Logistics- Supply

chain
Dr. TRAN QUYNH LE
Dr. LE THI DIEM CHAU
Industrial Systems Engineering Department
Mechanical Engineering Faculty
Ho Chi Minh City University of Technology (HCMUT)–
VNUHCM
CHAPTER 2: Demand management and
customer service

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 Chapter 3

Learning Objectives
• Appreciate the growing need for effective demand management.

• Know forecasts that may be needed and understand how collaboration among
trading partners will help the overall forecasting and demand management
process.

• Identify the key steps in the order fulfillment process and understand how
effective order management can create value for a firm and its customers.

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Learning Objectives

• Realize the meaning of customer service and understand its

importance to logistics and supply chain management.

• Understand the difference between logistics and marketing

channels and understand that goods may reach their intended
customer via number of alternative channels of distribution.

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 Chapter 3

Introduction

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Inbound-to-Operations Logistics Systems

• These systems refer to the set of processes that precede and

facilitate value-adding activities such as manufacturing,
assembly, and so on.

• This topic also is of historical interest in the study of the supply

chain and includes materials management and physical supply.

• The study of inbound-to-operations logistics systems will be

presented in the next chapter.

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Outbound-to-Customer Logistics Systems

• To increase levels of customer service, significant emphasis is placed on

outbound-to-customer logistics systems.

• These systems refer to the set of processes, systems, and capabilities

that enhance the firm’s ability to serve its customers.

• This topic also is of historical interest in the study of physical distribution,

logistics, and supply chain management.

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Demand Management
• Defined as “focused efforts to estimate and manage customers’
demand, with the intention of using this information to shape
operating decisions.”3

• Recent practice has been just the opposite, with the

manufacturer determining the what, where, when, and how
many of the sale.

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Demand Management
• It is this disconnect between manufacturing and the demand at
the point of consumption that attracts attention to demand
management.

• Any attention paid to demand management will likely result in

benefits flowing through the supply chain.

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 Chapter 3

Demand Management Objectives

• 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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 Chapter 3
Demand Management: Related Issues

• Lack of communication between departments results in little or

no coordinated response to demand information.

• Too much emphasis is often placed on forecasts of demand

with little attention paid to collaborative efforts and strategic and
operational plans that need to be developed from the forecasts.

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 Chapter 3
Demand Management: Related Issues

• Demand information is often used more for tactical and

operations purposes than for strategic purposes.
• Primary emphasis should be on using demand information to
create likely scenarios of the future as they relate to product
supply alternatives.
• Resulting business successes will be a outcome of the better
match of demand to product availability.

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 Chapter 3

Balancing Supply and Demand

The goal of supply chain management

• Match supply and demand

• What makes this seemingly simple task so

difficult in reality is the presence of uncertainty.

• This uncertainty brings with it a serious

challenge to the classic practice of running a
business on the basis of a forecast.

• Uncertainty increases so too will forecast

accuracy reduce.
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Traditional Forecasting: Demand Forecasting

• A major component of demand management is forecasting the

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

• In the integrated supply chain all other demand will be derived

from the primary demand.

• A key objective is to anticipate and respond to primary demand

as it occurs in the marketplace.

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Figure 3-1:Supply-Demand Misalignment

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Table 3-1 How Demand Management Supports
Business Strategy

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 Chapter 3

Traditional Forecasting
• An example of integrating forecasting with production is
illustrated by Figure 3-2.

• Long-term (more than three years), midrange (one to three

years), and short-term forecasting are each important
contributors to the forecasting process.

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 Chapter 3
Figure 3-2 Integration of Sales Forecasting and Production

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 Chapter 3

Demand management and planning

Generate Modify forecast
aggregate with demand
• Sales and operations planning (S&OP). demand forecast intelligence

✓ a formalized approach to demand

management and planning

✓ Aim ensure the highest level of Create ‘rough

Create a
consensus
customer satisfaction through OTIF cut’ capacity plan
forecast
(On-Time, In-Full ) deliveries with
minimum inventory

✓ The sales and operations planning Execute at

process: individual item Measure
(SKU) level performance
against demand

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 Generate
Chapter 3
aggregate

Demand management and planning demand forecast

• Generate aggregate demand forecast

Modify forecast
with demand
intelligence

✓ The impossible to forecast at the individual item Create a

consensus
level (SKU) too far ahead forecast

✓ Made on the basis of high-level aggregate volume Create ‘rough cut’

capacity plan

forecasts at the product family level.

Execute at

✓ Get closer to the point of demand fulfilment => start individual item
(SKU) level
against demand

to think about product mix requirements

Measure
performance

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 Generate
Chapter 3
aggregate

Demand management and planning demand forecast

• Modify forecast with demand intelligence

Modify forecast
with demand
intelligence

✓ Modify it utilizing specific intelligence on current Create a

consensus
market conditions and events forecast

✓ Involve key customers or accounts Create ‘rough cut’

capacity plan

Execute at
individual item
(SKU) level
against demand

Measure
performance

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 Generate
Chapter 3
aggregate

Demand management and planning demand forecast

• Create a consensus forecast Modify forecast

with demand

✓ A cross-functional approach to achieving a balance between supply intelligence

and demand
✓ A seamless alignment between the demand creation side of the Create a
consensus
business (i.E. Sales and marketing) with the demand fulfilment forecast

activity (i.E. Logistics and operations)

Create ‘rough cut’
capacity plan

Execute at
individual item
(SKU) level
against demand

Measure
performance

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 Generate
Chapter 3
aggregate

Demand management and planning demand forecast

• Create ‘rough cut’ capacity plan Modify forecast

with demand
intelligence

✓ Look at the aggregate product family forecast for

the planning period and to translate that into the
Create a
capacity and resources needed consensus
forecast

✓ How much machine time, how much time in an

assembly process, how much transport capacity
Create ‘rough cut’
and so on. capacity plan

• No enough the capacity:

Execute at

✓ Managing
individual item
demand, e.g delivery lead times re- (SKU) level
against demand

negotiated, prices adjusted to reduce demand, etc

✓ Finding additional capacity using external providers. Measure

performance

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 Generate
Chapter 3
aggregate

Demand management and planning demand forecast

• Execute at individual item (SKU) level against demand

Modify forecast
with demand
intelligence

✓ Ideally nothing is finally assembled, configured or packaged until we

Create a
know what the customer’s order specifies. consensus
forecast

✓ To achieve this ideal state clearly requires a high level of agility

Create ‘rough cut’
capacity plan

• Forecast and inventory

Execute at

✓ Make inventory ahead of time, at least the forecast will be more individual item
(SKU) level
against demand

accurate since the forecast horizon is closer

✓ A further enabler of more accurate forecasts is visibility of real demand

Measure
performance

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 Generate
Chapter 3
aggregate

Demand management and planning demand forecast

• Measure performance
Modify forecast
with demand
intelligence

✓ How high the percentage of perfect order achievement is

Create a
compared to the number of days of inventory and the amount of consensus
forecast

capacity needed to achieve that level.

Create ‘rough cut’

✓ The goal of the S&OP system: capacity plan

▪ Reduce the dependency on the forecast

Execute at
individual item

▪
(SKU) level
Measure the lead-time gap at the individual item level. against demand

▪ Reduce this gap by a concerted focus on time compression and

improved visibility. Measure
performance

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 Chapter 3

Collaborative planning, forecasting and

replenishment
• Logic of all these collaborative initiatives

✓ through sharing information and by working together to create joint plans and forecasts,
both the supply side and the demand side of the supply chain can benefit

• Collaborative planning, forecasting and replenishment (CPFR)

✓ The name given to a partnership-based approach to managing the buyer/supplier

interfaces across the supply chain

✓ The idea is a development of vendor managed inventory (VMI)

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 Chapter 3

Collaborative planning, forecasting and

replenishment
• Vendor managed inventory (VMI):

✓ A process through which the supplier rather than the customer manages the flow
of product into the customer’s operations

✓ Driven by frequent exchanges of information about the actual off-take or usage of

the product by the customer

✓ The supplier is in effect managing the customer’s inventory on the customer’s

behalf.

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 Chapter 3

Collaborative planning, forecasting and

replenishment
• VWI and CFFR:

✓ CPFR is in effect an extension of VMI in that it takes the idea of collaboration

amongst supply chain partners a step further

✓ the creation of an agreed framework for how information will be shared between
partners and how decisions on replenishment will be taken

✓ A key element of CPFR is the generation of a joint forecast, which is agreed and
signed off by both the supplier and the customer.

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Order Fulfillment and Order Management
• Order fulfillment activities differ as a supply chain matures through
transactional to interactive to interdependent levels.

• Examine the four key stages of order fulfillment in Figure .

Management of Business
\ Logistics, 7th Ed. 30
Chapt
Order Fulfillment and Order Management
• Order fulfillment activities differ as a supply chain matures through transactional
to interactive to interdependent levels.

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Order Fulfillment and Order Management
• Order-management systems represent the principal means by which buyers and
sellers communicate information relating to individual product orders and is key
to operational efficiency and customer satisfaction.

• Examine the characteristics of order-management functions in Figure 3-6.

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Figure: Order-Management Functions

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Order Fulfillment and Order Management
• The order cycle traditionally includes only those activities that occur from the
time an order is placed to the time it is received by the customer.

• Examine the four principal activities of the order cycle in Figure 3-7.

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 Order Fulfillment and Order Management

Order placement methods seem

to be changing to accommodate
new technologies.
Examine order placement trends
in Figure 3-8.

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Order Fulfillment and Order Management: Other Issues

Order processing

Order preparation

Order shipment

Length and variability of the order cycle

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Figure: Example of Order Cycle Time Analysis

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 Order Fulfillment and Order Management: E-Commerce

• Success is just as much about designing and implementing the

basic principles of logistics and supply chain management as it is
about marketing the latest technologies.
• According to Richer and Kalatora10, some of the critical decisions
are related to the evaluation of multiple fulfillment planning
strategies.
• What are the reasonable alternative fulfillment strategies?

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Five Alternative Fulfillment Strategies for E-Commerce

1. Distributed delivery centers

2. Partner fulfillment operations

3. Dedicated Fulfillment centers

4. Third-party fulfillment centers

5. Build to order

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Customer Service: The Logistics/Marketing Interface

• Customer service is often the key link between logistics and

marketing.

• Examine the traditional logistics- marketing interface in next

Figure

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FigureThe Traditional Logistics/Marketing Interface

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Customer Service: The Logistics/Marketing Interface

• A new vision of the interface is represented by National

Semiconductor, whose re-engineering of the supply chain
reduced overall logistics cost.

• Required a more dynamic, proactive approach that recognized

the value-added role of logistics supply chains in creating and
sustaining competitive advantage and providing win-win
outcomes.

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Customer Service: The Logistics/Marketing Interface

Defining customer service

• In terms of levels of product

• In terms of types of customer support/service

• In terms of levels of involvement

• In terms of complexity of customer service

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Customer Service: The Logistics/Marketing Interface

Elements of Customer Service

• Time

• Dependability

• Cycle time
• Safe delivery
• Correct orders
• Communications

• Convenience

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Customer Service Elements for the Food Industry

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 Customer Service: Performance Measures
Traditional
• New
• % availability in base units
• Orders received on time
• Speed and consistency
• Orders received complete
• Response time to special requests
• Orders received damage free
• Speed, accuracy, and message detail of response
• Orders filled accurately
• Response and recovery time requirements
• Orders billed accurately
• Response time, quality of response

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Elements and Measurement of Customer Service

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Customer Service: Implementation of Standards

• Set standards at realistic levels.

• Quality levels set below 100% can be problematic.
• Consult customers on policies and standards.
• Communicate standards to customers.
• Measure, monitor, and control customer service standards.

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Customer Service: Overview
• If the basics of customer service are not in place, nothing else
matters.
• Customers may define service differently.
• All customer accounts are not the same.
• Relationships are not one dimensional.
• Partnerships and added value can “lock up” customers.

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Customer Service Issues

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Stockouts
Four possible outcomes from a stockout
• Customers wait

• Back orders

• Lost sales

• Lost customers

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Expected Costs of Stockouts
Expected Costs
Event Probability Costs

Back Order 70% $ 6.00 $ 4.20

Lost Sale 20% $20.00 $ 4.00

Lost Customer 10% $200.00 $ 20.00

Estimated cost
100% --- $ 28.20
per stockout

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 Chapter 3

Going to market: Introduction

• The routes use to take products to market are commonly called distribution channels:

• Traditionally, distribution channels were viewed purely as a means to enable the physical
fulfilment of demand

• In recent year, eliminate the ‘middleman’ in a distribution channel, sold product direct to end
users

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 Chapter 3

Distribution channels are value delivery systems

• Distribution channels:

✓ Physical conduits through which products flow

✓ Connect with customers
✓ Provide a means of delivering the value that customers seek
✓ Work in both directions: serving the customer and providing a means of
capturing customer insight , enabling market understanding

✓ Seamless connections between all of the entities in the channel

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Distribution channels are value delivery systems

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 Chapter 3

Distribution channels are value delivery systems

• Choose the value:

✓ All businesses must choose where they want to compete, i.e. the target market

✓ Clear understanding of the segmentation of the market and strong insight into the value
preferences of each segment.

✓ The decision based on a rigorous and objective analysis of the capabilities that the
organization can access

✓ The value proposition is an articulation of the compelling reason(s) why customers should do
business with us.

✓ This is the starting point for the development of a ‘go-to-market’ strategy – the development
of the product/service offer and the value delivery system to support that offer.

Choose the Value Provide the Value Communicate the Value Capture the Value

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Distribution channels are value delivery systems

• Provide the Value

✓ Focused on developing solutions to buying problems

✓ Develop supply chains and distribution channels that are flexible and that can adapt
to customers changing needs

✓ Use value-adding partners:

▪ Seamlessly integrated into the total value delivery system

▪ Share the same strategic objectives and be committed to the overall value
proposition

Choose the Value Provide the Value Communicate the Value Capture the Value

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Distribution channels are value delivery systems

• Communicate the Value

✓ Proclaim the value proposition

▪ Ensure that the value proposition is enunciated and proclaimed in the end
market, the business and channel partners

✓ Develop a shared vision

▪ The communication process should be two-way

▪ Enable customer feedback and sales data to flow swiftly up the supply chain

Choose the Value Provide the Value Communicate the Value Capture the Value

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Distribution channels are value delivery systems

• Capture the Value

✓ Understand the cost-to-serve

▪ Multiple channels to go to market => portfolio of customers grows => not easy to
understand the real cost of serving specific customers through a particular
channel

▪ A lot of the potential financial value that could be captured by the channel is
being eroded because of the failure to understand the true costs involved.

Choose the Value Provide the Value Communicate the Value Capture the Value

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Distribution channels are value delivery systems

• Capture the Value

✓ What is the channel margin and who receives it?

▪ The financial value generated through that channel be shared amongst its
members

▪ The channel margin is defined as the difference between the price paid by the
end user in the final market (the ‘street’ price) and the price that the supplier
achieves when they sell it (the ‘factory gate’ price).

▪ The channel margin reflects the value that is going to intermediaries rather than
to the supplier
Choose the Value Provide the Value Communicate the Value Capture the Value

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Innovation in the distribution channel

• Until recently, channels of distribution changed very little.

• Combination of competitive pressure and technology development => dramatic

changes in distribution channels.

• The biggest drivers of these changes has been the rapid rise in the use of the
Internet both for on-line shopping and for business-to-business transactions.

• In many cases, intermediaries has been removed.

• In other cases, it has created new opportunities for intermediaries by acting as

‘info-mediaries’ i.e. using information and knowledge to create new value for
their customers.

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Innovation in the distribution channel

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The omni-channel revolution

• Major retailers around the globe are having to re-evaluate their strategies: temporarily
halt expansion

• The rise of convenience stores

• The biggest change is on-line shopping through the Internet

✓ The Internet is revolutionizing both marketing and supply chain management

✓ The volume and value of transactions conducted via the Internet continues to
grow

✓ Placing the customer or consumer at the centre of the network

✓ Growth of ‘mobile commerce’, i.e. the use of mobile phones to enable a two-
way communication channel

✓ Increase in home delivery

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 Chapter 3

Omni-channel retailing
• Multi-channel retailing:

✓ Is essentially a logistics and distribution

arrangement whereby each channel is more or
less independent of the other.

✓ Separate channels for brick-and-mortar

outlets, for its catalog business, and for its
online business.

✓ The logistics and distribution arrangements

could be quite separate.

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 Chapter 3

Omni-channel retailing
• Omni-channel retailing:

✓ All routes to market are served through the same

supply chain wherever possible

✓ Create high levels of customer satisfaction

✓ Bring down costs.
✓ Ensure that each channel complements the other to
provide a consistent customer experience and enable
a seamless transition from one channel to another
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End of chapter 2

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