Perreault−McCarthy: Basic
Marketing: A
Global−Managerial
Approach, 14/e- Distribution Customer
Service and Logistics
Text © The McGraw−Hill
Companies, 2002334 Chapter 12
“we will deliver 90 percent of all emergency repair parts within 8 business hours
and the remainder within 24 hours.” Such a service level might require that almost
all such parts be kept in inventory, that the most commonly needed parts be avail-
able on the service truck, that order processing be very fast and accurate, and that
parts not available locally be sent by airfreight. If Xerox doesn’t make the part, it
would need to be sent directly from Xerox’s supplier. Obviously, supplying this ser-
vice level will affect the total cost of the PD system. But it may also beat competitors
who don’t provide this service level.
Increasing service levels may be very profitable in highly competitive situations
where the firm has little else to differentiate its marketing mix. Marketing managers
at Clorox, for example, must do everything they can to develop and keep strong
partnerships with Clorox middlemen (supermarket chains, convenience stores, mass
merchandisers, warehouse clubs, and wholesalers) and other business customers
(ranging from white-tablecloth restaurants to the fast-service chains). Many other
firms sell products with precisely the same ingredients as Clorox and are constantly
trying to get orders from Clorox’s 100,000 business customers worldwide. Yet
Clorox’s objective is to “maintain the highest standards for customer service” in the
product-markets it serves because that helps it obtain a competitive advantage. For
example, when the bleach buyer for a major retail chain went on vacation, the fill-
in person was not familiar with the computerized reorder procedures. As a result,
the chain’s central distribution center almost ran out of Clorox liquid bleach. But
Clorox’s distribution people identified the problem themselves—because of a com-
puter system that allowed Clorox to access the chain’s inventory records and sales
data for Clorox products. Clorox rearranged production to get a shipment out fast
enough to prevent the chain, and Clorox, from losing sales at individual stores. In
the future when some other bleach supplier tries to tell buyers for the chain that
“bleach is bleach,” they’ll remember the distribution service Clorox provides.^5In selecting a PD system, the total cost approachinvolves evaluating each pos-
sible PD system and identifying allof the costs of each alternative. This approach
uses the tools of cost accounting and economics. Costs that otherwise might be
ignored—like inventory carrying costs—are considered. The possible costs of lost
sales due to a lower customer service level may also be considered. The following
simple example clarifies why the total cost approach is important.The Good Earth Vegetable Company was shipping produce to distant markets by
train. The cost of shipping a ton of vegetables by train averaged less than half the
cost of airfreight so the company assumed that rail was the best method. But then
Good Earth managers did a more complete analysis. To their surprise, they found
the airfreight system was faster and cheaper.
Exhibit 12-3 compares the costs for the two distribution systems—airplane and
railroad. Because shipping by train was slow, Good Earth had to keep a largeFind the lowest total
cost for the right
service level
A cost comparison of
alternative systems
Exhibit 12-2
Examples of Factors that
Affect PD Service Levels
- Online status information
- Advance information on delays
- Time needed to deliver an order
- Reliability in meeting delivery date
- Complying with customer’s instructions
- Defect-free deliveries
- How needed adjustments are handled
- Procedures for handling returns
- Advance information on product
availability - Time to enter and process orders
- Backorder procedures
- Where inventory is stored
- Accuracy in filling orders
- Damage in shipping, storing, and
handing