Syllabus 1: 1.
LOGISTICS AND CUSTOMER VALUE
CHAPTER 2
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TABLE OF CONTENT
2.1 The marketing and logistics interface
2.2 Delivering customer value
2.3 Out-of-stock
2.4 Customer service and customer retention
2.5 Market driven supply chain
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2.1 The marketing and logistics
interface
➢ ‘Place’, which might better be described in the
words of the old cliché, ‘the right product in the
right place at the right time’.
➢ Time has become a far more critical element in
the competitive process.
➢ Customers in every market want ever shorter
lead times; product availability will overcome
brand or supplier loyalty – meaning that if the
customer’s preferred brand is not available and a
substitute is, then the likelihood is a lost sale.
THE SUPPLY CHAIN MANAGEMENT: KEY
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CONCEPTS & CASE STUDIES
2.2 Delivering customer value
➢ Ultimately the success or failure of any business will
be determined by the level of customer value that it
delivers in its chosen markets.
➢ ‘Total cost of ownership’ rather than ‘price’ is used
here because in most transactions there will be costs
other than the purchase price involved.
Example
• Inventory carrying costs, maintenance costs,
running costs, disposal costs and so on.
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CONCEPTS & CASE STUDIES
Figure 2.1: The total cost of ownership
Acquisition
Cost
Management Cost
Maintenance Cost
Technical Support
Operating Inventory Cost Cost
Cost
Training Cost
Disposal
Cost
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2.2 Delivering customer value
(cont.)
➢ Logistics management is almost unique in its
ability to impact both the numerator and the
denominator of the customer value ratio.
➢ This point becomes clearer if we expand the
ratio as follows:
Source: Johansson, H.J., McHugh, P., Pendlebury, A.J. and Wheeler, W.A., Business
Process Reengineering, John Wiley & Sons, 1993.
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CONCEPTS & CASE STUDIES
2.2 Delivering customer value
(cont.)
➢ Each of the four constituent elements can
briefly be defined as follows:
• The functionality, performance and technical
Quality specification of the offer.
• The availability, support and commitment provided to
Service the customer.
• The customer’s transaction costs including price and
Cost life cycle costs.
• The time taken to respond to customer requirements.
Time • e.g. delivery lead times.
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CONCEPTS & CASE STUDIES
2.3 Out-of-stock
➢ One study (Corsten and Gruen, 2004)
identified that a significant cost penalty is
incurred by both manufacturers and retailers
when a stock-out occurs on the shelf.
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CONCEPTS & CASE STUDIES
Figure 2.2: Shopper behaviour when faced with a stock-out
9%
31%
15%
Do not purchase item
Delay purchase
Substitute different brand
Substitute same brand
Buy item at another store
26%
19%
Source: Corsten, D. and Gruen, T., ‘Stock-outs cause walkouts’, Harvard Business Review,
May 2004
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Figure 2.3: The impact of logistics and customer service on
marketing
Consumer Customer Supply chain Marketing
franchise franchise efficiency effectiveness
● Brand values ● Customer Service ● Flexibility ● Market share
● Corporate image ● Partnership ● Reduced asset base ● Customer retention
● Availability ● Quick response ● Low-cost supplier ● Superior ROI
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2.3 Out-of-stock (cont.)
➢ The impact of both a strong consumer franchise
and a customer franchise can be enhanced or
diminished by the efficiency of the supplier’s
logistics system.
➢ It is only when all three components are working
optimally that marketing effectiveness is
maximised.
➢ To stress the interdependence of these three
components of competitive performance it is
suggested that the relationship is multiplicative.
➢ In other words the combined impact depends
upon the product of all three.
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CONCEPTS & CASE STUDIES
2.4 Customer service and
customer retention
Figure 2.4: Using service to augment the core product
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CONCEPTS & CASE STUDIES
2.4 Customer service and …
(cont.)
➢ At the centre is the core product, which is the
basic product as it leaves the factory.
➢ The outer ‘halo’ represents all the added
value that customer service and logistics
provide.
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CONCEPTS & CASE STUDIES
Figure 2.5: Customer retention indicators
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2.4 Customer service and …
(cont.)
➢ A prime objective of any customer service
strategy should be to enhance customer
retention.
➢ Whilst customer service obviously also plays a
role in winning new customers it is perhaps
the most potent weapon in the marketing
armoury for the keeping of customers.
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CONCEPTS & CASE STUDIES
2.5 Market driven supply chain
➢ Instead of designing supply chains from the ‘factory
outwards’ the challenge is to design them from the
‘customer backwards’.
➢ This new perspective sees the consumer not at the
end of the supply chain but at its start.
➢ In effect this is the philosophical difference between
supply chain management and what more properly
might be called ‘demand chain management’.
• Managing demand chains is … fundamentally different to
managing supply chains. It requires turning the supply chain on its
head, and taking the end user as the organization’s point of
departure and not its final destination.
SOURCE: S. BAKER (2003)
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CONCEPTS & CASE STUDIES
2.5 Market driven supply chain
(cont.)
Example: ZARA - linking supply chain processes to the
value proposition
• Zara is one of world’s most successful clothing manufacturers
and retailers. They have achieved this leadership position
through creating a value proposition around the idea of ‘Fast
Fashion’. Almost uniquely they have developed supply chain
processes that enable them to capture ideas and trends in the
apparel market and to translate them into products in amazingly
short lead times. Zara’s target time to take an idea from design to
store is between three and four weeks.
• To achieve this quick response capability Zara have developed an
agile network of closely integrated company-owned and
independent manufacturing facilities that have the flexibility to
produce in small batches at short notice. Whilst this is not the
cheapest way to make a garment, it ensures that they achieve
their value proposition.
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CONCEPTS & CASE STUDIES
Figure 2.6: Linking customer value to supply chain strategy
Identify
value What do our customers value?
segments
Define the How do we translate these
value requirements into an offer?
proposition
Identify the
market
What does it take to succeed in
winners this market?
Develop
the supply How do we deliver against this
chain proposition?
strategy
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2.5 Market driven supply chain
(cont.)
Identifying customers’ service needs
➢ The approach to service segmentation
suggested here follows a three-step process:
Identify the key components of customer service as seen by
customers themselves.
Establish the relative importance of those service components to
customers.
Identify ‘clusters’ of customers according to similarity of service
preferences.
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CONCEPTS & CASE STUDIES
