Customer Service zAttacking the total cost of the relationship zCosts of Purchasing zCosts of...
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Customer ServiceAttacking the total cost of the
relationshipCosts of PurchasingCosts of ReceivingCosts of Ownership
Costs of Purchasing
Technical assistance in identifying the right product
Clerical assistance in reducing the cost of the transaction
Financing AssistanceTransportation Assistance
Costs of ReceivingAdvanced shipping
noticesScheduled arrivalPackaging
Costs of Ownership
Maintenance UpgradesAssociated services
Being in stock
Inventory availabilityShipping frequencyOrder cycle timeFill rates: The % of time orders (line
items) are filled as the customer requested
Service Level and Inventory
Time
Inve
ntor
y
Reorder Point
Lead Time
Lea
d T
ime
Dem
and
Ord
er Q
uant
ity
Service Level and Inventory
Time
Inve
ntor
y
Reorder Point
Safety Stock
Average Leadtime Demand
Inventory and Service Level
Average Inventory Level is 1/2 the Order Quantity plus The Safety Stock
The Safety Stock is Related to the service level or probability
leadtime demand does not exceed on hand stock.
Amount of stock you need to provide desired protection against variation in leadtime demand
Typical ModelNormal Distribution
0
0.0005
0.001
0.0015
0.002
0.0025
0.003
0.0035
0.004
0.0045
0 100 200 300 400 500 600 700 800 900
Leadtime Demand
Den
sity
Z
Probability Leadtime Demand is smaller
than z
Probability Leadtime Demand is larger
than z
Borden Foods Box 4.4 page 98Believe a 1% change in service level would
lead to a 0.1% change in sales volume$0.55 Trading Margin (Revenue - Direct Costs)
Std. Cost/Case: $5.38Annual Sales Volume: 59,904 cases Weekly Sales Volume: 1,152 casesStd. Deviation: 350 casesInventory Carrying Cost: 25% of Std Cost
Profit Calculation
Profit = Revenue - CostProfit =
Gross Revenue - Cost of Goods - Inventory Cost
Gross Revenue - Cost of Goods = Trading Margin * Sales Volume $0.55 * Sales Volume
Profit Calculation
Profit $0.55 * Sales Volume - Inventory Cost
Inventory Cost 25% of Std Cost * Inventory Volume 0.25 * $5.38/case = $1.345/case Inventory Volume =
Order Quantity/2 +Safety Stock
Profit Calculation
Profit $0.55 * Sales Volume - $1.345 * (Order Quantity/2 + Safety
Stock)How does Profit depend on Service
Level?
Service Level
Sales Volume “A 0.1% change in the [Sales Volume] … for
each 1% change in the service level” Sales Volume = (1+0.001*) * 59,904 cases is the change (in %) in the service level
Safety Stock Std Deviation * Normalized z(.99+ /100)
Typical ModelNormal Distribution
0
0.0005
0.001
0.0015
0.002
0.0025
0.003
0.0035
0.004
0.0045
0 100 200 300 400 500 600 700 800 900
Leadtime Demand
Den
sity
Current Safety Stock
.99 Probability Leadtime Demand is smaller
than Current Safety Stock
.01 Probability Leadtime Demand is larger
than Current Safety Stock
Typical ModelNormal Distribution
0
0.0005
0.001
0.0015
0.002
0.0025
0.003
0.0035
0.004
0.0045
0 100 200 300 400 500 600 700 800 900
Leadtime Demand
Den
sity
Current Safety Stock
.99 Probability Leadtime Demand is smaller
than Current Safety Stock
.01 Probability Leadtime Demand is larger
than Current Safety Stock
New Safety StockNew Service Level?
Optimum Service Level
Where incremental savings in Safety Stock balance incremental losses in Sales Volume
What makes this difficult?Relationship between Service Level and
Sales Volume (WAG)Relationship between Service Level and
Safety Stock (Normal Approximation)
The Balance
Impact of Changes in Sales Volume $0.55*0.001*59,904*(+d) = $32.95*(+d) Incremental effect is always $32.95 per 1%
Impact of Changes in Safety Stock $1.345*Incremental Change in Safety Stock $1.345*Std Dev. * Change in Normalized z
Have to work to get Change in Normalized z with Change in
Service Level (Look it up)
Using ExcelSafety Stock vs Service Level
300
400
500
600
700
800
900
0 0.02 0.04 0.06 0.08 0.1 0.12
Change in Service Level
Saf
ety
Sto
ck
The Formulas
Service Level Normalized Safety Stock Level Safety Stock Level0.99 0 =NORMINV(Service_Level,0,1) =350*Normalized_Safety_Stock_Level
Finding the new Service Level
Service Level
Safety Stock Level
Change In Safety
StockSafety Stock
ImpactIncremental Safety
Stock ImpactSales
Volume
Change in Sales Volume
Sales Volume Impact
Incremental Sales
Volume Impact
0.99 0 814 - -$ -$ 59,904 - -$ 32.95$ 0.98 0.01 719 (95) 128.32$ 128.32$ 59,844 (60) 32.95$ 32.95$ 0.97 0.02 658 (156) 209.74$ 81.42$ 59,784 (120) 65.89$ 32.95$ 0.96 0.03 613 (201) 270.99$ 61.25$ 59,724 (180) 98.84$ 32.95$ 0.95 0.04 576 (239) 320.81$ 49.82$ 59,664 (240) 131.79$ 32.95$ 0.94 0.05 544 (270) 363.22$ 42.41$ 59,604 (300) 164.74$ 32.95$ 0.93 0.06 517 (298) 400.40$ 37.18$ 59,545 (359) 197.68$ 32.95$ 0.92 0.07 492 (322) 433.69$ 33.29$ 59,485 (419) 230.63$ 32.95$ 0.91 0.08 469 (345) 463.97$ 30.28$ 59,425 (479) 263.58$ 32.95$ 0.9 0.09 449 (366) 491.84$ 27.87$ 59,365 (539) 296.52$ 32.95$
0.89 0.1 429 (385) 517.74$ 25.90$ 59,305 (599) 329.47$ 32.95$ 0.88 0.11 411 (403) 542.00$ 24.26$ 59,245 (659) 362.42$ 32.95$ 0.87 0.12 394 (420) 564.88$ 22.88$ 59,185 (719) 395.37$ 32.95$
Why is the incremental Safety Stock Impact decreasing?Why didn’t we do this in terms of Safety Stock?
Was this meaningful?
Inventory Effect Reduced Inventory by about 300-350 cases Saved about $400-$450 in carrying cost
Sales Volume Effect Reduced Sales Volume by 350-450 cases Lost $200 - $250 in revenue
Net Effect: Approximately $200 per year
Customer Service
Preparing for ContingenciesYour contingenciesYour suppliers’ contingenciesYour carriers’ contingenciesYour customers’ contingenciesYour competitors’ contingencies