Supply Chain Management, Demand and Customer Service

Supply Chain Management:
Demand management and
Customer Service

Rajendran Ananda
Krishnan

https://www.facebook.com/ialwaysthinkprettythings

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
https://www.facebook.com/ialwaysthink
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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
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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
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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
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Supply Demand Misalignment

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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 https://www.facebook.com/ialwaysthink
begins to set in, and orders are cancelled or prettythings

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.
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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.

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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
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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

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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. https://www.facebook.com/ialwaysthink
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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
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CPFR Business Model

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 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.
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 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.

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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. https://www.facebook.com/ialwaysthink
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Collaborative Planning
Collaborative demand
planning

Synchronized
Order fulfillment

Joint Capacity
planning

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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

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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

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 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
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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.
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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 https://www.facebook.com/ialwaysthink
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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. https://www.facebook.com/ialwaysthink
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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.
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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
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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.
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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 https://www.facebook.com/ialwaysthink
stockout cost also
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 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
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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

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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.
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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.
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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
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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.
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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 https://www.facebook.com/ialwaysthinkRs
unit, the loss is
1000. prettythings

Lost Customer
 The customer permanently switches to
another supplier. A supplier who loses
a customer loses a future stream of
income.

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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.
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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.

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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.)
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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

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
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Supply Chain Management, Demand and Customer Service

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