Chapter 4: Customer Accommodation

Definition and Perspective of the Customer

  • Total Supply Chain Perspective:

    • In the consumer market, the customer is the end user of the product.
    • In the business market, the company itself is considered the customer.

  • Specific Firm Perspective (Within Supply Chain):

    • Intermediate customer organizations exist between the focal firm and the end users.

  • Logistics Manager Perspective:

    • A customer is defined as any delivery location.
    • Examples include:
      • Consumer homes.
      • Retail and wholesale businesses.
      • Receiving docks of manufacturing plants.
      • Warehouses.

Basic Principles of the Marketing Concept

  • The marketing concept is built upon four fundamental ideas:
    • Customer needs and requirements are more basic and fundamental than specific products and services.
    • Differentiation: Different customers have different needs and requirements.
    • Positioning: Products and services only become meaningful when they are available and positioned from the perspective of the customer.
    • Profitability: Profit is considered more important than sales volume.

Transactional vs. Relationship Marketing

  • Transactional Marketing:

    • A traditional strategy focusing on creating successful individual transactions between a company and its customers.

  • Relationship Marketing:

    • A modern strategy focusing on the development of long-term relations with key supply chain participants.
    • Goal: To develop and retain long-term preference and loyalty.

Overcoming Supply Chain Discrepancies

  • Three primary discrepancies must be overcome to enable the exchange of goods and services:
    • Discrepancy in Space: Refers to the fact that the location of production activities and the location of consumption are seldom the same.
    • Discrepancy in Time: Refers to the difference in timing between when a product is produced and when it is consumed.
    • Discrepancy in Quantity and Assortment: Refers to the mismatch between customer demand (variety/small amounts) and manufacturing supply (mass production/uniformity).

Supply Chain Service Outputs

  • Four generic service outputs are necessary to accommodate customer requirements and eliminate discrepancies:
    • Spatial Convenience: The amount of shopping time and effort required on the part of the customer to access products (e.g., proximity of stores or ease of online access).
    • Waiting Time: The amount of time a customer must wait between ordering and receiving products.
    • Lot Size: The number of units to be purchased in each individual transaction.
    • Product Variety and Assortment: The breadth and depth of products offered.
      • Supermarkets: May stock over 35,00035,000 items.
      • Warehouse Stores: Generally stock 8,0008,000 to 10,00010,000 items, often with only one brand and size per item.
      • Convenience Stores: May stock only a few hundred items.

Omni-Channel Marketing

  • Omni-channel marketing describes an approach where firms market to customers through a variety of integrated channels including online, brick-and-mortar facilities, and telephone.
  • Different channels offer different mixes of the generic supply chain service outputs.

The Three Levels of Customer Accommodation

  • Supply chains configure service mixes to achieve one of three levels:
    1. Customer Service (Basic level: meeting internal standards).
    2. Customer Satisfaction (Intermediate level: meeting customer expectations).
    3. Customer Success (Highest level: meeting customer requirements and adding value).

Customer Service: Fundamental Elements

  • The goal of customer service is to provide the customer with the right amount of the right product, at the right time, in the right place, in the right condition, at the right price, and with the right information.
1. Availability
  • Fill Rate: Measures the magnitude or impact of stockouts over time.
  • Stockout Frequency: Occurs when a firm has no product available to fulfill demand.
  • Orders Shipped Complete: Requires shipping every item a customer orders for the shipment to count as complete.
2. Operational Performance
  • Speed: The elapsed time of the performance cycle (from order establishment to delivery).
  • Consistency: Measured by the number of times actual cycles meet the planned time for completion.
  • Flexibility: The ability to accommodate special situations and unusual/unexpected requests.
  • Malfunction Recovery: The ability to quickly implement contingency plans when a failure occurs.
3. Service Reliability
  • Ability to perform all order-related activities and provide accurate information.
  • Damage-free: Shipments arriving without damage.
  • Error-free Invoices: Percentage of invoices containing no errors.
  • Shipment Matches Order: Shipments containing the exact amount of product ordered.
  • Shipped to Correct Location: Shipments made to the customer's selected location.

The Perfect Order and Zero-Defect Performance

  • The Perfect Order is the ultimate logistical service level. It must be:

    • Delivered complete.
    • Delivered on time.
    • Delivered at the right location.
    • Delivered in perfect condition.
    • Delivered with complete and accurate documentation.

  • Zero-Defect Mathematical Example:

    • If a firm achieves 97%97\% performance in four categories (complete, on time, perfect condition, correct documentation), the probability of a perfect order is calculated as:
    • P(zero defects)=0.97×0.97×0.97×0.97=0.885P(\text{zero defects}) = 0.97 \times 0.97 \times 0.97 \times 0.97 = 0.885
    • Result: Only 88.5%88.5\% of orders are perfect; there is an 11.5%11.5\% probability that any given order has a problem.

Customer Satisfaction and the Expectancy Disconfirmation Model

  • Expectancy Disconfirmation: Satisfaction is achieved if perceived performance meets or exceeds expectations.

    • If Perceived Performance≥Expectations\text{Perceived Performance} \ge \text{Expectations}, then Satisfaction.
    • If Perceived Performance<Expectations\text{Perceived Performance} < \text{Expectations}, then Dissatisfaction.

  • Expectation Categories (from Table 4.2):

    • Reliability, Responsiveness, Access, Communication, Credibility, Security, Courtesy, Competency, Tangibles, and Knowing the Customer.

The Gaps Model of Satisfaction and Quality

  • Gap 1: Knowledge: Management's lack of understanding regarding customer needs.
  • Gap 2: Standards: Internal performance standards do not reflect customer expectations.
  • Gap 3: Performance: Difference between the established standard and actual performance.
  • Gap 4: Communications: Over-promising or promising higher performance than can be provided.
  • Gap 5: Perception: Customers perceiving performance as higher or lower than it actually is.
  • Gap 6: Satisfaction/Quality: The total perception that performance does not meet expectations when one or more of the previous gaps exist.

Limitations of Customer Satisfaction

  • Satisfied customers may still defect to competitors.
  • Satisfaction focuses on expectations, not necessarily the customer's real requirements.
  • Companies often treat all customers as identical, but what satisfies one may not satisfy another.
  • Inflation of Expectations: Competition raises minimum standards. Example: Federal Express introduced real-time tracking, forcing UPS and others to match the service to satisfy customers.

Customer Success and Value-Added Services

  • Customer Success Philosophy: Shift from meeting internal standards or expectations to meeting actual customer requirements. As Jack Ma stated: "Do not focus on your competitors. Focus on your customers."
  • Value-Added Services (VAS): Unique or specific activities jointly developed to enhance efficiency and effectiveness.
    • Example: A retail customer requiring unique palletization to support cross-docking for individual stores.
  • Strategy Framework:
    • Customers are segmented based on profit categories (e.g., Categories A, B, C, D) and product categories (1, 2, 3, 4).
    • High-yield combinations receive Success strategies; low-yield combinations may receive Basic service or be culled.

Customer Relationship Management (CRM)

  • CRM Definition: A process for improving business performance by understanding and anticipating customer wants/needs through technology.
  • Implementation Example: Procter & Gamble employees live and work in the same city as Wal-Mart (their largest customer) to facilitate better management.
  • CRM System Components:
    • Enterprise ERP system.
    • Order management, Promotion management, History management, and Contact management.
    • Field sales PC, Returns management, and Decision support.
    • Interfaces via EDI (Electronic Data Interchange) or Internet.

Assessment & Discussion Points

  • Transactional vs. Relationship: How do these lead to an increased emphasis on logistical performance?
  • Service Outputs: Importance of spatial convenience, lot size, and waiting time.
  • Philosophy Comparison: Contrating customer service, satisfaction, and success philosophies.
  • Value-Added Services: Why are they essential for customer success?
  • Omni-channel Challenges: Potential difficulties for manufacturers of consumer goods trying to implement an omni-channel approach.