What is Customer Service and Cost Trade-Off? Factors for Balancing

What is Customer Service and Cost Trade-Off?

Customer service and cost trade-off refer to the balance between providing high-quality customer service and managing the costs associated with delivering that service.

Customer service involves all the activities that a business undertakes to ensure that its customers are satisfied with the products or services they receive. These activities include everything from answering customer inquiries to providing technical support and handling customer complaints.

Costs, on the other hand, are the expenses that a business incurs in delivering customer service. These costs can include salaries, training, technology, infrastructure, and more.

The challenge for businesses is to find the right balance between delivering high-quality customer service and managing the costs associated with that service. Providing excellent customer service can lead to increased customer loyalty, repeat business, and positive word-of-mouth marketing. However, delivering that service can be expensive and can negatively impact a business’s bottom line if not managed carefully.

In a modern and highly competitive business environment, an organization can hardly be successful without being highly efficient. However, being and remaining efficient is a tight-rope walk for an organization, as it has to continuously face many trade-offs. For example, one of the most important trade-offs faced by manufacturing organizations is customer service and cost trade-off. Let us understand how this trade-off works.

If a manufacturer maintains too much inventory, it has to incur high amounts of inventory costs. Therefore, to reduce overall costs, a manufacturer would like to keep the minimum possible inventory. However, low inventory exposes the manufacturer to the risk of a stock-out situation, in which it fails to supply goods to customers, as and when demanded.

Therefore, to improve customer service, a manufacturer would like to keep a high level of inventory. Now, you can see the dilemma of the manufacturer in keeping the right inventory level while trying to maintain a balance between low cost and effective customer service. Lowering costs result in ineffective service and effective customer service comes at a higher cost.

In such a circumstance, a trade-off balance between cost and customer service level is maintained, in which inventory levels are maintained at a relatively lower level and customer service is maintained at a relatively higher level. When the customer service level and supply chain cost trade-off are plotted in the graph, it is called the supply chain’s ‘efficiency frontier’.

A manufacturer cannot increase customer service level without increasing the supply chain cost while being in the current efficient frontier. The figure also shows that a manufacturer can achieve the goal of lower supply chain costs and higher customer service levels by moving up to a higher efficiency frontier.

The service level and supply chain cost trade-off point towards the importance of managing inventory levels to achieve competitive advantage. Most organizations consider inventory mainly as a cost head. However, inventory can be managed to reduce costs, provide better customer service and increase revenue. This notion leads to the concept of Inventory Optimisation (IO).

A large number of organizations have benefitted by adopting IO. It is very common for companies to reduce up to 30% of inventory after implementing IO. For example, Hewlett Packard (HP) saved more than $130 million, Microsoft increased inventory turn by 18-20% while increasing fill rates by 6-7% and Procter & Gamble reduced inventory level by $100 million (Efficient Frontier: A Moving Target).

Factors for Balancing Customer Service Level and Supply Chain Cost

IO intends to achieve a balance between customer service level and supply chain cost by considering the following factors:

• Order Delivery Lead Time and Supply Chain Lead Time
  
• Push-pull Boundary of a Supply Chain
  
• Supply Chain Responsiveness
  
• Delivery Reliability
  
• Product Variety

Order Delivery Lead Time and Supply Chain Lead Time

It refers to the time taken by a manufacturer to deliver the finished product after receiving an order. The main objective of modern ‘lean’ manufacturing is to reduce the lead time so that customer satisfaction can be increased. For example, if e-retailing giant promises to deliver products within 48 hours of receiving the order, its order delivery cannot exceed 48 hours; else, it will result in customer dissatisfaction.

Supply chain lead time refers to the total time starting from the procurement of raw materials to the delivery of the finished goods to customers. Therefore, supply chain lead time includes the order delivery lead time as well as sourcing and manufacturing time.

a typical organization sources material from suppliers manufactures components, assembles products, and delivers the finished products to the end users. IO aims to optimize the order delivery lead time and supply chain lead time to create a balance between supply chain cost and customer service.

Push-pull Boundary of a Supply Chain

All activities in a supply chain can be categorized into push or pull depending upon whether the activity is being conducted in anticipation of a customer order (push) or because a customer order has already been placed (pull). The push-pull boundary separates these two processes.

Apple follows the push strategy in which it anticipates a huge demand for its products from the market and strives to expedite the manufacturing process to meet these demands. On the other hand, Dell computers start assembling a product only when they receive an order. This means Dell computers adopt the pull strategy.

The balance between customer service and supply chain cost is established based on the position of the push-pull boundary; that is whether the organization is pursuing a pull strategy or a push strategy.

Supply Chain Responsiveness

It refers to the capability of the supply chain of an organization to meet market demands in a given period. A highly responsive supply chain possesses the following abilities:

• Ability to handle supply uncertainty
  
• Ability to deal with a large assortment of products
  
• Ability to deliver in short lead times
  
• Ability to cater to wide fluctuations in market demand
  
• Ability to provide a high level of customer service

Delivery Reliability

Delivery reliability is a crucial aspect of customer service and it reflects the extent to which an organization can provide service to its customers within the promised delivery time. Delivery reliability is measured by the fraction of customer demand that is fulfilled within the specified delivery lead time.

Product Variety

The assortment of products or services offered by an organization is a crucial aspect of customer service. In the last two decades, an explosion of product assortment has taken place in most product categories. Higher product assortment offers a wide variety of choices to the customer who is willing to get a product that fits closest to his or her real requirement.