The role of Activity Based Costing and CRM (customer relationship management) as well as customer segmentation
The combination of CRM (customer relationship management) and Activity Based Costing is a profound strategy that has offered great value to the business by helping in the customer segmentation process as well as building a profitable revenue strategy for the business (Kumar and Reinartz). This strategy has also enabled the business to define the true cost of dealing with its customers which aids the shipper in attaining the highest level of cost efficiency and therefore better customer interaction. By combining the three different tools, the Shipper is able to use CRM to offer differentiated services to its various customers in different segments. By achieving effective differentiation of customers, the shipper is able to realize a maximum profit as well as the maximum satisfaction of the customer (Page 273)
Using figure8-5, customers are classified based on profitability. The sales value of a customer is measured on the y-axis whereas the X-axis measures the cost to serve. Using the segments in the figure, the most profitable segment is the customers that fall within the Protect segment. Another important zone is the Danger zone which houses the least profitable customers that are likely suffering from losses attributable to the shipper.
For the shipper, three different alternatives are available which include 1. Charging the client the actual cost incurred in doing the transaction (which would most likely stop the client from doing any more business with shipper). This is not common with many shippers as it reduces the probability of trading with the customer again in future 2. Alter the manner in which the shipper interacts with his customer which will most likely shift the customer to another segment. 3. Switching of the customer to a new distribution channel such as encouraging the customer to place his order through the wholesaler or distributor as compared to buying directly from the shipper.
The other customer segment is the 'Build' segment which houses the low net sales value and low cost to serve. This segment will have the strategy focusing on maintaining a cost to serve while building the net sales value and ensures that customers are able to shift into the 'Protect segment.'
Customers that are located within the "Cost Engineer" segment will have a high cost to serve and a high net sales value. The strategy ensures that the customer is able to find more efficient and better ways of interacting with the shipper. This will most likely help to encourage the customers to place their orders in tier quantity as opposed to case quantities. The switch in the order policy will ensure the achievement of cost savings related to the reduction of the operating cost which will possibly shift the customer to the 'Protect segment.'
The impacts of order cycle time length and variability on both buyers and sellers
Traditionally, the order cycle time length of the OTC was the key focus in different businesses, but presently the tide has changed which showcases the recent attention on the variability on buyers and sellers as well as the consistency of the process (Coyle, John J., et al.).
Industry practices have increasingly attached more importance to variability but as well not the overlooked absolute length of time which is still an important factor in the OTC. The force behind the recent attention to the OTC cycle variability is the safety stock. The demand inventory in the firm is directly influenced by the absolute length of the order cycle. The order cycle concept is of importance here as the key focus is on product delivery and not the cash flow to the supplier. A good example can be in the case of a buyer making an order which takes 10 days to be manufactured. Based on an assumption of 50 units EOQ the buyer will make an order at 40 units as the order cycle reduces to eight days. This showcases a reduction of 10 units by the buyer inventory in the lead time offered by the supplier (Page 280-281).
The nature and importance of the four logistics-related elements of customer service
Using the logistics view, customer service can be viewed as having four profound dimensions which include convenience, time, communication and dependability. Based on the seller's perspective, the time factor is the time used from ordering to the payment of the cash (Coyle, John Joseph, et al.). Alternatively, the buyer will refer to the time dimension as the time between ordering, and lead time offered to the replenishment. Buyers will value dependability more to the absolute length of lead time. Based on this factor, three different types of communication will be predominant to the seller-buyer relationship. These include the pre-transaction, transaction, and post-transaction. Likewise, convenience can also be used to mean that logistics service level must be flexible (Pages 289-291)
Cash flow = (number of incomplete orders x backorder% x backorder cost per order) +
(number of incomplete orders x cancelled% x lost pretax profit per order)
A. cash flow = (1,000 x 70% x $150) + (1,000 x 30% x $12,500)
= ($105,000) + ($3,750,000)
= $3,855,000 cash flow lost at 80% service level
B. cash flow = (400 x 70% x $150) + (400 x 30% x $12,500)
= ($42,000) + ($1,500,000)
= $1,542,500 cash flow lost at 92% service level
$1,542,500 - $3,855,000 = -$2,313,000 reduction in lost profit
C. $1,542,500/2,000,000 = 77.125% ROI
NO, the investment would not be justified
Coyle, John J., et al. Supply chain management: a logistics perspective. Nelson Education, 2016.
Coyle, John Joseph, et al. Managing supply chains: A logistics approach. South-Western Cengage Learning, 2013
Hammer, Michael. "What is business process management?." Handbook on business process management 1. Springer, Berlin, Heidelberg, 2015. 3-16.
Kumar, Vineet, and Werner Reinartz. Customer relationship management: Concept, strategy, and tools. Springer, 2018.
Stevenson, William J., Mehran Hojati, and James Cao. Operations management. Vol. 8. Boston: McGraw-Hill/Irwin, 2007.
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