Logistics and Supply Chain Management, 4th Edition

LOGISTIC S & SUPPLY CHAIN MANAGEMENT

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Many companies have suffered in this new competitive environment because

in the past they have focused on the traditional aspects of marketing – prod-

uct development, promotional activities and price competition. However, whilst

these are still necessary dimensions of a successful marketing strategy they are

not sufficient. Equally damaging has been the focus on cost reduction that has

driven many companies’ operational and logistics strategy – particularly as a result

of recession. Cost reduction is a worthy goal as long as it is not achieved at the

expense of value creation. Low-cost strategies may lead to efficient logistics but

not to effective logistics. More often than not today the order winning criteria are

those elements of the offer that have a clearly identifiable positive impact upon the

customers’ own value-creating processes.

One powerful way of highlighting the impact that customer service and logis-

tics management can have on marketing effectiveness is outlined in Figure 2.3.

The suggestion here is that customer service impacts not only on the ultimate end

user but also on intermediate customers such as distributors. Traditionally market-

ing has focused on the end customer – or consumer – seeking to promote brand

values and to generate a ‘demand pull’ in the marketplace for the company’s prod-

ucts. More recently we have come to recognise that this by itself is not sufficient.

Because of the swing in power in many marketing channels away from manufac-

turers and towards the distributor (e.g. the large concentrated retailers) it is now

vital to develop the strongest possible relations with such intermediaries – in other

words to create a customer franchise as well as a consumer franchise.

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 com-

petitive performance it is suggested that the relationship is multiplicative. In other

words the combined impact depends upon the product of all three.

Customer service and customer retention

It will be apparent from what has been said that organisations that compete only

on the product’s features will find themselves at a severe disadvantage to those

companies that augment the basic product with added-value services. It was one

Consumer

franchise

Customer

franchise

Supply chain

efficiency

Marketing

effectiveness

• Brand values

• Corporate image

• Availability

• Customer service

• Partnership

• Quick response

• Flexibility

• Reduced asset base

• Low-cost supplier

• Market share

• Customer retention

• Superior ROI

×

×

=

Figure 2.3 The impact of logistics and customer service on marketing

LO G ISTICS AND CUSTOMER VALU E

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of the leading thinkers in marketing, Theodore Levitt, who first said that ‘people

don’t buy products, they buy benefits’.

5

The idea behind this statement is that it

is the totality of the ‘offer’ that delivers customer value. A simple example would

be that a finished product in a warehouse is the same as a finished product in

the hands of the customer in terms of its tangible features. Clearly, however, the

product in the hands of the customer has far more value than the product in the

warehouse. Distribution service in this case has been the source of added value.

Figure 2.4 develops this idea with the concept of the ‘service surround’.

At the centre is the core product, which is the basic product as it leaves the fac-

tory. The outer ‘halo’ represents all the added value that customer service and

logistics provide. Clearly it is not only customer service and logistics activ-

ity that add value; in many cases advertising, branding and the packaging can

all enhance the perceived value of the product to the customer. However, it is

increasingly evident, as we have seen, that it takes more than branding to differen-

tiate the product.

This idea underpins the current emphasis on seeking to create strategies that

focus on ‘servitisation’, i.e. converting a product into a service. The example of

Rolls-Royce aero engines, highlighted below, provides powerful support for

this idea.

Service

Core

product

Surround

• Quality

• Product features

• Technology

• Durability, etc.

• Delivery lead time and flexibility

• Delivery reliability and consistency

• Order fill

• Ease of doing business

• After-sales support, etc.

Figure 2.4 Using service to augment the core product