Chapter 8 Order Management and Customer Service Learning Objectives

1. Chapter 8 Order Management and Customer Service Learning Objectives • After reading this chapter, you should be able to do the following: • Understand the relationships between order management and customer service. • Appreciate how organizations influence customers’ ordering patterns as well as how they execute customers’ orders. • Realize that activity-based costing (ABC) plays a critical role in order management and customer service. • Identify the various activities in the SCOR process D1 (deliver stocked product) and how it relates to the order-to-cash cycle.

2. Learning Objectives (cont.) • After reading this chapter, you should be able to do the following: • Know the various elements of customer service and how they impact both buyers and sellers. • Calculate the cost of a stockout. • Understand the major outputs of order management, how they are measured, and how their financial impacts on buyers and sellers are calculated. • Be familiar with the concept of service recovery and how it is being implemented in organizations today.

3. Influencing the Order • This is the phase where an organization attempts to change the manner by which its customers place orders. Order Execution • This occurs when the order is received.

4. Customer service: • is anything that touches the customer. This includes all activities that impact information flow, product flow, and cash flow between the organization and its customers. • Philosophy • Philosophy elevates customer service to an organization-wide commitment to providing customer satisfaction through superior customer service.

5. Customer service: Performance • emphasizes customer service as specific performance measures that pervade all three definitions of customer service and address strategic, tactical, and operational aspects of order management. Activity • treats customer service as a particular task that an organization must perform to satisfy a customer’s order requirements.

7. Customer relationship management: • is the art and science of strategically positioning customers to improve the profitability of the organization and enhance its relationships with its customer base. • is not a new concept used by service industries. • has not been widely used in the business-to business environment until lately. • Customer action affects firm’s cost • how customers order • how much customers order • what customers order • when customers order an order

8. Four basic steps in the implementation of the CRM • Step 1: Segment the Customer Base by Profitability • Step 2: Identify the Product/Service Package for Each Customer Segment • Step 3: Develop and Execute the Best Processes • Step 4: Measure Performance and Continuously Improve

11. Activity-Based Costing • ABC measures the cost and performance of activities, resources, and cost objects. Resources are assigned to activities, then activities are assigned to cost objects based on their use • Traditional cost accounting is well suited to situations where an output and an allocation process are highly correlated. • Traditional cost accounting is not very effective in situations where the output is not correlated with the allocation base.

13. The Management of Business Logistics Chapter 8

19. One method to classify customers by profitability. Protect Zone • Those customers who fall into the “Protect” segment are the most profitable. Danger Zone • Customers in the “Danger Zone” segment are the least profitable and incur a loss. • The firm has has three alternatives for danger zone customers: • (1) change customer interaction with firm so the customer can move to another segment • (2) charge the customer the actual cost of doing business • (3) switch the customer to an alternative distribution channel Build Zone • These customers have a low cost to serve and a low net sales value, so the firm should maintain the cost to serve and build net sales value to help drive the customer into the “Protect” segment.

21. Order Management • This system represents the principle means by which buyers and sellers communicate information regarding orders. • Effective order management is key to operational efficiency and customer satisfaction. • Logistics needs timely and accurate information relating to orders so many firms place order management in the logistics area.

22. Order to cash • Thirteen principle activities constitute the OTC cycle: • D1.1 through D1.7 represent information flows • D1.8 through D1.12 represent product flows • D1.13 represents cash flow Order cycle • all activities that occur from when an order is received until the product is received Replenishment cycle • refers to acquisition of additional inventory • one firm’s order cycle is another’s replenishment cycle

23. Order To Cash cycle: • recent attention has centered on the variability or consistency of this process • absolute length of time is important, variability is more important • a driving force is safety stock, as absolute length of the order cycle will influence demand inventory

24. E-Commerce Order Fulfillment Strategies • Many firms use Internet technology to capture order information for fulfillment systems for picking, packing, and shipping. • Internet allows faster collection of cash by the seller.

26. The Logistics/Marketing Interface • Customer service is the key link between logistics and marketing within an organization. • Manufacturing can produce a quality product at the right cost and marketing can sell it, but if logistics does not deliver it when and where promised, the customer will not be satisfied.

28. Three different perspectives on customer service: • Three different perspectives on customer service • philosophy • as a set of performance measures • as an activity Customer service needs to be put into perspective as including anything that touches the customer

29. Three levels of a product • (1) the core benefit or service, which constitutes what the buyer is really buying • (2) the tangible product, or the physical product or service itself • (3) the augmented product, which includes benefits, adds value for the customer

31. Four distinct dimensions of customer service: • Time • cycle time • safe delivery • correct orders • Dependability • more important than the absolute length of lead time • Communications • pretransaction • transaction • posttransaction • Convenience • service level must be flexible

33. Customer Service Performance Measures from buyer’s view • Orders received on time • Orders received complete • Orders received damage • Orders filled accurately • Orders billed accurately

36. Expected Cost of Stockouts: • Stockout occurs when desired quantities are not available • Four possible events: • the buyer waits until the product is available • the buyer back-orders the product • the seller loses current revenue • the seller loses a buyer and future revenue

37. Back Orders: • occurs when a seller has only a portion of the products ordered by the buyer • are created to secure the portion of the inventory that is currently not available Lost Sales: • some customers will turn to alternative supply sources Lost Customers: • customer permanently switches to another supplier

38. Determining the Expected Cost of Stockouts • back order • lost sale • lost customer • identify potential consequences • calculate each result’s expense or lost profit

40. Product availability from customer perspective: • Did I get what I wanted? • When I wanted it? • In the quantity I wanted? Product availability is the ultimate measure of logistics and supply chain performance.

41. Metrics • four are widely used across multiple industries: • internal metrics • item fill rate • line fill rate • external metrics • order fill rate • perfect order

44. Calculation for lost cash flow: Cash Flow Lost = (Number of Incomplete Orders Back- Ordered x Back Order Cost per Order) + (Number of Incomplete Orders Cancelled x Lost Pretax Profit per Order) + (Number of Incomplete Back- Ordered x Invoice Deduction per Order)

47. Order Cycle Time: • the time that elapses from when a buyer places an order until receipt of the order • absolute length and reliability of order cycle time influences both firm’s inventories, resulting in impacts on both revenues and profits for both organizations

49. Two inventory cost reduction calculations • reduced standard deviation of order cycle time on safety stocks Safety Stock = {Demand per Day x [OCT + (z x Standard Deviation of OCT)]} – (Demand per Day x OCT) • determine the impact of the reduction of absolute order cycle time on demand inventories Demand Inventory Cost Reduction = Difference in Absolute OCT x Demand per Day x Cost per Unit x Inventory Carrying Cost Percent

50. Logistics operations responsiveness (LOR) • Examines how well a seller can respond to a buyer’s needs. • This “response” can take two forms: • LOR can be how well a seller can customize its service offerings to the unique requirements of a buyer • LOR can be how quickly a seller can respond to a sudden change in a buyer’s demand pattern.