Customer

Accommodation

CHAPTER 3

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Overview of customer accommodationCustomer-focused marketingCustomer serviceCustomer satisfactionCustomer successDeveloping customer

accommodation strategy

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Who is the customer?From perspective of the total supply chainEnd user of product in consumer marketCompany is customer in business market

From perspective of specific firm within a supply chain Intermediate customer organizations exist

between the firm and end users

From perspective of a logistics managerAny delivery location

For example, consumer home’s, retail / wholesale businesses, receiving docks of manufacturing plants and warehouses

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Basic principles of the marketing conceptCustomer needs and requirements are more

basic than products and servicesDifferent customers have different needs and

requirementsProducts and services become meaningful

only when available and positioned from the customer’s perspective

Profit is more important than sales volume

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Transactional vs. Relationship MarketingTransactional marketing is a traditional strategy with a focus on creating successful individual transactions between the company and its customers

Relationship marketing is a new strategy with a focus on the development of long-term relations with key supply chain participants in an effort to develop and retain long-term preference and loyalty

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Relationship marketing to a segment of oneMicromarketing or one-to-one marketing

recognizes that each individual customer may indeed have unique requirementsFor example, Wal*Mart and Target are both mass

merchandisers However, their requirements to interact logistically with

suppliers differs significantly• One-to-one relationships can – Significantly reduce transaction costs– Better accommodate customer

requirements– Move individual customer transactions

into a matter of routine

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3 discrepancies must be overcome to enable exchange of goods and servicesDiscrepancy in space refers to the fact that

the location of production activities and location of consumption are seldom the same

Discrepancy in time refers to the difference in timing between production and consumption

Discrepancy in quantity and assortment refers to the mismatch between customer demand and manufacturing supplyCustomers seek small quantities and wide

assortmentFirms specialize in large quantities of a limited

assortment

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4 generic supply chain service outputs eliminate discrepancies Spatial convenience is the amount of shopping

time and effort will be required on the part of the customer

Lot size is the number of units to be purchased in each transaction

Waiting time is the amount of time the customer must wait between ordering and receiving products

Product variety and assortment differs by supply chain

Supermarkets may have over 35,000 items on the shelves Warehouse stores generally stock 8,000 to 10,000 items

with only one brand and size of an item Convenience stores may stock only a few hundred items

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3 levels of customer accommodationSupply chains provide a mix of services, both

generic and custom, in order to accommodate a range of customer requirements

Each service mix can be configured to achieve one of the following levels of customer accommodationCustomer serviceCustomer satisfactionCustomer success

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Basic customer service provides customersWith the right amountOf the right productAt the right timeAnd the right placeIn the right conditionAt the right priceWith the right information

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Basic elements of customer serviceAvailability

Fill ratesStockout frequencyOrders shipped

completeOperational

PerformanceSpeedConsistency FlexibilityMalfunction recovery

Service ReliabilityDamage freeError-free invoicesShipment matches

orderShipped to correct

locationEtc.

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Availability is the capacity to have inventory when desired by a customer Fill rate measures the

magnitude or impact of stockouts over time

Stockout occurs when a firm has no product available to fulfill customer demand

Orders shipped complete requires shipping everything that a customer orders to count as a complete shipment

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Operational performance deals with the time required to deliver a customer’s orderSpeed of the performance cycle is

the elapsed time from when a customer established a need to order until the product is delivered

Consistency of the order cycle is measured by the number of times that actual cycles meet the time planned for completion

Flexibility is a firm’s ability to accommodate special situations and unusual or unexpected customer requests

Malfunction recovery is a firm’s ability to quickly implement contingency plans when a failure occurs in the supply chain

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Service reliability is a firm’s ability to perform all order-related activities and provide critical infoService reliability involves a combination of

logistics attributes beyond simply availability and operational performance. For example:Damage free measures how many shipments arrive

without damaged productsError-free invoices measures what percentage of

invoices contain no errorsShipment matches order measures how many

shipments contain the exact amount of product ordered

Shipped to correct location measures how many shipments are made to the customer’s selected location

Plus a capability and willingness to provide customers with accurate information regarding operations and order status

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The perfect order is the ultimate in logistics service levelsThe perfect order is an order that is

Delivered completeDelivered on timeDelivered at the right locationDelivered in perfect conditionDelivered with complete and accurate

documentationThis requires the total order cycle

performance to be executed with zero defects

+ + +

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Example of zero-defect performance measurement Consider an order cycle that

achieves the following performance levels for shipments 97% delivered complete 97% delivered on time 97% delivered in perfect

condition 97% delivered with correct

documentation Probability that any order

will be delivered with no defects is only 88.5% P (zero defects) = .97 x .97 x

.97 x .97 = .885

Therefore, the probability that any order has a problem is 11.5%

Therefore, the probability that any order has a problem is 11.5%

What resources are needed to achieve a zero-defect level?

What resources are needed to achieve a zero-defect level?

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The basic service platform is a commitment to perform each basic element at a given levelAvailability level = MediumOperational performance =

HighService reliability = Above

average

Availability level = LowOperational performance =

MediumService reliability =

Average

Service platform for customer A Service platform for customer B

Basic Service Platform

Availability Level

Operational Performance

Level

Service Reliability Level

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How much basic service should the supply chain provide?Many firms establish their basic

service platforms using two factorsCompetitor or industry acceptable

practice Minimum and average service

performance levels have emerged in most industries

The firm’s overall marketing strategy High service levels needed to compete on

basis of logistics competency Low service levels are more common

when competing on the basis of priceZero-defect approach is not taken

across the board for all customersEstablish internal performance

standards for each service component to reflect industry practice, cost and resource requirements

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What is customer satisfaction?Expectancy

disconfirmation states if a customer’s expectations of a supplier’s performance are met or exceeded, the customer will be satisfied If Perceived Performance

> = Expectations, then Satisfaction

If Perceived Performance < Expectations, then Dissatisfaction“Customers will be satisfied if a supplier meets or exceeds the

customer’s expectations”

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Customer expectations related to logistical performance from Table 3.2ReliabilityResponsivenessAccessCommunicationCredibility

SecurityCourtesyCompetencyTangiblesKnowing the

customer

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How are customer expectations created?

Figure 3.1 Satisfaction and Quality Model

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The model identifies gaps managers must fill to help satisfy their customersGap 1: Knowledge

Reflects management’s lack of knowledge or understanding of customers

Gap 2: StandardsExists when internal

performance standards do not adequately reflect customer expectations

Gap 3: PerformanceThe difference between

standard and actual performance

Gap 4: CommunicationsOvercommitment or

promising higher levels of performance than can actually be provided

Gap 5: PerceptionCustomers sometimes

perceive performance to be higher or lower than actually achieved

Gap 6: Satisfaction/QualityWhen one or more gap

exists customer perception is that performance does not meet expectations

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Increasing customer expectationsPerformance that meets

customer expectations one year may result in extreme dissatisfaction next year

Competition in an industry will often raise the minimum standards that customer expectFor example, Federal

Express introduced real-time tracking of shipment status In response UPS and other

parcel delivery firms added this service to their platform

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Why customer satisfaction is not sufficientSatisfied customers

may not be happy with the supplier’s performanceCustomer satisfaction

focuses on expectations - not customer’s real requirements

Considerable research suggests that “satisfied” customers still are likely to defect

• What satisfies one customer may not satisfy other, much less all, customers– There is a tendency by

companies to treat all customers as being equal and identical

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Low expectations always result in satisfied customers

Figure 3.2 Satisfaction Is Not the Same as Happiness

But what if customer requirements are not met?

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Level 3 Focus• Assess customer requirements• Extend supply chain to include our customer’s customer• Provide value-added services for select customers• Manage performance cycles and levels to address needs of

each customer segment in the extended supply chain

Level 2 Focus • Assess customer perceptions of satisfaction• Manage performance cycle levels to keep customers

satisfied

Level 1 Focus• Assess industry and competitor practices• Achieve internal standards for performance cycles

Customer Satisfaction

Customer Service

Customer Success

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Achieving customer success requires knowledge of individual customer requirementsNot all customers have the

same requirementsKnow your customers’

processesDetermine how your

capabilities can enhance your customers’ performance

Extend the supply chain boundaries to include next-destination customer requirements

Introduce new performance metrics

Develop value-added services for select customers

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Customer success requires a comprehensive supply chain perspective

Figure 3.3 Moving Towards Customer Success

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Value-added services are a first step in achieving customer successValue-added services refer to unique or

specific activities that firms can jointly develop to enhance their efficiency, effectiveness and relevancy

Transportation carriers, warehouse firms and other specialists may become intimately involved to make value-adding activities a reality

For example, a retail customer may desire a unique palletization alternative to support its cross-dock activities for its individual storesEach store requires different quantities of specific

product to maintain in-stock performance with minimum inventory

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Developing a customer accommodation strategyBasic principle of

supply chain logistics is that customers should be segmented based on their service needs

Supply chain must adapt to serve those segments

Companies need A framework for choosing

the appropriate customer specific strategies

Programs for customer relationship management

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Framework for choosing a customer accommodation strategy using profit categories

Table 3.4 Choosing Customer Accommodation Strategy

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Customer relationship management has grown rapidly in recent yearsCustomer relationship management

(CRM) is a process for improving the overall performance of a business by better understanding and anticipating the wants and needs of customersIn practice companies and vendors use the term

CRM to mean different thingsOne CRM example – Procter & Gamble has

employees who live and work in the city of its largest customer Wal*Mart

Logistics has primary responsibility for many of the processes that drive value and customer success