Supply Chain Management Lecture 4 – Customer Service & Logistics Costs Alexa Kirkaldy.

Supply Chain Management Lecture 4 – Customer Service &

Logistics Costs

Alexa Kirkaldy

Lecture 4 - Learning ObjectivesOn completion you will be able to:

• Explain the concept of customer service in a supply chain context

• Identify the importance of both product and customer profitability

• Recognise the impact of logistics management on return on investment and shareholder value

• Explain the importance of total acquisition cost and total cost of ownership in relation to supply chain management

Post transactionComponents

Transactioncomponents

Pre-transactionComponents

• Written customer service policy

• Accessibility• Organisation structure• System flexibility

• Order cycle time• Inventory availability• Order fill rate• Order status information

• Availability of spares• Call-out time• Product

tracing/warranty• Customer complaints,

claims etc.

The Components of Customer Service

Based on work by LaLonde and Zinser, cited in Christopher M., Logistics & Supply Chain Management, Pearson, 3rd edition, 2005, pp 48-49.

Before During After

The Damage of Stock-Outs

9%

15%

19%

31%

26%

Do not purchase

Delay purchase

Buy substitute brand

Buy same brand,different item

Buy at another store

Corsten D., Gruen T., Stock-outs cause walkouts, Harvard Business Review, May 2004

Reputation and brand allegiance

Identifying Customer Service Needs

• Identify key components of customer service as seen by customers themselves

• Establish the relative importance of those service components to customers

• Identify customer segments according to similarity of service preferences

• Define customer service objectives– The perfect order 100% on time, 100% complete, 100% defect free– Actual performance 90% on time, 80% complete, 70% defect free– Chance of a perfect order = 90% * 80% * 70% = 50.4%

Venn diagrams to identify customer segments

On-time delivery

Minimum cost

Intensive technical support

Harrison, A. (2008) Putting the End-Customer First. In: Harrison, A and van Hoek, R. Logistics Management and Strategy : Competing Through the Supply Chain. 3rd ed.,: Prentice Hall Financial Times, Ch.2, p 53.

Translating to Shareholder

Value

Shareholder Value

Revenue growth

Taxoptimisation

Fixed assetefficiency

Operating cost reduction

Working capital efficiency

One measure of shareholder valueMarket value added = (Share price * No. of issued shares) minus Book value of capital invested

Translating to Shareholder Value

Return On Investment = X ProfitSales

SalesCapital employed

ROI

Profit

Sales revenue

Costs

Customer service

Logistics efficiency

Capitalemployed

Cash

Debtors/creditors

Cash-to-cash cycle time

Inventory Just-In-Time logistics

Fixed assets Asset utilization

Debt collection, early payment discountCloser integration of deliveries to demand

Key Ratios for SCMCash-to-Cash Cycle Time

Average settlement time for debtors

Plus

Average days of inventory

Minus

Average settlement period for creditors

Examples of Key Ratios for SCM

Yen

A + B - C = D (assets- liabilities)

Where To Find Financial Data

• Fame – UK firms– For large public firms look for plc

• Amadeus– European & UK firms– For large firms look for plc or country equivalent of plc– Provided by same firm as Fame but uses a different format and has

some different names for ratios!

• Thomson Research– US and large global firms– For large firms look for entries in the fields, ‘quote/ticker’, ‘exchange’

and relevant ‘country’. You will have the plc pr parent company if there is a ‘stock price and earnings information’ report

The Need for Relevant Costing Information

“Strategies may be conceptually brilliant, but if they are based on faulty information about the cost of a product, they are likely to fail in

the market place.

Many have!”Kaplan & Cooper (1988)

Source: Kaplan & Cooper (1998) Measure Costs Right: Make the Right Decisions, Harvard Business Review, September – October 1988

Supply Management’s Impact on Net Income and the Bottom Line

Increased Sales:– Faster to Market– Improved Quality– Pricing Flexibility– Innovation

Lower Total Cost:– Acquisition Cost– Processing Cost– Quality Cost– Downtime Cost– Risk Cost– Cycle Time Cost– Conversion Cost– Non-value Added Cost– Supply Chain Cost– Post Ownership Cost

Source: Burt, Petcavage, Pinkerton ( 8th Edition, 2013, page 9)

Total Acquisition Cost (TAC)

• Purchasing focus• Maps the costs related to the supply of

products• Can identify new sourcing and cost

reduction opportunities • Can support supplier selection

decisions

Total Acquisition Cost

Part Purchase

Price

Always Measured

Sometimes Measured

Rarely measured to technology family/commodity group level

A

Internal Acquisition

CostB

Quality Cost

C

Materials Mgt Cost

C

Transport

C

C

CA

Inventory Cost

C

B

Overheads

B

Labour Cost

B

Material Cost

B

A TAC model: A Hierarchy of costs

£per

annum

Classification of internal acquisition costs

Execution costs :

Cost of getting goods from supplier to the business

( materials management costs )

e.g.. - transport, internal administration costs etc..

Inventory costs :

Cost of holding inventory

.e.g. - stock-holding costs, cost of redundant stock etc..

Quality costs :

Cost involved in processing the goods through the

manufacturing process

e.g.. - inspection costs, scrap costs etc..

Total Acquisition Cost Model

Execution

Inventory

Quality

Purchasing Spend

100%

Inte

rnal

acq

uisi

tion

cos

tP

art

purc

hase

pric

e(

invo

ice

pric

e )

A model of Total Acquisition Costs

The total acquisition costs are £ 586k, representing 8.5 % inaddition to the invoice price of cable assemblies

Quality Cost

Inventory Cost

Execution Cost

Invoice Price

Cost£

£ 540,000£ 31,559 £ 10,415 £ 4,000

100 % 108.5 %Illu

strativ

e.

Illustra

tive.

Cable Assembly Example

Post transactionComponents

Transactioncomponents

Pre-transactionComponents

• Investigating sources• Qualifying sources• Training / education

• Price• Order placement• Transportation• Tariffs / duties• Billing / payment• Inspection• Return of parts• Follow-up and correction

• Production line stoppages

• Defective finished goods

• Cost of maintenance• Field failures• Repair in field• Reputation

Lisa Ellram

Total Cost of Ownership (TCO) extends TAC …

“All costs associated with the acquisition, use & maintenance of a good or service”

TCO Model

Logistics and Supply Chain Management, Christopher, 2011, Page 29

Logistics – Cost factors

38%

32%

8%

6%

16%

TransportWarehouse operationOrder processingAdministrationCost of inventory holding

Holding cost includes loss, obsolescence, interest, insurance and depreciation

Warehouse costs

UK Chartered Institute of Logistics and Transport Survey stated that between 24% and 35% of Logistics costs relate to warehouse activity and can be between 2% and 5% of the cost of sales.

LABOUR 48-60%

EQUIPMENT 10 - 15%

SPACE 25 - 42%

Lecture 4, Key Points & Tips• As many products take on the characteristics of commodities as they

mature delivering superior customer service via SCM and logistics is becoming increasingly important.

• In reality no two customers have identical needs but similar customers can be grouped together and the supply chain designed improve increase customer satisfaction thereby encouraging customers to spend more and improving customer retention.

• Logistics and SCM influences the income statement and balance sheet and is increasingly be recognised helping to improve ROI and shareholder value.

• To improve profitability supply chains need to prioritise profitable products and customers and Pareto analysis is a useful tool for this. In theory as few as 4% of customer/product transactions can be responsible for 64% of profits.

Lecture 4, Key Points & Tips

• To prioritise profitable customers and products it is vital to have good quality costing information. However, the true cost of logistics are often not fully understood.

• When purchasing materials it is vital to consider the total cost of acquisition and the total cost of ownership, not just the initial purchase price.

• In the assignment you could quantify your firm’s SCM performance by looking at the cash-to-cash cycle time over a number of years and/or the market value added for a listed company.

For next Friday• Read the case study on direct product profitability

– what can we tell from the analysis and the average DPPs per customer?

• Read the case study on Walmart– What can we learn from Walmart and K Mart?

• Read the scanned chapter ‘Putting the end customer first’• Read the paper ‘The benefits of central supply chain

management: Corus and TDG’

• Possible oral presentation questions– How could customer service be improved by better supply chain

management?– How could stock availability in this supply chain be improved?– Using published financial information for this firm, or firms in this

industry, determine whether logistics is improving and evaluate the impact on shareholder value.

– Could this supply chain benefit for improved costing techniques and systems?