Chapter 9 Customer Service PDF

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CHAPTER 9

CUSTOMER SERVICE

DEFINING CUSTOMER SERVICE Customer service has the potential to provide the distinctive difference between competing firms’ offerings. This differentiation potential is important in light of the declining power of the brand. Satisfactory customer service is a direct output of the logistics function by ensuring the availability of the market offering to the customer in the right place and at the right time. The place element links it to the marketing mix as shown in Figure 9.1 Figure 9.1

Cost trade-offs in marketing and logistics

Who is the customer? The party that patronises an organisation by purchasing its products or services. Any person at the receiving end of a delivery that can exist internally or externally to the organisation. Both internal and external customers are to be provided with replicated timely and accurate delivery.

Customer service defined The process that takes place between buyer, seller and third party, that results in value added to the product or service exchanged, in a cost effective way. A chain of sales-satisfying activities that begins with order entry and ends with delivery, that may or may not be accompanied by maintenance or technical support. Can be defined in three principal ways or as three levels of involvement and awareness.

ELEMENTS AND CONCERNS OF CUSTOMER SERVICE Customer service can be understood in a three-stage framework: 

Pre-transaction

Pre-transaction elements are mostly policy related and essentially serve to create the enabling climate for satisfactory customer service to be rendered. These elements often signal the commitment of the management of the organisation to ensure that the customer is served very well. While the activities tied to the elements in the pre-transaction state may not necessarily belong in the realm of logistics, they nevertheless help to shape the customer’s perception of the organisation and impact upon the customer’s decision to continue with the prospective transaction. 

Transaction

Transaction elements are reference to those customer service variable that directly result in the physical distribution of the product culminating in deliveries being made to the customer. Such elements help to demonstrate directly in action rather than word the organisation’s commitment to meet customers’ expectations within the important range of order and delivery of desired products. 

Post-transaction

Post-transaction elements come into play only after transactions resulting in the change of ownership have been concluded. Even though these elements only take place in the period after a sale, they have to be properly planned for at the same time with pre-transaction and transaction elements. Post-transaction elements basically serve to provide support for the product while in use. The support aims to reduce cognitive dissonance and increase the organisation’s performance rating on the part of the customer.

Each level has elements as shown in Figure 9.2

ABC ANALYSIS In the nineteenth century, Villefredo Pareto, in a study of the distribution of wealth in Milan, found that 20% of the people controlled 80% of the wealth. This logic of the few having the greatest importance and many having little importance has been broadened to include many situations and is termed the Pareto Principle (Jacobs, Chase and Aquilano, 2009: 569). Any inventory system must specify when an order is to be placed for an item and how many units to order. Most inventory control situations involve so many items that it is not practical to model and give thorough treatment to each item. To get around this problem, the ABC classification scheme divides inventory items into three groupings. High rand volume (A), moderate rand volume (B), and low rand volume (C). Rand volume is a measure of importance; an item low in cost but high in volume can be more important than a high-cost item with low volume (Jacobs, et al, 2009: 569). *The ABC analysis is based upon the principle that there are usually a few critical items, and many items which are less critical. Inventory may be categorised by measures other than rand volume. It categorises on-hand inventory into three groups based on annual rand volume. It is an application of the Pareto Principle.

*Another term for the 80/20 rule is called the Pareto Principle. Example of the ABC analysis You are required to conduct an ABC product/sales analysis of the products of a large manufacturing company that sells audio equipment. Identify the products that constitute the A- high priority, B- medium priority, and C- low priority items. STEP 1 Based on the data given in the table below, calculate the annual revenue for each of the products items of this company. The annual revenue is calculated by multiplying each of the item’s unit usage by the unit price.

E.g. 4500 x R20 = R90 000 2 000 x R10 = R20 000

PRODUCT ITEM 1SE 2EF 3RE 4WE 5AE 6AF 7YA 8UE 9KA 10GA

UNIT USAGE

UNIT PRICE

4 500 2 000 14 000 100 10 000 2 000 300 250 50 250

R20 R10 R25 R150 R60 R25 R30 R70 R50 R16

ANNUAL REVENUE R90 000 R20 000 R350 000 R15 000 R600 000 R50 000 R9 000 R17 500 R2 500 R4 000

STEP 2 Prioritise the list by rearranging it from the product generating the most profit to the product generating the least profit. The products generating the most profit appear at the top of the list and the products generating the least profit will be at the bottom of the list.

PRODUCT ITEM 1SE 2EF 3RE 4WE 5AE 6AF 7YA 8UE 9KA 10GA STEP 3

UNIT USAGE

UNIT PRICE

4 500 2 000 14 000 100 10 000 2 000 300 250 50 250

R20 R10 R25 R150 R60 R25 R30 R70 R50 R16

ANNUAL REVENUE R90 000 R20 000 R350 000 R15 000 R600 000 R50 000 R9 000 R17 500 R2 500 R4 000

PRODUCT PRIORITY 3 5 2 7 1 4 8 6 10 9

Transfer all the products’ times and annual revenue information to the appropriate headings in the table below. The product item with the highest annual sales must be first on the list. The items with the lowest annual sales must be at the bottom of the list. After transferring the product items and the annual items sales data – add up the figures in the column. In this example it is R1 158 000. PRODUCT

ANNUAL ITEM

ITEM 5AE 3RE 1SE 6AF 2EF 8UE 4WE 7YA 10GA 9KA TOTAL

SALES R600 000 R350 000 R90 000 R50 000 R20 000 R17 500 R15 000 R9 000 R4 000 R2 500 R1 158 000 STEP 4 The term “cumulative” means adding or summing. If you have one apple and you add another apple, then you have two apples. In this calculation, we start by adding the annual sales of the first product to the sales of the second product, until the sales of all the items have been added, resulting in the total sales. The sales of item 5AE is R600 000. Because it is the very first item, there is nothing to add to it. R600 000 is thus directly inserted into the first row of the “cumulative” sales column. For item 3RE with sales of R350 000, we add the R600 000 of items 5AE and the sum (total) is inserted as R950 000 in the second row of the cumulative column. For the item 1SE with sales of R90 000, we add it to R950 000, resulting in R1 040 000, the sum of the total for the three items. Complete the table.

PRODUCT ITEM 5AE 3RE 1SE 6AF 2EF 8UE 4WE 7YA 10GA 9KA TOTAL

ANNUAL ITEM SALES R600 000 R350 000 R90 000 R50 000 R20 000 R17 500 R15 000 R9 000 R4 000 R2 500 R1 158 000

CUMMULATIVE SALES R600 000 R950 000 R1 040 000 R1 090 000 R1 110 00 R1 127 500 R1 142 500 R1 151 500 R1 155 500 R1 158 000

STEP 5 The next step is to complete the cumulative percentage of sales column. The sales of the very first item on the list (5AE) is R600 000. You must now determine what percentage R600 000 is of the total sales of R1 158 000. The calculation is thus (R600 000/R1 158 000) X 100 = 52% of the total sales generated. For two items, the calculation will be (R950 000/R1 158 000) x 100 = 82%.

PRODUCT ITEM 5AE 3RE 1SE 6AF 2EF 8UE 4WE 7YA 10GA 9KA TOTAL

ANNUAL SALES R600 000 R350 000 R90 000 R50 000 R20 000 R17 500 R15 000 R9 000 R4 000 R2 500 R1 158 000

ITEM CUMMULATIVE SALES R600 000 R950 000 R1 040 000 R1 090 000 R1 110 00 R1 127 500 R1 142 500 R1 151 500 R1 155 500 R1 158 000

CUMMULATIVE OF SALES 52% 82% 90% 94% 96% 97% 98.7% 99.4% 99.8% 100%

%

STEP 6 The next column to be calculated is the “cumulative” percentage of items. There are 10 items listed in this example. The first item is thus (1/10) x 100 = 10% of total items. The second item will be (2/10) x 100 = 20% of total items. Complete the column. PRODUCT ITEM 5AE 3RE 1SE 6AF 2EF 8UE 4WE 7YA 10GA 9KA TOTAL

ANNUAL ITEM SALES R600 000 R350 000 R90 000 R50 000 R20 000 R17 500 R15 000 R9 000 R4 000 R2 500 R1 158 000

CUMMULATIVE SALES

CUMMULATIVE % OF SALES

CUMMULATIVE % OF ITEMS

R600 000 R950 000 R1 040 000 R1 090 000 R1 110 00 R1 127 500 R1 142 500 R1 151 500 R1 155 500 R1 158 000

52% 82% 90% 94% 96% 97% 98.7% 99.4% 99.8% 100%

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

STEP 7 Lastly, the products must be categorised into A (high priority), B (moderate priority), and C (low priority) categories. There are no hard and fast rules in this decisionmaking process. It is proposed that you refer to the “annual item sales” column in order to establish a pattern.

It this calculation, it would be logical to categorise all products in the R100 000s sales as category A, all products within the R10 000s as category B, and the rest would be category C. PRODUCT ITEM

ANNUAL ITEM SALES

CUMMULATIVE SALES

CUMMULATIVE % OF SALES

CUMMULATIVE % OF ITEMS

ABC CATEGORY

5AE 3RE 1SE 6AF 2EF 8UE 4WE 7YA 10GA 9KA TOTAL

R600 000 R350 000 R90 000 R50 000 R20 000 R17 500 R15 000 R9 000 R4 000 R2 500 R1 158 000

R600 000 R950 000 R1 040 000 R1 090 000 R1 110 00 R1 127 500 R1 142 500 R1 151 500 R1 155 500 R1 158 000

52% 82% 90% 94% 96% 97% 98.7% 99.4% 99.8% 100%

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

A A B B B B B C C C

Economic Order Quantity (EOQ) Inventory is held to avoid the nuisance, the time and the cost etc. of constant replenishment. However, to replenish inventory only infrequently would necessitate the holding of very large inventories. It is therefore apparent that some balance, trade-off, or compromise is needed in deciding how much inventory to hold, and therefore how much inventory to order. There are costs of holding inventory and there are costs of re-ordering inventory and these two costs need to be balanced. The purpose of the EOQ model is to minimise the total cost of inventory. The important costs are the ordering cost, the cost of placing an order, and the cost of carrying or holding a unit of inventory in stock. All other costs such as, for example, the purchase cost of the inventory itself, are constant and therefore not relevant to the model.

How large should orders be? If orders are too large, the result will be excess inventory and high holding costs. If orders are too small, the result will be the placement of more orders, leading to high ordering costs.

EOQ is based on the following set of assumptions: (Boyd, 2013)  Reorder point: The reorder point is the time when the next order should be placed. EOQ assumes that you order the same quantity at each reorder point.  Demand, relevant ordering cost, and relevant carrying cost: Customer demand for the product is known. In addition, the ordering and carrying costs are certain. A relevant cost refers to a cost you need to consider when you make a decision.  Purchase order lead times: The lead-time is the time period from placing the order to order delivery. EOQ assumes that the lead-time is known.  Purchasing cost per unit: The cost per unit does not change with the amount ordered. This removes any consideration of quantity discounts. Assume you will pay the same amount per unit, regardless of the order size.

 Stock outs: No stock outs occur. You maintain enough inventory to avoid a stock out cost. That means you monitor your customer demand and inventory levels carefully.

ECONOMIC ORDER QUANTIY FORMULA

EOQ = square root of [(2 x demand x ordering cost) ÷ carrying costs

Q = √2DS H

Q – is the Economic Order Quantity (units)

A spaza shop sells packets of cigarettes. One packet of cigarettes costs R45 per packet. The spaza shop sells 100 packets of cigarettes a month, or 1 200 per year. The order cost is R50 per order. The spaza owner added up the total time spent by all members involved in the ordering process, and the owner figures that the combined time to process each order is one hour. Based on average salary and benefit costs, the owner assigns a R50 cost per order. The carrying cost per unit is R3. That rate covers the occupancy cost and insurance where the inventory is stored. The amount also accounts for the opportunity cost of carrying the inventory.

Based on the data given calculate the EOQ EOQ = square root of [(2 x demand x ordering costs) ÷ carrying costs] EOQ = square root of [(2 x 1 200 x (R50)) ÷ R3] EOQ = square root of [R120 000 ÷ R3] EOQ = square root of 40 000 EOQ = 200...