Chapter 3Demand Management and Customer Service

Learning ObjectivesUnderstand the critical importance of outbound-to-customer logistics systems.Appreciate the growing need for effective demand management.Know the types of forecasts that may be needed, and understand how collaboration among trading partners will help the overall forecasting and demand management process.

Learning ObjectivesIdentify the key steps in the order fulfillment process, and understand how effective order management can create value for a firm and its customers.Realize the meaning of customer service, and understand its importance to logistics and supply chain management.

Learning ObjectivesUnderstand the difference between logistics and marketing channels, and understand that goods may reach their intended customer via a number of alternative channels of distribution.

Logistics Profile: DreyersInstituted scan-based trading.Manufacturer (Dreyers) is paid based on what is actually scanned at the checkout counter.Customer takeaway drives manufacturing and delivery.Freed resources for use elsewhere.Win-win partnership arrangement.

Figure 1-3(M. Porters) Generic Value Chain

Outbound-to-Customer Logistics SystemsTo increase levels of customer service, significant emphasis is placed on outbound-to-customer logistics systems.These systems refer to the set of processes, systems, and capabilities that enhance the firms ability to serve its customers.This topic also is of historical interest in the study of physical distribution, logistics, and supply chain management.

Inbound-to-Operations Logistics SystemsThese systems refer to the set of processes that precede and facilitate value-adding activities such as manufacturing, assembly, and so on. This topic also is of historical interest in the study of the supply chain and includes materials management and physical supply.The study of inbound-to-operations logistics systems will be presented in the next chapter.

Demand ManagementDefined as focused efforts to estimate and manage customers demand, with the objective of using this information to shape operating decisions.3Recent practice has been just the opposite, with the manufacturer determining the what, where, when, and how many of the sale.

Demand ManagementIt is this disconnect between manufacturing and the demand at the point of consumption that attracts attention to demand management.Any attention paid to demand management will likely result in benefits flowing through the supply chain.

Demand Management Objectives: Ways to unify channel members to satisfy customersGathering and analyzing knowledge about consumers, their problems, and their unmet needs.Identifying partners to perform the functions needed in the demand chain.Moving the functions that need to be done to the channel member that can perform them most effectively and efficiently.

Demand Management ObjectivesSharing with other supply chain members knowledge about 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 desired format.

Demand Management:Related IssuesLack of communication between departments results in little or no coordinated response to demand information.Too much emphasis is often placed on forecasts of demand with little attention paid to collaborative efforts and strategic and operational plans that need to be developed from the forecasts.Demand information is often used more for tactical and operations purposes than for strategic purposes.

Traditional Forecasting:Demand ForecastingA major component of demand management is forecasting the amount of product that will be purchased by consumers or end users.In the integrated supply chain all other demand will be derived from the primary demand.A key objective is to anticipate and respond to primary demand as it occurs in the marketplace.

Figure 3-1 Supply-Demand Misalignment

Traditional ForecastingAn example of integrating forecasting with production is illustrated by Figure 3-2.Long-term (more than three years), midrange (one to three years), and short-term forecasting are each important contributors to the forecasting process.

Figure 3-2 Integration of Sales Forecasting and Production

Collaborative Planning, Forecasting, and ReplenishmentPrevious industry initiatives (EDI, VMI, CRP, ECR) fail to deliver the expected benefits of SC integration.CPFR is recognized as a breakthrough business model for planning, forecasting, and replenishment.Uses available Internet-based technologies to collaborate from operational planning through execution.Developed by Wal-Mart and Warner-Lambert in 1995.

Collaborative Planning, Forecasting, and ReplenishmentThe CPFR model is illustrated in Figure 3-3.Emphasizes a sharing of consumer purchasing data among and between supply chain partners.Creates a direct link between the consumer and the supply chain.

Figure 3-3 CPFR Business Model

Collaborative Planning, Forecasting, and ReplenishmentThe plan and the forecast are entered by suppliers and buyers into an Internet accessible system.Within established parameters, any of the participating partners is empowered to change the forecast.Only a few CPFR initiatives have been made public, but results are impressive.

Supply Chain Technology: Midwest PharmaceuticalsUsing a statistically advanced demand-management system the company discovered that in one of its five 3,000 product families, 72% of the products were in the mature phase and 14% were in decline.Management modified and improved its product investment strategy.In essence, demand management helped make the company more profitable and effective.

Order Fulfillment and Order ManagementCollaborative planning improves the quality of the demand signal for the entire supply chain through a constant exchange of information from one end to the other.Goes beyond the traditional practice.Examine the three critical elements of collaborative planning in Figure 3-4.

Figure 3-4 Collaborative Planning

Order Fulfillment and Order ManagementOrder fulfillment activities differ as a supply chain matures through transactional to interactive to interdependent levels.Examine the four key dimensions of order fulfillment in Figure 3-5.

Figure 3-5 Stages of Order Fulfillment

Order Fulfillment and Order ManagementOrder-management systems represent the principal means by which buyers and sellers communicate information relating to individual product orders and is key to operational efficiency and customer satisfaction.Examine the characteristics of order-management functions in Figure 3-6.

Figure 3-6 Order-Management Functions

Order Fulfillment and Order ManagementThe order cycle traditionally includes only those activities that occur from the time an order is placed to the time it is received by the customer.Examine the four principal activities of the order cycle in Figure 3-7.

Figure 3-7 Major Components of the Order Cycle

Order Fulfillment and Order ManagementOrder placement methods seem to be changing to accommodate new technologies. Examine order placement trends in Figure 3-8.

Figure 3-8 Order-Placement Trends

Order Fulfillment and Order Management: Other IssuesMajor issue to customers: Length and variability of the order cycleExamine the order cycle time analysis in Figure 3-9 and order cycle length and variability in Figure 3-10.

Figure 3-9 Example of Order Cycle Time Analysis

Figure 3-10: Trends in Order Cycle Length and Variability

Order Fulfillment and Order Management: E-CommerceSuccess is just as much about designing and implementing the basic principles of logistics and supply chain management as it is about marketing the latest technologies.According to Richer and Kalatora10, some of the critical decisions are related to the evaluation of multiple fulfillment planning strategies.Then what are the reasonable alternative fulfillment strategies?

Five Alternative Fulfillment Strategies for E-CommerceDistributed delivery centersPartner fulfillment operationsDedicated Fulfillment centersThird-party fulfillment centersBuild to order

Customer Service: The Logistics/Marketing InterfaceCustomer service is often the key link between logistics and marketing. Examine the traditional logistics- marketing interface in Figure 3-11.

Figure 3-11 The Traditional Logistics/Marketing Interface

Customer Service: The Logistics/Marketing InterfaceDefining customer service: Difficult taskIn terms of levels of productIn terms of types of customer support/serviceIn terms of levels of involvementIn terms of complexity of customer service

Customer Service: A More Concrete ViewElements of Customer ServiceTime (Responsiveness)DependabilityCycle timeSafe deliveryCorrect ordersCommunicationsConvenience /flexibility

Table 3-2 Customer Service Elements for the Food Industry

Figure 3-12 Example of the Frequency Distribution of Lead Time

Customer Service:Performance MeasuresTraditional% availability in base unitsSpeed and consistencyResponse time to special requestsSpeed, accuracy, and message detail of responseResponse and recovery time requirementsResponse time, quality of response

NewOrders received on timeOrders received completeOrders received damage freeOrders filled accuratelyOrders billed accurately

Customer Service: Implementation of StandardsSet standards at realistic levels.Quality levels set below 100% can be problematic.Consult customers on policies and standards.Communicate standards to customers.Measure, monitor, and control customer service standards.

Customer Service: OverviewCustomerServiceMeasuresOther Corporate Strategies e.g., price, qualityCustomerSatisfactionOther Corporate Characteristics e.g., input price, efficiency

Costs-----------Revenues-----------CorporatePerformance

Customer Service: OverviewIf the basics of customer service are not in place, nothing else matters.Customers may define service differently.All customer accounts are not the same.Relationships are not one dimensional.Partnerships and added value can lock up customers.

StockoutsFour possible outcomes from a stockoutCustomers waitBack ordersLost salesLost customersFor proper inventory and order management, it is extremely important to recognize the expected cost of stockouts.

Expected Costs of Stockouts

Channels of DistributionOne or more companies or individuals who participate in the flow of goods and services from the producer to the final user or consumer.Wide variety of firms comprise these channels.Examine Figures 3-14 & 3-15.

Figure 3-14 Distribution Channel Separation

Figure 3-15Examples of Channels of Distribution for the Food Products Manufacturing Industry

Growth and Importance of Channels of DistributionRetail channels showing dramatic change / growth: ECR, VMI, EDLP, DSD, etc.Mass merchandisers such as Wal-Mart, Kmart, Sears, and Target squeezing smaller retailers .Nature of logistics changing to accommodate customized systems.Successful retailers base efficiency on logistics systems.

Chapter 3: Summary and Review QuestionsStudents should review their knowledge of the chapter by checking out the Summary and Study Questions for Chapter 3.

This is the last slide for Chapter 3

End of Chapter 3 SlidesDemand Management and Customer Service

Dreyers scan-based trading approach can be considered as a consignment sales channel. The biggest advantage is that Dreyers now has more detailed knowledge of product demand at each location, much higher customer service level (100% availability), and much more efficient transportation operations due to the removal of delivery time windows. Sales went up by 10-15%. Thus this VMI-consignment method can be considered as one effective approach of demand management.For instance, historically a manufacturer decides to make a product at a certain quantity based on its capacity, capabilities and preliminary market knowledge. As in any new product introduction, if they receive too many orders from the distributors, they allocate the demands based on some arbitrary factors; if they receive too few orders, they largely discount the product to push the product through the channel. In both cases, there are tremendous money making opportunities that are lost.Essence of CPFR: Not only collaborate to develop a COMMON forecast, but also design action plans and commit to carry them through. Other industry initiatives such as ECR, VMI, QR tend to be one-side initiative or action, and tend to benefit one party more than the other, and thus tend to generate less benefits.

Communications: transfer of customer order information to the order filling area, and active contact with customers.Convenience: How flexible can you address customers varying requirements? Ship it by rail, truck, or air? Some with pallets, others not? Some daytime delivery only, others night time only?The new performance measures mainly come from the customers perspective.Logistics channel more focused on the physical and product flows. Marketing channel more focused on the management of the transactions (customer orders, billing, accounts receivable, etc.).