Chapter 8 - Order Management & Customer Service

Class 3

Customer Service Concept

Customer service includes every activity that interacts with or impacts the customer, which covers information, product, cash, and demand flows

Customer Service Concept

Defined in three ways:

1. As a philosophy – a firm-wide commitment to satisfaction.

2. As performance measures – on-time delivery and fill rate metrics.

3. As an activity – order processing, billing, returns, claims

The customer ultimately determines what service level is acceptable.

Relationship Between Order Management and Customer Service

• Order management is the main buyer-seller communication channel.

• Efficient order systems → accurate, timely fulfillment → higher service performance.

• CRM (Influence Phase) links customer expectations to logistics capabilities.

• High-performing firms align front-end (customer) and back-end (order) processes

Customer Relationship Management (CRM)

Align company resources with customers to maximize satisfaction and profit by managing each based on how, what, when, and how much they buy.

Four Key Steps:

1. Segment Customers by Profitability

2. Identify Product/Service Package for Each Segment

3. Develop & Execute Best Processes

4. Measure Performance & Improve

Combine ABC, profitability, and segmentation to build stronger, profitable customer relationships.

Segment Customers by Profitability

Implementing CRM: Uses activity-based costing to serve the model

Identify Product/Service Package for Each Segment

Implementing CRM: Tailor offerings based on what each segment values most (speed, reliability, support, etc.)

Develop & Execute Best Processes

Implementing CRM: Internal systems to always deliver promised service.

Measure Performance & Improve

Implementing CRM: Track satisfaction and profitability, refine strategy.

Order Management Concept (2 Phases of Order Management)

1. Influence the order: How the organization affects when, how, and what customers buy.

2. Execution: Processing, fulfilling, shipping, billing, and payment and post-sale support.

• Order Receipt

• Order Fulfillment

• Order Shipments

Key Steps: Order receipt → Order fulfillment → Shipment → Billing → Payment.

Order-to-Cash (OTC)

Covers the full process: Order → Delivery → Invoice → Payment.

Replenishment Cycle

The buyer’s process for restocking inventory.

• One firm’s OTC is another’s replenishment cycle.

Customer Service & ROI

• Higher service levels raise revenue (retention, loyalty) but also costs (inventory, transport).

• There’s a tradeoff - increasing service beyond optimal levels may reduce ROI.

The goal is to balance service level vs. cost to maximize profitability.

Four Dimensions of Customer Service (Logistics Perspective)

1. Time

2. Dependability

3. Communication

4. Convenience 

All four together determine service quality and customer satisfaction

Time

Dimensions of Customer Service: order cycle length and consistency.

Dependability

Dimensions of Customer Service: reliable lead times and error-free delivery.

Communication 

Dimensions of Customer Service: accurate pre-, during-, and post-transaction information.

Convenience 

Dimensions of Customer Service: flexible options (order sizes, delivery times, channels).

Stockout Issues

Occurs when desired goods are unavailable at the needed time/location.

Possible Customer Reactions:

• Wait until the item is available (temporary delay).

• Back-order the product.

• Buy from another supplier (lost current sale).

• Switch permanently (lost future revenue).

Erodes loyalty and profit - firms must manage safety stock and forecasting carefully

Five Outputs: Order Management Influences on Customer Service

1. Product Availability

2. Order Cycle Time

3. Logistics Operations Responsiveness (LOR)

4. Logistics System Information (LSI)

5. Post-sale Support

Product Availability

Order Management Influences on Customer Service: Item, line, and order fill rates; perfect order index

Order Cycle Time

Order Management Influences on Customer Service: Time from order to delivery

Logistics Operations Responsiveness (LOR)

Order Management Influences on Customer Service: Ability to customize and react quickly.

Logistics System Information (LSI)

Order Management Influences on Customer Service: Visibility of orders (pre-, during, post-transaction)

Post-sale Support

Order Management Influences on Customer Service: Returns, repairs, spare parts, reverse logistics

Product Availability Metrics

Internal Metrics: Item fill rate, Line fill rate

External Metrics: Order fill rate, Perfect order

Financial Impacts:

• Higher fill rates improve customer satisfaction but need more inventory investment.

• Firms must balance cash flow lost from stockouts vs. cash tied up in inventory.

Item fill rate

Internal product availability metric: % of demand for specific items met from stock.

Line fill rate

Internal product availability metric: % of order lines completely filled.

Order fill rate

External product availability metric:% of total customer orders fulfilled.

Perfect Order

External product availability metric: Complete, accurate, on-time, damage-free, correct documentation

Logistics Operations Responsiveness (LOR)

Measures how fast and effectively a seller responds to buyer needs. There are 2 dimensions:

Customization: Ability to tailor logistics/service offerings to individual buyers.

Agility: Speed and flexibility in responding to sudden changes in demand.

LOR Metrics

Flexibility, customization, and agility (lead-time response).

LSI Phases

Pre = planning, Transaction = execution, Post = evaluation.

Service Recovery

The actions taken to correct errors or service failures.

• Measure service failure costs, anticipate weak points, act quickly, and empower employees - turning problems into opportunities to build loyalty.