Logistics Integration for Customer Satisfaction Distribution Cost Control and Customer Service

Logistics Integration for Customer Satisfaction, Distribution Cost, Control and

Customer Service

Customer Satisfaction

Logistics Integration for Customer SatisfactionLeads to customer satisfaction through superior

customer service. Organizational objectives of P [Productivity],Q

[Quality],C [Cost],D [Delivery],E [Employee Morale],F [Flexibility],S [Safety],H [Health],E [Environment] are set to meet customer expectations of Q,C,D.

Q, C, S, H, E are parts of must be quality that a customer expects. Logistics addresses D, F objectives which lead to customer satisfaction through superior customer service

How loogistics lead to customer satisfaction?1. Rapid response

Logistics should ensure that the supplier is able to respond to the change in the demand very fast. Entire production should change from traditional push system to pull system to facilitate rapid response.

IT helps management in producing and delivering goods when the consumer needs them. This results into reduction of inventory and exposes all operational deficiencies.

2. Minimum varianceLogistics is expected to minimize events like

delays due to obstacles in information flow, traffic snarls, acts of god, wrong dispatches, damage in transit, thereby minimize and improve on OTD or On Time Delivery

3. QualityIf the quality of product fails logistics will have

to ship the product out of customers premises and repeat the logistics operation again. This adds to costs and customer dissatisfaction. Hence logistics should contribute to TQM initiative of management.

4. Life cycle support- Logistics function is expected to provide life cycle support to the product after sale. This includes

a) After sales serviceb) Reverse logistics or Product recall

a) After sales service: the service support needed by the product once it is sold during its life cycle

b) Reverse logistics or Product recall as a result of

Rigid quality standards [critical in case of contaminated products which can cause environmental hazard]

Transit damage [leaking containers containing hazardous material]

Product expiration datingRigid laws prohibiting unscientific disposal of items

associated with product [packaging]Rigid laws making recycling mandatoryErroneous order processing by supplierReverse logistics is an important component of

logistics planning

Distribution costs

Analysis of distribution cost may be made on the following lines:

Product or Product lines Individual customers or Group of customersChannels of distributionSalesmenGeographical area or territoriesTerms of sales Order sizes

Elements of Total cost in Physical Distribution Systems

Total Distribution Cost TDC = TC + FC + CC + IC + HC + PC

+ MC

TC - Transport Cost (Substantial Fixed Cost element)Capacity to match volumes Centralised DistributionRoute PlanningOptimal SchedulesUse of softwareRailways, Airways ,Seaway cost

FC – Facility Cost Warehousing, capital cost and running cost

related to infrastructure and internal systems to store and pick up stocks

Use of Information Systems, Electronic Data Interchange

Warehouse Management System like radio links. Reduction in wage bill – Refer to HR

CC – Communication Cost Cost associated with EDI and other

communication through the chain. These are administrative costs

IC – Inventory Cost Direct capital cost for goods purchased and

Opportunity cost for carrying inventory. These are cost associated with maintenance and replenishment of inventory

HC – Handling Cost Cost associated with Damage, Pilferage,

Deterioration of stocks

PC – Packaging CostRepacking, shrink wrapping, pallets, boxes,

containers, tapes, labels etc

MC – Management Cost – Cost associated Management of the chain.

Ranging from security system to storage conditions to HR, Finance and almost everything where managerial input is needed

Control and Customer Service

Definition of Customer ServiceCustomer service is the fulfillment process,

the process to meet consumer demand as a whole.

The process includes records requests manually or electronically, payment, selection of goods, delivery and provision of goods, as well as providing service to users of goods, also regulates the handling of goods returned to the consumer at the time of complaint.

Customer service is a process for providing significant value added benefit to the supply chain in a cost-effective way.

Logistics planning in customer service

THE IMPORTANCE OF CUSTOMER SERVICE

THE IMPORTANCE OF CUSTOMER SERVICEEffect on Service Sales

Effect on Customer Service- Increasing customer loyalty- Maintain good relations with customers by creating customer satisfaction.- The cost of maintaining existing customers is cheaper than getting new customers (6X fold cost)

Service Improveme

nt

Improvement:

•Volume• Price

• Reputation

Increased Market Share

Increased Profit

THE COMPONENTS OF CUSTOMER SERVICE

Pre-transaction elements: customer service factors that arise prior to the actual transaction taking place

Transaction elements: the elements directly related to the physical transaction and are those that are most commonly concerned with distribution and logistics.

Post-transaction elements: these involve those elements that occur after the delivery has taken place

Pre-transaction elementsIs the determination of customer service strategies to

be implemented, provide a written record of customer service policies. For example, specify how the item is sent after the order is received, set the procedure returns (back order), and method of delivery so customers know what services will be obtained.

written customer service policy;accessibility of order personnel;single order contact point;organizational structure;method of ordering;order size constraints;system flexibility; transaction elements.

Transaction elementsIs a determination concerning the implementation of the

strategy delivery of goods / products to the consumer. This element is a direct result of the delivery of goods to customers, manage inventory levels, and selecting means of transport.

order cycle time (cycle time from order s / d order received)order preparation; inventory availability;delivery alternatives;delivery time;delivery reliability;delivery of complete order;condition of goods;order status information.

Post-transaction elementsDetermination procedure is performed services to

support products manufactured on the market. For example, to protect consumers from defective products, providing returns, guarantees reinstatement, warrants, and listening to consumer complaints.

availability of spares;call-out time; invoicing procedures; invoicing accuracy;product tracing/warranty;returns policy;customer complaints and procedures;claims procedures.

MULTIFUNCTIONAL DIMENSIONSof Customer service1. Time – usually order fulfilment cycle time;2. Dependability – guaranteed fixed delivery

times of accurate, undamaged orders;3. Communications – ease of order taking, and

queries response;4. Flexibility – the ability to recognize and

respond to a customer's changing needs.

CONCEPTUAL MODELS OF SERVICE QUALITYService quality is a measure of the extent to

which the customer is experiencing the level of service that he or she is expecting.

Service quality is that it is the match between what the customer expects and what the customer experiences.

Service quality = nsExpectatio Desired

100 x ePerformanc Perceived

The Increased Importance of Logistics• A Reduction in Economic Regulation

• Recognition by Prominent Non-Logisticians

• Technological Advances

• The Growing Power of Retailers

• Globalization of Trade

Three objectives of logistics strategy:• Cost reduction (variable costs)• Capital reduction (investment, fixed costs)• Service Improvement (may be at odds with

the above two objectives).

Marketing orientation

(competitive advantage)

Time and place utility

Efficient movement to

customer

Proprietary asset

Natural resources (land, facilities, and equipments)

Human resources

Financial resources

Information resources

Management actions

Planning Implementation Control

Logistics Activities

•Customer Service

•Demand forecasting

•Distribution communications

•Inventory control

•Material handling

•Order Processing

•Parts and service support

•Plant and warehouse site selection

•Procurement

•Packaging

•Return goods handling

•Salvage and scrap disposal

•Traffic and transportation

•Warehousing and storage

Raw materials

In-process inventory

Finished goods

Inputs into logistics

Suppliers

Logistics management

Customers

Outputs of logistics

Components of logistics management :

Logistics activities can be divided into three categories:

ProductionStorageTransportation

The term “Resource” applies to all of the factors of production, including materials (e.g., Iron, fabric, parts), equipment (e.g., machines or vehicles), energy (e.g., oil, coal, electricity) and labor.

PRODUCTION: Fundamental logistics questions are: (1) when should a resource be produced; and (2) where should a resource be produced.

The “when” question includes the topics of aggregate resource planning, and production scheduling.

The “where” question includes the topics of facility location and production allocation.

Some of the important production questions are:

(a) What outside source should be used to supply a part?

(b) Where should a new facility be built?

(c) When should a facility produce different items, taking into account:

• Seasonal demand patterns?

• Demand uncertainty?

• Cost of operating single, double, triple shifts?

• Labor costs?

(d) When should a firm use two or more sources for a part?

INVENTORY: Fundamental logistics questions are (1) when should a resource (material, machine or labor) be put in inventory and taken out of inventory; and (2) where should a resource be stored.

The “when” question includes the general topics of economic-order-quantity models, safety stock models and seasonal models, and specialized topics of fleet management, and personnel planning.

The “where” questions includes the topic of inventory echelons.

Some of the important inventory questions are:

(a) How much does it cost to store resources in inventory?

(b) How much “safety stock” should be carried in inventory to prevent against running out of a resource?

(c) How much inventory should be carried in order to smooth out seasonal variations in demand?

(d) Where should replacement parts be stored in multi-echelon inventory system?

TRANSPORTATION: Fundamental logistics are: (1) where should resources be moved to, and by what mode and route; (2) when should resources be moved.

The “where” question includes the topics of terminal location, vehicle routing, and shortest path methods and network flow allocation.

The “when” question includes the topic of distribution rules.

Some of the important questions are:

(a) When should shipment be sent through terminals, and when should shipment be sent direct?

(b) Which, and how many, terminals should shipments be sent through?

(c) What are the best vehicle routes?

(d) When should a vehicle be dispatched over a route?

Logistics - Science of managing (controlling) the movement and storage of goods (or people) from acquisition to consumption.

Goods: Raw Materials Final products, and everything in between.

Logistics for services & people similar to goods logistics.

Ex. Police, fire, ambulance, passenger airlines, taxi cabs, etc.

Movement = Transportation (between locations).

Storage = Inventory, Warehousing (at locations).

Difference between acquisition and consumption is a matter of space and time.

NOTE: Logistics does not deal with Technology of Production, such as the design of machines and vehicles and the design of finished products.

Focus: Best way to overcome space and time that separates acquisition and consumption.

Five Business Systems - Tightly Interconnected Within The Organization

Measurement Decisions

Management Systems

Reward Decisions

Strategic Decisions

Transportation Decisions

Sourcing Decisions

Inventory Decisions

Logistics Systems{

Price Decisions

Promotion Decisions

Marketing Systems

Product Decisions

Place (How, where, how

much)

}Production Scheduling Decisions

Production Capacity Decisions

Shop Floor Decisions

Manufacturing Systems}

Product Design

Decisions

Process Design

Decisions Engineering Systems}

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Activities and Logistics Decisions

Transportationrate and contract negotiationmode and service selectionrouting and scheduling

Inventoriesfinished goods policiessupply schedulingshort term forecasting

Warehousingprivate vs. publicspace determinationwarehouse configurationStock layout and dock designstock placementCross-docking

Facility Locationdetermining location, number

and size of facilitiesallocating demand to facilities

Customer Servicedetermining customer wantsdetermining customer response to service changes

Materials Handlingequipment selection equipment replacementorder picking procedures

Packaging design Order Processing

order procedure determinationProduction Scheduling

aggregate production quantitiessequencing and timing of production runs

Logistics PlanningDecide what, when, how in three levels:

Strategic – long range > 1 yearTactical - < 1 year horizonOperational – frequently on hourly or daily basis

Examples of Decisions

Type Strategic Tactical Operational

Location

Transportation

Order Processing (CS)

#Facilities, size, location

Mode

Selecting order entry system

Inventory positioning

Seasonal Service Mix

Priority rules for customers

Routing

Replenishment Qty and timing

Expediting orders

The Logistics (Strategic) Planning TriangleThe Logistics (Strategic) Planning Triangle

Which mode?Which carrier?Which route?Shipment size and frequency?

Where?, How many? What size?Allocation?

Strategy/Control system?How much?

Where?

Transport Fundamentals

Transport involves equipment (trucks, planes, trains, boats, pipeline), people (drivers, loaders & un-loaders), and decisions (routing, timing, quantities, equipment

size, transport mode). When deciding the transport mode for a given

product there are several things to consider: Mode price Transit time and variability (reliability) Potential for loss or damage.

NOTE: In developing countries we often find it necessary to locate production close to both markets and resources, while in countries with developed distribution systems people can live in places far from production and resources.

Most important component of logistics cost.Usually 1/3 - 2/3 of total cost.

Routes of GoodsGoods

at shipper

sFreight

forwarder

warehouse

Air termin

al

planeair

Freight forwarde

r warehou

se

Goods at consigne

es

Container

terminal

vesselsea

May change transpor-tation modes

truck

land railway

land

barge

mid-stream

pier

bulk goods

sea

Air

•Rapidly growing segment of transportation industry•Lightweight, small items [Products: Perishable and time sensitive goods: Flowers, produce, electronics, mail, emergency shipments, documents, etc.]•Quick, reliable, expensive•Often combined with trucking operations

Rail

•Low cost, high-volume [Products: Heavy industry, minerals, chemicals, agricultural products, autos, etc.] •Improving flexibility•intermodal serviceTruck •Most used mode •Flexible, small loads [Products: Medium and light manufacturing, food, clothing, all retail goods]•Trucks can go door-to-door as opposed to planes and trains

Single-mode Service Choices and Issues

Water •One of oldest means of transport•Low-cost, high-volume, slow •Bulky, heavy and/or large items (Products: Nonperishable bulk cargo - Liquids, minerals, grain, petroleum, lumber, etc )]•Standardized shipping containers improve service•Combined with trucking & rail for complete systems•International trade

Pipeline •Primarily for oil & refined oil products•Slurry lines carry coal or kaolin•High capital investment•Low operating costs•Can cross difficult terrain •Highly reliable; Low product losses

Transport Cost CharacteristicsRail

High fixed costs, low variable costsHigh volumes result in lower per unit (variable) costs

HighwayLower fixed costs (don’t need to own or maintain roads)Higher unit costs than rail due to lower capacity per truckTerminal expenses and line-haul expenses

WaterHigh terminal (port) costs and high equipment costs (both

fixed)Very low unit costs

AirSubstantial fixed costsVariable costs depend highly on distance traveled

PipelineHighest proportion of fixed cost of any mode due to pipeline

ownership and maintenance and extremely low variable costs

Vehicle Routing:

- Separate single origin and destination:Once we have selected a transport mode and have goods

that need to go from point A to point B, we must decide how to route a vehicle (or vehicles) from point A to point B.

Given a map of all of our route choices between A and B we can create a network representing these choices The problem then reduces to the problem of finding the shortest path in the network from point A to B.

This is a well solved problem that can use Dijkstra’s Algorithm for quick solution of small to medium (several thousand nodes) sized problems.

Suppose we have multiple sources and multiple destinations, that each destination requires some integer number of truckloads, and that none of the sources have capacity restrictions [No Capacity Restriction].

In this case we can simply apply the transportation method of linear programming to determine the assignment of sources to destinations.

Sources Destinations

Vehicle Routing:

- Multiple Origin and Destination Points

- Coincident Origin and Destination: The TSPIf a vehicle must deliver to more than two

customers, we must decide the order in which we will visit those customers so as to minimize the total cost of making the delivery.

We first suppose that any time that we make a delivery to customers we are able to make use of only a single vehicle, i.e., that vehicle capacity of our only truck is never an issue.

In this case, we need to dispatch a single vehicle from our depot to n - 1 customers, with the vehicle returning to the depot following its final delivery.

This is the well-known Traveling Salesman Problem (TSP). The TSP has been well studied and solved for problem instances involving thousands of nodes. We can formulate the TSP as follows:

Vehicle Routing:

Questions about the TSPGiven a problem with n nodes, how many distinct

feasible tours exist?How many arcs will the network have?How many xij variables will we have?How could we quantify the number of subtour

elimination constraints?The complexity of the TSP has led to several heuristic

or approximate methods for finding good feasible solutions. The simplest solution we might think of is that of the nearest neighbor.

Vehicle Routing: TSP, inventory routing, and vehicle routing

• Traveling Salesman Problem (TSP): salesman visits n cities at minimum cost

• vehicle routing problem (VRP): m vehicles with capacity to deliver to n customers who have volume requirement, time windows, etc.

• Inventory Routing: m vehicle to delivery to n customer with time windows, vehicle and storage capacity constraints, and un-specified amount to be delivered.

• Points to remember:1. Load points closest together on the same truck2. Build routes starting with points farther from depot first3. Fill the largest vehicle to capacity first4. Routes should not cross5. Form teardrop pattern routes.

6. Plan pickups during deliveries, not after all deliveries have been made.

Vehicle Routing

Find best vehicle route(s) to serve a set of orders from customers.

Best route may beminimum cost,minimum distance, or minimum travel time.

Orders may beDelivery from depot to customer.Pickup at customer and return to depot.Pickup at one place and deliver to another place.