Chapter 4: Logistics Customer Service

1. Chapter 4: Logistics Customer Service Skip: Determining Optimum Service Levels (pp. 97-100) Skip: Service as a Loss Function (pp. 100-101) • Definition and Measurement. • Fundamental Tradeoff • Sales-Service and Cost-Service relationships. • Service as a Constraint. • Contingencies.

2. Customer Service • Customer service is the result of logistics activities. • Create and foster customer loyalty through good service. • Hard to define & hard to measure comprehensively. • Includes: • Pre-transaction customer information about delivery options, return policy, warranty, billing information. • Post-transaction support after the sale, installation, repair, returns, recall. • Employee training affects all areas of customer service. • Not all customers should have same level of service.

3. Customer Service Measures • Availability • % of demand filled from stock • Example: 95% availability means 5% of demand is backordered. • Order Cycle Time • Time between placing and receiving an order. • Includes: • Order transmittal (consider role of e-commerce). • Order processing (document prep., credit check, etc.). • Order assembly (may need to produce if out-of-stock). • Delivery.

4. Customer Service Measures • Availability and Order Cycle Time address time a customer waits. • Customers point of view: • When will I receive it? • Is it correct? • Want on-time delivery and high quality. • Delivery reliability often more important than speed. • Correct, undamaged order expected.

5. Fundamental Question • What level of service should be offered? • Hard to answer! • Consider tradeoffs.

6. Fundamental Tradeoff • High level of customer service creates: • Higher sales and revenues. • Higher costs. • Lower level of customer service creates: • Lower costs. • Lower sales and lost customers. • Examples: • 5% decrease in service level = 24% drop in purchases. • 6 times more expensive to develop new customers than keep old customers.

7. Sales-Service Relationship • Increasing service increases cost and revenue. Revenue $ Cost Customer Service Level

8. Sales-Service Relationship • Want to maximize Profit = Revenue - Cost. Revenue $ Cost Profit Customer Service Level

9. Sales-Service Relationship • Optimum service level = Maximum Profit Revenue $ Cost Profit Optimum Customer Service Level

10. Determining Optimum Service Level • Optimum service level = Maximum profit. • Not maximum sales. • Cost as a function of service can be estimated. • Cost of better transportation and storage is known. • Sales (revenues) as a function of service is very hard to determine. • Can vary service levels and measure sales - Dangerous! • Easy to survey customers, but may not be reliable.

11. Service as a Constraint • Select several alternative logistics systems with different levels of service. • Evaluate cost of corresponding transportation and storage options. • Ask “Will expected increase in revenues will exceed estimated costs?” • Easier than “What is best level of service to offer?” • See Table 4-3 p. 102

12. Service as a Constraint Alternative Logistics Cost Service Level* Water transport $5,000,000/yr 80% Low inventory Rail transport. $7,000,000/yr 85% Medium inventory Truck + air transport. $11,0000,000/yr 95% High inventory * % of customers receiving 1 day service Will revenues from increase in service offset added costs?

13. Contingencies • Breakdown/Natural Disaster: • War, riots, attack, bankruptcy, etc. • Fire, flood, earthquake, hurricane, etc. • Strikes: • By employees, suppliers, affiliated workers. • Examples: UPS strike 1997, trucking strike 1994. • Product Recall: • Recall from customers and from logistics pipeline. • Find, collect, and repair or replace.

14. Contingencies • Prepare for: • Loss of product or service capability. • Loss of data (computers). • Loss of communications. • Loss of transportation. • Goal: Keep customer satisfied