Chapter 8 Order Management and Customer

Service
Learning Objectives
After reading this chapter, you should be able to do the
following:
Understand the relationships between order management and
customer service.
Appreciate how organizations influence customers ordering
patterns as well as how they execute customers orders.
Realize that activity-based costing (ABC) plays a critical role in
order management and customer service.
Identify the various activities in the SCOR process D1 (deliver
stocked product) and how it relates to the order-to-cash cycle.

Learning Objectives (cont.)
After reading this chapter, you should be able to do the
following:
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 how their financial impacts on buyers and
sellers are calculated.
Be familiar with the concept of service recovery and how it is
being implemented in organizations today.
Influencing the Order
This is the phase where an organization attempts to change the
manner by which its customers place orders.

Order Execution
This occurs when the order is received.
Customer service:
is anything that touches the customer. This
includes all activities that impact information
flow, product flow, and cash flow between the
organization and its customers.
Philosophy
Philosophy elevates customer service to an
organization-wide commitment to providing
customer satisfaction through superior
customer service.
Customer service:
Performance
emphasizes customer service as specific performance
measures that pervade all three definitions of customer
service and address strategic, tactical, and operational
aspects of order management.
Activity
treats customer service as a particular task that an
organization must perform to satisfy a customers order
requirements.
Customer relationship management:
is the art and science of strategically positioning customers to
improve the profitability of the organization and enhance its
relationships with its customer base.
is not a new concept used by service industries.
has not been widely used in the business-to business
environment until lately.

Customer action affects firms cost
how customers order
how much customers order
what customers order
when customers order an order
Four basic steps in the implementation of the CRM

Step 1: Segment the Customer Base by Profitability

Step 2: Identify the Product/Service Package for Each Customer
Segment

Step 3: Develop and Execute the Best Processes

Step 4: Measure Performance and Continuously Improve
Activity-Based Costing

ABC measures the cost and performance of activities, resources,
and cost objects. Resources are assigned to activities, then
activities are assigned to cost objects based on their use

Traditional cost accounting is well suited to situations where an
output and an allocation process are highly correlated.

Traditional cost accounting is not very effective in situations
where the output is not correlated with the allocation base.
The Management of Business Logistics Chapter 8

One method to classify customers by profitability.
Protect Zone
Those customers who fall into the Protect segment are the most profitable.

Danger Zone
Customers in the Danger Zone segment are the least profitable and incur a
loss.

The firm has has three alternatives for danger zone customers:
(1) change customer interaction with firm so the customer can move to
another segment
(2) charge the customer the actual cost of doing business
(3) switch the customer to an alternative distribution channel

Build Zone
These customers have a low cost to serve and a low net sales value, so the firm
should maintain the cost to serve and build net sales value to help drive the
customer into the Protect segment.
Order Management

This system represents the principle means by which buyers and
sellers communicate information regarding orders.

Effective order management is key to operational efficiency and
customer satisfaction.

Logistics needs timely and accurate information relating to
orders so many firms place order management in the logistics
area.
Order to cash
Thirteen principle activities constitute the OTC cycle:
D1.1 through D1.7 represent information flows
D1.8 through D1.12 represent product flows
D1.13 represents cash flow
Order cycle
all activities that occur from when an order is received until the
product is received
Replenishment cycle
refers to acquisition of additional inventory
one firms order cycle is anothers replenishment cycle
Order To Cash cycle:

recent attention has centered on the variability or
consistency of this process

absolute length of time is important, variability is more
important

a driving force is safety stock, as absolute length of
the order cycle will influence demand inventory
E-Commerce Order Fulfillment Strategies

Many firms use Internet technology to capture order
information for fulfillment systems for picking,
packing, and shipping.

Internet allows faster collection of cash by the seller.
The Logistics/Marketing Interface

Customer service is the key link between logistics and marketing
within an organization.

Manufacturing can produce a quality product at the right cost and
marketing can sell it, but if logistics does not deliver it when and
where promised, the customer will not be satisfied.
Three different perspectives on customer service:
Three different perspectives on customer service

philosophy

as a set of performance measures

as an activity

Customer service needs to be put into perspective as
including anything that touches the customer
Three levels of a product

(1) the core benefit or service, which constitutes what the buyer
is really buying

(2) the tangible product, or the physical product or service itself

(3) the augmented product, which includes benefits, adds value
for the customer
Four distinct dimensions of customer service:

Time
cycle time
safe delivery
correct orders

Dependability
more important than the absolute length of lead time

Communications
pretransaction
transaction
posttransaction

Convenience
service level must be flexible
Customer Service Performance Measures from buyers
view

Orders received on time

Orders received complete

Orders received damage

Orders filled accurately

Orders billed accurately
Expected Cost of Stockouts:
Stockout occurs when desired quantities are not
available
Four possible events:

the buyer waits until the product is available

the buyer back-orders the product

the seller loses current revenue

the seller loses a buyer and future revenue
Back Orders:
occurs when a seller has only a portion of the
products ordered by the buyer
are created to secure the portion of the inventory that
is currently not available
Lost Sales:
some customers will turn to alternative supply
sources
Lost Customers:
customer permanently switches to another supplier
Determining the Expected Cost of Stockouts
back order

lost sale

lost customer
identify potential consequences
calculate each results expense or lost profit
Product availability from customer perspective:

Did I get what I wanted?

When I wanted it?

In the quantity I wanted?

Product availability is the ultimate measure of
logistics and supply chain performance.
Metrics
four are widely used across multiple industries:
internal metrics
item fill rate
line fill rate
external metrics
order fill rate
perfect order
Calculation for lost cash flow:
Cash Flow Lost = (Number of Incomplete Orders Back-
Ordered x Back Order Cost per Order)
+ (Number of Incomplete Orders
Cancelled x Lost Pretax Profit per
Order) + (Number of Incomplete Back-
Ordered x Invoice Deduction per
Order)
Order Cycle Time:

the time that elapses from when a buyer places an order
until receipt of the order

absolute length and reliability of order cycle time
influences both firms inventories, resulting in impacts on
both revenues and profits for both organizations
Two inventory cost reduction calculations
reduced standard deviation of order cycle time on
safety stocks
Safety Stock = {Demand per Day x [OCT + (z x
Standard Deviation of OCT)]}
(Demand per Day x OCT)

determine the impact of the reduction of absolute
order cycle time on demand inventories
Demand Inventory Cost Reduction = Difference in Absolute OCT
x Demand per Day x Cost per
Unit x Inventory Carrying Cost
Percent

Logistics operations responsiveness (LOR)
Examines how well a seller can respond to a buyers
needs.
This response can take two forms:

LOR can be how well a seller can customize its service
offerings to the unique requirements of a buyer

LOR can be how quickly a seller can respond to a sudden
change in a buyers demand pattern.
Logistics System Information:

is critical to the logistics and order management
processes

underlies ability to provide quality product availability,
order cycle time, logistics operations responsiveness,
and post-sale logistics support

timely and accurate information can reduce
inventories in the supply chain and improve cash flow
to all supply chain partners
Financial Impact
The calculation used to measure the result on cash
flow for decreasing the order-to-cash cycle is as
follows:
Cast Flow Increase = Invoice Value x (Cost of
Capital/365) x Difference in
Days in the Order-to-Cash
Cycle

Postsale logistics support (PLS) can take two forms:

PLS can be the management of product returns from the
customer to the supplier.

The second form of PLS is product support through the delivery
and installation of spare parts.

Calculation to determine the spare part service cost is as follows:
Service Cost = Penalty Cost + Lost Purchase Margin + Lost
Support Margin

Service Recovery

No matter how well an organization plans to provide
excellent service, mistakes will occur.

Recovery requires a firm to realize that mistakes will
occur and have plans in place to fix them.
Summary
Order management and customer service are not mutually exclusive;
there is a direct and critical relationship between these two concepts.
There are two distinct, yet related, aspects of order management:
influencing the customers order and executing the customers order.
Customer relationship management (CRM) is a concept being used
today by organizations to help them better understand their customers
requirements and understand how these requirements integrate back
into their internal operations processes.
Activity-based costing (ABC) is being used today to help organizations
develop customer profitability profiles which allow for customer
segmentation strategies.
Order management, or order execution, is the interface between buyers
and sellers in the market and directly influences customer service.
Order management can be measured in various ways. Traditionally,
however, buyers will assess the effectiveness of order management
using order cycle time and dependability as the metric, while sellers will
use the order-to-cash cycle as their metric.
Summary (cont.)
Customer service is considered the interface between logistics and
marketing in seller organizations.
The three definitions of customer service are: (1) as an activity, (2) as a
set of performance metrics, and (3) as a philosophy.
The major elements of customer service are time, dependability,
communications, and convenience.
Stockout costs can be calculated as back order costs, the cost of lost
sales, and/or the cost of a lost customer.
The five outputs from order management that influence customer
service, customer satisfaction, and profitability are: (1) product
availability, (2) order cycle time, (3) logistics operations responsiveness,
(4) logistics system information, and (5) postsale logistics support.
The concept of service recovery is being used by organizations today to
help identify service failure areas in their order management process
and to develop plans to address them quickly and accurately.