SUPPLY CHAIN

MANAGEMENT

DEMAND MANAGEMENT AND

CUSTOMER SERVICE

Dr. Kiran Kale

CHAPTER 3

Learning Objectives

After reading this chapter, you should be able to:

• Understand the meaning of demand management and customer service.

• Discuss the performance measures for customer service.

• Discuss the demand management process.

• Describe the basic approach to demand forecasting and the forecasting methods or techniques.

• Understand how to establish a customer service strategy.

Dr. Kiran Kale

3.1 What is Demand Management?

Demand management refers to the focused efforts to estimate and manage customer’s demand with the intention of using the information to shape operating decisions.

Relationship between Customer Service and Demand Management

Customer service refers to activities between the buyer and seller that enhance or facilitate the sale of the seller’s products or services.

Customer service is the measure of how well the logistics system is performing in providing time and place utility to a product or service. Customer service and customer satisfaction do not mean one and the same. Customer satisfaction represents the customer’s overall assessment of all elements of the marketing mix: product, price, promotion and place (or distribution) whereas customer service is a part of customer satisfaction.

Dr. Kiran Kale

The essence of demand management is to 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. The desired end result should be to create greater value to the

end user or consumer.

• Demand Forecasting : Demand forecasting refers to the estimation of the

amount of product that will be purchased by the consumers or end users.

• Customer Service : Customer service can be defined as “a process which

takes place between the buyer, seller and third party. The process results in a

value addition to the product or service exchanged.

Customer service is really the fuel that drives the logistics supply chain.

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 recognises the importance of customer service.

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• The Logistics-Marketing Interface : Customer service is often the link

between logistics and marketing. If the logistics system, particularly

outbound logistics fails to function properly and a customer does not

receive a delivery as promised, the company could lose future sales.

3.2 Customer Service and Levels.

In this context, logistical customer service can be thought of as a

feature of the augmented(improved) product which adds value for the

buyer. Some of the other features of augmented product are: installation,

warranties, and after-sales-service. A firm could achieve competitive

advantage by providing superior levels of logistical towards customer

service. Thus a potential benefit exists in viewing customer service as a

‘product’ that may add significant value for a buyer.

Dr. Kiran Kale

3.3 Elements of Customer Service

From the point of view of logistics function, customer service can be

viewed as having four dimensions:

(i) Time,

(ii) Dependability,

(iii) Communication and

(iv) Convenience.

Dr. Kiran Kale

1. Time : The time factor is usually order cycle time from the perspective of seller looking at customer service. The buyer usually refers to the time dimension as the lead time or replacement time.

2. Dependability : Some customers consider dependability as more important than lead time. The customer firm can minimise its inventory level if lead time is fixed.

3. 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 the inventory, the items ordered & transportation.

4. Convenience : This means, logistics service level must be flexible. From the logistics operations stand point, having one or a few standard service levels that applies to all customers would be ideal, Convenience recognises customers’ different requirements.

Dr. Kiran Kale

• Implementing Customer Service Standards

The keys for successfully developing and implementing customer

service standards are:

(i) To be wary (cautious) of adopting easily achievable performance

standards. But setting standards at unrealistically low levels will not

help to establish a competitive advantage.

(ii) Emphasis on total quality or on creation of the “perfect order”

are very critical.

(iii) The firm should develop customer service policies and standards

through customer consultation.

(iv) The firm should develop procedures to measure, monitor and

control the customer service quality called for by the firm’s

performance measures and standards.

Dr. Kiran Kale

• The Perfect Order : Perfect order refers to an order where all customer requirements are met upon delivery of the order (i.e., right time, right place, right quantity, right condition and right documentation).

• Improving Customer Service Performance : The levels of customer service a firm achieves often can be improved through one or more of the following actions:

• (i) Thoroughly(systematic) researching customer needs,

• (ii) Setting service levels that make revenues and expenses,

• (iii) Making use of the latest technology in order processing systems and (iv) Measuring and evaluating the performance of logistic activities.

Dr. Kiran Kale

Automation improves customer service by providing the following benefits to the customer:

(i) Better product availability

(ii) More accurate invoices

(iii) The ability to reduce stock levels

(iv) Improved access for information on order status.

3.5 Demand Management

Demand management enhances the ability of firms throughout the supply chain, especially manufacturing through the customer with the end result of creating greater customer value. Demand management holds the key to an effective supply chain management process.

• Demand Management Process : In the process of demand management, representatives from all key departments first define the company’s strategic imperative – optimally up to three key goals which the company must accomplish to create value for the customers.

Dr. Kiran Kale

The manufacturing strategy is defined in terms of market driven

manufacturing modules which consist of following key factors, ie

(i) level of product complexity

(ii) time dependencies

(iii) scale(range) factors

(iv) change-over flexibility

To implement the strategies, monthly “demand management” meetings

are held to monitor progress and to make decisions based upon evaluation

of performance.

The demand management process must balance the customer’s

requirements with the supply capabilities of the firm. It involves

determining what customers will purchase and when.

Dr. Kiran Kale

Since, customer demand in the form of irregular order patterns or

demand patterns is by far the largest source of variability; demand

management holds the key to an effective supply chain management

process.

(i) Lack of co-ordination between departments

(ii) To much emphasis is based on forecasts of demand,

(iii) Demand information is mainly used to develop operational plans

rather than to develop strategic plans.

(iv) The conflicting and contradicting interests of departmental

managers in achieving their departmental goals rather than

contributing to the achievement of the company’s overall business

objectives/goals.

Dr. Kiran Kale

3.6 Demand Forecasting :

Forecasting demand is a necessary part of business planning and demand

management. Demand forecasting estimates the amount of product that

will be purchased by consumers and end users based on which decisions

regarding how much product the company should sell and how much the

company need to produce.

• Integrating Forecasting and Production

The steps involved in integrating the sales forecasting with production

scheduling activities are listed below:

(i) To develop an annual forecast demand by applying traditional

demand forecasting methods such as moving average, exponential

smoothing, regression analysis etc., to a three year historical data on

factors such as demand, price, seasonality, availability, deals and

promotions etc.,

Dr. Kiran Kale

(ii) Review of the forecast arrived in step 1 by brand and product managers to recommend relevant changes.

(iii) To develop aggregate production schedules for the next twelve- month period and to allocate specific production requirements to various manufacturing facilities.

(iv) To schedule production on a short-term basis (say quarterly or monthly) and carry out logistics operations in order to co-ordinate demand for finished product with the timing and availability of needed production inputs.

Dr. Kiran Kale