The customer service dimension
The marketing and logistics interface
Customer service has become of big importance due to growing expectations from customers and the inexorable transition towards commodity type markets.
Availability of the product is more important than price or image
What is customer service?
Customer service is determined by the interaction of all those factors that affect the process of making products and services available to the buyer
The components of customer service:
- Pre-Transaction elements
Written customer policy, Accessibility, Organization structure, System flexibility
- Transaction elements
Order Cycle time, Inventory availability, order fill rate, Order status information
- Post-transaction elements
Availability of spare parts, call-out time, Product tracing/warranty, Customer complaints and claims
-The demand is for ever-shorter lead times, reliable delivery with a base of fewer suppliers.
When reducing costs companies should take care of not developing efficient logistics but not effective logistics.
It is not longer effective to rely on “pull” marketing strategies promoting brand names to consumers, now it is necessary to complement with strong intermediaries relationships to create a customer franchise as well as a consumers franchise.
Customer service and customer retention
"People don't buy products, they buy benefits" it is the totality of the offer which delivers customer value. (a product in customer’s hands instead of a warehouse)
Retained customers are more profitable, the lifetime value of a customer is calculated as follows: Life time = Average transaction value x yearly frequency of purchase x customer ‘life expectancy’
A prime objective of any customer service strategy should be to enhance customer retention
Relationship marketing is developing marketing strategies to maintain and strengthen customer loyalty.
Service-driven logistics systems
It is a system designed to meet defined service goals.
Systems should be have external goals and not be internally focused (mega plants)
Ideally all logistics strategies and systems should be devised in the following sequence:
- Identify customers’ service needs
Making use of market research segment customers into groups characterized by a broad similarity of service needs. To accomplish that, a three-stage process can be utilized:
- Identify the key components of customer service as seen by customers themselves
It is important to develop ah understanding of the service need of customers through detailed research.
To identify the key sources of influence upon the purchase decision.
Personal interviews with a representative sample of buyers to determine the importance they attach to customer service and the specific importance they attach to the individual components of customer service
- Establishing the relative importance of customer service components
It is the importance that customers attach to each element of customer service, a good way of doing it is to use a trade-off technique where the customer is presented with feasible combinations of customer service elements and asking for a rank order of preference. Computer analysis then determines the implicit importance attached by the respondent to each service element.
- Identify customer service segments
To define customer segments a technique known as Cluster Analysis can be used. It is a computer-based method for looking across a s et of data and seeking to match respondents across as many dimensions as possible.
The traditional market segmentation “Standard industrial classification” SIC is not longer reliable.
- Define customer service objectives
- The concept of perfect order is achieved when the customer’s service requirements are met in full (applicable to any level: individual, segment, country or by distribution center)
- A measure of perfect order is ‘on-time, in-full’ (OTIF), and error free. example:
On time : 90%
In Full : 80%
Error free : 70%
The actual perfect order achievement would be: 90 x 90 x 70 = 50.4%
In other words the likelihood that a perfect order was achieved during the period under review was only 50.4 per cent.
- The challenge to customer service management is to identify the real profitability of customers and then develop strategies for service that will improve the profitability of all customers. There is finite limit to impact that service improvements can have upon customers’ purchasing behaviour. The Pareto law applies where 80% of the customer service will be generated by 205 of the customers.
- Design the logistics system
Setting customer service priorities
- Use the Pareto 80/20 rule as a basis for developing a more cost-effective service strategy.
- It is more appropriate to measure profit instead of revenue when classifying customers and products, but it is difficult because conventional accounting methods do not give such costs.
- It makes sense to focus resources on key accounts as well as key products:
20% of the customers buying 20% of the products = 4% of all customer/product transactions
Which provides: 80% of 80 % of total profit = 64%
In other words just 4 percent of all transactions (measured order-line by order-lie) gives us 64 per cent of all our profit
- Besides profitability also it should be taken into account the ‘critical value’ of products that are not high profitable, those product can have big importance to serve customers properly
Setting service standards
- There must be a complete match between what customer expects and what we are willing and able to provide, which may require negotiation of service standards for mutual beneficial.
- Research and competitive benchmarking can help to establish internal service standards that mirror the standards that our external customers place upon us, key areas were standards are essential are:
Order cycle time, Stock availability, order-size constraints, Ordering convenience, Frequency of delivery, Delivery reliability, Documentation quality, Claims procedure, Order Completeness, Technical Support, Order status information.
- 100 per cent order fill rates are very difficult to achieve, for example an order with 10 product having a 95% level of availability has a probability of (.95)**10= 0.599 of be filled completely
- Companies should monitor standards, which could be accomplished by using the pre-transaction, transaction, post-transaction framework.
- It is possible to create a composite service index to communicate service performance.
- The output of all logistic activity is customer service
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