LSCM214

Chapter 8: Order Management and Customer

Service
Comprehensive Study Notes

Topics: Order Management | CRM | SCOR | Order Cycle | Customer Service | Stockouts
| Five Outputs
SECTION 1: Introduction to Order Management

1.1 What is Order Management?

Definition:
Order management defines and sets in motion the logistics system. It determines how
orders are received, processed, fulfilled, and delivered. It directly impacts both operational
efficiency and customer satisfaction.
Order management refers to the extent to which a firm conducts all activities relating to a
customer order — including timeliness, accuracy, and completeness. It covers everything
from order receipt to final delivery. It is not a single activity but a coordinated process
across functions.

Order management consists of two main phases:

• Influencing the order — shaping how and when customers place orders.
• Executing the order — physically fulfilling and delivering the order.

1.2 Why Order Management Matters

• Effective order management improves operational efficiency.
• It reduces errors and delays in the system.
• It ensures better coordination between departments.
• It directly contributes to customer satisfaction.
• Poor order management leads to incorrect deliveries, delays, and increased costs.
• Order management can be a source of competitive advantage — faster, more reliable,
and more flexible systems differentiate firms.

1.3 Customer Service and its Relationship with Order Management

Customer service includes all activities that impact the customer experience — anything that
touches the flow of information, products, and cash between the firm and the customer. It is not
just after-sales support; it is integrated into the entire order management process.

Key Relationship:
Order management is the PROCESS. Customer service is the OUTCOME experienced
by the customer.
Every decision in order management affects customer service levels.

• Faster processing improves responsiveness.

• Accurate orders improve reliability.
 • Flexible delivery improves customer satisfaction.
• Improving customer service improves relationships and long-term profitability.

1.4 Types of Customers

Customer Type Description

End User The final recipient of a good or service — the person who ultimately
consumes the product.

Business to Business (B2B) One business supplies another business who in turn has end users.
E.g. a manufacturer supplying a retailer.

Internal Goods and services provided from one department to another within
the same firm.
SECTION 2: Influencing the Order

2.1 What Does It Mean to Influence the Order?

Influencing the order means changing how customers place and structure their orders. The goal
is to make orders easier, more efficient, and more profitable to fulfil. Companies do not just
passively accept orders — they actively shape customer ordering behaviour.

2.2 Why Do Firms Influence the Order?

• To reduce logistics costs.
• To improve efficiency in warehousing and transport.
• To standardise order sizes and timing.
• To reduce complexity in operations.
• To improve service levels by creating more predictable demand patterns.

2.3 Examples of Influencing the Order

• Encouraging customers to order in larger quantities.
• Offering discounts for bulk purchases.
• Setting minimum order quantities (MOQs).
• Providing specific delivery schedules that customers must align to.
• Using online platforms to standardise the ordering process.

2.4 Impact on Logistics Activities

Influencing the order directly improves logistics performance:

Transportation: becomes more efficient through consolidated, larger shipments.
Warehousing: becomes easier with predictable demand patterns.
Inventory control: improves with stable ordering patterns.
Order fulfilment: becomes faster and more accurate.
SECTION 3: Customer Relationship Management
(CRM)

3.1 What is CRM?

CRM: The strategic management of customer relationships with a focus on improving
profitability and customer value. CRM helps firms understand different customer needs and
behaviours, supporting better decision-making in order management.

• Customers are grouped based on profitability.

• Different customers require different service levels.
• Activity-based costing can be used to understand the true cost of serving each customer.
• Not all customers should be treated the same.

3.2 The 4-Step CRM Process

Step 1 — Segment Customers

Customers are divided into groups based on their profitability and value. Two approaches:
• Single allocation criteria: a simple measure like revenue or order volume is used to rank
customers.
• Activity-based costing: a more accurate method that assigns the true cost of serving
each customer based on the actual activities required.
A picking model is developed for each customer segment.

Step 2 — Identify Product/Service Packages per Segment

Each customer segment receives a tailored service offering based on what that segment values.
This includes:
• Delivery speed requirements
• Order size preferences
• Service level expectations
The firm matches its logistics capabilities to each segment's expectations.

Two actions in Step 2:

1. Identify what each customer values in their relationship with the supplier.
2. Package value-adding products and services for each segment.

Step 3 — Develop and Execute Best Processes

Efficiency and service must be balanced. Processes are designed to meet customer
requirements and this may require process reengineering.

Two goals in Step 3:

1. Deliver on the customer expectations identified in Step 2.
2. Process reengineering might be required to achieve this.

Step 4 — Measure and Improve

• Performance is continuously monitored.
• Customer satisfaction is evaluated.
• Profitability is assessed.
• Customers may shift between segments over time and must be reassigned.
• The process is continuous — CRM is not a once-off exercise.

3.3 CRM Summary Table

Step Name Purpose

Step 1 Segment Customers Group customers by profitability using single criteria or

activity-based costing.

Step 2 Identify Service Packages Tailor service offerings — delivery speed, order size,
service level — to each segment.

Step 3 Develop & Execute Design and implement processes that deliver on each
Processes segment's expectations.

Step 4 Measure and Improve Monitor performance, evaluate satisfaction, reassign

shifting customers, and continuously improve.
SECTION 4: Pre-Transaction Order Information

4.1 What is Pre-Transaction Order Information?

Pre-transaction information: All the information needed before the order is processed. It
ensures that the order can be executed efficiently and must be shared across departments to
improve coordination and service levels.

4.2 What Pre-Transaction Information Must Include

Information Required Why It Matters

Who is the customer Determines service agreements, pricing, and order history

What is being ordered Allows inventory reservation and picking preparation

How much is being ordered Enables transport planning and warehouse allocation

Where the order must be Drives route planning and carrier selection
delivered

When the order must be Sets service expectations and workflow priorities
delivered

Customer-specific SLAs Service Level Agreements determine performance standards the

seller must meet

4.3 Why Information Quality Matters

• Incomplete or incorrect information leads to order errors.
• Errors increase costs and reduce service quality.
• Accurate information enables a 'perfect order'.
• Information quality is just as important as physical logistics execution.

Checkers Sixty60 Example:

Customers expect fast delivery within a specific time window. If the system has incorrect
address or stock data, the order cannot be fulfilled correctly. This directly impacts customer
satisfaction — showing how pre-transaction information quality drives order execution
performance.
SECTION 5: Executing the Order

5.1 What is Executing the Order?

Executing the order is the process from when the order is received to when it is delivered. It is
the thread that runs through the entire order management process, covering both order
management and order fulfilment. Execution influences how customers perceive the company.

5.2 The Order Management System

• The order management system is the main way buyers and sellers communicate order
information.
• It manages the flow of information relating to individual customer orders.
• This includes order entry, updates, tracking, and confirmation.
• It connects customers, sales, operations, and logistics.

5.3 Key Definitions for Exam

These definitions are directly assessable:

Order Cycle Time: The time between when a customer places an order and receives the
item. Think outbound.
Replenishment Cycle: The process by which inventories are resupplied or restocked.
Think inbound.
Lead Time: The time between the initiation of any process and its expected completion.
Can be ordering lead time, delivery lead time, or production lead time.
Order-to-Cash (OTC) Cycle: How a business receives, processes, manages, and
completes customer orders — including shipping, invoicing, and collecting payment.
SECTION 6: The SCOR Model

6.1 What is the SCOR Model?

SCOR: The Supply Chain Operations Reference model. A framework developed by the Supply
Chain Council used to describe, analyse, and improve supply chain processes. It provides a
standard way of understanding how supply chains operate by linking business processes,
performance metrics, and best practices.

Purpose of SCOR:
• Helps organisations map and understand their supply chain activities.
• Allows firms to identify inefficiencies and areas for improvement.
• Provides a common language for supply chain processes.
• Supports performance measurement and benchmarking.

6.2 The Five Core SCOR Processes

Process What It Covers

PLAN Demand and supply planning — balancing resources with requirements across
the supply chain.

SOURCE Procurement of goods and services to meet planned or actual demand.

MAKE Production, manufacturing, or assembly activities that transform materials into

finished goods.

DELIVER Order management, transportation, and distribution activities to get products to

customers.

RETURN Reverse logistics — returning products from customers back through the supply
chain.

6.3 SCOR D1 — The Deliver Process (D1.1 to D1.15)

The SCOR D1 process describes the full order execution cycle. It consists of two flows:

Information Flow (Top Row) — Starts on the RIGHT, moves LEFT

This is everything that happens digitally / in the system before anything is physically touched:

Step Description

D1.1 Process Inquiry and Quote: Customer asks for product info, price, and availability.

D1.2 Receive, Enter, and Validate Order: Order is captured in the system and checked for
 accuracy.

D1.3 Reserve Inventory and Determine Delivery Date: Stock is allocated and delivery timing is
set.

D1.4 Consolidate Orders: Multiple orders may be grouped together for efficiency.

D1.5 Build Loads: Orders are grouped into shipments.

D1.6 Route Shipments: The best delivery routes are planned.

D1.7 Select Carrier and Rate Shipments: Transport provider is chosen and cost is calculated.

Product Flow (Bottom Row) — Starts on the LEFT, moves RIGHT

This is the physical movement of goods:

Step Description

D1.8 Receive Product from Source or Make: Stock arrives from supplier or production.

D1.9 Pick Product: Items are selected from inventory.

D1.10 Pack Product: Items are packed for delivery.

D1.11 Load Vehicle and Generate Shipping Documents: Goods are loaded and paperwork is
prepared.

D1.12 Ship Products: Goods are transported to the customer.

D1.13 Receive and Verify Product by Customer: Customer receives and checks the order.

D1.14 Install Product (if required): For some products, installation is needed after delivery.

Cash Flow (Final Step)

D1.15 — Invoice: The customer is billed and payment is collected.

Dell example: In the sell-buy-make model, Dell processes the buyer's credit card payment
at D1.3 (when inventory is reserved) — before they even own the components for the final
product. This means D1.15 effectively moves to after D1.3 in their model, significantly
improving cash flow.
SECTION 7: Order Cycle Length and Variability

7.1 Introduction
Understanding the average order cycle is not enough. Firms must consider variability and
consistency, as these determine how much inventory is required. Uncertainty in the system
creates risk.

7.2 Order Cycle Length vs Variability

Concept Definition Key Point

Order Cycle Length The average time it takes to complete an Determines demand
order from placement to delivery. inventory (cycle stock)
requirements.

Order Cycle Variability The inconsistency or range in completion Has a GREATER impact
times — how much the cycle time on inventory than length.
fluctuates around the average. Drives safety stock
requirements.

Critical Insight:
Variability has a GREATER impact on inventory than cycle length. A firm can have short
but highly variable cycles — or longer but consistent cycles. The consistent (low variability)
system often requires less safety stock even if the average cycle is longer.

7.3 Why Variability Matters

• Variability creates uncertainty in delivery times.
• Firms must plan for the worst-case scenario, not the average.
• This increases the need for safety stock.
• Higher variability increases inventory holding costs.
• Customers often prefer consistent performance over faster but unpredictable service.

7.4 The Four Components of the Order Cycle

Variability in any of these stages affects the total order cycle time:

Component Description Source of Variability

Order Placement Time taken by the customer to place the System delays, manual entry
order through the appropriate channel. errors, unclear order specs.
 Order Processing Time to enter, validate, and prepare the System speed, staff capacity,
order in the system. order complexity.

Order Preparation Time to pick, pack, and prepare the order Warehouse efficiency, inventory
physically. accuracy, labour availability.

Order Shipment Time to transport and deliver the order to Carrier performance, route
the customer. conditions, distance.

7.5 Before vs After: Systems Improvement Example (Langley, 2021)

Scenario Average Cycle Time Range Variability

BEFORE system 13 days 4 to 22 days High — wide range of

improvement delivery times

AFTER system 11 days 6 to 16 days Lower — more

improvement consistent delivery
times

Key lesson: Reducing variability (from 18-day range to 10-day range) is more impactful
than reducing average cycle time (from 13 to 11 days). The 'After' scenario is superior not
just because it is faster on average, but because it is far more predictable — reducing
safety stock requirements significantly.

7.6 Variability Calculation Example

Firms must plan inventory based on the MAXIMUM possible cycle, not the average:

Given:
Average cycle time = 10 days
Variability = plus/minus 3 days
Maximum cycle = 10 + 3 = 13 days
Daily demand = 5 units
Required inventory = 13 days x 5 units = 65 units
Reorder decision: Place a new order when inventory reaches 65 units (not the average of
50). This protects against uncertainty caused by variability.

7.7 Safety Stock vs Demand Inventory

Inventory Type What Drives It How to Reduce It

Demand Inventory (Cycle Driven by order cycle LENGTH — Reduce the absolute average
Stock) the average time to complete a order cycle time.
 cycle.

Safety Stock Driven by order cycle Reduce variability — make the

VARIABILITY — the uncertainty system more consistent and
and range of possible cycle times. predictable.

Safety stock exists because of variability. It is a buffer against uncertainty in the system.
Reducing variability reduces safety stock — which reduces inventory holding costs and
improves cash flow.

7.8 The Inventory vs Service Level Trade-Off

• Higher inventory levels increase product availability.
• Higher availability improves customer service levels.
• BUT higher inventory reduces cash flow.
• Firms must balance cost and service — every service level comes at a cost.

The Fundamental Trade-Off:

Increased inventory = increased stock availability = increased service levels
BUT increased inventory = decreased cash flow. Firms must find the optimal balance.
SECTION 8: Customer Service in Supply Chains

8.1 Understanding Customer Service

Customer service in logistics refers to the ability of a firm to meet customer requirements in
terms of product availability, delivery performance, and supporting information. It is not a
standalone activity but the outcome of how effectively the entire supply chain operates.

Customer service can be understood from three perspectives:

• As a philosophy: reflects the organisation's commitment to meeting customer needs.
• As performance measures: evaluated using specific metrics such as delivery reliability
and responsiveness.
• As an activity: the specific tasks and processes performed to serve customers.

8.2 Customer Service as a System Outcome

• Customer service is best understood as a system-wide outcome rather than an isolated
function.
• It reflects how well different supply chain activities are integrated and coordinated.
• Even efficient transportation will produce poor service if inventory availability is
inadequate.
• Accurate inventory without reliable delivery will still fail to meet customer expectations.
• This highlights the interdependence of all logistics activities in determining service
performance.

8.3 Strategic Importance of Customer Service

• Customer service is a key driver of competitive advantage in modern supply chains.
• Firms increasingly compete on service performance rather than only price or product
features.
• High levels of service lead to increased customer retention, repeat purchases, and long-
term profitability.
• Poor service results in lost customers, reduced demand, and reputational damage.
• Superior customer service is often more difficult for competitors to replicate than price
reductions.

8.4 Customer Service as the Link Between Logistics and Marketing

Customer service is the key link between logistics and marketing within an organisation:

• Marketing creates demand and sells the product.

• Logistics fulfils that promise by delivering the product.
 • If logistics fails to deliver when and where promised, the entire value proposition
collapses.
• Customer service therefore integrates internal functions into one customer-facing
outcome.

8.5 The Marketing Mix and Logistics (7 Ps)

Logistics influences each element of the extended marketing mix:

P How Logistics is Involved

Price Includes total lifecycle cost (total cost of ownership) — procurement, use, maintenance,
and disposal costs. Logistics costs directly affect pricing.

Product Logistics adds value through packaging, preservation, and ensuring availability. Physical
condition on arrival affects product perception.

Promotion Logistics leads two-way communication between buyer and seller during order execution.
Delivery notifications and order tracking are now part of promotion.

Place The core of logistics — making the product available at the correct geographical location
at the right time.

People The entire organisation plays a critical role in customer service. Technology makes
internal processes and people more visible to clients.

Process Pre- and post-transaction dimensions of customer service. Online ordering, mass
customisation, and delivery notifications place logistics at the centre of seamless
customer service.

Physical Physical aspects clients interact with — stores, pack houses, delivery vehicles. Many
Evidence facilities are under direct logistics control.

8.6 The Four Dimensions of Customer Service (MUST KNOW)

Dimension 1: Time
Time refers to the speed at which a customer order is fulfilled. Measured using order cycle time
(total time from order placement to delivery).
• Shorter order cycle times improve responsiveness and customer satisfaction.
• Reducing time often requires increased investment: higher inventory or faster
transportation.
• Time is influenced by: order processing speed, inventory positioning, transport mode
selection, and warehouse efficiency.

Dimension 2: Dependability
Dependability refers to the consistency and reliability of service performance over time.
• Includes delivering on time, in full, without damage, and with accurate documentation.
• Closely aligned with the concept of the 'perfect order'.
 • Directly affected by variability in the order cycle — high variability reduces dependability.
• Customers often prefer consistent performance over faster but unpredictable service.
• Reducing variability improves dependability and reduces safety stock.

Dimension 3: Communication
Communication refers to the flow of information between the firm and the customer throughout
the order process.
• Includes order confirmation, tracking updates, delivery notifications, and customer
support.
• Effective communication ensures customers are informed at all times.
• Enabled by information systems that provide real-time visibility.
• Even when service failures occur, effective communication can reduce customer
dissatisfaction.
• Poor communication amplifies the negative impact of delays or errors.

Dimension 4: Convenience
Convenience refers to the ease with which customers can interact with the firm.
• Includes simplicity of placing orders, flexibility of delivery options, and efficiency of
returns.
• Reduces the effort required by customers and enhances the overall experience.
• Has become a critical differentiator in modern supply chains — especially in e-
commerce.
• Customers expect user-friendly platforms, flexible schedules, and seamless returns.

Important: The four dimensions interact with each other.

Improving one dimension often affects the others. For example, faster delivery may reduce
dependability if processes become less stable. Increasing convenience may increase costs.
Firms must therefore manage trade-offs between these four dimensions.

8.7 E-Commerce and Customer Service

• E-commerce has significantly transformed how supply chains operate — increasing the
importance of all four service dimensions.
• Customers expect faster delivery times, real-time tracking, convenience in ordering and
returns, and consistent reliable service.

Impact on the Order-to-Cash (OTC) Cycle:

Model Flow Impact

Traditional (Buy-Make- Produce first, then sell and collect Cash is received after the product
Sell) cash. is produced and delivered. Long
OTC cycle.

E-Commerce (Sell-Buy- Sell first, collect payment, then Customers pay before the product
 Make) source and produce. is fully assembled. Significantly
improves cash flow.

Dell Example Customer orders online, credit card Dell receives funds before owning
charged at D1.3 (inventory the components. Best-practice
reservation). sell-buy-make model.

8.8 Customer Service Trade-Offs

Achieving high levels of customer service requires increased investment:
• Higher inventory improves product availability but increases holding costs.
• Faster transportation improves responsiveness but increases transport costs.
• Advanced information systems improve communication but require capital investment.
Firms must determine the optimal balance between service level and cost.
SECTION 9: Stockouts and Their Expected Cost

9.1 What is a Stockout?

Stockout: When demand cannot be met at the required time and location due to insufficient
inventory. A stockout represents a failure in customer service delivery — it is both an operational
issue and a customer service issue.

Stockouts:
• Disrupt the order fulfilment process.
• Reduce service reliability and customer satisfaction.
• May lead to lost revenue and damaged customer relationships.
• Increase order cycle time and variability.
• Reduce all four dimensions of customer service — time, dependability, communication,
and convenience.

9.2 The Four Outcomes of a Stockout

Outcome What Happens Cost to Seller

Customer Waits Customer is willing to wait for stock to Indirect: loss of goodwill, possible
arrive. Creates an unsatisfied customer future defection.
with bad brand perceptions and
potential loss of loyalty.

Backorder Only a portion of the ordered items are Extra order document, second pick
available. A backorder is created for the list, additional labour, extra
remainder. transportation costs.

Lost Sale Customer is not prepared to wait and Direct loss: the revenue/profit on the
turns to an alternative supplier. unfulfilled portion of the order.

Lost Customer Customer stops purchasing Severe: loss of all future purchases
permanently from the company after — customer lifetime value.
the stockout experience. Reputational damage through
negative word-of-mouth.

The Cost Triangle (from highest frequency to highest cost):

Backorders: most common, lowest cost per occurrence.
Lost sales: less common, moderate cost per occurrence.
Lost customers: least common, HIGHEST cost per occurrence.

9.3 Calculating the Expected Cost of a Stockout

To make an informed decision about how much inventory to carry, organisations must determine
the expected cost of a stockout through three steps:

Step Action

Step 1 Identify the potential results of a stockout (backorder, lost sale, lost customer, customer
waits).

Step 2 Calculate each result's expense or lost profit.

Step 3 Estimate the total expected cost of a single stockout using probability-weighted
outcomes.

Worked Example (From Your Slides)

Given probabilities and costs:

70% of stockouts result in backorders — cost to seller = R75 per backorder
20% of stockouts result in lost sales — cost to seller = R400 per lost sale
10% of stockouts result in lost customers — cost to seller = R20,000 per lost customer
Formula:

Expected Cost = (0.70 x R75) + (0.20 x R400) + (0.10 x R20,000)

= R52.50 + R80.00 + R2,000.00
= R2,132.50 per stockout

Interpretation: The firm should carry additional inventory as long as the cost of that
additional inventory is equal to or less than R2,132.50 per stockout prevented.

Lost Sale Calculation Example

Given:
Buyer orders 100 computers. Seller has 60 available. Profit per unit = R10.
Scenario A: Buyer takes 60 and cancels remaining 40 — Lost sale cost = 40 x R10 =
R400
Scenario B: Buyer cancels entire order — Lost sale cost = 100 x R10 = R1,000

9.4 Service Recovery

Service Recovery: The actions taken by a firm to correct a service failure and restore customer
satisfaction. It recognises that mistakes are inevitable in complex supply chains — the focus is
on responding effectively to minimise negative impact.

Four important aspects of proactive service recovery management:

• Measuring the cost of poor service.
 • Anticipating the need for recovery.
• Acting fast when failures occur.
• Training and empowering employees to resolve issues.

Service recovery actions:

• Own up to the service failure.
• Solve the customer's problem quickly.
• Conduct a root cause investigation.
• Offer the customer some form of compensation.
• Follow up to assure that the customer is satisfied.
• Ask customers for service feedback for continuous improvement.
SECTION 10: The Five Major Outputs of Order
Management

Order management directly influences customer service through five interrelated

outputs. A weakness in one output can negatively affect all others — they cannot be
managed in isolation.

The Five Outputs (NB: calculations are assessable):

1. Product Availability
2. Order Cycle Time
3. Logistics Operations Responsiveness (LOR)
4. Logistics System Information (LSI)
5. Post-Sale Logistics Support (PLS)

10.1 Output 1 — Product Availability

Product availability is usually the most basic output of an organisation's order management and
logistics system. It answers the customer's simplest question: Did I get what I wanted, when I
wanted it, in the quantity I wanted?

• Sellers may hold more inventory to increase availability.

• Buyers may hold more inventory to reduce the risk of seller stockouts.
• If the seller cannot make product available, the buyer may cancel the order entirely.
• Not all products require the same availability level — it should depend on substitutability,
stockout cost, and demand profile.

Cumulative Availability — The Chain Effect

A 90% availability rate at each stage of the supply chain does not result in 90% availability at the
shelf:

Four-stage supply chain, 90% availability at each stage:

Farmer to processing plant: 90%
Processing plant to supplier DC: 90%
Supplier DC to retailer DC: 90%
Retailer DC to store: 90%

Cumulative shelf availability = 0.90 x 0.90 x 0.90 x 0.90 = 0.6561 =

65.61%

Conclusion: The product is unavailable at shelf level 34.39% of the time, even though each
individual stage operates at 90% availability. A 90% rate at each stage can still result in
 poor customer service at the final point of demand.

Product Availability Metrics

Metric What It Measures Internal or External?

Item Fill Rate The percentage of items (cases, units, Internal

packs) available to fill an order. Focuses
on quantity.

Line Fill Rate The percentage of order lines filled Internal

completely. A line = one product type on a
multi-product order.

Order Fill Rate The percentage of orders filled External

completely. If one item or line is missing,
the order is NOT complete.

Perfect Order Rate The percentage of orders completed External

without any failure: complete, on time,
damage-free, and accurately billed.

Critical Rule:
Whenever item fill rate or line fill rate is below 100%, order fill rate and perfect order rate
automatically become ZERO. This is because the customer did not receive a complete
order.

Multiple Line Order Example (From Slides)

Order contains 10 product lines, total of 200 items:

Metric Scenario 1 Scenario 2

Lines filled 9 out of 10 3 out of 10

Items filled 90 out of 200 130 out of 200

Line Fill Rate 9 ÷ 10 = 90% 3 ÷ 10 = 30%

Item Fill Rate 90 ÷ 200 = 45% 130 ÷ 200 = 65%

Order Fill Rate 0% (order incomplete) 0% (order incomplete)

Perfect Order Rate 0% 0%

Key insight: Different metrics can tell very different stories about the same order. Scenario 2 has
a higher item fill rate but a much lower line fill rate. The seller must track both internal and
external metrics.
10.2 Output 2 — Order Cycle Time
Order Cycle Time: The time from when the buyer places an order until the buyer receives it.
Both the absolute length AND reliability of order cycle time matter to customer service.

• Shorter order cycle times usually require the seller to hold more inventory to respond
faster.
• Longer order cycle times may force the buyer to hold more inventory.
• Order cycle time does not eliminate inventory from the supply chain — it shifts it between
members.
• Order cycle time affects inventories, revenues, and profits for both buyer and seller.

Appliance Retailer Example

An appliance retailer sells washing machines:
• If customers demand 1-2 day delivery: retailer must hold inventory in its distribution
network.
• If customers accept 7-day delivery: the retailer can hold less inventory, and the
manufacturer absorbs more of the burden.
This shows how customer expectations directly influence where inventory is held in the supply
chain.

Order Cycle Time Metrics (Three Perspectives)

Perspective When OCT Ends

Buyer's perspective When goods are received at the buyer's location.

Seller's perspective When payment is received (order-to-cash cycle time).

Customer's broader perspective Customer wait time — includes maintenance or repair time after a
breakdown.

Order Cycle Time and Inventory Types

Inventory Type Reduced By

Demand Inventory (Cycle Stock) Reducing the ABSOLUTE LENGTH of order cycle time.

Safety Stock Reducing the VARIABILITY in order cycle time.

Current vs Proposed Order Cycle Time — Financial Example

Given:
Current average OCT = 10 days | Proposed average OCT = 5 days
Current standard deviation = 3 days | Proposed standard deviation = 1 day
Daily demand = 1,377 units | Service level = 97.7%
 Improvement Calculation Financial Impact

Safety stock reduction Current SS = 8,262 units | Proposed SS Safety stock cost reduction
= 2,754 units | Reduction = 5,508 units = $692,465.76

Demand inventory OCT decreases by 5 days. With daily Demand inventory cost
reduction demand of 1,377 units, fewer units reduction = $865,582.20
needed to cover the cycle.

TOTAL improvement Combined financial impact of both Total cash flow

reductions. improvement =
$1,558,047.96

10.3 Output 3 — Logistics Operations Responsiveness (LOR)

Logistics Operations Responsiveness (LOR) examines how well a seller can respond to a
buyer's specific needs. It takes two forms:
• Customisation: tailoring service offerings to meet a buyer's unique requirements.
• Flexibility: responding quickly to sudden changes in the buyer's demand pattern.

Why responsiveness matters:

• Responsiveness goes beyond basic delivery performance.
• It is about adapting to customer needs — not just delivering on time.
• In volatile markets, customers value suppliers who can respond quickly and flexibly.
• Responsiveness does not have one universal definition — different buyers define it
differently.

P&G Rainbow Pallet Example

Procter & Gamble Example:

P&G developed 'rainbow pallets' (store-built pallets) for customers. Each pallet contained
multiple products that could move through the customer's distribution centre and be
delivered directly to the store floor for shelf replenishment.
Benefits for the buyer: reduced handling and inventory holding costs.
This shows that responsiveness may require investment from the seller — but creates
value for the buyer, which can strengthen the relationship.

Reinvestment Ratio
Reinvestment Ratio: The percentage of the customer's savings from value-added services that
would be reinvested in the seller's products — either by buying more of the seller's products or
by lowering prices to consumers. Creates financial value for both buyer and seller.

LOR Metrics (SCOR)

• Upside Deliver Adaptability: how much demand can the seller accommodate above the
current level?
 • Downside Deliver Adaptability: how much can the seller scale down if demand
decreases?
• Upside Deliver Flexibility: how quickly can the seller respond to demand increases?

10.4 Output 4 — Logistics System Information (LSI)

Logistics System Information (LSI) is critical to order management and customer service. Timely
and accurate information can reduce inventories, improve cash flow, and support all other order
management outputs.

Three Types of Logistics Information

Information Type When Needed Also Called

Pre-transaction information Before the order is placed. Planning information

Transaction information To execute the order in Execution information

progress.

Post-transaction information After delivery — for evaluation Evaluation information

and improvement.

Technology Enablers
• Barcodes, RFID tags, EDI (Electronic Data Interchange), and internet-based systems all
improve supply chain visibility.
• The key challenge is not just collecting data — it is using data to improve operations.
• Point-of-sale data improves forecast accuracy, reduces safety stock, improves product
availability, and supports more efficient manufacturing schedules.

Proof of Delivery — Cash Flow Example

Computer manufacturer case:

Because products were high value, customers required proof of delivery before paying
invoices.
Original process: Manual proof of delivery through ground carrier, air freight company, and
freight forwarder. OTC cycle = 50 days.
Investment: Electronic global freight tracking system using barcodes and EDI. OTC cycle =
30 days.
Financial result:

Cash flow increase = $648,000 avg invoice x 10% cost of capital x

(20/365 days)
= $3,550.68 per order
Across 344 orders = $1,221,434 total cash flow improvement

10.5 Output 5 — Post-Sale Logistics Support (PLS)

Post-sale logistics support focuses on what happens after the product has been delivered. Many
firms focus mainly on outbound logistics — but support after delivery can become a major
source of competitive advantage, especially when returns, repairs, or spare parts are involved.

Two Forms of Post-Sale Logistics Support

Form Description Key Metric

Returns Management Managing product returns from the Ease of return — the customer
customer back to the supplier. Especially wants the process to be simple
important in e-commerce and retail. and convenient.

Spare Parts Logistics Delivering and installing spare parts after Availability, order fill rate, order
equipment failure. Critical in heavy cycle time — because downtime
equipment, military, and industrial costs are extremely high.
environments.

After-sales service is often called the 'forgotten supply chain' — many firms focus on the sale
but underinvest in service operations.

Spare Parts Financial Example

Heavy equipment manufacturer — 5,000 machines per year:

At 70% spare parts availability: service cost = $8,700,000
At 85% spare parts availability: service cost = $4,350,000
A 15% increase in availability improves pre-tax cash flow by $4,350,000.

10.6 How the Five Outputs Link Together

Output Role in Customer Service

Product Availability Ensures the customer can receive what they ordered, when they
ordered it.

Order Cycle Time Determines how quickly the customer receives it.

Logistics Operations Determines how well the seller adapts to changing or unique
Responsiveness customer needs.

Logistics System Information Allows accurate planning, execution, and evaluation across the
entire order process.

Post-Sale Logistics Support Maintains customer satisfaction and competitive advantage after
delivery.

Conclusion: Order management has a direct influence on customer service. The five major
outputs are interrelated and must be managed together. Improving customer service
usually requires investment — the challenge is to balance service improvements with
financial impact.
SECTION 11: Exam Quick Reference

11.1 Key Definitions at a Glance

Term Definition

Order Management The extent to which a firm conducts all activities relating to a customer
order — timeliness, accuracy, and completeness from receipt to
delivery.

Order Cycle Time Time from when a customer places an order to when they receive it
(outbound perspective).

Replenishment Cycle Process by which inventories are resupplied or restocked (inbound

perspective).

Lead Time Time between initiation of any process and its expected completion.

OTC Cycle Order-to-cash cycle — how a business receives, processes, manages,

and completes customer orders including payment collection.

SCOR Supply Chain Operations Reference model — standard framework for

describing, analysing, and improving supply chain processes.

CRM Strategic management of customer relationships to improve profitability

and customer value.

Stockout When demand cannot be met at the required time and location due to
insufficient inventory.

Backorder Created when a seller has only a portion of the products ordered —
secures available stock and promises remainder later.

Service Recovery Actions taken by a firm to correct a service failure and restore
customer satisfaction.

Safety Stock Buffer inventory held to protect against uncertainty caused by order
cycle variability.

Demand Inventory Inventory needed to cover demand during the average order cycle
length (cycle stock).

Product Availability Whether the customer received what they wanted, when they wanted
it, in the quantity they wanted.

Perfect Order An order that is complete, delivered on time, damage-free, and

accurately billed.

LOR Logistics Operations Responsiveness — how well a seller customises

or adapts service to meet specific buyer needs.

LSI Logistics System Information — timely and accurate information used

to support order management and customer service.
11.2 Calculation Summary
Calculation Formula

Maximum cycle inventory = (Average cycle time + variability) x daily demand

Cumulative product availability = Availability at stage 1 x stage 2 x stage 3 x stage 4 (etc.)

Item fill rate = Items available / Items ordered x 100%

Line fill rate = Lines filled completely / Total lines ordered x 100%

Order fill rate = Orders completely filled / Total orders x 100% (= 0 if any
line/item missing)

Expected stockout cost = Sum of (Probability of each outcome x Cost of that

outcome)

Lost sale cost = Units not supplied x Profit per unit

Cash flow improvement (LSI) = Invoice value x Cost of capital x Days saved / 365

11.3 Critical Distinctions for the Exam

• Order management = the process. Customer service = the outcome.
• Order cycle LENGTH drives demand inventory. Order cycle VARIABILITY drives safety
stock.
• Variability has a GREATER impact on inventory than cycle length.
• Item/line fill rates are internal metrics. Order fill rate and perfect order rate are external
(customer-facing) metrics.
• If item fill rate or line fill rate < 100%, then order fill rate and perfect order rate = 0%.
• Cumulative availability multiplies — 90% at 4 stages = only 65.61% at shelf.
• The cost triangle: backorders (most frequent, lowest cost) → lost sales → lost customers
(least frequent, highest cost).
• Reducing OCT length reduces demand inventory. Reducing OCT variability reduces
safety stock.
• LSI is measured by its financial outcomes (cash flow improvement), not directly.
• Post-sale support is the 'forgotten supply chain' — often underinvested but highly
strategic.

11.4 Case Study Quick Reference

Case Key Issue Relevant Concept

Checkers Sixty60 Incorrect address/stock data prevents Pre-transaction order

order fulfilment. information quality.

Woolworths Dash Small, frequent orders create logistics Influencing the order; LOR;
pressure. CRM segmentation.

Dell (sell-buy-make) Payment collected at D1.3 before E-commerce OTC cycle;

components sourced. cash flow improvement.
SA online grocery (case) Stockouts 25% of cycles; backorders, lost Expected cost of stockout
sales, lost customers. calculation.

SA fitness importer (case) Long lead times, poor communication, Four dimensions of
limited inventory. customer service.

SA grocery delivery Inconsistent 2-10hr cycle times, 200 Order cycle variability;
(case) orders/day. SCOR D1 framework.

P&G rainbow pallets Store-built pallets reduce customer LOR; reinvestment ratio.
handling costs.

Computer manufacturer Manual POD = 50-day OTC. Electronic = LSI cash flow improvement:
(LSI) 30-day OTC. $1,221,434.

Caterpillar / spare parts Machine downtime costs thousands per Post-sale logistics support;
hour. availability metrics.

Heavy equipment 70% to 85% spare parts availability = PLS financial impact
manufacturer $4.35M improvement. calculation.

Good luck on 5 June 2026!