Setting service standards
Obviously if service performance is to be controlled then it must be against predetermined
standards.
Ultimately the only standard to be achieved is 100 per cent conformity to customer
expectations. This requires a clear and objective understanding of the
customers’ requirements and at the same time places an obligation upon the supplier
to shape those expectations. In other words there must be a complete match
between what the customer expects and what we are willing and able to provide.
This may require negotiation of service standards since clearly it is in neither party’s
interest to provide service levels that would lead to a long-term deterioration in
profitability – either for the supplier or the customer.
What are the customer service elements for which standards should be set?
To be effective these standards must be defined by the customers themselves.
This requires customer research and competitive benchmarking studies to be conducted
so that an objective definition of customer service for each market segment
may be identified.
LOGISTICS AND CUSTOMER VALUE 51
However, for the moment we can indicate some of the key areas where standards
are essential:
MM Order cycle time
MM Stock availability
MM Order-size constraints
MM Ordering convenience
MM Frequency of delivery
MM Delivery reliability
MM Documentation quality
MM Claims procedure
MM Order completeness
MM Technical support
MM Order status information
Let us examine each of these in turn.
Order cycle time
This is the elapsed time from customer order to delivery. Standards should be
defined against the customer’s stated requirements.
Stock availability
This relates to the percentage of demand for a given line item (stock keeping unit,
or SKU) that can be met from available inventory.
Order-size constraints
More and more customers seek just-in-time deliveries of small quantities. Do we
have the flexibility to cope with the range of customer demands likely to be placed
upon us?
Ordering convenience
Are we accessible and easy to do business with? How are we seen from the customers’
viewpoint? Do our systems talk to their systems?
Frequency of delivery
A further manifestation of the move to just-in-time is that customers require more
frequent deliveries within closely specified time windows. Again it is flexibility of
response that should be the basis for the performance standard.
52 LOGISTICS & SUPPLY CHAIN MANAGEMENT
Delivery reliability
What proportion of total orders are delivered on time? It is a reflection not just
of delivery performance but also of stock availability and order processing
performance.
Documentation quality
What is the error rate on invoices, delivery notes and other customer communications?
Is the documentation ‘user friendly’? A surprisingly large number of service
failures are from this source.
Claims procedure
What is the trend in claims? What are their causes? How quickly do we deal with
complaints and claims? Do we have procedures for ‘service recovery’?
Order completeness
What proportion of orders do we deliver complete, i.e. no back orders or
part shipments?
Technical support
What support do we provide customers with after the sale? If appropriate do we
have standards for call-out time and first-time fix rate on repairs?
Order status information
Can we inform customers at any time on the status of their order? Do we have
‘hotlines’ or their equivalent? Do we have procedures for informing customers of
potential problems on stock availability or delivery?
All of these issues are capable of quantification and measurement against
customer requirements. Similarly they are all capable of comparison against competitive
performance.
It must be recognised that from the customer’s perspective there are only two
levels of service – either 100 per cent or 0 per cent. In other words either the customer
gets exactly what they ordered at the time and place required or they don’t.
It must also be remembered that 100 per cent order fill rates are extremely difficult
to achieve – the laws of probability see to that! If there are ten items on a particular
order and each item is carried in stock at the 95 per cent level of availability then
the probability that the complete order can be filled is (0.95)10, which is 0.599. In
other words, just over a 50/50 chance that we can satisfy the complete order.
Table 2.3 shows how the probability of order fill diminishes as the number of
items on the customer order increases.
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Table 2.3 Probability of a complete order
Number of lines
in order
Line item availability