Customer

Accommodation

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin

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Overview of customer accommodation

• Customer-focused marketing• Customer service• Customer satisfaction• Customer success• Developing customer

accommodation strategy

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Who is the customer?

• From perspective of the total supply chain– End user of product in consumer market– Company 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 manager– Any 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 concept

• Customer needs and requirements are more basic than products and services

• Different customers have different needs and requirements

• Products 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 Marketing

Transactional 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 one

• Micromarketing or one-to-one marketing recognizes that each individual customer may indeed have unique requirements– For 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 services

• Discrepancy 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 supply– Customers seek small quantities and wide assortment– Firms 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 accommodation

• Supply 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 accommodation– Customer service– Customer satisfaction– Customer success

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Basic customer service provides customers

• With the right amount• Of the right product• At the right time• And the right place• In the right condition• At the right price• With the right information

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Basic elements of customer service

• Availability– Fill rates– Stockout frequency– Orders shipped complete

• Operational Performance– Speed– Consistency – Flexibility– Malfunction recovery

• Service Reliability– Damage free– Error-free invoices– Shipment matches order– Shipped to correct location– Etc.

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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 order

• Speed 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 info

• Service reliability involves a combination of logistics attributes beyond simply availability and operational performance. For example:– Damage free measures how many shipments arrive without

damaged products– Error-free invoices measures what percentage of invoices

contain no errors– Shipment 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 levels

• The perfect order is an order that is– Delivered complete– Delivered on time– Delivered at the right location– Delivered in perfect condition– Delivered with complete and accurate documentation

• This 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 level

• Availability level = Medium• Operational performance = High• Service reliability = Above average

• Availability level = Low• Operational performance = Medium• Service 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 factors– Competitor 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 price• Zero-defect approach is not taken across the

board for all customers• Establish 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 3.2

• Reliability• Responsiveness• Access• Communication• Credibility

• Security• Courtesy• Competency• Tangibles• Knowing 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 customers

• Gap 1: Knowledge– Reflects management’s lack of

knowledge or understanding of customers

• Gap 2: Standards– Exists when internal performance

standards do not adequately reflect customer expectations

• Gap 3: Performance– The difference between standard

and actual performance

• Gap 4: Communications– Overcommitment or promising

higher levels of performance than can actually be provided

• Gap 5: Perception– Customers sometimes perceive

performance to be higher or lower than actually achieved

• Gap 6: Satisfaction/Quality– When one or more gap exists

customer perception is that performance does not meet expectations

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Increasing customer expectations

• Performance 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 expect– For 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 sufficient

• Satisfied customers may not be happy with the supplier’s performance– Customer 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

3 levels of customer focus

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Achieving customer success requires knowledge of individual customer requirements

• Not all customers have the same requirements

• Know your customers’ processes• Determine 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 success

• Value-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 stores– Each store requires different quantities of specific product to

maintain in-stock performance with minimum inventory

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Developing a customer accommodation strategy

• Basic 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 years

• Customer relationship management (CRM) is a process for improving the overall performance of a business by better understanding and anticipating the wants and needs of customers– In practice companies and vendors use the term CRM to mean

different things• One 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