supply chain management lecture 4 – customer service & logistics costs alexa kirkaldy
TRANSCRIPT
Supply Chain Management Lecture 4 – Customer Service &
Logistics Costs
Alexa Kirkaldy
Lecture 4 - Learning ObjectivesOn completion you will be able to:
• Explain the concept of customer service in a supply chain context
• Identify the importance of both product and customer profitability
• Recognise the impact of logistics management on return on investment and shareholder value
• Explain the importance of total acquisition cost and total cost of ownership in relation to supply chain management
Post transactionComponents
Transactioncomponents
Pre-transactionComponents
• Written customer service policy
• Accessibility• Organisation structure• System flexibility
• Order cycle time• Inventory availability• Order fill rate• Order status information
• Availability of spares• Call-out time• Product
tracing/warranty• Customer complaints,
claims etc.
The Components of Customer Service
Based on work by LaLonde and Zinser, cited in Christopher M., Logistics & Supply Chain Management, Pearson, 3rd edition, 2005, pp 48-49.
Before During After
The Damage of Stock-Outs
9%
15%
19%
31%
26%
Do not purchase
Delay purchase
Buy substitute brand
Buy same brand,different item
Buy at another store
Corsten D., Gruen T., Stock-outs cause walkouts, Harvard Business Review, May 2004
Reputation and brand allegiance
Identifying Customer Service Needs
• Identify key components of customer service as seen by customers themselves
• Establish the relative importance of those service components to customers
• Identify customer segments according to similarity of service preferences
• Define customer service objectives– The perfect order 100% on time, 100% complete, 100% defect free– Actual performance 90% on time, 80% complete, 70% defect free– Chance of a perfect order = 90% * 80% * 70% = 50.4%
Venn diagrams to identify customer segments
On-time delivery
Minimum cost
Intensive technical support
Harrison, A. (2008) Putting the End-Customer First. In: Harrison, A and van Hoek, R. Logistics Management and Strategy : Competing Through the Supply Chain. 3rd ed.,: Prentice Hall Financial Times, Ch.2, p 53.
Translating to Shareholder
Value
Shareholder Value
Revenue growth
Taxoptimisation
Fixed assetefficiency
Operating cost reduction
Working capital efficiency
One measure of shareholder valueMarket value added = (Share price * No. of issued shares) minus Book value of capital invested
Translating to Shareholder Value
Return On Investment = X ProfitSales
SalesCapital employed
ROI
Profit
Sales revenue
Costs
Customer service
Logistics efficiency
Capitalemployed
Cash
Debtors/creditors
Cash-to-cash cycle time
Inventory Just-In-Time logistics
Fixed assets Asset utilization
Debt collection, early payment discountCloser integration of deliveries to demand
Key Ratios for SCMCash-to-Cash Cycle Time
Average settlement time for debtors
Plus
Average days of inventory
Minus
Average settlement period for creditors
Examples of Key Ratios for SCM
Yen
A + B - C = D (assets- liabilities)
Where To Find Financial Data
• Fame – UK firms– For large public firms look for plc
• Amadeus– European & UK firms– For large firms look for plc or country equivalent of plc– Provided by same firm as Fame but uses a different format and has
some different names for ratios!
• Thomson Research– US and large global firms– For large firms look for entries in the fields, ‘quote/ticker’, ‘exchange’
and relevant ‘country’. You will have the plc pr parent company if there is a ‘stock price and earnings information’ report
The Need for Relevant Costing Information
“Strategies may be conceptually brilliant, but if they are based on faulty information about the cost of a product, they are likely to fail in
the market place.
Many have!”Kaplan & Cooper (1988)
Source: Kaplan & Cooper (1998) Measure Costs Right: Make the Right Decisions, Harvard Business Review, September – October 1988
Supply Management’s Impact on Net Income and the Bottom Line
Increased Sales:– Faster to Market– Improved Quality– Pricing Flexibility– Innovation
Lower Total Cost:– Acquisition Cost– Processing Cost– Quality Cost– Downtime Cost– Risk Cost– Cycle Time Cost– Conversion Cost– Non-value Added Cost– Supply Chain Cost– Post Ownership Cost
Source: Burt, Petcavage, Pinkerton ( 8th Edition, 2013, page 9)
Total Acquisition Cost (TAC)
• Purchasing focus• Maps the costs related to the supply of
products• Can identify new sourcing and cost
reduction opportunities • Can support supplier selection
decisions
Total Acquisition Cost
Part Purchase
Price
Always Measured
Sometimes Measured
Rarely measured to technology family/commodity group level
A
Internal Acquisition
CostB
Quality Cost
C
Materials Mgt Cost
C
Transport
C
C
CA
Inventory Cost
C
B
Overheads
B
Labour Cost
B
Material Cost
B
A TAC model: A Hierarchy of costs
£per
annum
Classification of internal acquisition costs
Execution costs :
Cost of getting goods from supplier to the business
( materials management costs )
e.g.. - transport, internal administration costs etc..
Inventory costs :
Cost of holding inventory
.e.g. - stock-holding costs, cost of redundant stock etc..
Quality costs :
Cost involved in processing the goods through the
manufacturing process
e.g.. - inspection costs, scrap costs etc..
Total Acquisition Cost Model
Execution
Inventory
Quality
Purchasing Spend
100%
Inte
rnal
acq
uisi
tion
cos
tP
art
purc
hase
pric
e(
invo
ice
pric
e )
A model of Total Acquisition Costs
The total acquisition costs are £ 586k, representing 8.5 % inaddition to the invoice price of cable assemblies
Quality Cost
Inventory Cost
Execution Cost
Invoice Price
Cost£
£ 540,000£ 31,559 £ 10,415 £ 4,000
100 % 108.5 %Illu
strativ
e.
Illustra
tive.
Cable Assembly Example
Post transactionComponents
Transactioncomponents
Pre-transactionComponents
• Investigating sources• Qualifying sources• Training / education
• Price• Order placement• Transportation• Tariffs / duties• Billing / payment• Inspection• Return of parts• Follow-up and correction
• Production line stoppages
• Defective finished goods
• Cost of maintenance• Field failures• Repair in field• Reputation
Lisa Ellram
Total Cost of Ownership (TCO) extends TAC …
“All costs associated with the acquisition, use & maintenance of a good or service”
TCO Model
Logistics and Supply Chain Management, Christopher, 2011, Page 29
Logistics – Cost factors
38%
32%
8%
6%
16%
TransportWarehouse operationOrder processingAdministrationCost of inventory holding
Holding cost includes loss, obsolescence, interest, insurance and depreciation
Warehouse costs
UK Chartered Institute of Logistics and Transport Survey stated that between 24% and 35% of Logistics costs relate to warehouse activity and can be between 2% and 5% of the cost of sales.
LABOUR 48-60%
EQUIPMENT 10 - 15%
SPACE 25 - 42%
Lecture 4, Key Points & Tips• As many products take on the characteristics of commodities as they
mature delivering superior customer service via SCM and logistics is becoming increasingly important.
• In reality no two customers have identical needs but similar customers can be grouped together and the supply chain designed improve increase customer satisfaction thereby encouraging customers to spend more and improving customer retention.
• Logistics and SCM influences the income statement and balance sheet and is increasingly be recognised helping to improve ROI and shareholder value.
• To improve profitability supply chains need to prioritise profitable products and customers and Pareto analysis is a useful tool for this. In theory as few as 4% of customer/product transactions can be responsible for 64% of profits.
Lecture 4, Key Points & Tips
• To prioritise profitable customers and products it is vital to have good quality costing information. However, the true cost of logistics are often not fully understood.
• When purchasing materials it is vital to consider the total cost of acquisition and the total cost of ownership, not just the initial purchase price.
• In the assignment you could quantify your firm’s SCM performance by looking at the cash-to-cash cycle time over a number of years and/or the market value added for a listed company.
For next Friday• Read the case study on direct product profitability
– what can we tell from the analysis and the average DPPs per customer?
• Read the case study on Walmart– What can we learn from Walmart and K Mart?
• Read the scanned chapter ‘Putting the end customer first’• Read the paper ‘The benefits of central supply chain
management: Corus and TDG’
• Possible oral presentation questions– How could customer service be improved by better supply chain
management?– How could stock availability in this supply chain be improved?– Using published financial information for this firm, or firms in this
industry, determine whether logistics is improving and evaluate the impact on shareholder value.
– Could this supply chain benefit for improved costing techniques and systems?