Supply Chain Management:

Demand management and Customer Service

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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
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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 firms 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
physical supply.
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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.
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 undertaken.
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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 customers
problems.
Developing and executing the best logistics, transportation
and distribution methods to deliver products and services to
consumers in the desired format.
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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 demandthus 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 returned.
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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 industrys
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
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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
various manufacturing facilities.
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Integration of sales forecasting and Production

History file ( 3 Years
demand, price,
seasonality, deals,
promotions etc.
Forecasting model
(moving averages,
regression analysis
etc.)

12-month
forecast (by
month)

Brand and product

managers review
and recommend
changes

Revised
forecast

Gross market
requirements (1
to 3 year
periods)

Aggregate
production
schedules (12
months)
Allocation of
aggregate
requirements
to plants
Short-term
production
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
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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 overall
demand planning.
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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 [Link]://[Link]/ialwayst
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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.
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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-tocustomer 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
firms
order
cycle
is
anothers
replenishment cycle.
Order
Order
Order
Order
Major
components
of
Order
Cycle
preparation
shipment
processing
placement

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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 movement,
until the moment it is received and unloaded at the buyers
location.
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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 todays consumers, who are
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The Traditional Logistics/Marketing Interface

Product
Price

Promotion
Place/Customer
service levels

Inventory
carrying costs

Lot quantity
costs

Transportati
on costs

Warehousin
g costs
Order
processing and
information
costs

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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.
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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 customers 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 customers 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 customers 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
customer service by laying emphasis on quality and
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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.

2.

3.

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.
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.
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 directly
affects the seller.
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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 Internetenabled 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 delivery
times.
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Performance Measures for Customer Service

Element
Product
availability

Order
time

cycle

Distribution
system
flexibility

Brief
Description
Usually defined as percent
in
stock
(target
performance
level)
in
some base unit (i.e. order,
product, dollars)
Elapsed time from order
placement to order receipt.
Usually measured in time
units and variation from
standard or target order
cycle
Ability
of
system
to
respond to special and/or
unexpected
needs
of
customer.

Typical
Measurement
Unit
% availability
in base units

Speed
and
consistency

Response
time
special
requests

to

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Distribution
system
information

Distribution
system
malfunction

Postsale
product
support

Ability
of
firms
information system to
respond in timely and
accurate manner to
customers
requests
for information

Speed, accuracy
and
message
detail
of
response

Efficiency of procedures
Response
and
and time required to
recovery
time
recover
from
requirements
distribution
system
malfunction (i.e. errors
in
billing,
shipping,
damage , claims).
Efficiency in providing
Response
product support after
time, quality
delivery,
including
of response
technical, information,
spare
parts,
or
equipment
modification,
as
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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
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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
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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 orders 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 sellers 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 Rs 1000.
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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 stockouts potential consequences.

These include a back order, a lost sale, and a lost customer. The
second step is to calculate each results 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

Transportati
on

National
account sales

Manufacturer
Transportati
on

Wholesaler/
Distributor
Distribution
center
Retail
customer

Transportati
on
Retail store
Consumer

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Example of channels of distribution for the

food products manufacturing industry
Food Manufacturing firms
Food
Service
distributors

Restauran
ts

Grocery
wholesalers

Specialty
(airlines
etc.) Retail
chains
(local and
regional)

Retai
l
groc
ers

Food
brokers

Instituti
onal
buyers

Internet
(direct)

Retail
chains

Consumers of manufactured food products

Intern
et
retaile
r

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Thank

You
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