Logistics Chapter 8

Customer service as a philosophy

Elevates customer service as an organization-wide commitment.

Customer service as performance measures

Emphasizes customer service as specific performance measures

T or F: "Order to cash" and "replenishment cycle" are the same.

False

T or F: A stockout always results in a back order.

False

T or F: Activity-based costing works well in warehouse-type environments but does not work for customer-service applications.

False

T or F: Customer relationship management is a new concept only recently receiving attention.

False

T or F: Dependability is not as important to a buyer as is absolute length of lead time.

False

T or F: For the best service, all products should be available at all levels regardless of cost.

False

T or F: Most organizations employ all six definitions of customer service in their order management process.

False

T or F: Reserve Inventory and Determine Delivery Date has traditionally been referred to as order processing.

False

T or F: The buyer and seller look at order time from the same perspective.

False

T or F: The identification of the product/service package for each customer segment is one of the easier activities in the CRM process.

False

T or F: There are four types of communications that exist between a buyer and a seller.

False

T or F: There are ten principal activities to the OTC model

False

Logistics Operation responsiveness Metrics (LOR)

Flexibility/ Adaptability of Process Customization of Products / Service

When a seller is unable to satisfy demand with available inventory, one of four possible events might occur. Name all four, and pick two to discuss in detail.

(1) the buyer waits until the product is available; (2) the buyer back-orders the product; (3) the seller loses current revenue; or (4) the seller loses a buyer and future revenue. Buyer Waits Theoretically, if the customer waits, it should cost nothing; this situation is more likely to occur where product substitutability is very low. Back Orders As previously mentioned, a back order occurs when a seller has only a portion of the products ordered by the buyer. The back order is created to secure the portion of the inventory that is currently not available. By placing the back order, the buyer is indicating that it is willing to wait for the additional inventory. However, after experiencing multiple back orders with a seller, a buyer might decide to switch to another seller. Lost Sales Most organizations find that although some customers might prefer a back order, others will turn to alternative supply sources. Much of the decision here is based on the level of substitutability for the product. In such a case, the buyer has decided that if the entire order cannot be delivered at the same time, it will cancel the order and place it with another seller. In the likely event that the seller will sustain lost sales with inventory stockouts, the seller will have to assign a cost to these stockouts as suggested earlier. Then the seller should analyze the number of stockouts it could expect with different inventory levels. Lost Customer The third possible event that can occur because of a stockout is the loss of a customer; that is, the customer permanently switches to another supplier. A supplier who loses a customer loses a future stream of income. Estimating the profit (revenue) loss that stockouts can cause is difficult.

Examples of these Metrics:

*Forecast Error (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).

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.

Two forms of Post Sale Logistic Supports (PLS)

*The management of product returns from the customer to the supplier -For the most part, the PLS that manages product returns is measured by the ease with which a customer can return a product. *The delivery and installation of spare parts Metrics for a PLS that manages spare parts are the same as those used for all products, but availability and time are relatively more critical for spare parts logistics.

What are the 2 phases of order management?

1. Influence the order (Organizations attemp to change the manner by which its customers place orders. 2. Execute the order: Order receipts, order fulfillment, order shipments

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. They are:

1. Product availability 2. Postscale logistics support 3. Logistics System Information 4. Logistics Operations Responsiveness 5. Order cycle time

There are 4 basic steps in the implementation of the CRM process (influencing the order)

1. Segment the customer base by profitability 2. Identify the product/service package for each customer segment. 3. Develop and execute the best processes. 4. Measure performance and continuously improve.

As a result of a stock out, one of four possible events might occur.

1. The buyer waits until the product is available. 2. The buyer back-orders the product. 3. The seller loses current revenue. 4. The seller loses a buyer and future revenue.

From the perspective of logistics, customer service can be viewed as having four distinct dimensions.

1. Time (lead time) 2. Dependability (consistent lead times, safe delivery, correct orders.) 3. Communications (pretransactions, transactions, post transactions.) 4. Convenience (flexible logistics service level.)

Executing Orders: Orders to cash

: Refer to outbound-to-customer shipments. The order to cash (or order cycle) is all of the activities that occur from when an order is received by a seller until the product is received by the buyer, plus the flow of funds back to the seller based on the invoice.

There are ____ different perspectives on customer service. Fill in the blank as to how many there are and pick one to discuss in detail.

A philosophy, a set of performance measures, and as an activity. However, customer service needs to be put into perspective as including anything that touches the customer. From a marketing perspective, there are three levels of a product that an organization provides to its customers: (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; and (3) the augmented product, which includes benefits that are secondary, but an integral enhancement to, the tangible product the customer is purchasing. In this context, logistics customer service can be thought of as a feature of the augmented product that adds value for the customer. However, the product and logistics customer service are not the only outputs by which a seller "touches" the customer. Customer service also includes how a seller interfaces with a customer and provides information about the product. This would include providing information about product availability, pricing, delivery dates, product tracking, installation, postsale support, and so on. Customer service is really an all-encompassing strategy for how a seller interacts with its customers. Customer service is an activity, a set of performance measures, a philosophy, a core benefit, a tangible product, and an augmented product. Customer service focuses on how a seller interacts with its customers on information flows, product flows, and cash flows.

The concept behind Customer relationship Management (CRM) is simple...

Align the suppliers resources with the customers in a manner that increases both the customer satisfaction and supplier profits. Knowing How, How much, What and when can maximize the efficiencies of the shipping organizations logistics network.

Marketing Objectives

Allocate resources to the marketing mix to maximize long-term profitability of the firm.

. What events might occur when an organization is out of stock of a needed product? How might the cost of a stockout be calculated?

Answer: A stockout occurs when desired quantities of finished goods are not available when or where a customer needs them. When a seller is unable to satisfy demand with available inventory, one of four possible events might occur: (1) the buyer waits until the product is available; (2) the buyer back-orders the product; (3) the seller loses current revenue; or (4) the seller loses a buyer and future revenue. From the perspective of most organizations, these four outcomes are ranked from best to worst in terms of desirability and cost impact. Theoretically, scenario 1 (customer waits) should cost nothing; this situation is more likely to occur where product substitutability is very low. Scenario 2 would increase the seller's variable costs. Scenario 3 would result in the buyer canceling a portion of or the entire order, thus negatively impacting the current revenue of the seller. Scenario 4 is the worst situation for the seller and the most difficult to calculate because it results in the loss of future revenue from the buyer. (Page 294-295)

. Explain the relationship between customer service levels and the costs associated with providing those service levels.

Answer: Customer service is an important reason for incurring logistics costs. Economic advantages generally accrue to the customer through better supplier service. As an example, a supplier can lower customer inventories by utilizing air transportation rather than motor carrier transportation. Lower inventory costs result from air transportation's lower and more reliable transit time, which will decrease order cycle time but result in higher transportation costs than those incurred by using motor carriage. The supplier's logistics analysis must balance the improved service level the customer desires and the benefits the supplier might gain from possible increased revenue versus the cost of providing that service. Every incremental improvement in service (e.g., on-time delivery) will require some incremental level of investment from the supplier. This investment could be in faster and more reliable transportation or in additional inventories. An assumption is that for every incremental improvement in service there is an incremental increase in revenue for the supplier from the customer. With the cost and revenue parameters identified, a return on investment (ROI) can be calculated. Figure 8-9 attempts to illustrate that the ROI from service improvement increases at a decreasing rate. In other words, as service continues to improve, the marginal cost of providing the improved service increases, while the marginal increase in revenue decreases. At some point, the cost of service will far outweigh the incremental revenue gained from that service, providing a negative ROI. This is why it is impractical for most firms to provide 100 percent service levels. Therefore, suppliers must recognize the importance of balancing the tradeoffs between service and cost. (Pages 288-292)

. Customer service is often viewed as the primary interface between logistics and marketing. Discuss the nature of this interface and how it might be changing.

Answer: Customer service is often the key link between logistics and marketing within an organization. If the logistics system, particularly outbound logistics, is not functioning properly and a customer does not receive a delivery as promised, the organization could lose both current and future revenue. 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. Figure 8-8 represents the traditional role of customer service at the interface between marketing and logistics. This relationship manifests itself in this perspective through the "place" dimension of the marketing mix, which is often used synonymously with channel-of-distribution decisions and the associated customer service levels provided. In this context, logistics plays a static role that is based upon minimizing the total cost of the various logistics activities within a given set of service levels, most likely determined by marketing. However, as Chapter 5 and examples in this chapter illustrate, logistics today is taking on a more dynamic role in influencing customer service levels as well as in impacting an organization's financial position. Again, appropriate examples here would include both Dell and Wal-Mart that have both used logistics and customer service to reduce product prices, increase product availability, and reduce lead times to customers. These two organizations have gained an appreciation for the impact of dynamic logistics systems on their financial positions. (Page 286)

. What is the role of activity-based costing in customer relationship management? In customer segmentation?

Answer: Figure 8-5 shows one method to classify customers by profitability. The vertical axis measures the net sales value of the customer, while the horizontal axis represents the cost to serve. Those customers who fall into the "Protect" segment are the most profitable. Their interactions with the shipper provide the shipper with the most cost efficiencies. Those customers who are in the "Danger Zone" segment are the least profitable and are more than likely incurring a loss for the shipper. For these customers, the shipper has three alternatives: (1) change the manner in which the customer interacts with the shipper so the customer can move to another segment; (2) charge the customer the actual cost of doing business (this would more than likely make the customer stop doing business with the shipper—this is usually not an acceptable strategy employed by most shippers); or (3) switch the customer to an alternative distribution channel (for example, the shipper might encourage the customer to order through a distributor or wholesaler rather than buying direct from the shipper). The customers who fall into the "Build" segment have a low cost to serve and a low net sales value. The strategy here is to maintain the cost to serve but build net sales value to help drive the customer into the "Protect" segment. Finally, the customers who are in the "Cost Engineer" segment have a high net sales value and a high cost to serve. The strategy here is to find more efficient ways for the customer to interact with the shipper. This might include encouraging the customer to order in tier quantities rather than in case quantities. This switch in ordering policy would reduce the operating cost of the shipper and possibly move the customer into the "Protect" segment. Combining ABC, customer profitability, and customer segmentation to build profitable revenue is a strategy being utilized by an increasing number of organizations today. This strategy helps define the true cost of dealing with customers and helps the shipper influence how the customer interacts with the shipper to provide the highest level of cost efficiency for the shipper. Combining these three tools with CRM allows the shipper to differentiate its offerings to its different customer segments, resulting in maximum profit for the shipper and maximum satisfaction for the customer. (Page 273)

. Discuss the nature and importance of the four logistics-related elements of customer service

Answer: From the perspective of logistics, customer service can be viewed as having four distinct dimensions: time, dependability, communications, and convenience. The time factor is usually order to cash, particularly from the seller's perspective. On the other hand, the buyer usually refers to the time dimension as the order cycle time, lead time, or replenishment time. To many buyers, dependability can be more important than the absolute length of lead time. Three types of communication exist between the buyer and the seller: pretransaction, transaction, and post-transaction. Convenience is another way of saying that the logistics service level must be flexible. (Pages 289-291)

Explain how order management and customer service are related.

Answer: How an organization receives an order (electronically versus manually), how it fills an order (inventory policy and number and location of warehouses), and how it ships an order (mode choice and its impacts on delivery times) are all dictated by how an organization manages an order. Customer service, on the other hand, 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. Customer service can be described as a philosophy, as performance measures, or as an activity. Customer service as a philosophy elevates customer service to an organization-wide commitment to providing customer satisfaction through superior customer service. This view of customer service is entirely consistent with many organizations' emphasis on value management, elevates it to the strategic level within an organization, and makes it visible to top executives. Most organizations employ all three definitions of customer service in their order management process. Figure 8-1 shows one way in which order management and customer service are related. As this figure shows, customer service is involved in both influencing a customer's order as well as in executing the customer's order. The topics in this figure will be discussed in more detail in this chapter. (Pages 268-269)

Organizations can have three levels of involvement with respect to customer service. What are these, and what is the importance of each?

Answer: The beginning of this chapter offered three different perspectives on customer service: (1) as a philosophy, (2) as a set of performance measures, and (3) as an activity. However, customer service needs to be put into perspective as including anything that touches the customer. From a marketing perspective, there are three levels of a product that an organization provides to its customers: (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; and (3) the augmented product, which includes benefits that are secondary, but an integral enhancement to, the tangible product the customer is purchasing. In this context, logistics customer service can be thought of as a feature of the augmented product that adds value for the customer. However, the product and logistics customer service are not the only outputs by which a seller "touches" the customer. Customer service also includes how a seller interfaces with a customer and provides information about the product. This would include providing information about product availability, pricing, delivery dates, product tracking, installation, postsale support, and so on. Customer service is really an all-encompassing strategy for how a seller interacts with its customers. Customer service is an activity, a set of performance measures, a philosophy, a core benefit, a tangible product, and an augmented product. Customer service focuses on how a seller interacts with its customers on information flows, product flows, and cash flows. (Pages 286-288)

Effective management of customer service requires measurement. Discuss the nature of performance measurement in the customer service area.

Answer: The four traditional dimensions of customer service from a logistics perspective—time, dependability, convenience, and communications—are essential considerations in developing a sound and effective customer service program. These dimensions of customer service also provide the underlying basis for establishing standards of performance for customer service in the logistics area. Table 8-6 expands these four elements into a format that has been used by organizations in developing customer service policy and performance measurement standards. The traditional performance metrics that have been used are stated in the right-hand column. Typically, such metrics were stated from the perspective of the seller, for example, orders shipped on time, orders shipped complete, product availability when an order was received, order preparation time, and so on. Using Figure 8-6 as a reference, traditional logistics metrics would measure performance after the completion of Step D1.10. The new supply chain environment for customer service has resulted in much more rigorous standards of performance. Logistics performance metrics today are now stated from the buyer's point of view: • Orders received on time • Orders received complete • Orders received damage free • Orders filled accurately • Orders billed accurately Again, using Figure 8-6, the supply chain perspective would measure performance after the completion of Step D1.12. If the seller is concerned only with customer service prior to shipping, as per traditional metrics, the buyer might not be satisfied and the seller might not know it, because of problems occurring during the delivery process. Furthermore, the seller using traditional metrics would have no basis upon which to evaluate the extent and magnitude of the problem. The supply chain approach, focusing on measurement at the delivery level, not only provides the database to make an evaluation, but it also, and perhaps more importantly, provides an early warning of problems as they are developing. For example, if the standard for on-time delivery is 98 percent and it decreases during a given month to 95 percent, an investigation might show that a carrier is not following instructions or even that the buyer is at fault by not being ready to accept shipments. (Pages 291-293)

. Describe the two approaches to order management. How are they different? How are they related?

Answer: The order management system represents the principal means by which buyers and sellers communicate information relating to individual orders of product. Effective order management is a key to operational efficiency and customer satisfaction. To the extent that an organization conducts all activities relating to order management in a timely, accurate, and thorough manner, it follows that other areas of company activity can be similarly coordinated. In addition, both present and potential customers will take a positive view of consistent and predictable order cycle length and acceptable response times. By starting the process with an understanding of customer needs, organizations can design order management systems that will be viewed as superior to competitor firms. There are two phases of order management. First is influencing the order, the phase where an organization attempts to change the manner by which its customers place orders. Second is order execution, the phase that occurs after the organization receives the order. (Pages 269-270)

Compare and contrast the concepts of order-to-cash cycle time and order cycle time

Answer: When referring to outbound-to-customer shipments, the term order to cash (or order cycle) is typically used. The term replenishment cycle is used more frequently when referring to the acquisition of additional inventory, as in materials management. Basically, one organization's order cycle is another's replenishment cycle. Traditionally, organizations viewed order management as all of those activities that occur from when an order is received by a seller until the product is received by the buyer. This is called the order cycle. The OTC cycle is all of those activities included in the order cycle plus the flow of funds back to the seller based on the invoice. The OTC concept is being adopted by many organizations today and more accurately reflects the effectiveness of the order management process. (Pages 273-275)

Explain the impacts of order cycle time length and variability on both buyers and sellers.

Answer: While interest has traditionally focused more on the overall length of the OTC cycle, recent attention has been centered on the variability or consistency of this process. Industry practices have shown that while the absolute length of time is important, variability is more important. A driving force behind the attention to OTC cycle variability is safety stock. The absolute length of the order cycle will influence demand inventory. The concept of the order cycle is used here because the focus is on the delivery of product to the buyer and not on the flow of cash to the supplier. For example, assume that the order cycle (time from order placement to order receipt) takes 10 days to complete and the buyer needs five units per day for its manufacturing process. Assuming the basic economic order quantity (EOQ) model is being used by the buyer, the buyer will place an order when it has 50 units of demand inventory on hand. Assuming that the supplier has been able to reduce the order cycle to eight days, the buyer will now place an order when it has 40 units of demand inventory on hand. This is a reduction of 10 units of demand inventory on hand during lead time for the buyer. (Pages 280-281)

Define and discuss the Marketing/Logistics interface.

Customer service is often the key link between logistics and marketing within an organization. If the logistics system, particularly outbound logistics, is not functioning properly and a customer does not receive a delivery as promised, the organization could lose both current and future revenue. 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. The relationship between marketing and logistics manifests itself in this perspective through the "place" dimension of the marketing mix, which is often used synonymously with channel-of-distribution decisions and the associated customer service levels provided. In this context, logistics plays a static role that is based upon minimizing the total cost of the various logistics activities within a given set of service levels, most likely determined by marketing. However, as Chapter 5 and examples in this chapter illustrate, logistics today is taking on a more dynamic role in influencing customer service levels as well as in impacting an organization's financial position.

Customization of Products / Service

Customization Metrics The time it takes the seller to offer a new package for sale in the retailers' stores.

There are 13 elements to the Process D1: Deliver Stocked Product in the Supply Chain Council's SCOR Model. Name any four, and discuss them in detail.

D1.1: Process Inquiry and Quote This step in the process precedes the actual placement of the order by the customer. D1.2: Receive, Enter, and Validate Order This step involves the placement and receipt of the order. D1.3: Reserve Inventory and Determine Delivery Date This step in the process has traditionally been referred to as order processing. In the case where the seller has inventory to fill the order, the delivery date is based on the concept of available to deliver (ATD). If the seller does not have the inventory but knows when it will be produced internally or delivered from a supplier to the seller's distribution centers, the delivery date is based on the concept of available to promise (ATP). D1.4: Consolidate Orders This step examines customer orders to determine opportunities for both freight consolidation as well as for batch warehouse picking schedules. Both of these consolidation opportunities offer cost efficiencies for the seller. D1.5: Plan and Build Loads This step takes the freight consolidation opportunities identified in D1.4 and the delivery date given in D1.3 and develops a transportation plan. D1.6: Route Shipments This step can follow or be concurrent with D1.5. Here, the "load" (usually a transportation vehicle) is assigned to a specific route for delivery to the customer. D1.7: Select Carriers and Rate Shipments Following or concurrent with D1.5 and D1.6, this step will assign a specific carrier to deliver an order or a consolidation of orders. D1.8: Receive Product at Warehouse This step gains importance when an ATP has been given to a customer's order. In this step, product is received at the distribution center and the order management system is checked to see if there are any orders outstanding that need this particular product. D1.9: Pick Product This step uses the outputs from D1.3, D1.4, and D1.5 to determine the order picking schedules in the distribution center. D1.10: Load Vehicle, Generate Shipping Documents, Verify Credit, and Ship Based on the output from D1.5 and D1.6, the transportation vehicle is loaded in. Finally, this step will generate shipment documents to provide to the carrier to execute the shipment. These documents might include bills of lading, freight bills, waybills, and manifests for domestic shipments as well as customs clearance documents for international shipments. D1.11: Receive and Verify Product at Customer Site Once the shipment is delivered to the customer location, the receiving location will determine whether or not the delivered product is what was ordered. D1.12: Install Product If an order involves a product that must be installed at the customer location, it is at this point in the OTC cycle where installation takes place. D1.13: Invoice This step is the culmination of the OTC cycle for the buyer and seller.

Customer Segmentation

Danger zone segment strategies are: (1) Change the manner in which the customer interacts with the shipper to move the customer to another segment; (2) Charge the customer the actual cost of doing; or (3) Switch the customer to an alternative distribution channel. Build segment strategies aim to maintain the cost to serve but build net sales value to help drive the customer into the "Protect" segment. Cost engineer segment strategies aim to find more efficient ways for the customer to interact with the shipper.

3. Develop and execute the best processes.

Deliver on customer expectations determined and set in Step 2

Flexibility/ Adaptability of Process

Delivery Agility Metrics -Upside deliver adaptability -Downside deliver adaptability -Upside deliver flexibility

2. Identify the product/service package for each customer segment.

Determine what each customer segment values in its relationship with the supplier based on feedback from customers and sales representatives

4. Measure performance and continuously improve.

Determining if (1) the different customer segments are satisfied and (2) the supplier's overall profitability has improved.

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.

_____________________ is critical to successful order management and customer service.

Logistics System Information (LSI) -Pre-transaction Info -Transaction Info -Post-trasaction Info

Key aspects of service recovery

Measuring the costs of poor service Anticipating the needs for recovery Developing employee training and empowerment.

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

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 same types of supplier offerings.

The traditional role of customer service at the interface between marketing and logistics. This relationship manifests itself through the ____ dimension of the marketing mix.

Place

Product Availability Metrics

Product Availability *Metrics: Internal Metrics -Item fill rate -Line fill rate *External Metrics -Order fill rate -Perfect order

_____________ requires an organization to realize that mistakes will occur and to have plans in place to fix them.

Service recovery

There are four basic steps in the implementation of the CRM process in a business-to-business environment.

Step 1: Segment the Customer Base by Profitability. Most firms allocate direct materials, labor, and overhead costs to customers using a single allocation criterion, e.g., pounds of product purchased during a particular time period. However, firms today are beginning to use techniques, such as activity-based costing, to more accurately allocate costs to customers based on the specific costs of servicing a customer's orders based on how, how much, what, and when a customer orders. Normally, a cost-to-serve (CTS) model is developed for each customer. These CTS models are very much like an income statement for the customer. Step 2: Identify the Product/Service Package for Each Customer. This step presents one of the most challenging activities in the CRM process. The goal of this step is to determine what each customer segment values in its relationship with the supplier. This decision is usually based on feedback from customers and sales representatives. The challenge here is how to "package" the value-adding products and services for each customer segment. One solution is to offer the same product/service offering to each customer segment, while varying the product quality or service levels. Step 3: Develop and Execute the Best Processes. In Step 2, customer expectations were determined and set. Step 3 delivers on those expectations. Organizations many times go through elaborate processes to determine customer needs and set target performance levels, only to fail when it comes to executing on those customer promises. Step 4: Measure Performance and Continuously Improve. The goal of CRM is to better serve the different customer segments of the supplier organization, while at the same time improving the profitability of the supplier. Once the CRM program has been implemented, it must be evaluated to determine if (1) the different customer segments are satisfied and (2) the supplier's overall profitability has improved.

A__________________ 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.

Stockout

Define and discuss the Order Management System.

The order management system represents the principal means by which buyers and sellers communicate information relating to individual orders of product. Effective order management is a key to operational efficiency and customer satisfaction. To the extent that an organization conducts all activities relating to order management in a timely, accurate, and thorough manner, it follows that other areas of company activity can be similarly coordinated. In addition, both present and potential customers will take a positive view of consistent and predictable order cycle length and acceptable response times. By starting the process with an understanding of customer needs, organizations can design order management systems that will be viewed as superior to competitor firms.

Executing Orders: Replenishment Cycle

The term replenishment cycle is used more frequently when referring to the acquisition of additional inventory as in materials management.

Discuss how the Internet has affected how the OTC cycle.

This discussion on order management would not be complete without a brief discussion on how the Internet has affected how the OTC cycle is designed and managed. Many organizations are using Internet technology as a means to capture order information and transmit it to their "back end" systems for picking, packing, and shipping. What the Internet is now allowing is the faster collection of cash by the seller organizations. The traditional "buy-make-sell" business model used by many organizations that produce product to inventory makes them wait for an order. Obviously, the longer it takes the selling organization to complete the order management process, the longer it takes to collect its cash.

Customer service can be viewed as having four distinct dimensions. Name all four, pick two and discuss.

Time The time factor is usually order to cash, particularly from the seller's perspective. On the other hand, the buyer usually refers to the time dimension as the order cycle time, lead time, or replenishment time. Dependability To many buyers, dependability can be more important than the absolute length of lead time. The buyer can minimize its inventory levels if lead time is constant. Communications Three types of communication exist between the buyer and the seller: pretransaction, transaction, and posttransaction. Pretransaction communication includes current product availability and the determination of delivery dates. Convenience is another way of saying that the logistics service level must be flexible. From the logistics operation perspective, having one or a few standard service levels that applies to all buyers would be ideal; but this assumes that all buyers' logistics requirements are alike. In reality, this is not the situation.

Define and discuss Activity Based Costing, including its impact on profitability.

Traditional cost accounting in this case would be penalizing the most cost effective method of moving product through the warehouse and subsidizing the least cost effective method of moving product. This is where activity-based costing can be effective. ABC can be defined as, "A methodology that 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. ABC recognizes the causal relationships of cost drivers to activities." Using the ABC methodology in the warehouse example previously discussed would more accurately assign costs to those activities that absorbed the most resources. In other words, ABC would identify that picking and shipping inner-packs is more expensive that picking and shipping pallets. With this information on how a customer's interaction drives a shipper's costs, the shipper can then segment its customers by profitability. Combining ABC, customer profitability, and customer segmentation to build profitable revenue is a strategy being utilized by an increasing number of organizations today. This strategy helps define the true cost of dealing with customers and helps the shipper influence how the customer interacts with the shipper to provide the highest level of cost efficiency for the shipper. Combining these three tools with CRM allows the shipper to differentiate its offerings to its different customer segments, resulting in maximum profit for the shipper and maximum satisfaction for the customer.

Customer service as an activity

Treats customer service as a particular task that an organization must perform.

T or F: "Order to cash" and "order cycle" are the same.

True

T or F: A driving force behind the attention to OTC cycle variability is safety stock. The absolute length of the order cycle will influence demand inventory.

True

T or F: Customer service is anything that touches the customer.

True

T or F: Customer service is of equal importance to both logistics and marketing.

True

T or F: Deliver Stocked Product in the Supply Chain Council SCOR Model is the same as the OTC model.

True

T or F: Firms today are beginning to use techniques such as activity-based costing to more accurately allocate costs to customers. It's based on the specific costs of servicing a customer's orders relative to how, how much, what, and when a customer orders.

True

T or F: From a marketing perspective, logistics customer service can be thought of as a feature of the augmented product that adds value for the customer product.

True

T or F: There are five logistics performance metrics from the buyer's point of view.

True

T or F: With the proper information on how a customer's interaction drives firm's costs, the firm can then segment its customers by profitability.

True

1. Segment the customer base by profitability

Use techniques such as activity-based costing and cost-to-serve (CTS) model

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.

The SCOR model provides suggested metrics

across multiple dimensions for each of the five Level One processes

Basically, one organization's order cycle is

another's replenishment cycle.

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 can be defined as

anything that touches the customer.

Customer relationship management is the art and science of

positioning customers to improve the profitability of the organization.

Order management system represents the principal means by which

buyers and sellers communicate relating to individual orders of product

Activity Based Costing

can be applied to customer segmentation.

Often overlooked definition of order cycle time is.......

customer wait time (CWT). CWT includes not only order cycle time but also maintenance time.

Which is NOT part of dependability?

cycle time, correct order, and convenience

Traditional customer profitability analyses would start with ____ less returns and allowances (net sales) and subtracts the cost of goods sold.

gross sales

Applying Internet technology to the order management process has allowed organizations to not only take time out of the process but also to

increase the velocity of cash back to the selling organization.

Post-trasaction Info

is used for evaluation.

Transaction Info

is used for execution

Pre-transaction Info

is used for planning,

Most __________ involved with LSI address how accurate and timely the data are to allow a decision to be made or an activity to be performed.

metrics

What are the steps in the CRM process?

segment customer base, then identify service/package, then measure service and improve

The term replenishment cycle refers to

the acquisition of additional inventory.

Those customers who are in the "Danger Zone" segment are

the least profitable

While interest has traditionally focused more on the overall length of the OTC cycle, recent attention has been centered on

variability or consistency within this process.