scm module 8

8/12/2019 Scm Module 8

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Demand management andCustomer Service


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Outbound-to-Customer LogisticsSystemsOutbound-to-customer Logistics systems ,

also referred to as physical distribution, refersto the set of processes, systems andcapabilities that enhance a firms ability to serveits customers. In an effort to serve theircustomers, many firms have placed significantemphasis on outbound-to-customer logisticssystems.

Inbound-to-operations Logistics systems refersto the activities and processes that precede andfacilitate value-adding activities such asmanufacturing, assembly and so on. It as also

referred to as materials management and


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Demand ManagementDemand management may be thought of asfocused efforts to estimate and managecustomers demand with the intention of usingthis information to shape operating decisions.

The essence of demand management is tofurther improve the ability of firms throughoutthe supply chain-particularly manufacturingthrough the customer-to collaborate on

activities related to the flow of product, services,information and capital.The desired end result should be to creategreater value for the end user or consumer , forwhom all supply chain activities should be


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The following list suggests a number of ways in whicheffective demand management will help to unify channelmembers with the common goal of satisfying customersand solving customer problems:Gathering and analyzing knowledge about customers,their problems and their unmet needs.Identifying partners to perform the functions needed inthe demand chain.

Moving the functions that need to be done to the channelmember that can perform them most effectively andefficiently.Sharing with other supply chain members knowledgeabout consumers and customers, available technology,

and logistics challenges and opportunities.Developing products and services that solve customers problems.Developing and executing the best logistics,transportation and distribution methods to deliver

products and services to consumers in the desiredformat.


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Supply Demand Misalignment


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Refer to the graph given in class on Supply-demand misalignment (Page No 186- A logistics Approach to Supply Chain Management by Coyle, Bardi & Langley)

Supply-Demand Misalignment In the firstphase of a new product launch, when end-userdemand is at its peak and opportunities forprofit margins are greatest, PC assemblers arenot able to supply product in quantitiessufficient to meet demand-thus creating trueproduct shortages.

Also during this time-frame, distributors andresellers tend to over-order, often creatingsubstantial phantom demand.

In the next phase, as production begins to rampup, assemblers ship product against thisinflated order situation and book sales at thepremium high-level launch price. As channel

inventories begin to fill, price competitionbegins to set in, and orders are cancelled or


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In the final phase, as end user demandbegins to decline, the situation clearly has

shifted to one of over supply. This is largelydue to the industrys planning processes andsystems, which are primarily designed touse previous period demand as a gauge.The net result of these behaviors in aligningsupply and demand is that a large majorityof product is sold during the declining period

of profit opportunity, thereby diminishingsubstantial value creation opportunities forindustry participants.


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Traditional Forecasting A major component of demand managementis forecasting the amount of product that willbe purchased by consumers or end users.

Although forecasts are made throughout the

supply chain, the single most importantforecast is that of primary demand. In a trulyintegrated supply chain scenario, all other

demand will emanate directly from-or at leastbe influenced by primary demand.


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Integrating forecasting and productionI Step Develop a twelve-month forecast of

demand by month by applying traditionaldemand forecasting approaches (e.g. movingaverage, exponential smoothing, Regressionanalysis etc.) to a three year history file of dataon factors such as demand, price, seasonality,availability, deals and promotions.

II Step Brand and product managers review thisforecast and recommend relevant changes.

III Step Developing aggregate productionschedules for the next twelve-month period and

allocating specific production requirements to


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Integration of sales forecasting and ProductionHistory file ( 3 Years

demand, price,seasonality, deals,

promotions etc .

Forecasting model(moving averages,regression analysis

etc.)

12-monthforecast (by

month)

Brand and product

managers reviewand recommend

changes

Revisedforecast

Gross marketrequirements (1 to

3 year periods)

Aggregate production

schedules (12months)

Allocation ofaggregate

requirements toplants

Short-termproductionscheduling


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d l


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PFR Business Model


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The CPFR initiative begins with the sharingof marketing plans between trading partners.

Once an agreement is reached on the timingand planned sales of specific products, and acommitment is made to follow that planclosely, the plan is then used to create aforecast, by stock-keeping unit, by week, andby quantity. The planning can be for thirteen,twenty-six, or fifty two weeks.


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Order and Replenishment CyclesWhen referring to outbound-to-customer

shipments, we typically use the term ordercycle. The term replenishment cycle is usedmore frequently when referring to the

acquisition of additional inventory, as inmaterials management. Basically one firms order cycle is anothers replenishment cycle.

Major components of Order Cycle

Orderplacement

Orderprocessing

Orderpreparation

Ordershipment


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Order Placement Order-placement time can varysignificantly, from taking days or weeks to beinginstantaneous. Company experiences indicate thatimprovements in order-placement systems and

processes offer some of the greatest opportunities forsignificantly reducing the length and variability of theoverall order. Significant increases were projected forInternet facilitated resources such as E-marketplace,Extranets and E-mail.

Order Processing

The order-processing functionusually involves checking customer credit, transferringinformation to sales records, sending the order to theinventory and shipping areas, and preparing shippingdocuments.

Order Preparation

Depending on the commodity beinghandled and other factors, the order-preparation processsometimes may be very simple and performed manuallyor, perhaps, may be relatively complex and highlyautomated.

Order Shipment

Shipment time extends from themoment an order is placed upon the transport vehicle for


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Customer ServiceHaving the right product, at the right time, inthe right quantity, without damage or loss, tothe right customer is an underlying principleof logistics systems that recognizes the

importance of customer service. Another aspect of customer service thatdeserves mention is the growing consumer

awareness of the price/quality ratio and thespecial needs of todays consumers, who aretime conscious and who demand flexibility.


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The Traditional Logistics/Marketing Interface

Product

Price

Place/Customer servicelevels

Promotion

Inventory carryingcosts

Lot quantitycosts

Order processingand information

costs

Warehousingcosts

Transportation costs


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Defining Customer ServiceCustomer service is a process for providingcompetitive advantage and adding benefits to thesupply chain in order to maximize the total value tothe ultimate customer.

According to marketers, there are three levels ofproduct:

1. The core benefit or service, which constitutes whatthe buyer is really buying.2. The tangible product, or the physical product or

service itself;3. The augmented product, which includes benefits

that are secondary to, but an integral enhancementto, the tangible product the customer is purchasing.Logistical customer service, installation warrantiesand after-sale service are examples of augmented

product features.


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Examples of the various forms that customerservice may take include the following:

1. Revamping a billing procedure to

accommodate a customers request.2. Providing financial and credit terms.3. Guaranteeing delivery within specified time

periods.4. Providing prompt and congenial sales

representatives.5. Extending the option to sell on consignment.6. Providing material to aid in a customers sales

presentation.7. Installing the product.8. Maintaining satisfactory repair parts

inventories.


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Levels of Customer ServiceCusto m er servic e as an ac t iv i ty This level treatscustomer service as a particular task that a firm mustaccomplish to satisfy the customers needs. Orderprocessing, billing and invoicing, product returns andclaims handling are all typical examples of this levelof customer service.Customer se rv ice as per formance measures This level emphasizes customer service in terms ofspecific performance measures, such as thepercentage of orders delivered on time and completeand the number of orders processed withinacceptable time limits.Custom er se rv ice as a ph i los op hy This levelelevates customer service to a firm-wide commitment

to providing customer satisfaction through superior


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Elements of Customer ServiceCustomer service has multifunctional interest for a

company; but, from the point of view of thelogistics function, we can view customer serviceas having four traditional dimensions:Time The time factor is usually order cycletime, particularly from the perspective of theseller looking at customer service. On the otherhand, the buyer usually refers to the timedimension as the lead time, or replenishmenttime.Dependability Dependability can be moreimportant than lead time. The customer canminimize its inventory level if lead time is fixed.


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Performance Measures for Customer Service

Element BriefDescription

TypicalMeasurementUnitProduct

availability

Order cycle time

Distributionsystem flexibility

Usually defined as percent instock (target performancelevel) in some base unit (i.e.order, product, dollars)

Elapsed time from orderplacement to order receipt.Usually measured in time unitsand variation from standard ortarget order cycle

% availability inbase units

Speed andconsistency

Ability of system to respondto special and/or unexpectedneeds of customer.

Response timeto specialrequests


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Distributionsysteminformation

Ability of firms informationsystem to respond intimely and accurate

manner to customers requests for information

Speed, accuracyand message detail

of response

Distributionsystemmalfunction

Efficiency of proceduresand time required to

recover from distributionsystem malfunction (i.e.errors in billing, shipping,damage , claims).

Response andrecovery timerequirements

Postsale

productsupport

Efficiency in providingproduct support afterdelivery, includingtechnical, information,spare parts, orequipment modification,as appropriate.

Response time,quality ofresponse


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Expected cost of stockouts A principal benefit of inventory availability and,

hence of customer service is to reduce theincidence of stockouts. Once we develop aconvenient way to calculate the costs of a

stockout, we can use stockout probabilityinformation to determine the expectedstockout cost. Last, we can analysealternative customer service levels directlyby comparing the expected cost of stockoutswith the revenue enhancing benefits ofcustomer service.


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Effects of stockouts A stockout occurs when desired quantities of

finished goods are not available when andwhere a customer needs them. When a selleris unable to satisfy demand with available

inventory, one of four possible events mayoccur:1. The customer waits until the product is

available2. The customer back orders the product3. The seller loses a sale

4. The seller loses a customer


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Back Order A company having to back order an item that

is out of stock will incur expenses for specialorder processing and transportation.

The extra order processing traces the back

orders movement , in addition to the normalprocessing for regular replenishments.The customer usually incurs extra

transportation charges because a back orderis typically a smaller shipment and oftenincurs higher rates.


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Lost salesMost firms find that although some customers may

prefer a back order, others will turn to alternativesupply sources.Most companies have competitors who produce

substitute products; and when one source does not

have an item available, the customer will order thatitem from another source. In such cases, the stockouthas caused a lost sale.

The sellers direct loss is the loss of profit on the item

that was unavailable when the customer wanted it.Thus, a seller can determine direct loss by calculatingprofit on one item and multiplying it by the number thecustomer ordered. For eg. If the order was for 100units and the profit is Rs. 10 per unit, the loss is Rs1000.


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Lost Customer

The customer permanently switches toanother supplier. A supplier who losesa customer loses a future stream ofincome.


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Determining the Expected Cost ofStockouts

The first step is to identify a stockouts potential consequences.These include a back order, a lost sale, and a lost customer. Thesecond step is to calculate each results expense or loss of profitand then to estimate the cost of a single stockout.

Assume : 70% of all stockouts result in a back order, and a backorder requires extra handling costs of Rs. 6; 20% results in a lostsale for the item, and this loss equals Rs. 20 in lost profit margin;and 10% result in a lost customer, or a loss of Rs. 200.Overall impact :

70% of Rs 6 = Rs. 4.2020% of Rs. 20 = Rs 4

10% of Rs. 200 = Rs 20Total estimated cost per stockout = Rs 28.20 A firm should carry additional inventory to protect against stockouts

only as long as carrying the additional inventory costs less thanRs. 28.20.


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Channels of Distribution A channel of distribution consists of one or

more companies or individuals whoparticipate in the flow of goods, services,information and finances from the producer

to the final user or consumer. Thisencompasses a variety of intermediary firms,including those that we classify aswholesalers or retailers.


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Types of ChannelsManaging distribution channels requires firms

to coordinate and integrate logistics andmarketing activities in a manner consistentwith overall corporate strategy.

Logistical channel refers to the means bywhich products flow physically from wherethey are available to where they are needed.Marketing channels refers to the means bywhich necessary transactional elements aremanaged. (e.g. customer orders, billing,accounts receivable etc.)


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Logistical and Marketing ChannelsLogistical channel Marketing

Channel SupplierTransportatio

nManufacturer

Transportation

Distribution center

Transportation

Retail store

Consumer

E-Procurement

National accountsales

Wholesaler/Distributor

Retail customer

Example of channels of distribution for


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Example of channels of distribution forthe food products manufacturingindustry

Food Manufacturing firms

Food Servicedistributors

Grocerywholesalers

Foodbrokers

Internet(direct)

Restaurants

Specialty(airlines

etc.) Retail

chains(local andregional)

Retailgroce

rs

Institutional

buyers

Retailchains Internet

retailer

Consumers of manufactured food products

scm module 8

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