
Define
What do our
customers value? the value
proposition
Identify
value
segments
Source: Christopher and Peck (2003)
Customer Value

Order qualifier and winner

• Order Qualifier: the attributes that make a product or

service as a viable competitor in the marketplace
• Order Winner: the attributes that will win an order of a
customer

• Both of them are essential.

• Both of them are time and market specific.
• Not all criteria will be order qualifies or winners.

Source: Hill (2000)

Customer Value

Order qualifier and winner

• As customers’ expectation is continuously increasing,

today’s order winner becomes tomorrow’s order qualifier.
Time

Order Time to market

Product Functionality Quality
Qualifier Characteristics Flexibility
Cost Innovation
Service

Time to market
Order Functionality Quality Market
Flexibility
Winner Cost Innovation differentiation
Service

Source: Johansson et al. (1993)

Quality
Quality

Operational view of quality

Quality is “consistent conformance to customers’

expectations” (Slack et al. 2010)
Quality

Quality dimensions

1. Performance – main characteristics of the product/service

2. Aesthetics – appearance, feel, smell, taste
3. Special features – extra characteristics
4. Conformance – how well the product/service conforms to
customers expectations
5. Safety – low risk of injury
6. Reliability – consistency of performance
7. Durability – useful life of the product or service
8. Perceived quality – indirect evaluation of quality (e.g. Reputation)
9. Service after sale – handling of customer complaints or checking
on customer satisfaction
Source: Garvin (1984; 1987)
Quality

Quality effects
Quality

Total Quality Management (TQM)

TQM is “a philosophy of how to approach the organisation

for quality improvement.” (Slack et al. 2010)

TQM focuses on
• Meeting the needs and expectations of customers
• Covering all parts of the organisation
• Including every person in the organisation
• Examining all costs related to quality
• Developing systems and procedures to support quality and
improvement
• Developing a continuous process of improvement
Quality

Total Quality Management (TQM) TQM can be

viewed as a
natural extension
of earlier
approaches to
quality
management.
Quality

Toyota Recall
What is the consequence of quality issues?

Source: YouTube - https://youtu.be/NDYou3B8-hs

Customer Service
Customer Service

Discussion

What is customer service

in comparison with quality?
Customer Service

Core and Surround

Tangible Elements
- Quality
- Product features
- Technology
- Durability
Core
Product Intangible Elements
- Delivery frequency
- Delivery reliability
- Ease of doing business
Product Surround - Customer support

Source: Christopher (1992)

Customer Service

Customer Service

• Coyle et al. (1996) define customer service as “an increased

product feature that adds value for the buyer”.
• Between the 1970s and 1980s customer service was a reactive
process – i.e. a customer would complain and then something
would happen, (Collins et al. 2001).
• It is recognised that exceeding the anticipation and
expectations of customer’s in a value-added way is the only
way required to retain and develop markets (Livingstone
1992)
• Customer service is often the best way of gaining a
competitive advantage for businesses.
Customer Service

Types of service

Pre-transac- Post-transac-
Transactional
tional tional
Customer Service

5 service concepts

1. Dependability (product availability, delivery

reliability)
2. Time (delivery time)
3. Convenience (delivery times, frequency, after-
sales service)
4. Communications (answering queries, cargo
tracking, billing)
5. Flexibility (able to satisfy customer needs)
Customer Service

Service improvement

• Availability of substitute products

• Improved after care service
• Improved and direct communication
• Improve via feedback
• Considering cost trade offs in a logistics system
Customer Service

Results of poor customer service

• Buying the item from another supplier

• Put up with service this time but choose another
supplier for next orders
• Complaints and legal actions
• Broadcasting bad service
Any Questions?
Recommended Reading

• Rushton, A., Croucher, P. and Baker P. (2014) ‘The Handbook of

Logistics and Distribution Management’, 5th edition, Kogan Page
Ltd, London. (Chapter 3)

• Christopher, M. (2011) ‘Logistics and Supply Chain Management’,

4th edition. Harlow: Prentice Hall. (Chapter 2)

• Grant, B., Lambert, D., Stock, J. and Ellram, L. (2006)

‘Fundamentals of Logistics Management: European edition’,
McGraw Hill, London. (Chapter 2)

• Johansson, H.J., McHugh, P., Pendlebury, A.J. and Wheeler, W.A.

(1993) ‘Business Process Reengineering’, John Wiley & Sons.
Logistics Performance

353SAM International Logistics

Lecture Objectives

At the end of this session, you will be able to:

1. Understand the reasons for trade-offs in

logistics operations

2. Evaluate various logistics performance

measurement

3. Apply the total cost analysis concept to

logistics decisions
Overview

1. Trade-offs

2. Performance Measurement

3. Logistics cost
Trade-offs
Trade-offs

Cost vs Service trade-off

• You are responsible for improving the customer service

in a large logistics company. Recently there has been an
emphasis on cost-reduction and it is believed this has at
least partially caused dissatisfaction amongst customers.

• What would you do/what services would you offer to

ensure customer service is second to none?
Trade-offs

Definition

• Trade off - an inter-relationship between

elements of logistics where one subsystem will
benefit while the other does not

• Sub-optimisation - optimising the outcome for a

subsystem within a supply chain will in general
not optimise the outcome for the supply chain as
a whole
Trade-offs

Discussion

What would be the typical trade-off situations

in logistics planning and operations?
Trade-offs

Levels of trade-offs

• Within logistics components

- e.g., centralised vs. dispersed warehouses, air vs. sea
• Between logistics components
- e.g., packaging vs. warehousing, transport vs. inventory
• Between company functions
- e.g., finance vs. production, marketing vs. logistics
• Between the company and external organisations
Source: Rushton et al. (2014)
Trade-offs

Competitive Advantage
Performance Measurement
Performance Measurement

Logistics impact on ROI

Return on
= = X
Investment
(Margin) (Asset turn)

Source: Christopher (2011)

Performance Measurement

Logistics impact on ROI

Customer service
Revenue CRM, Reputation
Profit Efficient logistics
Costs
Return Less waste
On Cash Cash-to-cash cycle
Investment Order cycle time
Capital Net
Invoice accuracy
Employed receivables
Just-in-time logistics
Inventory
Inventory management
Fixed Asset utilisation
Assets Outsourcing
Source: Christopher (2011); Rushton et al. (2014)
Performance Measurement

Logistics Performance

• Efficiency: the degree to which resources have been

used economically
“Doing things right”
• Effectiveness: the extent to which an objective has
been achieved
“Doing the right thing”
• Efficacy: the extent to which a desired result or effect
can be produced
“Doing things differently”
Source: Chow et al. (1994)
Performance Measurement

Quantitative Measurement

• On-time delivery percentage

• Logistics costs as a percentage of sales
• Days order late
• Inventory turnover ratio
• Compete order fill rate
• Average order cycle time
• Order cycle time variability
• Items picked per person per hour
• Average backorder fill rate
• Sales lost due to stock-out
• Percentage error pick rate
• Logistics cost per unit
Source: Griffis et al. (2007)
Performance Measurement

Qualitative Measurement
Low freight rate
Logistics Cost Prompt response to quoting / rate change
Pricing flexibility in meeting rates
Short transit time
High frequency of sailing
Speed & Reliability On-time pick-up
Reliability of schedule
Good condition of equipment
Equipment & Facilities Ability to provide cargo tracing
Ability to provide non-standard equipment
Courtesy of Inquiries
Prompt response to complaints / claims
Easy Process Accurate documentation
Favorable payment terms
Ability to provide door-to-door service
Value-added Service Ability to provide customs clearance service
Ability to provide consolidation service
Knowledge of sales personnel
Sales Representative Relationship with sales personnel
Ability to sales representative to handle problems
Good reputation
Image & Promotion Good finance condition
Advertisement in various channels

Source: Kwak (2010)

Performance Measurement

Balanced Scorecard (BSC)

Customer Perspective Financial Perspective

Customer satisfaction Profitability, Growth

New client Debt/equity, ROI
Balanced
Scorecard

People, innovation
Process Perspective
& environment
perspective Efficiency increase

Source: Richards and Grinsted (2013)

Performance Measurement

Balanced Scorecard (BSC)

Strategic

environment perspective
People, innovation and
Customer perspective

Customer Perspective
aims

Financial perspective
Critical
success
factors

Departmental
performance
measurement
Source: Richards and Grinsted (2013)
Performance Measurement
Performance measurement by BSC
Perspectives Performance Measurement
1. On-time delivery
Customer 3. Correct documentation
Perspective 5. Perfect order
7. Customer complaints
1. Operational cash flow
Financial 3. Day’s sales outstanding
Perspective 5. Inventory days of supply
7. Logistics costs per unit
1. Employee turnover
People, Innovation 3. Training days per employee
and Environment 5. Sickness and absence
Perspective 7. Level of waste
1. Forecast accuracy
Process 3. Dock to stock time
Perspective 5. Returns percentage
7. Order to completion time
2. Orders in full first time
4. Damage claims
6. Total order cycle time
8. POD returns
2. Budget vs. actual
4. Overtime costs
6. Logistics costs as a % sales
8. Stock loss/obsolescence
2. % turnover spent on training
4. Accident levels
6. CO2 footprint
8. Energy usage
2. Stock accuracy
4. Picking accuracy
6. Space efficiency percentage
8. Audit results
Logistics Cost
Logistics cost

Total cost analysis

What is the true logistics cost?

• The conventional accounting system absorbs logistics-
related costs in other cost elements
• The impacts of specific logistics decisions throughout the
corporate system are not fully acknowledged

The total cost analysis

• Analysis on the total logistics costs based on the material
flows
• Analysis on the changes of the total logistics costs by
logistics decisions
Source: Christopher (2005)
Logistics cost

Total logistics cost

Logistics
Logistics Costs costs to
Direct / turnover
Explicit
(1) Transport Cost 5.1%
Costs
(2) Warehousing Cost 3.4%
(3) Packaging Cost 1.4%
(4) Administration Cost 1.5%
Indirect / (5) Inventory Carrying Cost 5.8%
Implicit (6) Indirect Cost 1.3%
Costs
Total 18.6%

Source: Engbolm et al. (2012)

Logistics cost

Logistics decisions

Total
Logistics Costs Total
Logistics
Cost
Transport, Warehousing, Decisions
Packaging, Administration, Savings
Inventory holding, indirect

e.g. Intermodal route selection

Warehouse location
Process re-engineering
Cost-saving technologies
Logistics cost

Any other hidden costs?

Source: Christopher (2011)

Logistics cost

Revisit customer value matrix

Source: Johansson et al. (1993)

Any Questions?
Recommended Reading

• Rushton, A., Croucher, P. and Baker P. (2014) ‘The Handbook of

Logistics and Distribution Management’, 5th edition, London: Kogan
Page Ltd. (Chapter 3)

• Christopher, M. (2011) ‘Logistics and Supply Chain Management’,

4th edition. Harlow: Prentice Hall. (Chapter 3)

• Richards, G. and Grinsted, S. (2013) ‘The Logistics and Supply

Chain Toolkit’, London: Kogan Page Ltd. (Chapter 7)

• Woo, S.-H., Kim, S.-N. and Kwak, D.-W. (2013) Transport route
choice in multimodal supply chains: the case of Korean auto parts
exporters, Proceedings of the IAME 2013 Conference, Marseilles,
France.