1LogisticsCustomerService“Ontheaverageitisapproximatelysixtimesmoreexpensivetodevelopanewcustomerthanitistokeepacurrentcustomer.”“Thebitternessofpoorservicefaroutlaststhesweetnessoflowprice.”2LogisticsTriangleCustomerServiceTransportationInventoryLocation3Agenda•Serviceelements•Relativeimportanceofserviceelements•Ordercycleandordercycletimes•Relationshipbetweensalesandservice•Servicevariability4CustomerServiceElementsPre-transactionelementsTransactionelementsPost-transactionelements•Writtenstatementofpolicy•Statementinhandsofcustomer•Organizationalstructure•Systemflexibility•Technicalservice•Stockoutlevel•Abilitytoback-order•Elementsofordercycle•Time•Transshipment•Systemaccuracy•Orderconveniences•Productsubstitution•Installation,warranty,alterations,repairs,parts•Producttracking•Customerclaims,complaints•Productpackaging•Temporaryreplacementofproductduringrepairs5CommonCustomerServiceComplaints12%Damagedgoods31%Productorqualitymistakes7%Other6%Frequentlycutitems44%LatedeliverySource:S.BaritzandL.Zissman6RelativeImportanceofServiceElements•Abilitytomeetpromiseddeliverydate•Accuracyinfillingorders•Qualityrelativetoprice•Advancednoticeonshippingdelays•Timelyresponsetorequestsforassistance•Actiononcustomerservicecomplaints•Ordercycleconsistency•AccuracyinforecastingestimatedshipdatesSource:D.LambertandT.Harrington7PenaltiesforCustomerServiceFailuresCR(2004)PrenticeHall,Inc.29%Reducedthevolumeofbusiness2%Refusedtosupportpromotion16%Discontinueditems26%Calledinsalesmanormanager9%Refusedtopurchasenewitems18%Stoppedallpurchaseswithsupplier8ServiceObservationsThedominantcustomerserviceelementsarelogisticalinnatureLatedeliveryisthemostcommonservicecomplaintandspeedofdeliveryisthemostimportantserviceelementThepenaltyforservicefailureisprimarilyreducedpatronage,i.e.,lostsales9CUSTOMERRetailoutletCustomerordertransmittalTransmittalofbackorderitemsOrderdeliveryExpressorderdeliveryFACTORYOrderprocessing,assemblyfromstock,orproductionifnostockWAREHOUSEOrderprocessingandassemblyComponentsofaCustomerOrderCycle10OrderCycleTime•DefinitionTheelapsedtimebetweenthetimeacustomerorder,purchaseorder,orservicerequestisplacedandthetimeitisreceivedbythecustomer.•Components–Ordertransmittal,orderprocessingandassembly,additionalstockacquisitiontime,deliverytime•Adjustments–Priorities,orderconditionstandards,orderconstraints11IncreasinglogisticscustomerservicelevelofasuppliertothebestofitscompetitionSales00ThresholdDiminishingreturnsDeclineRangeoftransitionRangeoftransitionSales-ServiceRelationship12ModelingaSales-ServiceRelationshipAmathematicalexpressionofthelevelofserviceprovidedandtherevenuegeneratedItisneededtofindtheoptimalservicelevelAtheoreticalbasisfortherelationshipMethodsfordeterminingthecurveinpractice-Two-pointsmethod-Before-afterexperiments-Gameplaying-Buyersurveys13Sales-ServiceRelationshipbytheTwo-PointsMethodLogisticscustomerservicelevelSales00Approximationbytwo-pointsmethod14Determiningoptimalservicelevels•Revenue=P(s)•Logisticscost=C(s)•Profit=Revenue–Logisticscost=P(s)–C(s)•Objective:findaservicelevelsuchthatprofitismaximized15DeterminingOptimumServiceLevelsCostvs.serviceTheoryOptimumprofitisthepointwhereprofitcontributionequalsmarginalcostPracticeForaconstantrate,P=tradingmarginsalesresponserateannualsalesC=annualcarryingcoststandardproductcostdemandstandarddeviationoverreplenishmentlead-timezSetP=Candfindzcorrespondingtoaspecificservicelevel16ProfitmaximizationRevenueLogisticscostsImprovedlogisticscustomerservice00CostsorsalesGeneralizedCost-RevenueTradeoffs17DeterminingOptimumServiceLevels(Cont’d)Example-GiventhefollowingdataforaparticularproductSalesresponserate=0.15%changeinrevenuefora1%changeintheservicelevel(fillrate)Tradingmargin=$0.75percaseCarryingcost=25%peryearAnnualsalesthroughthewarehouse=80,000casesStandardproductcost=$10.00Demandstandarddeviation=500casesoverLTLeadtime=1week18DeterminingOptimumServiceLevels(Cont’d)FindPP=0.750.001580,000=$90.00peryearFindCC=0.2510.00500z=1250zSetP=Candsolveforz,i.e.,90.00/1250=zz=0.072Forthechangeinzfoundinanormaldistributiontable,theoptimalin-stockprobabilityduringtheleadtime(SL*)isabout92%.19SL(%)ULz87-861.125-1.08=0.04588-871.17-1.125=0.04589-881.23-1.17=0.0590-891.28-1.23=0.0591-901.34-1.28=0.0692-911.41-1.34=0.0793-921.48-1.41=0.0794-931.55-1.48=0.0795-941.65-1.55=0.1096-951.75-1.65=0.1097-961.88-1.75=0.1398-972.05-1.88=0.1799-982.33-2.05=0.28SLLevelsin%forVariouszValues*DevelopedfromentriesinanormaldistributiontablezU–zL=2005010015020025030035087-8688-8789-8890-8991-9092-9193-9294-9395-9496-9597-9698-9799-98Probabilityofbeinginstockduringreplenishmentleadtime,%$/yearChangeingrossprofit,PChangeinsafetystockcost,CGraphicallySettingtheServiceLevel21OptimizingonServicePerformanceVariabilitySettingservicevariabilityaccordingtoTaguchi•AlossfunctionoftheformL=lossin$k=aconstanttobedeterminedy=valueoftheservicevariablem=thetargetvalueoftheservicevariable2)(mykLTargetServicevariable,mCostpenalty,LMissingtargetcausesincreas