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Supply Chain Management, Demand and Customer Service

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Supply Chain Management
Supply Chain Management, Demand and Customer Service
Presentations By Rajendran Ananda Krishnan,

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Supply Chain Management, Demand and Customer Service

  1. 1. Supply Chain Management: Demand management and Customer Service Rajendran Ananda Krishnan
  2. 2. Topics to be covered  Demand management and Customer Service  Outbound to customer logistics systems  Demand Management  Traditional forecasting  CPFRP, Customer Service  Expected cost of stockouts  Channels of distribution prettythings
  3. 3. Outbound-to-Customer Logistics Systems Outbound-to-customer Logistics systems, also referred to as physical distribution, refers to the set of processes, systems and capabilities that enhance a firm’s ability to serve its customers. In an effort to serve their customers, many firms have placed significant emphasis on outbound-to-customer logistics systems. Inbound-to-operations Logistics systems refers to the activities and processes that precede and facilitate value-adding activities such as manufacturing, assembly and so on. It as also referred to as materials management and prettythings
  4. 4. Demand Management  Demand management may be thought of as focused efforts to estimate and manage customer’s demand with the intention of using this information to shape operating decisions.  The essence of demand management is to further improve the ability of firms throughout the supply chain-particularly manufacturing through the customer-to collaborate on activities related to the flow of product, services, information and capital.  The desired end result should be to create greater value for the end user or consumer , for whom all supply chain activities should be prettythings
  5. 5. The following list suggests a number of ways in which effective demand management will help to unify channel members with the common goal of satisfying customers and solving customer problems:  Gathering and analyzing knowledge about customers, their problems and their unmet needs.  Identifying partners to perform the functions needed in the demand chain.  Moving the functions that need to be done to the channel member that can perform them most effectively and efficiently.  Sharing with other supply chain members knowledge about consumers and customers, available technology, and logistics challenges and opportunities.  Developing products and services that solve customer’s problems.  Developing and executing the best logistics, transportation and distribution methods to deliver products and services to consumers in the desired format. prettythings
  6. 6. Supply Demand Misalignment prettythings
  7. 7. Refer to the graph given in class on Supply-demand misalignment (Page No 186- A logistics Approach to Supply Chain Management by Coyle, Bardi & Langley) Supply-Demand Misalignment – In the first phase of a new product launch, when end-user demand is at its peak and opportunities for profit margins are greatest, PC assemblers are not able to supply product in quantities sufficient to meet demand-thus creating true product shortages. Also during this time-frame, distributors and resellers tend to over-order, often creating substantial phantom demand. In the next phase, as production begins to ramp up, assemblers ship product against this inflated order situation and book sales at the premium high-level launch price. As channel inventories begin to fill, price competition begins to set in, and orders are cancelled or prettythings
  8. 8. In the final phase, as end user demand begins to decline, the situation clearly has shifted to one of over supply. This is largely due to the industry’s planning processes and systems, which are primarily designed to use previous period demand as a gauge. The net result of these behaviors in aligning supply and demand is that a large majority of product is sold during the declining period of profit opportunity, thereby diminishing substantial value creation opportunities for industry participants. prettythings
  9. 9. Traditional Forecasting  A major component of demand management is forecasting the amount of product that will be purchased by consumers or end users. Although forecasts are made throughout the supply chain, the single most important forecast is that of primary demand. In a truly integrated supply chain scenario, all other demand will emanate directly from-or at least be influenced by – primary demand. prettythings
  10. 10. Integrating forecasting and production I Step – Develop a twelve-month forecast of demand by month by applying traditional demand forecasting approaches (e.g. moving average, exponential smoothing, Regression analysis etc.) to a three year history file of data on factors such as demand, price, seasonality, availability, deals and promotions. II Step – Brand and product managers review this forecast and recommend relevant changes. III Step – Developing aggregate production schedules for the next twelve-month period and allocating specific production requirements to prettythings
  11. 11. Integration of sales forecasting and Production History file ( 3 Years – demand, price, Brand and product Aggregate production seasonality, deals, managers review schedules (12 promotions etc. and recommend months) changes Forecasting model (moving averages, Revised Allocation of regression analysis forecast aggregate etc.) requirements to plants Gross market Short-term 12-month requirements (1 to forecast (by production 3 year periods) month) scheduling prettythings
  12. 12. Purposes of forecasting  Long-term forecasts usually cover more than three years and are used for long-range planning and strategic issues.  Midrange forecasts in the one-to three year range- address budgeting issues and sales plans.  Short-term forecasts are most important for the operational logistics planning process. They project demand into the several months ahead and are focusing increasingly on shorter time intervals. prettythings
  13. 13. Collaborative Planning, Forecasting And Replenishment (CPFR)  Initiatives that have attempted to create efficiency and effectiveness through integration of supply chain activities and processes have been identified as quick response, electronic data interchange (EDI), short cycle manufacturing, vendor managed inventory (VMI), continuous replenishment planning (CRP) and efficient consumer response (ECR).  CPFR has become recognized as a breakthrough business model for planning, forecasting and replenishment. Using this approach, retailers, transport providers, distributors and manufacturers can utilize available internet-based technologies to collaborate from operational planning through execution. CPFR simplifies and streamlines prettythings
  14. 14. CPFR Business Model prettythings
  15. 15.  Development of CPFR came from an effort by Wal Mart and one of its suppliers, Warner- Lambert Company, particularly with regard to its Listerine brand product. In addition to rationalizing inventories of specific line items and addressing out-of-stock occurrences, these two companies collaborated to increase their forecasting accuracy, so as to have just the right amount of inventory where it was needed, when it was needed.  CPFR emphasizes a sharing of consumer purchasing data among and between trading partners for the purpose of helping to govern supply chain activities. In this manner, CPFR creates a significant, direct link between the consumer and the supply chain. prettythings
  16. 16.  The CPFR initiative begins with the sharing of marketing plans between trading partners. Once an agreement is reached on the timing and planned sales of specific products, and a commitment is made to follow that plan closely, the plan is then used to create a forecast, by stock-keeping unit, by week, and by quantity. The planning can be for thirteen, twenty-six, or fifty two weeks. prettythings
  17. 17. Order Fulfillment and Order Management  Three critical elements of collaborative planning are collaborative demand planning, joint capacity planning, and synchronized order fulfillment. This type of planning improves quality of the demand signal for the entire supply chain through a constant exchange of information from one end to the other that goes well beyond traditional practices.  The Order-Management system represents the principal means by which buyers and sellers communicate information relating to individual orders of product. Effective order management is a key to operational efficiency and customer satisfaction. prettythings
  18. 18. Collaborative Planning Collaborative demand planning Synchronized Order fulfillment Joint Capacity planning prettythings
  19. 19. Order Management Functions  Receive order  Enter order – manual/electronic  Verify and check order for accuracy  Check credit  Check inventory availability  Process back order  Acknowledge order  Modify order  Suspend order  Check pricing and promotion  Identify shipping point  Generate picking documents  Originate shipment  Inquire order status  Deliver order  Measure service level  Measure quality of service prettythings
  20. 20. Order and Replenishment Cycles When referring to outbound-to-customer shipments, we typically use the term order cycle. The term replenishment cycle is used more frequently when referring to the acquisition of additional inventory, as in materials management. Basically one firm’s order cycle is another’s replenishment cycle. Major components of Order Cycle Order Order Order Order placement processing preparation shipment prettythings
  21. 21.  Order Placement – Order-placement time can vary significantly, from taking days or weeks to being instantaneous. Company experiences indicate that improvements in order-placement systems and processes offer some of the greatest opportunities for significantly reducing the length and variability of the overall order. Significant increases were projected for Internet facilitated resources such as E-marketplace, Extranets and E-mail.  Order Processing – The order-processing function usually involves checking customer credit, transferring information to sales records, sending the order to the inventory and shipping areas, and preparing shipping documents.  Order Preparation – Depending on the commodity being handled and other factors, the order-preparation process sometimes may be very simple and performed manually or, perhaps, may be relatively complex and highly automated.  Order Shipment – Shipment time extends from the moment an order is placed upon the transport vehicle for prettythings
  22. 22. Customer Service  Having the right product, at the right time, in the right quantity, without damage or loss, to the right customer is an underlying principle of logistics systems that recognizes the importance of customer service.  Another aspect of customer service that deserves mention is the growing consumer awareness of the price/quality ratio and the special needs of today’s consumers, who are time conscious and who demand flexibility. prettythings
  23. 23. The Traditional Logistics/Marketing Interface Product Price Promotion Place/Customer service levels Inventory carrying Transportatio costs n costs Warehousing Lot quantity costs costs Order processing and information costs prettythings
  24. 24. Defining Customer Service  Customer service is a process for providing competitive advantage and adding benefits to the supply chain in order to maximize the total value to the ultimate customer.  According to marketers, there are three levels of product: 1. The core benefit or service, which constitutes what the buyer is really buying. 2. The tangible product, or the physical product or service itself; 3. The augmented product, which includes benefits that are secondary to, but an integral enhancement to, the tangible product the customer is purchasing. Logistical customer service, installation warranties and after-sale service are examples of augmented product features. prettythings
  25. 25. Examples of the various forms that customer service may take include the following: 1. Revamping a billing procedure to accommodate a customer’s request. 2. Providing financial and credit terms. 3. Guaranteeing delivery within specified time periods. 4. Providing prompt and congenial sales representatives. 5. Extending the option to sell on consignment. 6. Providing material to aid in a customer’s sales presentation. 7. Installing the product. 8. Maintaining satisfactory repair parts inventories. prettythings
  26. 26. Levels of Customer Service  Customer service as an activity – This level treats customer service as a particular task that a firm must accomplish to satisfy the customer’s needs. Order processing, billing and invoicing, product returns and claims handling are all typical examples of this level of customer service.  Customer service as performance measures – This level emphasizes customer service in terms of specific performance measures, such as the percentage of orders delivered on time and complete and the number of orders processed within acceptable time limits.  Customer service as a philosophy – This level elevates customer service to a firm-wide commitment to providing customer satisfaction through superior prettythings
  27. 27. Elements of Customer Service Customer service has multifunctional interest for a company; but, from the point of view of the logistics function, we can view customer service as having four traditional dimensions:  Time – The time factor is usually order cycle time, particularly from the perspective of the seller looking at customer service. On the other hand, the buyer usually refers to the time dimension as the lead time, or replenishment time.  Dependability – Dependability can be more important than lead time. The customer can minimize its inventory level if lead time is fixed. prettythings
  28. 28. 1. Cycle time – A seller who can assure the customer of a given level of lead time, plus some tolerance, distinctly differentiates its product from that of its competitor. The seller that provides a dependable lead time permits the buyer to minimize the total cost of inventory, stockouts, order processing and production scheduling. 2. Safe delivery – If goods arrive damaged or are lost, the customer cannot use the goods as intended. A shipment containing damaged goods aggravates several customer cost centers – inventory, production and marketing. 3. Correct orders – An improperly filled order forces the customer to reorder, if the customer is not angry enough to buy from another supplier. If a customer who is an intermediary in the marketing channel experiences a stockout, the stockout cost also prettythings
  29. 29.  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 inventory the items ordered. In the order information stage, the use of EDI or Internet-enabled communications can reduce errors in transferring order information from the order to the warehouse receipt.  Convenience – Convenience is another way of saying that the logistics service level must be flexible. Basically, logistics requirements differ with regard to packaging, the mode and carrier the customer requires, routing and prettythings
  30. 30. Performance Measures for Customer Service Typical Element Brief Measurement Description Product Usually defined as percent in Unit availability stock (target performance % availability in level) in some base unit (i.e. base units order, product, dollars) Elapsed time from order Speed and Order cycle time placement to order receipt. consistency Usually measured in time units and variation from standard or target order cycle Distribution system flexibility Ability of system to respond Response time to special and/or unexpected to special needs of customer. requests prettythings
  31. 31. Distribution Ability of firm’s information system system to respond in Speed, accuracy information timely and accurate and message detail manner to customer’s of response requests for information Distribution Efficiency of procedures Response and system and time required to recovery time malfunction recover from distribution requirements system malfunction (i.e. errors in billing, shipping, damage , claims). Postsale Efficiency in providing product Response time, product support after support quality of delivery, including response technical, information, spare parts, or equipment modification, as appropriate. prettythings
  32. 32. Expected cost of stockouts A principal benefit of inventory availability and, hence of customer service is to reduce the incidence of stockouts. Once we develop a convenient way to calculate the costs of a stockout, we can use stockout probability information to determine the expected stockout cost. Last, we can analyse alternative customer service levels directly by comparing the expected cost of stockouts with the revenue enhancing benefits of customer service. prettythings
  33. 33. Effects of stockouts  A stockout occurs when desired quantities of finished goods are not available when and where a customer needs them. When a seller is unable to satisfy demand with available inventory, one of four possible events may occur: 1. The customer waits until the product is available 2. The customer back orders the product 3. The seller loses a sale 4. The seller loses a customer prettythings
  34. 34. Back Order A company having to back order an item that is out of stock will incur expenses for special order processing and transportation. The extra order processing traces the back order’s movement , in addition to the normal processing for regular replenishments. The customer usually incurs extra transportation charges because a back order is typically a smaller shipment and often incurs higher rates. prettythings
  35. 35. Lost sales Most firms find that although some customers may prefer a back order, others will turn to alternative supply sources. Most companies have competitors who produce substitute products; and when one source does not have an item available, the customer will order that item from another source. In such cases, the stockout has caused a lost sale. The seller’s direct loss is the loss of profit on the item that was unavailable when the customer wanted it. Thus, a seller can determine direct loss by calculating profit on one item and multiplying it by the number the customer ordered. For eg. If the order was for 100 units and the profit is Rs. 10 per unit, the loss is 1000. prettythings
  36. 36. Lost Customer  The customer permanently switches to another supplier. A supplier who loses a customer loses a future stream of income. prettythings
  37. 37. Determining the Expected Cost of Stockouts  The first step is to identify a stockout’s potential consequences. These include a back order, a lost sale, and a lost customer. The second step is to calculate each result’s expense or loss of profit and then to estimate the cost of a single stockout.  Assume : 70% of all stockouts result in a back order, and a back order requires extra handling costs of Rs. 6; 20% results in a lost sale for the item, and this loss equals Rs. 20 in lost profit margin; and 10% result in a lost customer, or a loss of Rs. 200.  Overall impact : 70% of Rs 6 = Rs. 4.20 20% of Rs. 20 = Rs 4 10% of Rs. 200 = Rs 20 Total estimated cost per stockout = Rs 28.20 A firm should carry additional inventory to protect against stockouts only as long as carrying the additional inventory costs less than Rs. 28.20. prettythings
  38. 38. Channels of Distribution  A channel of distribution consists of one or more companies or individuals who participate in the flow of goods, services, information and finances from the producer to the final user or consumer. This encompasses a variety of intermediary firms, including those that we classify as wholesalers or retailers. prettythings
  39. 39. Types of Channels Managing distribution channels requires firms to coordinate and integrate logistics and marketing activities in a manner consistent with overall corporate strategy.  Logistical channel refers to the means by which products flow physically from where they are available to where they are needed.  Marketing channels refers to the means by which necessary transactional elements are managed. (e.g. customer orders, billing, accounts receivable etc.) prettythings
  40. 40. Logistical and Marketing Channels Logistical channel Marketing Channel E-Procurement Supplier Transportatio n National account Manufacturer sales Transportatio Wholesaler/ n Distributor Distribution center Transportatio Retail customer n Retail store Consumer prettythings
  41. 41. Example of channels of distribution for the food products manufacturing industry Food Manufacturing firms Food Service Grocery Food Internet distributors wholesalers brokers (direct) Restaurant Specialty s (airlines etc.) Retail Retail Institutio Retail chains Interne groce nal chains (local and t rs buyers regional) retailer Consumers of manufactured food products prettythings
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Supply Chain Management Supply Chain Management, Demand and Customer Service Presentations By Rajendran Ananda Krishnan,


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