Trade-offs between Service Level and Cost
- A Strategic Perspective
ABSTRACT
The importance of customer service cannot be over emphasized. A typical supply chain management（SCM) challenge is to strike the right balance of transportation, process and inventory policies. Only the balance can lead us to the top goal of providing higher customer service level. However, in the practical process, the significant logistic costs conflict with higher customer service level.
Logistics customer service expectations are increasing. Consumers are expecting that products and services can be made available in increasingly shorter time. In addition, improved information systems and flexible manufacturing process have led the marketplace toward mass customization. On the other hand, today's logistics costs are significant. According to the International Monetary Fund (IMF), logistics costs average about 12 percent of the world's gross domestic product. Over the last decade, physical distribution costs have ranged between 7 percent and 9 percent of sales. At the same time, there may be a trend of increasing costs for individual firms.
This thesis analyses the trade-offs between customer service and logistic cost, and how to realize higher customer service level. There are many things we can do through logistic process (including transportation and inventory) for higher customer service level. Rather than consumer having to accept the "one size fits all " philosophy in their purchases, suppliers are increasingly offering products that meet individual customer needs. The Internet, just-in-time operating procedures, and continuous replenishment of inventories have all contributed to customers expecting rapid processing of their requests, quick delivery, and a high degree of product availability. Value is added by minimizing logistic costs and by passing the benefits on to customers and to the firm's shareholders.
Key words: Customer service level; Cost; Trade-off; supply chain management（SCM）; Logistics
客户服务水平与成本的战略平衡
摘 要
服务水平的重要意义毋容置疑。如何在运输、加工过程以及库存这三者之间达到最优化的平衡是物流供应链管理当中的一个典型难题。而这个最优化平衡点又是我们实现提高客户服务水平与能力的关键所在。在实际操作中，显著的物流成本与更高的服务水平总是互相矛盾的两个因素。
客户对物流服务的期望值不断攀升。顾客们希望商家能够在更短的时间给他们提供产品与服务。此外，优化后的信息系统以及生产程序将市场推向大众定制型方向发展。而另一方面，现在的物流成本愈加显著。根据国际货币基金组织的报告，物流费用平均占世界GDP的12%。在过去的十年中，物流成本占据销售额的7%到9%之间。与此同时，个体企业的物流费用也呈上升的趋势。
本文分析了客户服务水平以及成本的战略平衡，讨论了如何降低物流成本并且实现更高的服务水平。在供应链的各个环节中（包括运输和库存等）我们需要改进操作以追求更优质的服务。供应商们逐渐地提供更多能满足不同客户需求的产品，这样一来客户就可以挑选自己喜欢的产品而不必被迫接受同一产品。客户希望他们的要求能够得到快速的处理，诉求更短的货物交付时间以及更大的产品价值，而互联网，实时操作程序和不断补充与更新的库存则有助于满足客户的这些要求。只有降低物流成本，为客户和投资者传递更大的价值，才能获得更大的利润。
关键词：客户服务水平，成本，平衡，供应链管理，物流
Contents
Abstract in English……………………………………………………I
Abstract in Chinese……………………………………………………II
1. Introduction……………………………………………………1
1.1 Customer Service…….…………………………………………1
1.2 Customer Service Level Analysis…………………………………2
1.2.1 Customer Service Elements……………………………………2
1.2.2 Customer Service Quality…………………………………….3
1.3 Cost….………………………………………………………4
1.4 Cost Analysis.……………………………………………….……5
1.4.1 Cost Estimates………………………………………………5
1.4.2 Logistics Costs …………………………………………… …6
2. Trade-offs between Service Level and Cost………………………8
2.1 Cost Benefit Analysis….…………………………………………8
2.2 Cost Curve………………………………………………………9
2.3 Trade-off Analysis: Service-level V.S. Cost……………………10
2.4 Taguchi Loss Function .……………………………………………10
2.4.1 Definition of Taguchi Loss Function.………………………11
2.4.2 Interpreting the Concept…………………………………11
2.4.3 Formula………………………………………………………13
2.4.4 Target-stable and Capable………….………….……………15
3. Transportation and the Trade-off……………………………….17
3.1 Transportation Analysis…………………………………………….17
3.2 Transportation Cost Characteristics………………………………18
3.3 Basic Transportation Cost Trade-offs….…………………………….19
3.4 Freight Management and Operations………………………………19
3.4.1 Reorganization…………………………………………….19
3.4.2 Changes in Logistics Network Infrastructure………………20
3.4.3 Applications……………………………………………………21
4. Inventory and the Trade-off……………………………………….23
4.1 Reasons for Inventories……………………………………….23
4.2 Reasons Against Inventories…………………………………………25
4.3 Cost Relevent to Inventory Management ……….…………………25
4.4 The Inventory Trade-off Analysis…………………………………27
4.4.1 Days of Supply…………………………………….…………27
4.4.2 Classification and Prioritization………………………….28
4.4.3 Service Level Measurement…………………………….28
4.4.4 Inventory Decisions……….…………………………………30
5. Conclusion………………………………………………………………31
Bibliography………………………………………………………………32
Acknowledgement……………………………………………………….34
List of Figures
Figure 1……………………………………………………………….13
Figure 2…………………………………………………….………………15
Figure 3………………………………………………………….…………21
Figure 4…………………………………………………………………….22
Figure 5…………………………………………………………….………23
Figure 6………………………………………………………………….…26
