Chapter 4 Customer Response Principles and Systems

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SCMN 7700/7706Demand Fulfillment Segment
05 Demand Mgt. Customer demand is the
fountainhead for all logistics activities. It
creates the need for all logistics resources and
activities. Frazelle, pg. 71
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The Overriding Logistics Goal
Minimize Total Logistics Cost Subject to
Customer Service Policy
Customer response drives all other logistics
activities. The objective is to satisfy customer
response requirements at the lowest possible cost.
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is a Major Challenge, Given SCM Complexity
Challenges

• Customer Focused
• How can I meet customer service and quality
  requirements?
• How do I extend my reachto global markets?

• Lower Costs
• How can I improve my operational efficiencies?
• How do I track and control rising material costs?

• Customized Product
• How do I keep my products aligned to constantly
  changing market requirements?
• How can I efficiently mass customize my products?

• Short, Shrinking Lifecycles
• How do I create a flexible production
  environment?
• How do I make it convenient for OEMs to outsource
  to me?

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How can we achieve customer responsiveness?

• Through effective demand management
• The ability to recognize and fulfill demand for
  goods and services to support the marketplace.
• Major components
• Forecasting planning
• Customer response activities
• Policy design
• Order management (demand fulfillment)
• Performance analysis

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What is demand planning?

• Demand Planning Forecasting
• involves the prediction of demand by location,
  SKU, and time period for the purpose of planning
  supply chain operations
• is not a guessing game. It is the careful
  analysis of all available data to establish an
  approximation of future demand for products or
  services.
• Forecasting dimensions issues
• Temporal dimension when will demand occur?
• There may be seasonality, time of month, week, or
  day components
• Spatial dimension where will demand occur?
• There may regional demand variation
• Irregularity of demand
• Trends or lumpiness of demand
• Different types of products
• Independent demand items vs. dependent demand
  items
• Accuracy of data can be questionable
• May be a lack of historical data
• New products, start-up operations

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Demand Planning Challenges

• Too much independent forecasting
• Conflicting goals
• Commitment phobia
• Variation negatively impacts flows
• Buffers excess inventory
• Mistakes lead to overreaction

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Demand Components

• Base - the base (or horizontal) component
  represents the minimum level of demand. It can be
  thought of as a baseline demand.
• Seasonal - a seasonal component represents
  fluctuations in demand due to the time of the
  year. Seasonal fluctuations may be daily, weekly,
  monthly, quarterly, or annually.
• Trend - a trend component consists of either an
  upward or a downward movement of the demand
  pattern. The following graph illustrates an
  upward trend added and illustrates a demand
  pattern with base, seasonality, and a trend.
• Cyclical - usually related to the business cycle
  of a product or industry.
• Random - exists in all demand patterns. It
  represents the impact from a collection of
  uncontrollable factors in any demand system.

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Qualitative vs. Quantitative Methods
Quantitative Methods
Qualitative Methods
Executive Judgment
Moving Average
Historical Analogy
Weighted moving average
Time series analysis
Delphi Method
Exponential smoothing
Market Research
Linear Regression
Grass Roots
Causal Relationships
CPFR
Panel Consensus
Simulation
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Customer Response Activities
Order Management
Order Entry

Customer satisfaction monitoring
Order Processing
Customer service policy design
Invoicing collections
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Customer Service Policy Design

• Developing a CSP is the first step in proactive
  customer and demand mgt.
• CSP serves as foundation for logistics master
  planning
• CSP should
• Formally document policies
• Quantify service standards
• Create classifications (e.g., Table 4-2)

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Establishing CS Policy

• Determine CS-sales relationship
• Analyze sales/service curves
• Conduct experiments
• Survey customers
• Determine cost of providing CS
• Analyze cost/revenue trade-offs
• Seek to maximize profit
• Service cost curve increases at an increasing
  rate
• Revenue curve tends to taper as service increases

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Establishing CS Policy
Revenue
Logistics costs
low
Customer Service
high
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Order Management Activities

• Order Management all activities involved in
  receiving, filling, and delivering customer
  orders

Order capture and entry
Order processing
Documentation, invoicing, collection
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Performance Analysis Ultimately Focuses on
Customer Satisfaction
Delivery capability
In-stock availability
Cycle Time
Fill Rates
Transit time
Accuracy
Damage
Information
SATISFACTION INTENTIONS FUTURE SALES
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Effective Demand Mgt. Results in Supply Chain
Success

• What - position supply chain resources, such as
  inventory and capacity, to fulfill customer
  demand in a timely, cost-effective manner.
• How forecast, execute, measure
• Result - the organization is more competitive
• Greater customer responsiveness
• Better control of costs
• Competitive advantage
• GREATER PROFITS

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7 Principles of SCM

• Principle 3 Listen to market signals and align
  demand planning accordingly across the supply
  chain, ensuring consistent forecasts and optimal
  resource allocation.

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In a perfect world, it all starts with the
customer

• Principle 3 Listen to market signals and align
  demand planning accordingly across the supply
  chain, ensuring consistent forecasts and optimal
  resource allocation.

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and flows thru the supply chain

• When a customer in the showroom orders leather
  seats in a Cadillac, I want the cow
  in the field to shiver.
• Covisint Executive
• DC Velocity May 2003

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In the real world, its hard to manage demand
synchronize supply chains

• The Bullwhip Effect
• Increased variation in demand as you move across
  the supply chain

• Creates distorted and incomplete information and
  leads to
• Insufficient or excessive inventory
• Poor forecasts
• Capacity problems
• Unhappy customers
• Higher SC costs

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What strategies can be used to manage demand more
effectively?

• Centralize and share demand information
• Give up control when appropriate
• Prioritize customers products
• Improve visibility
• Other moves
• Eliminate delays in the supply chain
• Forecast more accurately
• Eliminate echelons
• Promote stable consumption

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1. Develop a unified forecast

• Collaborative planning, forecasting, and
  replenishment
• A strategy intended to improve communication
  throughout the retail supply chain, and, in
  particular enable better forecasting between
  partners
• With CPFR, retailers give suppliers freer access
  to point-of-sale data
• Such information is necessary for making joint
  forecasting and replenishment programs work more
  effectively
• The goal - to give the supplier/manufacturer more
  upfront time and more information so that they
  can make better informed manufacturing plans
• Share plans for sales and promotions
• Provide seasonality change information

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2. Empower key supply chain participants to make
decisions

• Vendor Managed Inventory defined
• any two trading partners formulate an agreement
  that the vendor in the relationship assumes
  primary replenishment responsibility for the
  customers inventory.
• ...a process where the supplier generates orders
  for the customer based on demand information sent
  by the customer.
• a means of optimizing supply chain performance
  in which the manufacturer is responsible for
  maintaining the suppliers inventory levels.
• under VMI, instead of the customer monitoring it
  sales and inventory for the purpose of triggering
  replenishment orders, the vendor assumes
  responsibility for these activities.
• the default term for identifying the process
  where buying organizations agree to
  electronically share point of sale information
  with a supplier who then uses software or
  services to automatically generate purchase
  orders to replenish the buyers warehouse.

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3. Put key customers first

• ABC analysis - method of segmenting individual
  customers (or items) by their revenue or gross
  margin () relative to one another.
• Using the Pareto Principle, you create three
  classifications
• A relatively small group of A customers, which
  account for the top 80 of revenue or gross
  margin
• A larger group of B customers which represent
  the next 15
• A large group C" customers which account for the
  last 5.
• Provides a means of segmenting customers (items)
  for the purposes of providing differentiated
  service levels.
• Be cautious classification is somewhat
  arbitrary and this strategy doesnt account for
  growth potential

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All customers are not equal and demand
fulfillment must reflect it.
95 Fill Rate 99.5 On-time 1 Fill Priority 24
hr Orders Expedite Svcs. ASN Provided Qty
Discounts
93 Fill Rate 99 On-time 2 Fill Priority Daily
Orders Expedite Svc
85 Fill Rate 95 On-time 3 Fill Priority Weekly
Orders
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4. Develop supply chain event management
capabilities

• Having the latest information and real-time
  knowledge are critical to making effective supply
  chain decisions
• SCEM tools allow companies to monitor their
  extended supply chains for events and exceptions
  that impact the ability to
• Fulfill customer orders
• Satisfy inventory needs
• Manage shipping requirements
• SCEM connects decision makers across the supply
  chain, allowing them to increase supply chain
  efficiencies, balance inventory with demand,
  lower costs, and make better use of assets

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Other Improvement Strategies

• Eliminate supply chain delays
• Use IT to streamline information flows
• Combat dwell time with cross-docking direct
  delivery
• Improve forecast accuracy
• Establish forecast accountability
• Measure and monitor forecast accuracy
• Remove echelons
• Drop entities that do not add value
• Promote stable consumption
• Reduce demand variability via EDLP strategy
• Eliminate quantity discounts

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In Summary

• By embracing these strategies, an organization
  can synchronize supply with demand to better
  serve the customer and reduce the impact of the
  bullwhip effect

Effectively managing these increasing customer
demands and product offerings in complex global
supply chains requires tight integration between
partners. What constitutes supply chain
integration? There are three key dimensions
information integration, coordination, and
organizational linkage. Professor Hau
Lee Reading 2, SCMR 9/00