Ch2 Week 2

CHAPTER 2
DEMAND MANAGEMENT AND CUSTOMER SERVICE
Learning Objectives

Chapter 2 Demand Management And Customer Service
After reading this chapter, you should be able to: Understand the meaning of demand management and customer service. Discuss the performance measures for customer service. Discuss the demand management process and the problems in demand management. Describe the basic approach to demand forecasting and the forecasting methods or techniques. Understand how to establish a customer service strategy.
Himalaya Publishing House
Logistics and Supply Chain Management K. Shridhara Bhat
2.1 What is Demand Management?
Demand management may be thought of as focused efforts to estimate and manage customers demand, with the intention of using this information to shape operating decisions.
2.1.1 Relationship between Customer Service and Demand Management

Customer service is the measure of how well the logistics system is performing in providing time and place utility to a product or service. Customer service and customer satisfaction do not mean one and the same. Customer satisfaction represents the customers overall assessment of all elements of the marketing mix: product, price, promotion and place (or distribution) whereas customer service is a part of customer satisfaction. Customer service is defined as:
(i) An activity or function to be managed, such as order processing or handling of customer complaints. (ii) Actual performance on parameters such as ability to ship orders within a certain period. (iii) Part of an overall corporate philosophy.
2.1.2 Demand Forecasting :

Demand forecasting refers to the estimation of the amount of product that will be purchased by the consumers or end users.
2.1.3 Customer Service :

Customer service can be defined as a process which takes place between the buyer, seller and third party. The process results in a value addition to the product or service exchanged. Customer service is really the fuel that drives the logistics supply chain.
2.1.4 The Logistics/Marketing Interface :

Successful implementation of the marketing concept requires that companies both win and retain customers. emphasise is on winning new customers and gaining new accounts. The objective of a firm is still to make a profit, but not without establishing service policies and programs that will satisfy customers needs and deliver them in a costefficient manner. This approach is referred to as customer service. Customer service is often the link between logistics and marketing. If the logistics system, particularly outbound logistics fails to function properly and a customer does not receive a delivery as promised, the company could lose future sales.
2.1.5 Customer Service and Levels of Product

Three levels of product are (i) core benefit or service, (ii) tangible product and (iii) augmented product
Customer service can be thought of as something a firm provides to those who purchase its products or services. According to marketers there are three levels of product: (i) the core benefit or service which constitutes what the buyer is really buying, (ii) the tangible product or the physical product or service itself and (iii) the augmented product which includes benefits that are secondary to it but an integral enhancement to the tangible product the customer is purchasing. Customer service is a concept whose importance reaches far beyond the logistics area.
2.1.6 Levels of Customer Service Involvement :

Three levels of customer service involvement are : (i) customer service as an activity, (ii) customer service as performance measure and (iii) customer service as a philosophy.
2.1.7 Dimensions or Elements of Customer Service

From the point of view of logistics function, customer service can be viewed as having four dimensions: (i) time, (ii) dependability, (iii) communication and (iv) convenience. These dimensions are briefly discussed in the following paragraphs. Time : The time factor is usually order cycle time from the perspective of seller looking at customer service. Dependability : Some customers consider dependability as more important than lead time. Communications : The two logistics activities vital to order filling are the communication of customer order information to the order-filling area and the actual process of picking out of the inventory, the items ordered. Convenience : This means, logistics service level must be flexible.
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2.1.8 Performance Measures for Customer Service

Box 2.1 lists the elements and measurement of customer service in logistics management. Box 2.1 : Elements and Measurements of Customer Service
2.1.9 Implementing Customer Service Standards
The keys for successfully developing and implementing customer service standards are: (i) To be wary of adopting easily achievable performance standards. But setting standards at unrealistically low levels will not help to establish a competitive advantage. (ii) Emphasis on total quality or on creation of the perfect order are very critical to any acceptable quality level set below 100 per cent. (iii) The firm should develop customer service policies and standards through customer consultation. (vii)The firm should develop procedures to measure, monitor and control the customer service quality called for by the firms performance measures and standards.
2.1.10 The Perfect Order :

Perfect order refers to an order where all customer requirements are met upon delivery of the order (i.e., right time, right place, right quantity, right condition and rig
2.1.11Improving Customer Service Performance :

The levels of customer service a firm achieves often can be improved through one or more of the following actions: (i) thoroughly researching customer needs, (ii) setting service levels that make realistic trade-offs between revenues and expenses, (iii) making use of the latest technology in order processing systems and (iv) measuring and evaluating the performance of individual logistic activities.
2.2 Demand Management
Demand management enhances the ability of firms throughout the supply chain, especially manufacturing through the customer with the end result of creating greater customer value. Demand management holds the key to an effective supply chain management process. 2.2.1Demand Management Process : 2.2.2 Problems in Demand Management (i) Lack of co-ordination between departments (for example, finance, sales and marketing, manufacturing, distribution and customer service) which function as autonomous business units. (ii) To much emphasis is based on forecasts of demand, with less attention on the collaborative efforts and the strategic and operational plans that need to be developed from the forecasts. (iii) Demand information is mainly used to develop tactical and operational plans rather than to develop strategic plans.
(iv) The conflicting and contradicting interests of departmental managers in achieving their departmental goals rather than contributing to the achievement of the companys overall business objectives/goals. 2.2.3 Demand Forecasting : Forecasting demand is a necessary part of business planning and demand management. Demand forecasting estimates the amount of product that will be purchased by consumers and end users based on which decisions regarding how much product the company should sell and how much the company need to produce. Integrating Forecasting and Production The steps involved in integrating the sales forecasting with production scheduling activities are listed below:
(i) To develop an annual forecast demand (ii) Review of the forecast arrived (iii)To develop aggregate production schedules (iv) To schedule production on a short-term basis 2.2.4 The Role of Forecasting in a Supply Chain All strategic and operating decisions in a supply chain are based on the forecast of future demand. The amount of product produced per period of time and the production capacity that must be made available are all based on the forecast of customer demand for the period under consideration Some of the important decisions taken in some functional areas based on demand forecasts are: (i) Production : Scheduling, inventory planning and control, and aggregate planning. (ii) Marketing : Sales force allocation, sales promotions and new product launching.
(iii) Finance : Capital investment in plant and equipments, budgeting etc. (iv) Human Resource : Manpower Planning, hiring, lay off etc. 2.2.5 Types of Forecasting/Forecasts Three different approaches to demand forecasting are : (i) Long term forecasting (ii) Intermediate term or Midrange or medium term forecasting and (iii) Short term forecasting. Long term forecasting results in long-term forecasts which usually cover a period of three or more than three years. Intermediate term or midrange or medium term forecasts have a planning horizon of one to three years. They address issues related to budgeting and sales plans. Short term forecasts are more important for planning the logistics operations. The forecast of demand is for short intervals of time (monthly) for several months ahead, usually for a planning horizon up to one year.
Himalaya Publishing House Logistics and Supply Chain Management K. Shridhara Bhat
2.2.6 Purpose of Forecasting Some of the reasons for engaging in forecasting are : (i) To increase customer satisfaction. (ii) To reduce stock-outs. (iii) To schedule production more efficiently. (iv) To lower safety stock requirements. (v) To reduce product obsolescence costs. (vi) To manage shipping (transportation)better. (vii) To improve pricing and promotion management. (viii) To negotiate better terms with suppliers. (ix) To make more informed pricing decisions.
The essence of forecasting is to assist in logistics decision making.
2.2.7 Nature of Forecasting Forecasting demand levels is vital to the firm as it provides the basic inputs for the planning and control of all functional areas including logistics, marketing, production and finance. Demand levels and their timing have great impact on capacity levels, financial needs and general structure of the business. 2.2.8 Logistics forecasting is concerned with the spatial (space) as well as temporal (time) nature of demand, the extent of its variability and its degree of randomness. 2.2.9 Forecasting Methods : A number of standardized forecasting methods are available. They have been classified into: (i) Qualitative methods (ii) Historical projection methods (Time series) (iii) Causal methods and (iv) Simulation methods
(i) Qualitative Forecasting Methods : Qualitative methods are those that use judgment (subjective), intuition, surveys, or comparative techniques to produce quantitative estimates about the future demand. (ii) Historical Projection or Time Series Forecasting Methods : These methods use historical demand data to make a forecast of demand into the future. (iii) Causal Methods : Causal forecasting methods involve the assumption that the demand forecast is highly correlated with certain factors in the environment such as economic status, interest rates etc., which are independent variables on which the demand depends. (iv) Simulation Methods : Simulation forecasting methods imitate the choices of consumers which give rise to demand so that the forecast can be estimated.
2.2.10 Usefulness of Forecasting Techniques for Logistics Executives Generally logistics managers and executives are not directly involved in forecasting techniques. Sales forecasting is the function of marketing or planning departments. Forecasts of medium or long-term periods usually are provided to logistics personnel. But logistics personnel usually use short-term forecasts for inventory control, shipment scheduling, warehouse planning etc. Basic Approach to Demand Forecasting The various steps involved in the basic approach to forecasting are : (i) Understanding the objective of forecasting. (ii) Integrating demand planning and forecasting. (iii) Identifying the major factors that influence the demand forecast. (iv) Understanding and identifying the customer segments. (v) Determining the appropriate sales forecasting method or technique. (vi) Establishing measures of performance and error for the forecast.
2.3 Forecasting methods or Techniques
The two general approaches to forecasting are : (i) Qualitative and (ii) Quantitative. Qualitative methods consist mainly of subjective inputs, often of non-numerical description. Quantitative methods involve either projection of historical data or the development of association models which attempt to use causal variables to arrive at the forecasts. 2.3.1Overview of Qualitative Methods 1. Jury of Executive Opinion : Jury of executive opinion method uses the opinions of a small group of high level executives (managers) to arrive at a group estimate of demand as forecast. 2. Sales Composite Method : Sales composite method pools the opinion of each sales person into estimates at district and national levels to arrive at the overall forecast.
3. Market Research Method (or Consumer Survey Method) :Market research method determines consumer interest in a product or service by conducting a consumer survey on a sample basis. 4. Other Judgemental Methods : Delphi Method :In Delphi method, managers and staff complete a series of questionnaires, each developed from the previous one, to arrive at a consensus forecast. 2.3.2 Overview of Quantitative Methods There are five quantitative forecasting methods, all of which use historical data. They fall into two categories.
Time series models predict on the assumption that the future is a projection of the past. They look at what has happened over a period of time and use a series of past data to make a forecast for the future. Causal (or association) models such as linear regression, incorporate the variable or factors that might influence the quantity being forecast. The demand or sales forecast is a dependent variable and other factors that affect demand are independent variables (causal variables). Time Series Forecasting MethodsTime series is a time-ordered sequence of observations taken at regular intervals. Decomposition of a Time SeriesTrend is a long-term upward or downward movement in data. Seasonality is a short-term regular variation. Cycle is a wavelike variation lasting more than one year. Random variations are residual variations after all other behaviours are taken into account.
Techniques for Averaging (i) Naive forecasts or Naive approach, (ii) Moving averages (Simple and weighted) and (iii) Exponential smoothing. 1. Naive Approach :Naive forecast is the forecast for any period which equals the previous periods actual value (demand). 2. Moving Averages Method :Moving averages method is a technique that averages a number of recent actual values, updated as new values become available. In the weighted moving average method, more recent values in a series are given more weight in computing a forecast. 3. Exponential Smoothing Method :Exponential smoothing is a weighted moving average method based on previous forecast plus a percentage of the forecast error. Regression Analysis Regression analysis is a technique used for fitting a line to a set of points.
2.3.3 Econometric Model Building and Simulation Econometric model building method is the most accurate method to forecast sales because it considers the interaction of independent variables which bear logical and measurable relationships to sales. It uses regression analysis technique to quantity these relationships. Focus Forecasting : Focus forecasting method uses several rules which seem logical and easy to understand to project past data into the future. Each of these rules is used in a computer simulation program to actually project demand and then measure how well that rule performed when compared to what actually happened. Two components (i) several simple forecasting rules and (ii) computer simulation of these rules on past data, make up the focus forecasting method.
2.3.4 Collaborative Planning, Forecasting and Replenishment (CPFR) Collaborative planning, forecasting and replenishment (CPFR) seeks to enhance vendor managed inventory and continuous replenishment through a more proactive means of information sharing between supply chain partners. 2.3.5 Steps involved in the CPFR approach are : (i) Creating a front-end partnership agreement (ii) Joint business planning (iii) Developing demand forecasts (iv) Sharing forecasts and (v) Replenishing inventory 2.3.6 The Pitfalls of Managing a Supply-Chain without Demand Based Management Supply Chain management has traditionally assumed that the demand pattern is exogenous. Hence the demand for products or services is viewed as the key input to supply chain management.
2.3.7 Logistics as a Core Strategic Competency A firms marketing strategy is built around its marketing mix elements viz., product, price, promotion and place (or distribution). The key to formulating an effective mix strategy is to integrate resources committed to these activities into an effort that maximizes customer impact. Logistics is the process that satisfies the broad requirements of time and place utility. Logistics ensures that customer requirements involved in timing and location of inventory are satisfactorily met. Thus the output of logistical performance is customer service. 2.3.8 How to Establish a Customer Service Strategy Customer service policies should focus on meeting customer requirements while at the same time should be cost effective and contributing to the overall profitability of the firm.
Four methods suggested for establishing customer service strategies are : (i) Determining customer service levels based on customer reactions to stock outs at retail level. (ii) Cost/revenue trade-off (iii) ABC analysis of customer service (iv) Customer service audits. (i) Customer Reactions to Stockouts Knowledge of consumers response to stock-outs is important to establish the desired level of customer service at the retail level. (ii) Cost/Revenue Trade Offs Exhibit 2.1 illustrates the cost trade-offs and considerations required to implement an integrated logistics management concept. The objective of cost/revenue trade-offs is to provide the firm with the lowest logistics costs for a given specific customer service level.
Exhibit 2.1 : Cost Trade-offs Required for a Logistics System
(iii) ABC Analysis/Paretos Law ABC analysis is the classification of items in an inventory according to importance defined in terms of criteria such as sales volume, annual consumption value of purchase volume. 4. The Customer Service Audit Customer service audit is a means to evaluate the level of service a firm is providing to its customers. The objectiveof customer audit are: (a) To identify customers service elements which are critical for achieving customer satisfaction. (b) To identify how performance of those elements is controlled and (c) To asses the quality and capabilities of the internal information system. Four district stages of the customer service audit are :
(i) External customer service audit. (ii) Internal customer service audit. (iii) Identification of opportunities and methods for improvement. (iv) Establishment of customer service levels. 1. The External Customer Service Audit : The objectives of external audit are : (i) To identify the elements of customer service which customers believe are important in their purchasing decisions. (ii) To determine the customers perception of the service being offered by the firm and each of the major competitors. 2. The Internal Customer Service Audit : 3. Identifying Opportunities and Methods for Improvement : The firm can use competitive bench marking to optimize its profitability by suitably developing its customer service and marketing strategies based on the information obtained from both external and internal customer service audits.
4.Establishing Customer Service Levels :
Target service levels are set by the management of the firm for segments based on factors such as the type of customer, geographical area, channel of distribution and product line. Periodically, the management should review its customer service standards and policies to ensure that the service policies and programs reflect the current customer needs. 2.3.9Measuring Logistics Customer Service
The best single measures of customer service could be total order cycle and its variability Customer service may also be measured in terms of each logistics activity. Some common measures of logistics performance include the following:
(i) Order Entry : (ii) Accuracy of Order Documentation : (iii)Transportation : (iv)Inventory and Product Availability : (v) Product Damage : (vi)Production/Warehousing Processing Time : 2.3.10 Development of Customer Service Standards After determining which elements of customer service are most important, a firm must develop standards of performance.
Exhibit 2.4 : Examples of Customer Service Standards
CHAPTER 3
CUSTOMER SERVICE DIMENSION
Learning Objectives

After reading this chapter, you should be able to: Discuss customer service as a competitive weapon. Discuss customer service and customer retention. Discuss the various elements of customer service. Discuss the relationship between customer service and sales. Describe service driven logistics systems. Discuss the concepts - customer satisfaction and success and time based logistics.
3.1The Marketing and Logistics Interface
Place (or distribution) is one element of the marketing mix, on which much emphasis has not been placed earlier as in the case of other elements viz., product, price and promotion. What we mean by place is having the right product in the right place at the right time. However this element of marketing mix is now being given more importance as the power of customer service as a potential means of differentiation is increasingly recognised. Customer service is the measure of how well the logistics system is performing in providing time and place utility to a product or service. Customer service and customer satisfaction do not mean one and the same. Customer satisfaction represents the customers overall assessment of all elements of the marketing mix i.e., product, price, promotion and place whereas customer service is a part of customer satisfaction.
3.2 Customer Service as a Competitive Weapon 3.3 Customer service and Customer retention
3.3.1Customer Service
Customer service is an output of the logistics system and is a key to gain competitive advantage.
3.3.2Customer Service Defined

Customer service includes all activities between the buyer and seller that enhance or facilitate the sale or use of the sellers product or services. We can view customer service as a part of the total product or service concept. According to marketers, three levels of a product are (i) The core product or service, which constitutes what the buyer is really buying
(ii) The tangible product or the physical product or service itself, which includes the design, physical features, size, shape, weight, volume etc., of the product. And (iii)The augmented product, which includes benefits enhancing the value of the tangible product the customer is purchasing. 3.3.3 Logistical customer service can be thought-of as a feature of the augmented product. But the customer service is a concept whose importance reaches far beyond the logistics area. It affects every area of operation of the firm by attempting to ensure customer satisfaction through providing aid or service to the customer. 3.3.4 Elements of Customer Service Three categories of elements of customer service are : (i) Pretransaction elements, (ii) Transaction elements and (iii) Post-transaction elements.
I. Pretransaction Elements Pretransaction elements of customer service tend to be related to a firms customer service policy. Pretransaction elements include the following: (i) A Written Statement of Customer Service Policy : (ii) Customers Provided With a Written Statement of Policy : Exhibit 3.1 : Elements of Customer Service
(iii) Organisation Structure : (iv) System Flexibility : (v) Technical and Management Services : II. Transaction Elements These are the elements, which are normally considered to be associated with customer service. They include the following: (i) Stock Out Level : (ii) Order Information Availability : (iii) System Accuracy : (iv) Consistency of Order Cycle : (v) Special Handling of Shipments : (vi) Transshipment : (vii) Order Convenience :
III. Post-transaction Elements These elements of customer service support the product or service after the customer has received it. Post transaction elements include : i. Installation, Warranty, Repair and Service Parts : ii. Product Tracking : iii. Customer Complaints, Claims and Returns : iv. Product Replacement : 3.3.5 Importance of Logistics/Supply Chain Customer Service (i) Effects of Customer Service on Sales : (ii) Effects of Customer Service on Customer Loyalty :
3.4 Customer Retention
Customer retention is crucial because getting a new customer is five times as costly as retaining an existing customer.
3.5 Service Driven Logistics Systems

Service driven logistics system is a system that is designed to meet the defined service goals of the organisation. Logistics system design ideally starts with the full understanding of the service needs of the various markets served and then developing the low cost logistics solutions. Ideally all logistics strategies and systems are designed in the following sequence: (i) Identifying customers service needs (ii) Defining customer service objectives (iii) Designing the logistics systems
3.6 Basic Service Capability

Basic logistical service is measured in terms of (a) availability, (b) operational performance and (c) service reliability. (a) Availability :Availability means having inventory to meet customers requirements of materials or products consistently without fail. (b) Operational Performance :Operational performance is concerned with the elapsed time from order receipt to order delivery. It involves delivery speed and consistency. (c) Service Reliability : Service reliability is concerned with quality attributes of logistics. The key to quality is how accurately availability and operational performance can be measured.
3.7 Value Added Services

Value added services refer to unique or specific activities that firms can together workout to augment their efficiency, effectiveness and relevancy. Customer service has a proactive, value-adding role in the logistics supply chain.
3.8 Customer Satisfaction and Success
Customer satisfaction results when the customers expectations of a suppliers performances are met or exceeded. 3.8.1Customer Expectations : 3.8.2 Customer Success : Commitment to customer success helps a supplier firm to gain true competitive advantage through logistical performance.
3.9 Time Based Logistics

Time based logistics is based on two basic concepts : (i) postponement and (ii) consolidation which facilitate timely performance and reduce total costs. Time-based competition refers to the ways of taking time out of operations in the supply chain. It could entail reducing the order cycle time, reducing order placement time or introducing new products to markets more rapidly.
Time based logistics recognises the direct impact of information technology on the performance of the supply chain and improvement in the firms competitiveness based on time. The availability of lowcost information has created time-based competition. Information is increasingly being shared by managers in the supply chain to improve both the speed and accuracy of supply chain logistics
CHAPTER 4
LOGISTICS PLANNING AND STRATEGY
Learning Objectives
After reading this chapter, you should be able to: Discuss the organisational planning process and the strategic logistics plan. Discuss the logistics mission and objectives. Describe the various logistics strategies that can provide competitive advantages to the firm. Describe the various generic logistics strategies. Discuss how logistics strategy is formulated. Discuss the approach to logistical system design.
4.1 Why Corporate Strategy is Important to Logistics?
A clear understanding of corporate strategy by logistics managers will enable them to take decisions that are in the best interest of the organisation. The logistics strategy must be based on the corporate strategy and the knowledge of the corporate strategy will help the logistics personnel to know how to value various alternatives in making decisions about trade-off between logistics costs and customer service.
4.2 The hierarchy of planning

Organisational planning is usually carried out in a hierarchy (a) Strategic planning, (b) Tactical planning and (c) Operational planning. Strategic planning is done at the highest level of management for a long term and the resulting plan is known as strategic plan. The planning horizon for strategic planning may vary from 5 to 10 years.
Tactical planning is done at the middle management level and generally having a planning horizon of one to five years. The resulting plan is a medium range plan called a tactical plan. Operational planning is carried out in more detail on yearly basis, broken down to quarterly or monthly plans. The resulting plan is called operating plan which breaks down revenues, expenses and associated cash flows and activity by month for a one year period. 4.2.1Relationship Between Logistics Strategy and Corporate Strategy
Logistics strategic planning can be defined as: A unified, comprehensive and integrated planning process to achieve competitive advantage through increased value and customer service, which result in superior customer satisfaction, by anticipating future demand for logistics services and managing the resources of the entire supply chain. This planning is done within the context of the overall corporate goals and plan.
Logistics strategy can be best formulated only by understanding the corporate strategy. Majority of logistics managers believed that the logistics plan was critical to the firms corporate strategic plan. Logistics can contribute to and support an organisations strategic planning process in a number of ways. Six specific ways that show how logistics supports corporate strategy in Intel are as follows: (i) Increased planning capability and reduced inventory as a result of reliable delivery time. (ii) Increased profit margin and improved customer service (iii) Reduced inventory levels through shorter cycle time (iv) Increased marketing advantage from consistent, shorter order cycles (v) Uninterrupted supply of in-bound materials (vi) Reduced total costs by incorporating logistics into the corporate planning process.
4.3 The Organizational Planning Process
Exhibit 4.1 : Environmental Influences in Organisational Planning
The corporate strategic planning process has the following major steps: (i) Evaluation of consumer and/or industrial customer needs (ii) Identification of possible target markets (iii) Evaluation of target markets (iv) Selection of target markets (v) Formulation of channel objectives and channel strategy (vi) Identification and evaluation of channel structure alternatives (vii) Selection of the channel structure and (viii) Development of the strategic logistics plan.
4.4 The Strategic Logistics Plan

Strategic logistics plan depends on a number of inputs from various functional areas. They are: (i) marketing, (ii) manufacturing, (iii) finance/accounting and (iv) logistics. Marketing is closely related to logistics and hence provides the key inputs to logistics.
Customer service policies are critical to logistics strategy. i) Order placement methods, (ii) Order entry, (iii) Target cycle, (iv) Order cycle variability, (v) Desired fill-rate or in-stock levels. Manufacturing provides some key informations to logistics strategic plan.These are: (i) locations of current and planned production facilities and (ii) planned volume and product mix for each location. Finance/accounting provides forecasts of costs related to inflation rates and growth assumption to project future costs. It provides the cost data required to perform cost trade-off analysis. Logistics provide data and analysis related to the existing logistics network to the other functions, including current storage and distribution facilities owned and rented, both at manufacturing locations and in the field, equipment capacity and capabilities at each location, and current transportation arrangements between various channel members.
4.4.1Developing a Strategic Logistics Plan : The requirements of a strategic logistics plan are: (i) a thorough grasp and support of corporate strategy and supporting marketing plans in order to optimize cost-service trade-offs (ii) thorough understanding of the customers view regarding the importance of various customer service elements and the performance of the firm compared with its competitors. (iii) A knowledge of the cost and profitability of channel alternatives.
4.4.2 Logistics Audit :

The logistics audit should be conducted on a routine basis and it involves a review of how logistics is performing with respect to its objectives. The logistics audit complements and supports the strategic planning process. Logistics audit is formally conducted over a year to help align the efforts of the logistics function and to focus the strategic planning process.
4.4.3 Developing Logistics Strategy : Development of logistics strategy requires the knowledge of the organization's overall strategy and the key trade-offs in the organization. 4.4.4 The Logistics Plan : Once the logistics strategy has been formulated, a logistics plan must be developed to support that strategy. The logistics plan includes the specific activities required to be undertaken by the logistics function to achieve its objectives. The logistics decisions are made in a hierarchical manner as illustrated in Exhibit 4.2. The logistics plan covers a variety of issues and requires inputs from people participating in each of the logistics activities.
4.5 Logistics Planning

Logistics planning takes place at three levels : (i) strategic, (ii) tactical and (iii) organisational.
Strategic planning is a long-range planning having a planning horizon of more than one year. Tactical planning involves an intermediate time horizon, usually less than a year. Operational planning is shortrange planning involving decisions frequently made on an hourly or daily basis. Logistics planning is concerned with how to move the product efficiently and effectively through the logistics channel which is planned strategically. Exhibit 4.2 : Logistics Decisions in a Hierarchy
4.5.1 Logistics Mission and Objectives
The mission of logistics is to create customer value at the lowest total cost. 4.5.2 Logistics Mission Statement The mission statement provides a foundation upon which a company develops objectives, strategies, plans and tactics. It defines the basic purpose of an organisation and identifies the parameters under which the firm will operate. 4.5.3 Logistical Objectives There are six different operational objectives which must be achieved by the firm in terms of logistical system design and management. These operational objectives which primarily determine the logistical performance include : (i) rapid response, (ii) minimum variance, (iii) minimum inventory, (iv) movement consolidation, (v) quality and (vi) life-cycle support. Each of these objective is briefly discussed.
(i) Rapid Response : This objective is concerned with a firms ability to satisfy customer service requirements in time. (ii) Minimum Variance :Any unexpected event which disrupts the performance of a system is termed as variance. Any aspect of logistical operation may cause variance. (iii)Minimum Inventory : This inventory involves commitment of assets and relative turn velocity. The total commitment is the financial value of inventory deployed throughout the logistical system. The objective is to reduce inventory deployed to the lowest level consistent with customer service goals so that the overall total logistics cost is kept at the lowest level. (iv)Movement Consolidation : Transportation cost is one of the most significant logistical costs. Therefore it is desirable to achieve movement consolidation to reduce transportation cost. Generally, the larger the overall shipment and the longer the distance it is transported, the lower the transportation cost per unit. Hence, the size of overall shipment can be increased by consolidation of small shipments for transportation.
(v) Quality : Total quality management (TQM) has become a major commitment throughout all facets of industry. Hence logistics also seeks to contribute to continuous quality improvement. Logistics can add value by avoiding defects in products and by keeping customer service promises. (vi) Life-cycle Support : Many products are sold with some guarantee that the products will perform as advertised over a specific period. In such cases, if defects are observed in the products sold, product recall becomes necessary and the normal value added inventory flows toward customers must be reversed. Further, increasing number of laws prohibiting waste disposal and need for recycling waste or scrap materials (such as glass bottles, plastic containers, packaging materials etc.) will necessitate reverse logistics. Hence, reverse logistical requirements have become part of sound logistical strategy. This kind of customer service support logistics extended over the entire life-cycle of a product is known as life-cycle support.
4.6 The changing logistics environment

Business environments change constantly. Four forces drive business environment change: the market, competition, technological evolution and government regulation. These challenges are briefly discussed in the following paragraphs: The most pressing challenges faced by managers in the logistics area are : (i) the customer service explosion, (ii) time compression, (iii) globalization of industry and(iv) organizational integration. (i) The Customer Service Explosion : Customer in todays market is more demanding, not just of product quality, but also of quality service. Companies giving high priority for their logistics performance can achieve recognition for service excellence and thus establish a differential advantage over their competition
(ii) Time Compression : Time has become a key issue in management today because of the following reasons: (a) Product life cycles are shorter than ever. (b) Industrial customers and distributors require just-in-time deliveries. (c) End users are more willing to accept a substitute product if their choice is not readily available. (d) New product introduction to the market should be done in the minimum possible lead time. (iii) Globalisation of Industry : In the current era of globalisation, changes in customers expectations or geographical locations continually transform the nature of markets and in turn, generate constraints that modify the flows of goods within companies. (iv) Organisational Integration :In traditional organisations functional departments such as materials management, production, marketing etc.,
4.7 LOGISTICS STRATEGIES

Three major objectives of a logistics strategy are (i) cost reduction, (ii) capital reduction and (iii) service improvement. a) Cost reduction strategy aims at minimizing the variable costs associated with movement and storage. b) Capital reduction strategy is directed toward minimizing the level of investment in the logistics system. This strategy has the motive of maximising return on logistics assets. c) Service improvement strategies recognise the relationship between revenues and the level of logistics service provided. A proactive logistics strategy usually begins with the determination of business goals and customer service requirements. Proactive strategies are referred to as attack strategies to meet competition.
4.7.1 Generic Logistics Strategies Three generic logistics strategies are : (i) process-based strategy, (ii) market-based strategy and (iii) channel-based strategy. a) Process-based strategy is concerned with the management of a broad group of logistics activities as a value added chain. This strategy emphasises the achievement of efficiency from managing the activities of purchasing, manufacturing, scheduling and physical distribution as an integrated system. b)Market-based strategy is concerned with the management of small group of logistics activities across multi division business or across multiple business units. c) Channel-based strategy focuses on the management of logistics activities performed jointly in combination with dealers and distributors.
4.7.2 Triangle of Logistics Decision Making Four problem areas involved in logistics planning are: (i) customer services levels, (ii) facility location decisions, (iii) inventory decisions and (iv) transportation decisions. The three logistics decision areas are illustrated in Exhibit 4.3 Exhibit 4.3 : The Triangle of Logistics Decision Making
4.7.3 Relationship Between Operations Strategy and Logistics Strategy Operations and logistics strategy has the following characteristics: is a coherent, unifying and integrative pattern of decisions (i) determines and reveals the purpose of operations and logistics of the firm (in terms of the firms long-term objectives, action programs and resource allocation priorities) (ii) attempts to support or achieve long-term sustainable advantage for the firm by responding properly to the opportunities and threats existing in the environment of the firm. Twelve decision categories involved in a comprehensive operations and logistics strategy are: (i) Structure of facilities networks. (ii) Choice of operations process technology. (iii) Choice of logistics process technology. (iv) Vertical integration of the supply chain. (v) Work force.
4.8 Formulating Logistical strategy
Guidelines for Strategy Formulation The various guidelines for formulation of logistics strategy are: (i) When to plan the logistics network. (ii) Appraisal and audit of logistics network in five key areas of demand, customer service, product characteristics, logistics costs and pricing policy. (iii) Total cost concept. (iv) Differentiated distribution concept. (v) Mixed strategy concept. (vi) The principle of postponement. (vii) The concept of consolidation. (viii) Standardisation in production and reduction of product variety. These guidelines are briefly discussed in the following paragraphs:
(i) When to Plan :If no logistics system currently exists (as in the case of a new firm) there arises a need for planning a new logistics network. In cases where a logistics network already exists, a decision must be made to modify the existing network if necessary. (ii) Appraisal and Audit of Logistics Network : General guide lines for network appraisal and audit can be offered in the five key areas of demand, customer service, product characteristics, logistics cost and pricing policy. (iii)Total Cost Concept :Total cost concept is the key to manage logistics process effectively. The total cost of logistics activities should be reduced rather than merely focussing on each activity in isolation for cost reduction. (iv)Differentiated Distribution Concept :Differential distribution concept states that different products require different service requirements, have different characteristics and sales volumes and hence require different distribution strategies.
(v) Mixed Strategy Concept :. A mixed strategy establishes an optimal strategy for separate product groups and often has lower costs than a single strategy for all product groups (vi) The Principle of Postponement :This principle is stated ad below: The time of shipment and the location of the final product processing in the distribution of a product should be delayed until a customer order is received. (vii) The Concept of Consolidation :Consolidation refers to collecting smaller shipments to form a larger quantity in order to realise lower transportation rates. (viii) Standardisation :Product standardisation (i.e., reducing product varieties) provide customers a variety of products without significantly increasing logistics costs.
4.9 DESIGNING THE LOGISTICAL SYSTEM

In general the approach to logistical system design consists of the following steps: (i) Determining a least-total-cost system design. (ii) Measuring availability and capability of the service associated with the least-total-cost system design. (iii) Conducting a sensitivity analysis related to incremental service and cost directly associated with generation of revenue. (iv) Finalising the logistical strategy. The logic underlying the formulation of a service-oriented logistical strategy is discussed in the following paragraphs: (i) The Least-Total-Cost System Design : A strategy of least total cost seeks a logistical system design with the lowest fixed and variable expenses. The level of customer service associated
with a least cost logistical system design results from safety stock policies and the locational proximity of warehouses to customers. (ii) Threshold Service : The overall level of customer service associated with any least-total-cost system is referred to as threshold service level. To establish a threshold service level, the logistics system has to be reengineered with policies regarding desired inventory availability and capability performance for the logistics system. (iii) Services Sensitivity Analysis : Sensitivity analysis is conducted based on the threshold service resulting from the least-total-cost logistical design. The basic service capabilities of a logistical system can be varied by a variety of methods such as (a) variation in the number of warehouses in the system, (b) change in one or more performance cycles to increase speed or consistency of operations and/or (c) change in safety stock policy. iv) Finalising Logistical Strategy : The final step in establishing a logistical strategy is to evaluate the cost of incremental service in terms of generating offsetting revenue. While, marketing management expects customer service level to be as high as possible, logistical management is faced with a critical strategic consideration. Accepting or rejecting the proposal of marketing management for increased customer services in a choice of strategic positioning.
In addition to the lowest total cost, the other strategies available are : (a) maximum service strategy, (b) profit maximisation strategy, (c) maximum competitive advantages strategy and (d) maximum assets development strategy. Each of these strategies requires unique logistical system design. These strategy alternatives are briefly discussed below: (a) Maximum Service Strategy : This strategy is rarely implemented. Logistics systems designed to provide maximum customer service attempts to consistently deliver products on a two to four hour basis. (b) Profit Maximisation Strategy : Most firms set the objective of maximising profit in the design of logistical systems. (c) Maximum Competitive Strategy : This strategy may be the most desirable strategy to guide logistical system design to seek maximum competitive advantage. Two ways in which logistics systems can be modified to gain maximum competitive advantage are:
(i) selective service programs and (ii) justified high-cost location (d) Minimal Asset Deployment Strategy : This strategy is motivated by a desire to minimise assets deployed for the logistics system.
END OF WEEK 2

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CHAPTER 2

DEMAND MANAGEMENT AND CUSTOMER SERVICE

Chapter 2 Demand Management And Customer Service

Himalaya Publishing House

Logistics and Supply Chain Management K. Shridhara Bhat

2.1 What is Demand Management?

Chapter 2 Demand Management And Customer Service

2.1.1 Relationship between Customer Service and Demand Management

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Logistics and Supply Chain Management K. Shridhara Bhat

Chapter 2 Demand Management And Customer Service

2.1.2 Demand Forecasting :

2.1.3 Customer Service :

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Chapter 2 Demand Management And Customer Service

2.1.4 The Logistics/Marketing Interface :

2.1.5 Customer Service and Levels of Product

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Logistics and Supply Chain Management K. Shridhara Bhat

Chapter 2 Demand Management And Customer Service

2.1.6 Levels of Customer Service Involvement :

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Chapter 2 Demand Management And Customer Service

2.1.7 Dimensions or Elements of Customer Service

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Logistics and Supply Chain Management K. Shridhara Bhat

Chapter 2 Demand Management And Customer Service

2.1.8 Performance Measures for Customer Service

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Logistics and Supply Chain Management K. Shridhara Bhat

2.1.9 Implementing Customer Service Standards

Chapter 2 Demand Management And Customer Service

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Logistics and Supply Chain Management K. Shridhara Bhat

Chapter 2 Demand Management And Customer Service

2.1.10 The Perfect Order :

2.1.11Improving Customer Service Performance :

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Logistics and Supply Chain Management K. Shridhara Bhat

2.2 Demand Management

Chapter 2 Demand Management And Customer Service

Himalaya Publishing House

Chapter 2 Demand Management And Customer Service

Himalaya Publishing House

Logistics and Supply Chain Management K. Shridhara Bhat

Chapter 2 Demand Management And Customer Service

Himalaya Publishing House

Chapter 2 Demand Management And Customer Service

Chapter 2 Demand Management And Customer Service

The essence of forecasting is to assist in logistics decision making.

Himalaya Publishing House

Logistics and Supply Chain Management K. Shridhara Bhat

Chapter 2 Demand Management And Customer Service

Himalaya Publishing House

Chapter 2 Demand Management And Customer Service

Himalaya Publishing House

Logistics and Supply Chain Management K. Shridhara Bhat

Chapter 2 Demand Management And Customer Service

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Logistics and Supply Chain Management K. Shridhara Bhat

2.3 Forecasting methods or Techniques

Chapter 2 Demand Management And Customer Service

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Logistics and Supply Chain Management K. Shridhara Bhat