INDUSTRIAL LOGISTICS

IMB 411
LECTURER:
ROBERT MONAGENG
OFFICE: 235
Robert.Monageng@mopipi.ub.bw

CUSTOMER SERVICE
LECTURE OBJECTIVES

Know and understand what is Customer Service.

Know and understand the components of customer
service.
Know and understand the importance of logistics in
satisfying customers.
Know and understand what are customer service
priorities and how they are set.
Know and understand what are customer service
standards and how they are set.
Know and understand how the Pareto rule can be
used in managing customer service.

CUSTOMER SERVICE
INTRODUCTION
The ultimate purpose of any logistics system is to satisfy
customers.
The objective should be to establish a chain of
customers that links people at all levels in the
organization directly or indirectly to the market.

WHAT IS CUSTOMER SERVICE?

There are several definitions of customer service as
can be shown by a study that was done by LaLonde and
Zinszer (1976).

CUSTOMER SERVICE
DEFINITIONS
Some of these definitions are as below:
All activities required to accept, process, deliver and bill
customer orders and to follow up on any activity that erred.
Timeliness and reliability of getting materials to customers
in accordance with the customers expectation.
A complex set of activities involving all areas of
business which combine to deliver and invoice
companys products in a fashion that is perceived
satisfactory by the customer and which advance
companys objectives.

the
the
as
our

Total order entry, all communications with customers, all

shipping, all freight, all invoicing and total control of repair of

CUSTOMER SERVICE
DEFINITIONS
of products.
Timely and accurate delivery of products ordered
by customers with accurate follow-up and inquiry
response, including timely delivery of invoice.
What can be seen here is that there is no value in
the product or service until it is in the hands of the
customer or consumer in a timely and accurate
fashion.
Customer service is the measure of how well the
logistics system is performing in providing time
and place utility for a product or service.

CUSTOMER SERVICE
DEFINITIONS
A process which takes place between the buyer,
seller, and third partywhich results in a value
added to the product or service exchanged.the
value added might be short term (single
transaction)
or
long
term
contractual
relationship.the value added is shared.all
parties benefit at the end of the service
process.Customer service is a process for
providing significant value added benefits to the
supply chain in a cost effective way.
Customer service can be examined or broken down
for analysis under three [3] headings, being: pretransaction elements, transaction elements, and
post-transaction elements.

CUSTOMER SERVICE
Transacting here can be understood to mean the process of
negotiating exchange of be it either goods or services.
The pre-transaction elements of customer service relate to
corporate policy or programs, e.g. written statements
of service policy, adequacy of organizational structure and
system flexibility. Can have significant impact on customers
perceptions of the organization and their overall satisfaction.
The actual transaction elements are those customer
service variables directly involved in performing the
physical distribution function of the product and service
delivery reliability.
The post-transaction elements of customer service are
generally supportive of the product while in use, for
instance

CUSTOMER SERVICE
product warranty, parts and repair service,
procedures for customer complaints and product
replacement.
The tables below indicates some of the many
elements of customer service under these three
headings.

CUSTOMER SERVICE
The components of Customer Service:

CUSTOMER SERVICE

CUSTOMER SERVICE
SERVICE-DRIVEN LOGISTICS SYSTEMS :
The role of logistics can be seen as the provision of
systems and the supporting coordination processes to
ensure that customer service goals are met.
This is the idea of the service-driven logistics system-a
system that is designed to meet defined service goals.
So often we find that organizations design and
manage systems which have internally-focused
objectives rather than external goals.
For example many companies with a strong production-

CUSTOMER SERVICE
-orientation have developed mega-plants which can produce
world volumes of product with great economies of scale-yet
paradoxically this strategy could reduce flexibility and
lengthen lead-times because of greater distance from
markets.
A far more effective starting point for logistics system
design is the market place; in other words we must fully
understand the service needs of the various markets that we
address and then seek to develop low cost logistics solutions.
Ideally all logistics strategies and systems should be devised
in the following sequence:
1. Identify customers service needs through market
research: then

CUSTOMER SERVICE
2. Define customer service objectives: And it
should be borne in mind that the primary objective
of any customer service strategy should be
expressed very simply-and this is to reduce the
customers costs of ownership.

There are many ways of achieving this depending

on the customer service needs, an example could be
reducing the customers travelling time, or waiting
time to obtain the goods/service they want.

3. Design the logistics system. This should be

very much closely aligned with the customer service
needs and the primary objective of the customer
service strategy.

CUSTOMER SERVICE
THE COST BENEFIT OF CUSTOMER SERVICE :
All companies have to face a basic fact: there will be
significant
differences
in
profitability
between
customers.
Not only do different customers buy different quantities of
different products, but the cost to service these
customers will typically vary considerably.
Thus the 80/20 rule will often be found to hold: That is 80% of
the profits of the business come from 20% of the customers.
Furthermore, 80% of the total costs to service will be
generated from 20% of the customers (but probably not the
same 20%!)

CUSTOMER SERVICE
Whilst the proportion may not be exactly 80/20 it
will generally be in that region. (This is the so called
Pareto Law, named after a 19th century Italian
economist).
A
typical graph of the distribution of customer
profitability might be as shown below:
Pareto diagrams similar to this can be powerful
graphical tools that can easily show which are the
20% customers that provide 80% of the profits.

CUSTOMER SERVICE

The challenge to customer service management therefore is:

Firstly to identify the real profitability of customers and then..

CUSTOMER SERVICE
Secondly to develop strategies for service that will
improve the profitability of all customers.

The nature of the cost/benefit trade-off in service

level decisions can be depicted by this graph below:
Basically what the graph tells us is that as the service
level increases, the difference between the costs
expended to provide that service and the revenues
obtained increases until a certain point where the
difference becomes small due to the law of diminishing
returns.
That is the more costs we incur do not necessarily
increase the profits as much and the profit curve slows
down and actually declines.

CUSTOMER SERVICE

CUSTOMER SERVICE
SETTING CUSTOMER SERVICE PRIORITIES:
Due to resource constraints, the objective of the logistics
system which should be to provide customers with the
level of service they need, should consider that
resources are finite.
A typical company might find its profits varying by
customer and by product as shown in the Pareto
diagram below.
It can be seen here that the curve is traditionally divided
into three categories by profitability, and this is one of
the main factors to be considered when designing the
logistics system.

CUSTOMER SERVICE

How to use the ABC categorization?

1. Classic inventory control (stock holding policy): It goes

CUSTOMER SERVICE
without saying that it makes much business sense

to provide the highest level of service (as

represented by safety stock) for A products, then a
slightly lower for B products and lower still for C.

Differentiate stock holding by holding the A

items as close as possible to the customer, and the
B and C items further back up the supply chain.
Perhaps the best way to manage product service
levels is to take into account both the profit
contribution and individual product stock turn.
Stock-turn is measured as:

CUSTOMER SERVICE
The matrix below gives a graphical depiction of
how decisions using the profit/product stock turn
service levels can be determined.

CUSTOMER SERVICE
Quadrant 1: Seek Cost Reductions
Because these products have high stock-turn it would
suggest that they are in frequent demand.
However they are also low in profit contribution and the
priority should be to re-examine their inventory costs
to see if there is any scope for enhancing profit.
Quadrant 2: Provide High Availability
These products are frequently demanded and they are
more profitable.
We should offer the highest level of service on these
items by holding them as close to the customer as
possible and with

CUSTOMER SERVICE
high availability (e.g. 99% plus).
Because there will be relatively few of these items
we can afford to follow such a strategy.
Quadrant 3: Review
Products in this category should be regularly
appraised with a view to deletion from the range.
They do not contribute to profits (or at least only
marginally) and they are slow movers from a sales
point of view.
Unless they play a strategic role in the product
portfolio of the firm then there is probably a strong
case for dropping them.

CUSTOMER SERVICE
Quadrant 4: J.I.T. Delivery
Because these products are highly profitable but only
sell at a relatively slow rate they are candidates for J.I.T
delivery.
In other words they should be kept in some central
location, as far back up the supply chain as possible in
order to reduce the total inventory investment, and then
shipped by express transport direct to customers.

SETTING CUSTOMER SERVICE STANDARDS :

Obviously if service performance is to be controlled then
it must be against pre-determined standards.

CUSTOMER SERVICE
One thing to bear in mind is that these standards or
targets should be well aligned and agreed between the
customer expectations and the capabilities of the
supplier.
But what are the customer service elements for
which standards should be set?
Firstly there are internal service standards. And in
many respects these should be mirroring the
standards that our external customers place upon us.
And these external standards it goes without saying
that they should be defined by the customers
themselves.

CUSTOMER SERVICE
As has been discussed before to obtain these
external customer standards will require customer
service
research,
and
ideally
competitive
benchmarking studies so that an objective definition
of customer service for each market segment may be
identified.
Typical customer service elements for which standards
can be or should be set can include the following:
Order cycle time; Stock availability; Order-size
constraints; Ordering convenience; Frequency of
delivery; Delivery reliability; Documentation quality;
Claims procedure; Order completeness; Technical
support; and Order status information.

CUSTOMER SERVICE
While all these elements of customer service are of

potential importance, two in particular are

increasingly seen as being crucial to winning and
keeping customers: delivery reliability and order
completeness.

These two elements can be combined into a single

performance measure: on-time order fill.
This measure can be expressed as:
On-time order fill =

CUSTOMER SERVICE

It must also be recognized that from the customers

perspective there are only two levels of service-either
100% or 0%.

In other words either the customer gets exactly what

he/she ordered at the time and place required or they
dont.
It must also be remembered that 100% order fill rates are
extremely difficult to achieve-the laws of probability see to
that!
E.g.: If there are 10 items on a particular order and each
item is carried in stock at the 95% level of availability then
the probability that the complete order can be filled is
which is 0.599.

CUSTOMER SERVICE
In other words, just over a 50/50 chance that we
can satisfy the complete order.
Therefore it might be actually wiser to carry at least
always 100% availability.
Ideally organizations should establish standards
and monitor performance across a range of
customer service measures.
For example using the pre-transaction, transaction
and post transaction framework, the following
measures can provide valuable indicators of
performance.

CUSTOMER SERVICE

CUSTOMER SERVICE

CUSTOMER SERVICE
Other customer service measures not capture
above include:
Pre-transaction:
Response times to queries

Post-transaction:
First call fix rate
Customer complaints
Service parts availability

CUSTOMER SERVICE
LECTURE TUTORIAL
1. Define customer service.
2. List the three [3] components of customer
service elements?
3. State
elements
element.

two
per

examples of
category of

customer
customer

service
service

4. Briefly discuss why designing logistics systems

that have internally focused objectives as opposed
to externally focused can be detrimental to an
organization.

CUSTOMER SERVICE
LECTURE TUTORIAL CONTI.
5. List and explain the three [3] ideal strategic
steps in designing a logistics system.
6. Explain how the Pareto (80/20) rule can help in
managing the cost/benefit ratio in customer
service.
7. With the aid of a diagram explain the cost/benefit
trade-off in service level decisions.
8. With an aid of a diagram explain how the Pareto
rule can help in setting customer service priorities.

CUSTOMER SERVICE
LECTURE TUTORIAL CONTI.
9. How can you use the profit contribution and
individual product stock turn to manage product
service levels. Explain this using the two by two
matrix (the four quadrants).
10. Why are customer service standards important?
11. How are customer service standards defined?
12. How can organization go about obtaining
customer service standards that can inform the
internal standards of the organization?

CUSTOMER SERVICE
LECTURE TUTORIAL CONTI.
9. List two [2] measures per category of
customer
service
elements
that
an
organization may need to monitor in order to
manage effectively its customer service.