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Chapter 8 Order Management and Customer ServiceLearning
ObjectivesAfter 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.
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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.
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Influencing the OrderThis is the phase where an organization
attempts to change the manner by which its customers place orders.
Order ExecutionThis occurs when the order is received.
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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.PhilosophyPhilosophy elevates customer service to an
organization-wide commitment to providing customer satisfaction
through superior customer service.
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Customer service: Performanceemphasizes 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
customers order requirements.
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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 firms costhow customers order how much
customers orderwhat customers orderwhen customers order an
order
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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
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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.
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The Management of Business Logistics Chapter 8
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One method to classify customers by profitability. Protect
ZoneThose customers who fall into the Protect segment are the most
profitable. Danger ZoneCustomers 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 ZoneThese 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.
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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.
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Order to cashThirteen principle activities constitute the OTC
cycle:D1.1 through D1.7 represent information flowsD1.8 through
D1.12 represent product flowsD1.13 represents cash flowOrder cycle
all activities that occur from when an order is received until the
product is received Replenishment cyclerefers to acquisition of
additional inventoryone firms order cycle is anothers replenishment
cycle
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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
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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.
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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.
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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
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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
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Four distinct dimensions of customer service: Timecycle timesafe
deliverycorrect orders Dependabilitymore important than the
absolute length of lead time Communicationspretransaction
transactionposttransaction Convenienceservice level must be
flexible
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Customer Service Performance Measures from buyers view Orders
received on time Orders received complete Orders received damage
Orders filled accurately Orders billed accurately
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Expected Cost of Stockouts:Stockout occurs when desired
quantities are not availableFour 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
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Back Orders:occurs when a seller has only a portion of the
products ordered by the buyerare created to secure the portion of
the inventory that is currently not availableLost Sales:some
customers will turn to alternative supply sourcesLost
Customers:customer permanently switches to another supplier
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Determining the Expected Cost of Stockoutsback order lost sale
lost customeridentify potential consequencescalculate each results
expense or lost profit
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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.
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Metrics four are widely used across multiple industries:internal
metricsitem fill rate line fill rate external metricsorder fill
rateperfect order
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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)
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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 firms inventories, resulting in
impacts on both revenues and profits for both organizations
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Two inventory cost reduction calculationsreduced 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 inventoriesDemand Inventory Cost Reduction =
Difference in Absolute OCT x Demand per Day x Cost per Unit x
Inventory Carrying Cost Percent
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Logistics operations responsiveness (LOR)Examines how well a
seller can respond to a buyers 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 buyers demand
pattern.
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Logistics System Information: is critical to the logistics and
order management processes underlies ability to provide quality
product availability, order cycle time, logistics operations
responsiveness, and post-sale logistics support timely and accurate
information can reduce inventories in the supply chain and improve
cash flow to all supply chain partners
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Financial ImpactThe calculation used to measure the result on
cash flow for decreasing the order-to-cash cycle is as follows:Cast
Flow Increase = Invoice Value x (Cost of Capital/365) x Difference
in Days in the Order-to-Cash Cycle
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Postsale logistics support (PLS) can take two forms: PLS can be
the management of product returns from the customer to the
supplier. The second form of PLS is product support through the
delivery and installation of spare parts. Calculation to determine
the spare part service cost is as follows:Service Cost = Penalty
Cost + Lost Purchase Margin + Lost Support Margin
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Service Recovery No matter how well an organization plans to
provide excellent service, mistakes will occur. Recovery requires a
firm to realize that mistakes will occur and have plans in place to
fix them.
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SummaryOrder management and customer service are not mutually
exclusive; there is a direct and critical relationship between
these two concepts.There are two distinct, yet related, aspects of
order management: influencing the customers order and executing the
customers order.Customer relationship management (CRM) is a concept
being used today by organizations to help them better understand
their customers requirements and understand how these requirements
integrate back into their internal operations
processes.Activity-based costing (ABC) is being used today to help
organizations develop customer profitability profiles which allow
for customer segmentation strategies.Order management, or order
execution, is the interface between buyers and sellers in the
market and directly influences customer service.Order management
can be measured in various ways. Traditionally, however, buyers
will assess the effectiveness of order management using order cycle
time and dependability as the metric, while sellers will use the
order-to-cash cycle as their metric.
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Summary (cont.)Customer service is considered the interface
between logistics and marketing in seller organizations.The three
definitions of customer service are: (1) as an activity, (2) as a
set of performance metrics, and (3) as a philosophy.The major
elements of customer service are time, dependability,
communications, and convenience.Stockout costs can be calculated as
back order costs, the cost of lost sales, and/or the cost of a lost
customer.The five outputs from order management that influence
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.The concept of service recovery is
being used by organizations today to help identify service failure
areas in their order management process and to develop plans to
address them quickly and accurately.