Walden - PROC 5850

Class 2

Logistics Done Well is all but Invisible!In other words, no one really gets concerned about logistics and supply chain issues until

something goes wrong!

Walden - PROC 5850

Ways to Get Cost Savings in Supply Chains

• Reduced inventory levels

• reduced stockouts - less expediting

• cross docking -

• reduced links in chain

• reduced number of inventories

• reduction in order processing

• Shipping consolidation

• better workforce planning

• less travel time

• less injuries

• increased production from measuring workers

• name the aisle

• returnable, reusable totes

• CPFR

CHAPTER 3

Customer Service

Walden - PROC 5850

Walden’s Definition of Customer Service

Give the customer what they want in such a mannerthat they want to come back - what ever it takes

• Dell – were getting better but have moved backwards in last couple of years – way back in over the past year• Amazon - recommendations• Starbucks – remember name and favorite drink

Walden - PROC 5850

Cost trade-offs in Marketing and Logistics

Product

Order processing and information

costs

Inventory carrying costs

Place/customer service levels

Order processing and information

costsPrice

Lot quantity costs Warehousing costs

Transportation costs

LO

GIS

TI C

SM

AR

KE

TIN

G

Walden - PROC 5850

Elements of Customer Service

Transaction elements

• Written statement of policy

• Customer receipt of policy statement

• Organization structure

• System flexibility

• Management services

• Installation, warranty, alterations, repairs, parts

• Product tracing

• Customer claims, complaints, returns

• Temporary replacement of products

• Stockout levels

• Order information

• Elements of order cycle

• Expedited shipments

• Transshipment

• System accuracy

• Order convenience

• Product substitution

Posttransaction elements

Pretransactionelements

Walden - PROC 5850

Logistics/Supply Chain Customer

Service“Logistics is no longer the ‘last frontier of cost reduction,’ it’s the new frontier of demand generation.”

Walden - PROC 5850

Customer Service Defined Customer service is generally presumed to be a means by which

companies attempt to differentiate their product, keep customersloyal, increase sales, and improve profits.

Its elements are: Price Product quality Service

It is an integral part of the marketing mix of: Price Product Promotion Physical Distribution

Relative importance of service elements Physical distribution variables dominate price, product, and

promotional considerations as customer service considerations Product availability and order cycle time are dominant physical distribution variables

Customer service here

Walden - PROC 5850

Customer Service

• Customer service is a collection of activities performed in a way that keeps customers happy and creates in the customer’s mind the perception of an organization that is easy to do business with.

• Customer service is much more difficult for competitors to imitate than price cuts or other competitive strategies.

Walden - PROC 5850

Customer Service

• Value-added activities provided by customer service– Placing bar code labels on cartons

– Arranging a carton, pallet, or truck in the sequence the customer would like to unload it

– Shrink-wrapping

– Inserting documents into cartons

– Blending products

– Adding price tags

– Adding graphics for export goods

– Assembling kitsAlso known as postponement when done at the distribution center

Importance of Logistics Customer Service

Service affects sales - From a GTE/Sylvania study:

...distribution, when it provides the proper levels of service to meet customer needs, can lead directly to increased sales, increased market share, and ultimately to increased profit contribution and growth.

- Service differences have been shown to

account for 5 to 6% variation in supplier sales

Service affects customer patronage - Service plays a critical role in maintaining the

customer base:

On the average it is approximately 6 times more expensive to develop a new customer than it is to keep a current one.

Walden - PROC 5850

Common Customer Service Complaints

12% Damaged goods

31% Product or quality

mistakes

7% Other

6% Frequently cut

items

44% Late delivery

Walden - PROC 5850

Penalties for Customer Service Failures

CR (2004) Prentice Hall, Inc.

29% Reduced the

volume of business

2% Refused to

support promotion

16% Discontinued

items

26% Called in

salesman or manager

9% Refused to

purchase new items

18% Stopped all purchases

with supplier

Walden - PROC 5850

Most Important Customer Service Elements

•On-time delivery•Order fill rate•Product condition•Accurate documentation•Out of stock rates

- # of items - which items- how long

Walden - PROC 5850

Order cycle time contains the basic elements of customer servicewhere logistics customer service is defined as:

the time elapsed between when a customer order, purchase order, orservice request is placed by a customer and when it is received by thatcustomer.

Order cycle elements- Transport time- Order transmittal time- Order processing and assembly time- Production time- Stock availability

Constraints on order cycle time- Order processing priorities- Order condition standards (e.g., damage and filling accuracy)- Order constraints (e.g., size minimum and placement schedule)

Order Cycle Time

CR (2004) Prentice Hall, Inc.

Walden - PROC 5850

Order Management

• Order management is the activities that take place in the period between the time a firm receives an order and the time a warehouse is notified to ship the goods to fill that order.– Order planning-connected to sales forecasting

– Order transmittal

– Order processing

– Order picking and assembly

– Order delivery

Walden - PROC 5850

Order Management

• Order cycle defined by the seller: time from when an order is received to when the goods arrive at the customer’s dock.

• Order cycle defined by the buyer: time from when an order is placed to when the goods are received. Also called replenishment cycle– Getting shorter– More precise delivery times– Customer can track orders– Quality is important and is benchmarked

Walden - PROC 5850

Order Management

• Order planning– Needs an efficient order handling system to prevent

bunching• Methods to reduce bunching

– Use of field salespeople

– Use of phone salespeople

– Price discounts to customers placing regular orders

Walden - PROC 5850

Order Management

• Order transmittal is the series of events that occur between the time a customer places or sends an order and the time the seller receives the order.– Methods of order transmittal

• Phone• FAX• Mail• Scanning bar codes-electronic submission• POS registers• Internet

Walden - PROC 5850

Order Management

• Order processing includes– Checking for completeness and accuracy– A customer credit check– Order entry into the computer system– Marketing department credits salesperson– Accounting department records transaction– Inventory department locates nearest warehouse to

customer and advises them to pick the order– Transportation department arranges for shipment

Walden - PROC 5850

Order Management

• Order processing– If there is a stockout

• Notify the customer as soon as possible of stockout• Notify when shipment will occur• Give the customer the option of accepting in stock similar

products

– Export orders• Need a letter of credit • international freight forwarders prepare documents and

arrange shipment

Walden - PROC 5850

Order Management

• Order picking and assembly includes– Notifying the warehouse to assemble a given order– Providing an order picking list, indicating items and

order of pick to a warehouse employee– Checking picked orders for accuracy– Stockout information sent to order handling

department so that documents can be adjusted– Packing list enclosed with order including employee

initials of person who packed order

Walden - PROC 5850

Order Management

• Order delivery is the time from when a carrier picks up the shipment until it is delivered to the customer’s receiving dock.– Load planning is the arrangement of goods within

the trailer or container.– Carriers establish their own service standards.– Some customers pick up their orders.

Walden - PROC 5850

Order Management

• Importance of the order cycle– Short cycle time used as a marketing and sales tool– Monitoring the order cycle can increase firm

efficiency– Efficient Consumer Response (ECR)/Quick

Response (QR)• Used in grocery industry and by mass merchandisers• POS data used to trigger order• Keyed to more orderly, regular flow of product, smaller

inventory

Walden - PROC 5850

Customer Service

• Establishing Objectives– Specific– Measurable– Achievable– Consistent with broader firm goals– Must consider competitor’s objectives– Provide guidance to operating personnel

Walden - PROC 5850

Customer Service

• Returned Products– New flow of products are set up– New infrastructure is required– Goods and materials are returned for various reasons– Grocery industry uses reclamation centers for returns– Home Depot now reserves right to limit returns– How returns are handled part of customer service– Thoughts?

Walden - PROC 5850

Role of Logistics in Establishing Customer Service Levels

• Advisor to marketing

• Establishing a customer service program– Ask the customer what is important to them.

– Investigate the service offered by competitors.

– Consider the cost of alternative service programs.

– Analyze the information and write the objectives.

– Customer feedback

• Using the Internet to improve customer service

Walden - PROC 5850

Meeting Customer Demands

• Control the process– Firms demanding higher levels of customer

service• With reliable service, the firm can maintain lower

inventory levels

• Resellers monitor vendor quality looking for those with unacceptable quality levels

• Process is often dehumanized; service can make it more personal

Walden - PROC 5850

Service Observations

The dominant customer service elements are logistical in nature

Late delivery is the most common service complaint and speed of delivery is the most important service element

The penalty for service failure is primarily reduced patronage, i.e., lost sales

The logistics customer service effect on sales is difficult to determine

Walden - PROC 5850

Service Contingencies

System Breakdown Actions

•Insure the risk•Plan for alternate supply sources•Arrange alternate transportation•Shift demand•Build quick response to demand shifts•Set inventories for disruptions

Product Recall Actions•Establish a task force committee •Trace the product•Design a reverse logistics channel

Walden - PROC 5850

Methods of Establishing a Customer Service Strategy

• Determining channel service levels based on knowledge of consumer reactions to stockouts

• Analyzing cost/revenue trade-offs

• Using ABC analysis of customer service

• Conducting a customer service audit

Walden - PROC 5850

Model of Consumer Reaction to a Repeated Stockout

Source: Clyde K. Walter, “An Empirical Analysis of Two Stockout Models,” unpublished Ph. D. Dissertation, Ohio State University, 1971.

Customer

3Lower

4Other size

2Same

1Higher

Anotherstore

6Ask here

again

5Specialorder

Switch stores

?

Substitute?

Switch brand

?

Substitute?

Switch price

?

No

No

Yes

Yes

Yes

Yes

No

No

Walden - PROC 5850

Internal Audit External Audit

Evaluate Customer Perceptions

Differentiate Channel Levels & Market Segments

Identify Opportunities

Determine Marketing Services Mix & Levels

Stages of the Customer Service Audit

Walden - PROC 5850

Internal Audit Questions

• How is customer service currently measured?

• What are the units of measurement?

• What are the performance standards?

• What is the current level of attainment?

Walden - PROC 5850

Internal Audit Questions cont.

• How are these measures derived from corporate information flows and the order processing system?

• What is the internal customer service reporting system?

• How do the functional areas of the business perceive customer service?

• What is the relation between these functional areas in terms of communication and control?

Walden - PROC 5850

Measuring and Controlling Customer Service Performance

• Establish quantitative standards of performance for each service element.

• Measure actual performance for each service element.

• Analyze variance between actual service provided and standard.

• Take corrective action as needed to bring actual performance into line.

Walden - PROC 5850

Customer Service Standards

• Reflect the customer’s point of view.

• Provide an operational and objective measure of service performance.

• Provide management with cues for corrective action.

Walden - PROC 5850

Select performance measures carefully; people perform to look good on them

Walden - PROC 5850

Thoughts on Chapter 3

• What sets your supply chain apart from others? Who knows it?

• Sam Walton

• How many times will a customer tolerate a stockout?

• What is the cost of a stockout vs. the cost of customer service?

Walden - PROC 5850

More Thoughts

• How well do you take care of the customer after the sale? Post transaction

• What are the impacts of safety/buffer stocks on customer service?

• P 104 - Book says: in most stockouts consumers will not switch stores - depends on how bad you want the item and how many times products are not available -

Walden - PROC 5850

Thoughts part 3

• Vendor Managed Inventory

• Metrics

• ABC Classifications: customers, products, inventory - cost, velocity, volume

• Keys to success on page 125 - WIIFM?

• Perfect order fulfillment - on time, quantity, condition, right item

• p 146 - JIT, ECR, QR not really systems

CHAPTER 4

Order Processing and Information Systems

Walden - PROC 5850

Order Processing and Information

SystemsThe difference between mediocre and excellent logistics is often the firm’s information technology capabilities.

Dale S. RogersRichard L. Dawe

Patrick Guerra

Walden - PROC 5850

Typical Elements of Order Processing

Sales order

Order Preparation•Requesting products or services

Order Transmittal•Transferring order information

Order Entry•Stock checking•Accuracy checking•Credit checking•Back ordering/ order canceling

•Transcription•Billing

Order Filling•Product retrieval, production, or purchase•Packing for shipment•Scheduling for delivery•Shipping document preparation

Order Status Reporting•Tracing and tracking•Communicating with customer on order status

Sales order

Order Preparation•Requesting products or services

Order Transmittal•Transferring order information

Order Entry•Stock checking•Accuracy checking•Credit checking•Back ordering/ order canceling

•Transcription•Billing

Order Filling•Product retrieval, production, or purchase•Packing for shipment•Scheduling for delivery•Shipping document preparation

Order Status Reporting•Tracing and tracking•Communicating with customer on order status

Walden - PROC 5850

Order Filling

Processing rules affect order filling speed•First-received, first-processed•Shortest processing time first•Specified priority number•Smaller, less complicated orders first•Earliest promised delivery date•Orders having the least time before promised delivery date

Walden - PROC 5850

Factors AffectingOrder Processing Time

•Processing priorities•Parallel versus sequential processing•Order-filling accuracy•Order batching•Lot sizing•Shipment consolidation

Walden - PROC 5850

The Logistics Information System

INTERNAL

Finance/Accounting

Marketing

Logistics

Manufacturing

Purchasing

EXTERNAL

Customers

Vendors

Carriers

Supply chain partners

LOGISTICS INFORMATION

SYSTEM

OMS

•Stock availability

•Credit checking

•Invoicing

•Product allocation to customers

•Fulfillment location

WMS

•Stock level management

•Order picking

•Picker routing

•Picker assignments and work loading

•Product availability estimating

TMS

•Shipment consolidation

•Vehicle routing

•Mode selection

•Claims

•Tracking

•Bill payment

•Freight bill auditing

INTERNAL

Finance/Accounting

Marketing

Logistics

Manufacturing

Purchasing

EXTERNAL

Customers

Vendors

Carriers

Supply chain partners

LOGISTICS INFORMATION

SYSTEM

OMS

•Stock availability

•Credit checking

•Invoicing

•Product allocation to customers

•Fulfillment location

WMS

•Stock level management

•Order picking

•Picker routing

•Picker assignments and work loading

•Product availability estimating

TMS

•Shipment consolidation

•Vehicle routing

•Mode selection

•Claims

•Tracking

•Bill payment

•Freight bill auditing

Walden - PROC 5850

Order Management System Module

Elements•Stock availability•Credit checking•Invoicing•Product allocation to customers•Fulfillment location

Walden - PROC 5850

Warehouse Management System Module

Elements•Receiving•Putaway•Inventory management•Order processing and retrieving•Shipment preparation

Walden - PROC 5850

Transportation Management System Module

Elements•Mode selection•Freight consolidation•Routing and scheduling shipments•Claims processing•Shipment tracking•Bill payment and auditing

Walden - PROC 5850

Total Order Cycle: A Customer's Perspective

Key: 1. Order preparation and transmittal 1 days2. Order received and entered into system 1 day3. Order processed 1 day4. Order picking/production and packing 1 days5. Transit time 3 days6. Warehouse receiving and placing into storage 1 day

Total order cycle time 8 days

1. Customerplaces order

6. Orderdelivered to

customer

5. Ordershipped tocustomer

2. Orderreceived

3. Orderprocessed

4. Order picked

and packed

Walden - PROC 5850

Traditional Supply Chain Flows

Demand flow

Product flow

Supplier RetailerDistributorManufacturer

Walden - PROC 5850

Information-based Supply Chain Flows

Timely, accurate information flow

Supplier Manufacturer Distributor Retailer

Smooth, continual product flow matched to demand

Walden - PROC 5850

Definition of EDI

Interorganizational exchange of business documentation in structured, machine-processable form.

Unstructured Structured

Fax EDIE-Mail Order entryPerson-to-person Computer-to-computer

Walden - PROC 5850

EDI Versus Traditional Methods

Source: Margaret A. Emmelhainz, Electronic Data Interchange: A Total Management Guide (New York: Van Nostrand Reinhold, 1990), p. 5.

BUYER'S PURCHASINGAPPLICATION

SELLER'S ORDERENTRY APPLICATION

PURCHASING

PURCHASING

POST OFFICEBUYER'S

COMPUTER

EDI FLOW

PO POSELLER'S

COMPUTER

ORDERENTRY

Walden - PROC 5850

Typical EDI Configurations

SOURCE: GE Information Service, as reported in Lisa H. Harrington, "The ABC's of EDI," Traffic Management 29, no. 8 (August 1990), p. 51.

Manufacturer

Manufacturer

Manufacturer

Manufacturer

Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

Third-party

vendor

Proprietary system

Value-added network (VAN)

Walden - PROC 5850

Benefits of Effective and Efficient Use of Information

• Replacement of inventory with information

• Reduced variability in the supply chain

• Better coordination of manufacturing, marketing, and distribution

• Streamlined order processing and reduced lead-times

Walden - PROC 5850

Figure 3-1: General Types of Information Management

Systems

Walden - PROC 5850

General Types of Information Management Systems

• Enterprise resource planning (ERP)– All company functional areas use a common database to:

• Standardize manufacturing processes• Integrate financial data• Standardize human resource data

– Shortcomings• Costs of installation – may be coming down• Primarily designed for large companies – SAP now with mid-sized

package• Time-consuming installation process• Standardization

Walden - PROC 5850

Electronic Commerce and Logistics

• Internet impacts include:

– Logistics functions• Transportation

• Order management

– Channel design

Walden - PROC 5850

Electronic Commerce and Logistics

• Internet impacts (continued)

– Intermediaries • 4 categories of logistics exchanges

– Enhancing procurement services– Matching shippers and carriers– Executing relevant transactions– Transacting with partners

• Application service providers provide access over the Internet to applications and related services that would otherwise have to be located in enterprise computers.

Walden - PROC 5850

Electronic Commerce and Logistics

• E-Fulfillment is the coordinated inbound and outbound logistics functions that facilitate the management and delivery of customer orders placed online.

Walden - PROC 5850

Electronic Commerce and Logistics

• E-fulfillment– Many logistical functions

and activities occur– More, smaller orders– Order management and

information management systems must handle large volumes of orders

– Smaller orders dictate open-case picking

• Traditional Fulfillment– Many logistical functions

and activities occur– Fewer, larger orders– Order management

system is set up to handle orders from resellers, not consumers

– Full-case picking– Warehouse set up to

handle large volume orders

Walden - PROC 5850

Electronic Commerce and Logistics

• E-fulfillment– Products slotted to

facilitate picking smaller orders

– Totes and push carts used

– Packaging is small cartons, envelopes, bags suited to holding small quantities

• Traditional Fulfillment– Warehouse set up to

handle large volume orders

– Variety of materials handling equipment used

– Packaging generally cartons that hold large volume orders

Walden - PROC 5850

Electronic Commerce and Logistics

• E-fulfillment– Transportation companies

used with extensive delivery networks; experience in parcel shipments

– Outbound shipments usually picked up by vans

– Return rates much higher and from ultimate consumers

• Traditional Fulfillment– Transportation methods

and companies vary by request of buyer

– Outbound shipments may be picked up by tractor trailers or railcars

– Return rates lower and from resellers

Walden - PROC 5850

RFID

Walden - PROC 5850

Example of 80 card column punch cardExample of 80 card column punch cardThese were used in logistics operations fromThese were used in logistics operations fromthe 1960s until the mid 1980s the 1960s until the mid 1980s

Walden - PROC 5850

Walden - PROC 5850

RFID Quick Review

• Gillette Program for Mach 3 – loss prevention - 2 tests

• Wal*Mart Directive

• October 2003 – Department of Defense Directive for top Suppliers

Walden - PROC 5850

Historical Background of Army Use of RFID

• 1994/95: started a proof of principle test in Europe – every truck and shipment equipped with an RFID tag

• 1997/98: all pallets coming out of the Susquehanna, PA depot equipped with RFID tag

• 1997: All vehicles coming to the National Training Center at Fort Irwin, CA were equipped with RF tags for the Advanced Warfighter Experiment

Walden - PROC 5850

Uses

• Asset Visibility

• Location of Critical assets in the yard

• Planning for workload and workforce

Walden - PROC 5850

TAGS

• ACTIVE – always on and can be read from any interrogator – very expensive

• PASSIVE – battery activated by the interrogator and must be within close proximity to the interrogator – relatively inexpensive – goal is to get the price down to $.05 per tag – real cost is in the infrastructure to implement

Walden - PROC 5850

Active RFID Tag on pallet in Kuwait Theater Distribution Center

Walden - PROC 5850

Walden - PROC 5850

EPCglobal or ISO Class 1 & Class 0 Intellectual Property WTO Frequencies Item identification v. anti-counterfeiting

Issues on RFIDIssues on RFID

Walden - PROC 5850

Where did EPC Where did EPC come from?come from?

Walden - PROC 5850

EPC Tag ClassificationEPC Tag Classification

Class 3 capabilities plus active communication and the ability to communicate with other tagsClass 4

Class 2 capabilities plus a power source to provide increased range and/or advanced functionality, e.g., sensorsClass 3

Class 1 with extended TID, extended user memory, authenticated access control, ++Class 2

EPC, TID, “kill function”, optional password-protected access control, and optional user memoryClass 1

Read only, (i.e., the EPC number is encoded onto the tag during manufacture and can be read by a reader, not written to)Class 0

Tag Class CapabilitiesEPC Tag Class

TID = Transponder Identification

Walden - PROC 5850

Wal-Mart & DoDWal-Mart & DoD

Walden - PROC 5850

Wal-Mart Wal-Mart Information SystemsInformation Systems

Wal-Mart’s information systems are largely integrated Wal-Mart’s legacy data structures are GTINs (U.P.C./EAN), GLNs

(Location Codes), GRAI/GIAIs (Asset IDs), and SSCCs (Transportation Control Codes)

Such legacy data structures serve as the “primary keys” to Wal-Mart’s systems

These are the data structures supported by EPCglobal (particularly, Class 0 and Class I v1, and Class I G2)

Wal-Mart will not require a major change to their information systems to implement EPC

The latest – Wal-Mart back peddling

Walden - PROC 5850

DOD Information SystemsDOD Information Systems

The Department of Defense has 1,500 logistics systems These systems are fed by legacy data structures, notably,

NATO/National Stock Numbers, CAGE/NCAGE codes, DoDAACs, and TCNs

Such legacy data structures serve as the “primary keys” to DOD systems

Walden - PROC 5850

How far? How fast? How many? How much? Geometry of tagging space Interferers (physical and radio)

Which TechnologyWhich Technology

Walden - PROC 5850

Summary for Chapters 3 and 4

• RFID – important but has issues• Bar Codes still in use for a while• What are the differences between e-fulfillment and

traditional fulfillment?• Information systems – multiple systems – drive the need

for ERP• Metrics for all logistics must be from the perspective of the

customer!• Therefore, systems must have customer in mind• Have to be able to define who the customer is and what the

customer wants – customer service is the differentiator • Hard to emulate customer service

Walden - PROC 5850

Next Class

• Chapters 5-6