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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.

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Chapter 4 logistics customer service l.jpg
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.


Customer service l.jpg
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.


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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.


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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.


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Fundamental Question

  • What level of service should be offered?

  • Hard to answer!

  • Consider tradeoffs.


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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.


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Sales-Service Relationship

  • Increasing service increases cost and revenue.

Revenue

$

Cost

Customer Service Level


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Sales-Service Relationship

  • Want to maximize Profit = Revenue - Cost.

Revenue

$

Cost

Profit

Customer Service Level


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Sales-Service Relationship

  • Optimum service level = Maximum Profit

Revenue

$

Cost

Profit

Optimum Customer Service Level


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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.


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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


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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?


Contingencies l.jpg
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.


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Contingencies

  • Prepare for:

    • Loss of product or service capability.

    • Loss of data (computers).

    • Loss of communications.

    • Loss of transportation.

  • Goal: Keep customer satisfied