DIPLOMA IN LOGISTICS MANAGEMENT

TACTICAL LOGISTICS MANAGEMENT (TLMLMA2) - LU3
Presented by Prof. P Kilbourn
UNIVERSITY OF JOHANNESBURG

Study Unit 3: ORDER MANAGEMENT AND CUSTOMER SERVICE

  • Source: Coyle et al (Additional Material - Learning Material)

Learning Objectives

After reading this chapter, you should be able to:

  • Understand the concepts of order management and customer service.
  • Know the relationship between order management and customer service.
  • Understand the role and importance of Customer Relationship Management (CRM).
  • 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 their financial impacts on buyers and sellers.
  • Be familiar with the concept of service recovery and how it is being implemented in organizations today.

Phases of Order Management

Two Phases of Order Management

  • Influencing the Order:
    • This is the phase where an organization attempts to change the way its customers place orders.
  • Order Execution:
    • This occurs after the order is received.

Customer Service Definition

  • Customer service includes all activities that impact information flow, product flow, and cash flow between the organization and its customers.
  • Defined as:
    • Philosophy: A commitment to providing customer satisfaction through superior service.
    • Performance Measure: Emphasizes specific performance measures addressing strategic, tactical, and operational aspects of order management.
    • Activity: A particular task performed to satisfy a customer’s order requirements.
  • Organizations are encouraged to adopt all three definitions.

Customer Relationship Management (CRM)

  • CRM is the art and science of strategically positioning customers to improve organizational profitability and enhance customer relationships.
  • Importance:
    • Traditionally a concept used by service industries,
    • Recently gaining traction in the business-to-business sectors.
  • Customer actions influence a firm's costs and subsequently its profitability:
    • Factors: How customers order, how much, what, and when they order.

Implementation of CRM

  • Four Basic Steps in CRM Implementation:
    1. Segment the Customer Base by Profitability.
    2. Identify the Product/Service Package for Each Customer Segment (as detailed in Table 8.1).
    3. Develop and Execute the Best Processes.
    4. Measure Performance and Continuously Improve.

Activity-Based Costing (ABC)

  • ABC can be used to place customers into segments by measuring costs and performance of activities related to customer orders.
    • Process: Resources assigned to activities, which are then assigned to cost objects based on their use.

Order Management

  • Definition: Represents the principal means by which buyers and sellers communicate order information.
  • Effective order management is fundamental to operational efficiency and customer satisfaction.
  • Many firms place order management within the logistics area due to the need for timely and accurate order information.

Order to Cash (OTC) Cycle

  • Definition: The complete process from order receipt to product delivery and includes thirteen principal activities (Process D1) according to the SCOR model:
    • D1.1 to D1.7: Information flows.
    • D1.8 to D1.12: Product flows.
    • D1.13: Cash flow.
  • Order Cycle: Activities happening from when an order is received until product receipt (lead time).
  • Replenishment Cycle: Seen as the acquisition of additional inventory.

Variability in Order Cycle

  • Recent focus has been on the consistency of the order cycle:
    • Absolute order cycle time is important, but variability plays a critical role in influencing demand and inventory levels.

E-Commerce Order Fulfillment Strategies

  • Use of Internet technology for capturing order information enhances fulfillment processes including picking, packing, and shipping.
  • The Internet facilitates quicker cash collection for sellers.

Logistics and Marketing Interface

  • Customer service acts as a vital link between logistics and marketing within organizations:
    • Manufacturing can produce quality products and marketing can sell them, but logistics must deliver as promised to ensure customer satisfaction.

Dimensions of Customer Service

  • Four Distinct Dimensions:
    1. Time:
    • Cycle time, safe delivery, correct orders.
    1. Dependability:
    • More important than the absolute length of lead time.
    1. Communications:
    • Includes pre-transaction, transaction, and post-transaction communication.
    1. Convenience:
    • Service level must remain flexible.

Customer Service Performance Measures (Buyer's View)

  • Measures Include:
    • Orders received on time.
    • Orders received complete.
    • Orders received undamaged.
    • Orders filled accurately.
    • Orders billed accurately.

Stockout Costs

  • A stockout occurs when desired quantities are not available, leading to:
    • Buyers waiting for product availability.
    • Buyers back-ordering products.
    • Sellers losing current revenue or future customers.

Events Related to Stockouts

  1. Back Orders: Where only a portion of products are available; sellers must secure inventory that is currently unavailable.
  2. Lost Sales: When customers seek alternative suppliers due to stockout.
  3. Lost Customers: When a customer permanently switches to another supplier.

Calculating the Expected Cost of Stockouts

  • The cost of a stock-out is assessed by calculating potential consequences (back orders, lost sales, lost customers).
  • Example Calculation:
    • 70% of stockouts result in a back order requiring an additional cost of $75.
    • 20% result in a lost sale with a profit loss of $400.
    • 10% result in a lost customer with a potential loss of $20,000.
  • Total Costs:
    • 70% of $75 = $52.50
    • 20% of $400 = $80.00
    • 10% of $20,000 = $2,000
    • Total Estimated Cost Per Stockout: 52.50+80+2000=2132.5052.50 + 80 + 2000 = 2132.50.

Order Cycle Time

  • Refers to the duration from when a buyer places an order until its receipt.
  • Influences inventory levels and firm revenues/profits.

Logistics System Information

  • Critical to logistics processes, underpinning quality product availability, order cycle time, responsiveness, and post-sale support.
  • Timely and accurate information helps reduce inventories and improve cash flows across partners.

Service Recovery

  • Recognizes that mistakes will occur, requiring plans for recovery.
  • The principle of "Never waste a crisis!" emphasizes learning from service failures.

Summary of Key Concepts

  • Order Management and Customer Service:
    • They're interrelated; influencing a customer’s order and executing that order are two critical components.
    • CRM helps organizations understand customer requirements and integrate them into processes.
  • Outputs from Order Management: Influence customer service and satisfaction through five outputs:
    1. Product availability.
    2. Order cycle time.
    3. Logistics operations responsiveness.
    4. Logistics system information.
    5. Post-sale logistics support.
  • Service Recovery Implementation: Helps identify areas for improvement in order management processes.

Final Notes

  • Key Aspects of Customer Service:
    1. Customer service defines both an activity and performance metrics.
    2. Major service elements: time, dependability, communication, convenience.
    3. Effective stockout management via identifying back order costs, lost sales, and customer attrition.
    4. Understanding and measuring order management can drastically affect customer satisfaction and organizational profitability.