CHAPTER 3

Customer Service

Cost trade-offs in
Marketing and Logistics
Price

MARKETING

Product

Order processing
and information
costs

Place/customer
service levels
Inventory
carrying costs

Transportation
costs

Lot quantity costs

Warehousing costs
Order processing
and information
costs
2

Elements of Customer Service

Pretransaction
elements
Written statement of
policy
Customer receipt of
policy statement
Organization
structure

Transaction
elements
Stockout levels
Order information
Elements of order
cycle
Expedited shipments

System flexibility

Transshipment

Management
services

System accuracy
Order convenience
Product substitution

Posttransaction
elements
Installation, warranty,
alterations, repairs,
parts
Product tracing
Customer claims,
complaints, returns
Temporary
replacement of
products

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

Model of Consumer Reaction

to a Repeated Stockout
Yes
Yes
No
Customer

Switch
stores
?
Yes

Substitute
?
No

Switch
brand
?
No

Switch
price
?

1
Higher

2
Same

3
Lower
4
Other
size
5
Special
order
6
Ask here
again

Substitute
?

Yes

No
Another
store
5

Source: Clyde K. Walter, An Empirical Analysis of Two Stockout Models, unpublished Ph.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

Relationship Between Customer

Service and Inventory Investment
600
500
400
300
200
100
0
75

80

85

90

95

100

Stages of the
Customer Service Audit
Internal Audit

External Audit

Evaluate Customer Perceptions

Differentiate Channel Levels & Market Segments

Identify Opportunities

Determine Marketing Services Mix & Levels

Overall Importance Compared To Selected

Performance Of Major Manufacturers Evaluated
By Dealers
Overall
Impt. All
Dealers

Dealer Evaluations
of Manufacturers

Mfr. 1

Description

M.

SD

M.

SD

M.

SD

M.

SD

M.

SD

M.

SD

M.

SD

Ability of manufacturer to meet promised delivery date (on-time

shipments)
Accuracy in filling orders (correct product is shipped)
Competitiveness of price
Advance notice on shipping delays
Special pricing discounts available on contract/project quotes
Overall manufacturing and design quality of product relative to
the price and range involved
Updated and current price data, specifications and promotion
materials provided by manufacturer
Timely response to requests for assistance from manufacturer's
sales representative
Order cycle consistency (small variability in promised versus
actual delivery, i.e., vendor consistency meets expected date).
Length of promised order cycle (lead) times (from order
submission to delivery) for base line/in-stock ("quick ship")
product
Accuracy of manufacturer in forecasting and committing to
estimated shipping dates on contract/project orders
Completeness of order (% of line items eventually shipped
complete) -- made to order product (contract orders)

6.4

0.8

5.9

1.0

4.1

1.6

4.7

1.6

6.6

0.6

3.7

1.8

3.3

1.6

6.4
6.3
6.1
6.1
6.0

0.8
1.0
0.9
1.1
0.9

5.6
5.1
4.6
5.4
6.0

1.1
1.2
1.9
1.3
1.0

4.7
4.9
3.0
4.0
5.3

1.4
1.4
1.6
1.7
1.3

5.0
4.5
3.7
4.1
5.1

1.3
1.5
1.7
1.6
1.2

5.8
5.4
5.1
6.0
6.5

1.1
1.3
1.7
1.2
0.8

5.1
4.4
3.0
4.7
5.2

1.2
1.5
1.7
1.5
1.3

4.4
3.6
3.1
4.5
4.8

1.5
1.8
1.7
1.8
1.5

6.0

0.9

5.7

1.3

4.1

1.5

4.8

1.4

6.3

0.9

4.9

1.7

4.3

1.9

6.0

0.9

5.2

1.7

4.6

1.6

4.4

1.6

5.4

1.6

4.2

2.0

4.3

1.7

6.0

0.9

5.8

1.0

4.1

1.5

4.8

1.4

6.3

0.9

3.6

1.7

4.4

1.7

6.0

1.0

6.1

1.1

4.5

1.4

4.9

1.5

6.2

1.1

4.3

1.7

3.7

2.0

6.0

1.0

5.5

1.2

4.0

1.6

4.3

1.4

6.3

1.1

3.8

1.7

3.5

1.6

6.0

1.0

5.5

1.2

4.3

1.2

4.7

1.3

6.0

1.1

4.4

1.4

4.0

1.6

Mfr. 2

Mfr. 3

Mfr. 4

Mfr. 5

Mfr. 6

Rank

Var.
Num

2
3
4
5
6

39
90
40
94
3

16

47

14

10

4b

11

54

12

49a

50

33a

Price range of product line offering (e;g., low, medium, high

price levels) for major vendor

5.0

1.3

4.4

1.5

4.6

1.6

5.1

1.5

5.2

1.4

4.3

1.6

3.9

1.6

101

77

Store layout planning assistance from manufacturer

2.9

1.6

4.2

1.7

3.0

1.5

3.4

1.6

4.7

1.6

3.0

1.4

3.4

1.2

Note : Mean (average score) based on a scale of 1 (not important) through 7 (very important).

8
Source: Douglas M. Lambert and Jay U. Sterling, Developing Customer Service Strategy, unpublished manuscript. All Rights reserved.

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?

3-9 a

3-9 b

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?

Importance And Performance Evaluations

For Selected Customer Service Attributes

3-9 c

Performance Evaluation
No.
1
2
3
4
5
6
7
8
9
10

Attribute
Accuracy in filling orders
Ability to expedite emergency orders in a
fast, responsive manner
Action on complaints (e.g., order servicing,
shipping, product, etc.)
Accuracy of supplier in forecasting and
committing to shipping date for
custom-made products
Completeness rate (percentage of order
eventually shipped)
Rapid adjustment of billing and shipping
errors
Availability of blanket orders
Frequency of deliveries (supplier
consolidates multiple/split shipments
into one larger, less frequent shipment)
Order processing personnel located in your
market area
Computer-to-computer order entry

Relative
Performance

Importance

Company A

Company B

6.42
6.25

5.54
4.98

5.65
5.23

-0.11
-0.25

6.07

4.82

5.18

-0.36*

5.92

4.53

4.73

-0.20

5.69

5.29

5.27

+0.02

5.34

4.64

4.90

-0.24

4.55
4.29

5.03
5.07

4.15
5.03

3.58

5.33

5.21

+0.12

2.30

4.07

3.53

+0.54**

+0.88**
+0.04

* Performance evaluations of A and B are significantly different at p < 0.05.

** Performance evaluations of A and B are significantly different at p < 0.01.

11

Source: Douglas M. Lambert and Arun Sharma, A Customer-Based Competitive Analysis for Logistics
Decisions, International Journal of Physical Distribution and Logistics Management 20, no.1 (1990), p.18.

3-10

Competitive
Position
Competitive
CompetitiveMatrix
Competitive
disadvantage
7

parity

advantage

Major weakness

Major strength
1*
2*
3* 4*

5*
6*

8*

7*

9*
3
10*

Minor weakness
-3.0

Minor strength
-1.0

+1.0

Relative performance

+3.0

3-11

Performance Evaluation Matrix

7

Definitely improve

Improve

Maintain/improve
1*

2*
3*
4*

6*

5*

5
Improve

Maintain

Reduce/maintain
7*
8*
9*

3
Maintain

Reduce/maintain

Reduce/maintain

10*

1
1

Performance evaluation

Strategic Opportunities For A Competitive Advantage

Competitive
disadvantage

Competitive
advantage

Competitive
parity

Major weakness

Major strength
H
I
G
H

1*

2*
3*
4*
I
M
P
O
R
T
A
N
C
E

3-12

6* 5*

*7

M
E
D
I
U
M

*8
*9

3
* 10

L
O
W
Minor weakness

-3.0

Minor strength

-1.0

+1.0

+3.0

Relative performance

* denotes attribute number

indicates desired shift in relative performance
indicates potential opportunities that may be revealed within specific customer segments
14

Source: Douglas M. Lambert and Arun Sharma, A Customer-Based Competitive Analysis for Logistics Decisions,
International Journal of Physical Distribution and Logistics Management 20, no.1 (1990), p.23.

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.

3-13

3-14

Customer Service Standards

Reflect the customers point of view.

Provide an operational and objective
measure of service performance.
Provide management with cues for
corrective action.