CONCEPTUAL FRAMEWORK OF PERFORMANCE MANAGEMENT
1.1 PERFORMANCE MANAGEMENT - CONCEPTS, COMPONENTS
Performance Management is a continuous process of identifying, measuring, and
developing performance in organizations by linking each individual’s performance and
objectives to the organization’s overall mission and goals.
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Continuous Process – Performance Management is ongoing. It involves a
never-ending process of setting goals and objectives, observing
performance, and giving and receiving ongoing coaching and feedback
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Linked to Missions and Goals – Performance Management requires
managers to ensure that employee’s activities and outputs are congruent
with the organization’s goals and, consequently, help the organization gain
a competitive business advantage. Performance Management therefore
creates a direct link between employee performance and organizational
goals, and makes the employees’ contribution to the organization explicit
1. DIFFERENCE
APPRAISAL
BETWEEN
PERFORMANCE
MANAGEMENT
AND
PERFORMANCE
Performance Management is the process of identifying, measuring, managing,
and developing the performance of the human resources in an organization.
Basically we are trying to figure out how well employees perform and then to
ultimately improve that performance level. When used correctly, performance
management is a systematic analysis and measurement of worker performance
(including communication of that assessment to the individual) that we use to
improve performance over time.
On the other hand, performance appraisal is the ongoing process of evaluating
employee performance. Performance appraisals are reviews of employee
performance over time, so appraisal is just one piece of performance
management.
Performance Appraisal VS Performance Management
Performance Appraisal
Performance Management
Top-down assessment
Joint process through dialogue
Annual appraisal meeting
Continuous review with one or more
formal reviews
Use of ratings
Ratings less common
Monolithic system
Flexible process
Focus on quantified objectives
Focus on values and behaviors as well as
objectives
Often linked to pay
Less likely to be directly linked to pay
Bureaucratic – complex paperwork
Documentation kept to a minimum
Owned by the HR Departments
Owned by line managers
2. PERFORMANCE MANAGEMENT - CONCEPT
Performance Management directs and leads the business to the overall
achievement with the assessment of employees’ effectiveness by the
implementation of performance appraisals at regular intervals.
THE PERFORMANCE MANAGEMENT CYCLE
PLAN
Setting your
goals
ACT
Doing your job
& developing
yourself
MONITOR
Ongoing
check-in
Coaching
Improvemen
t
REVIEW
Final check-in
Rating
Components of Performance Management
(1) Performance Planning
Performance planning is the first crucial component of any performance
management process which forms the basis of performance appraisals.
Performance Planning is jointly done by the employee (appraiser) and employer
(reviewer) in the beginning of a performance session. During this period, the
employees decide upon the targets (KPI) and the Key Result Areas (KRA), which is
finalized after a mutual agreement between the reporting officer and the
employee.
(2) Performance Appraisal and Reviewing
The appraisals are normally performed twice in a year in an organization in the
form of mid reviews and annual reviews which is held at the end of the financial
year. In this process, the appraisee first offers the self filled up ratings in the self
appraisal form and describes his/her achievements over a period of time in
quantifiable terms. After the self appraisal, the final ratings are provided by the
appraiser for the quantifiable and measurable achievements of the employee
being appraised. The entire process of review seeks an active participation of both
the employee and the appraiser for analyzing the causes of loopholes in the
performance and how it can be overcome.
(3)
Feedback on the Performance followed by personal counseling and
performance facilitation
This is the stage in which the employee acquires awareness from the appraiser
about the areas of improvements and also information on whether the employee
is contributing the expected levels of performance or not. The employee receives
an open and very transparent feedback and along with this the training and
development needs of the employee is also identified. The appraiser adopts all
the possible steps to ensure that the employee meets the expected outcomes for
an organization through effective personal counseling and guidance,mentoring
and representing the employee in the training programs which develop the
competencies and improve the overall productivity.
(4) Rewarding good performance
This is a very vital component as it will determine the work motivation of an
employee. During this stage, an employee is publicly recognized for good
performance and is rewarded.
(5) Performance Improvement Plans
In this stage, fresh set of goals are established for an employee for the next
appraisal cycle and new deadline is provided for accomplishing those objectives.
The employee is clearly communicated about the areas in which the employee is
expected to improve and a stipulated deadline is also assigned within which the
employee must show this improvement. This plan is jointly developed by the
appraisee and the appraiser and is mutually approved.
(6) Potential Appraisal
Potential appraisal forms a basis for both lateral and vertical movement of
employees. By implementing competency mapping and various assessment
techniques, potential appraisal is performed. Potential appraisal provides crucial
inputs for succession planning and job rotation.
1.2 PERFORMANCE, PRODUCTIVITY AND EFFICIENCY
1. PRODUCTIVITY
Productivity examines the relationship between inputs and outputs in a given
production process. Thus, productivity is expressed in an output versus input
formula for measuring production activity. It does not merely define the volume of
output, but output obtained in relation to the resources employed.
It can be achieved through:
(a) Efficiency;
(b) Producing goods and services with fewer inputs or producing more output
from the same quantity of inputs.
If the productivity growth of an organization is higher than that of its competitors,
or other firms, that firm performs better and is considered to be more efficient.
Performance will be product of efficiency, utilization, and productivity
2. EFFICIENCY
Efficiency consists of two main components: technical efficiency and allocative
efficiency. Generally, the term efficiency refers to technical efficiency.
●
●
Technical Efficiency occurs if a firm obtains maximum output from a set of
inputs
Allocative Efficiency occurs when a firm chooses the optimal combination
of inputs, given the level of prices and the production technology. When a
firm fails to choose the optimal combination of inputs at a given level of
prices, it is said to be allocatively inefficient, though, it may be technically
efficient. When a firm achieves maximum output from a particular input
level, with utilization of inputs at least cost, it is considered to be an overall
efficient firm.
EXAMPLE: Let us consider a ferro-alloy plant manufacturing ferro-chrome
with chrome one, coke and limestone as chief inputs. Suppose it can
produce 6,000 tons of ferro-chrome of a specific grade in a day with least
cost per ton, if 15,000 tons of domestic ore and 3,300 tons of imported coke
of appropriate grades are available at agreed prices (assume requisite
limestone is sourced from captive mines). Let us consider the following
scenarios:
●
If inputs as above are available, any adverse deviation in output is
attributable to technical inefficiency
●
●
Suppose, on a particular day imported coke is out of stock and
3,500 tons of domestic coke is purchased as a cheaper substitute
though with lower yield. This is an allocative efficiency resulting in
higher cost per ton of ferro-chrome (NOTE: Higher quantity of
domestic coke is required for compensating lower yield, entailing
adverse cost. Rush purchases further add to cost).
Suppose, there is a breakdown of machinery in limestone mines on
a day. This would limit ferro-chrome production, if sufficient stock of
limestone was not built up. Breakdown could be due to technical
inefficiency in preventing it or due to allocative inefficiency in not
having requisite spares for machine maintenance. Short production
could also be due to insufficient limestone stock which is again an
allocative failure.
3. MEASUREMENT OF PRODUCTIVITY AND EFFICIENCY
Basically, for a single firm that produces one output using a single input, the ratio
of output to input is a measure of the productivity level. In this case, productivity is
relatively easy to measure. However, in the case of many outputs and many inputs
in a production process, the measurement of an output-input ratio is difficult.
4. LIMITATION OF PFP APPROACH - DEVELOPMENT OF TFP APPROACH
In general, in an industrial context, goods and services are produced by a
combination of many factors or inputs. The output of goods and services cannot
be used as a measure of the productivity of any one of the inputs. The output is
only a measure of the joint power of inputs to achieve results. This is the main
disadvantage of measuring productivity and efficiency using the PFP approach.
To overcome this shortcoming of PFP, TFP has been developed. TFP measures
overall productivity and efficiency by considering all inputs and all outputs in the
production process.
1.3 FINANCIAL PERFORMANCE ANALYSIS
1. DEFINITION
Financial Performance Analysis is the process of identifying the financial strengths
and weaknesses of the firm by properly establishing the relationship between the
items of the balance sheet and profit and loss account. It also helps in short-term
and long-term forecasting and growth can be identified with the help of financial
performance analysis.
However, financial statements do not reveal all the information related to the
financial operations of a firm, but they furnish some extremely useful information,
which highlights two important factors: profitability and financial soundness. Thus
analysis of financial statements is an important aid to financial performance
analysis. Financial Performance Analysis includes analysis and interpretation of
financial statements in such a way that it undertakes full diagnosis of the
profitability and financial soundness of the business.
The analysis of financial statements is a process of evaluating the relationship
between component parts of financial statements to obtain a better
understanding of the firm’s position and performance.
The first task is to select the information relevant to the decision under
consideration from the total information contained in the financial statements. The
second is to arrange the information in a way to highlight significant relationships.
The final is interpretation and drawing of inferences and conclusions.
A financial statement is an organized collection of data according to logical and
consistent accounting procedures. Its purpose is to convey an understanding of
some financial aspects of a business firm. It may show a position at a moment of
time as in the case of a Balance Sheet, or may reveal a series of activities over a
given period of time, as in the case of an Income Statement. Thus, the term
‘financial statements’ generally refers to three basic statements:
●
●
●
Balance Sheet shows the financial position (condition) of the firm at a given
point of time. It provides a snapshot and may be regarded as a static
picture. “Balance Sheet is a summary of a firm’s financial position on a
given date that shows Total Assets = Total Liabilities + Owner’s Equity”.
Income Statement (Profit and Loss Statement) reflects the performance of
the firm over a period of time. “Income Statement is a summary of a firm’s
revenues and expenses over a specified period, ending with net income or
loss for the period”.
Cash Flow Statement depicts cash accrual for the period under
consideration. It can be prepared either by direct method of receipts and
payments or by indirect method of adjusting increase or decrease in
liabilities and non-cash assets to profit or loss. Direct Method is simple and
easier to understand while indirect method is more informative (since it
combines Balance Sheet and Income Statement).
2. AREAS OF FINANCIAL PERFORMANCE ANALYSIS
Financial health is measured from the following perspectives:
(a) Working Capital Analysis
(b) Financial Structure Analysis
(c) Activity Analysis
(d) Profitability Analysis
3. SIGNIFICANCE OF FINANCIAL PERFORMANCE ANALYSIS
Interest of various related groups is affected by the financial performance of a
firm. Therefore, these groups analyze the financial performance of the firm. The
type of analysis varies according to the specific interest of the party involved.
●
●
●
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Trade Creditors: interested in the liquidity of the firm (appraisal of firm’s
liquidity)
Bond holders: interested in the cash-flow ability of the firm (appraisal of
firm’s capital structure, the major sources and uses of funds, profitability
over time, and projection of future profitability)
Investors: interested in present and expected future earnings as well as
stability of these earnings (appraisal of firm’s profitability and financial
condition)
Management: interested in internal control, better financial condition and
better performance (appraisal of firm’s present financial condition,
evaluation of opportunities in relation to this current position, return on
investment provided by various assets of the company, etc)
4. TYPES OF FINANCIAL PERFORMANCE ANALYSIS
Financial Performance Analysis can be classified into different categories on the
basis of material used and modus operandi as under:
A. MATERIAL USED: On the basis of material used financial performance can
be analyzed in the following two ways:
(1) External Analysis: this analysis is undertaken by the outsiders of the
business namely investors, credit agencies, government agencies,
and other creditors who have no access to the internal records of
the company. They mainly use published financial statements for the
analysis and as it serves limited purposes.
(2) Internal Analysis: this analysis is undertaken by the persons namely
executives and employees of the organization or by the officers
appointed by government or court who have access to the books
of account and other information related to the business.
B. MODUS OPERANDI: On the basis of modus operandi financial performance
can be analyze in the following two ways:
(1) Horizontal Analysis: in this type of analysis financial statements for a
number of years are reviewed and analyzed. The current year’s
figures are compared with the standard or base year and changes
are shown usually in the form of percentage. This analysis helps the
management to have an insight into levels and areas of strength
and weaknesses. This analysis is also called Dynamic Analysis as it is
based on data from various years.
(2) Vertical Analysis: in this type of analysis study is made of quantitative
relationships of the various items of financial statements at a
particular date. This analysis is useful in comparing the performance
of several companies in the same group, or divisions or departments
in the same company. This analysis is not much helpful in proper
analysis of firm’s financial position because it depends on the date
for one period. This analysis is also called Static Analysis as it based
on data from one date or for one accounting period.
5. TECHNIQUES/TOOLS OF FINANCIAL PERFORMANCE ANALYSIS
An analysis of financial performance can be possible through the use of one or
more tools/techniques of financial analysis.
ACCOUNTING TECHNIQUES
It is also known as financial techniques. Various accounting techniques such as
Comparative Financial Analysis, Common-size Financial Analysis, Trend Analysis,
Fund Flow Analysis, Cash Flow Analysis, CVP Analysis, Ratio Analysis, Value Added
Analysis, etc. may be used for the purpose of financial analysis. Some of the
important techniques which are suitable for the financial analysis are discussed
hereunder:
1. Ration Analysis
In order to evaluate financial condition and performance of a firm, the
financial analyst needs certain tools to be applied on various financial
aspects. One of the widely used and powerful tools is ratio or index. Ratio
expresses the numerical relationship between two or more things. This
relationship can be expressed as percentages (25% of Revenue), fraction
(one-fourth of Revenue), or proportion of numbers (1:4). Accounting ratios
are used to describe the significant relationships, which exist between
figures shown on a balance sheet, in a profit and loss account, in a
budgetary control system or in any other part of the accounting
organization. Ratio analysis plays an important role in determining the
financial strengths and weaknesses of a company relative to that of other
companies in the same industry. The analysis also reveals whether the
company’s financial position has been improving or deteriorating over
time. Ratios can be classified into four broad groups on the basis of items
used: (a) Liquidity Ratio, (b) Capital Structure/Leverage Ratios, ©
Profitability Ratios, and (d) Activity Ratios
2. Common-Size Financial Analysis
Common size ratios are used to compare financial statements of differentsize companies or of the same company over different periods. By
expressing the items in proportion to some size-related measure,
standardized financial statements can be created, revealing trends and
providing insight into how the different companies compare.
For example, if the item of interest is inventory and it is referenced to total
assets (as it normally would be), the common size ratio would be:
Common Size Ratio for Inventory = Inventory/Total Assets
The ratios often are expressed as percentages of the reference amount.
Common size statements usually are prepared for the income statement
and balance sheet, expressing information as follows:
●
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Income Statement items - expressed as a percentage of total
revenue
Balance Sheet items - expressed as a percentage of total assets
The ratios in common size statements tend to have less variation than the
absolute values themselves, and trends in the ratios can reveal important
changes in the business. Historical comparisons can be made in a timeseries analysis to identify such trends.
Common size statements also can be used to compare the firm to other
firms
Comparisons between Companies (Cross-Sectional Analysis)
Common size financial statements can be used to compare multiple
companies at the same point in time. A common-size analysis is especially
useful when comparing companies of different sizes. It often is sightful to
compare a firm to the best performing firm in its industry (benchmarking). A
firm also can be compared to its industry as a whole. To compare to the
industry, the ratios are calculated for each firm in the industry and an
average for the industry is calculated. Comparative statements then may
be constructed with the company of interest in one column and the
industry averages in another. The result is a quick overview of where the firm
stands in the industry with respect to key items on the financial statements.
Limitation
As with financial statements in general, the interpretation of common size
statements is subject to many of the limitations in the accounting data used
to construct them. For example:
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Different accounting policies may be used by different firms or within
the same firm at different points in time. Adjustments should be
made for such differences.
Different firms may use different accounting calendars, so the
accounting periods may not be directly comparable.
3. Trend Analysis
Trend analysis indicates changes in an item or a group of items over a
period of time and helps to draw the conclusion regarding the changes in
date. In this technique, a base year is chosen and the amount of items for
that year is taken as one hundred for that year. On the basis of that the
index numbers for other years are calculated. It shows the direction in which
concern is going.
1.4 SUPPLY CHAIN MANAGEMENT
1. DEFINITION
Supply Chain Management encompasses the planning and management of all
activities involved in sourcing, procurement, conversion, and logistics
management activities. Importantly, it also includes coordination and
collaboration with channel partners, which can be suppliers, intermediaries, thirdparty service providers, and customers. In essence, Supply Chain Management
integrates supply and demand management within and across companies.
The Supply Chain Management Program integrates manufacturing operations,
purchasing, transportation, and physical distribution.
Supply Chain Management is a set of approaches utilized to efficiently integrate
suppliers, manufacturers, warehouses and stores, so that merchandise is produced
and distributed at the right quantities, to the right locations, and at the right time,
in order to minimize system wide costs while satisfying service level requirements. It
originated initially in a marketing function.
2. OBJECTIVE OF SUPPLY CHAIN MANAGEMENT
(a) Supply Chain Management takes into consideration every facility that has
an impact on cost and plays a role in making the product conform to
customer requirements
(b) The supply chain management is to be efficient and cost-effective across
the entire system; total system-wide costs from transportation and
distribution to inventories of raw materials, work-in-process and finished
goods
(c) Finally, supply chain management revolves around efficient integration of
suppliers, manufacturers, warehouses and stores; it encompasses the firm’s
activities at many levels, from the strategic level through the tactical to the
operational level.
3. VALUE CHAIN TO SUPPLY CHAIN
•
•
•
Value Chain allows alignment of processes with customers. This generates
a Quality advantage.
Value Chain focuses on Cost management efforts.
Value Chain provides for efficient processes which improve the Timeliness
of operations.
(a) Primary Activities
• Inbound logistics – covers stores, warehousing, handling, and stock
control
• Operations – production and packing and all activities that transfer
inputs into outputs
• Outbound Logistics – transport and warehouse networks to get
products to customers
• Marketing and sales – methods by which customers know about and
purchase products
• Service – support all activities such as installation and returns
(b) Support Activities
• Procurement
• Technology – Information and communications technology and
Research and Development
• Human resource – all aspects concerned with personnel
• Infrastructure – finance, legal, other management activities
Cost and Value
• Michael Porter expanded the concept by joining value chains you create
value systems – in effect creating a Supply Chain.
• According to Porter, only when the product is purchased can the value be
measured, and finally, it is not until the product reaches the final customer
that the real value is found.
• Value is added by improving the product, changing its form and moving
Cost and Value in Logistics
• Shows that goods incur cost and does not create value
• Challenging definition of a warehouse, in supply chain terms: “A warehouse
is an admission of defeat as we are planning to stop the flow of goods and
material”
• The diagram emphasizes the urgency of bringing the product to the
customer as quickly as possible.
4. STANDARDS OF SUPPLY CHAIN
•
•
•
•
•
Products meeting 100 % Quality specifications from source to ultimate user
Customers replenished using Store Point of Sales data
Continuously aim to decrease our supply chain costs
Operate and produce in line with customer needs
Develop proactively the programs to anticipate consumer/customer
demands
5. COMPONENT OF SUPPLY CHAIN MANAGEMENT
(a) Plan: This is the strategic portion of SCM. You need a strategy for managing
all the resources that go toward the meeting demand for your product and
services.
(b) Source: Choose the suppliers that will deliver the goods and services you
need to create your product. Develop a set of pricing, delivery and
payment processes with suppliers and create metrics for monitoring and
improving the relationships.
(c) Make: This is the manufacturing step. Schedule the activities necessary for
production, testing, packaging and preparation for delivery.
(d) Deliver: This is the part that many insiders refer to as logistics. Coordinate the
receipt of orders from customers, develop a network of warehouses, pick
carriers to get products to customers and set up an invoicing system to
receive payments.
(e) Return: The problem part of the supply chain. Create a network for
receiving defective and excess products back from customers and
supporting customers who have problems with delivered products.
6. DEVELOPMENT OF SUPPLY CHAIN
The development of a chain is the set of activities and processes associated with
new product introduction. It includes the product design phase, the associated
capabilities and knowledge that need to be developed internally, sourcing
decisions and production plans. Specifically, the development chain includes
decisions such as product architecture; what to make internally and what to buy
from outside suppliers, that is, make/buy decisions; supplier selection; early supplier
involvement; and strategic partnerships.
In many organizations, additional chains intersect with both the development and
the supply chains. These may include the reverse logistics chain, that is, the chain
associated with returns of products or components, as well as the spare - parts
chain.
7. FOUR PILLARS OF THE SUPPLY CHAIN
(a) Procurement
Definition
The process of fulfilling a requisitioner’s need for materials, supplies and
services at the right quality, quantity, time and price from a reliable and
dependable source.
Principles
1. Develop and maintain reliable sources of supply
2. Challenge product specification and qty.
3. Buy at the best price
4. Minimize ordering cost
5. Standardize specifications
6. Ensure supply continuity
7. High degree of coordination and cooperation with user department
8. Get involve in Make or Buy decisions
9. Attain high inventory turnover
10. Maintain good records.
Negotiating the Best Deals Objectives
• To obtain a fair and reasonable price for the quality specified
• To get the supplier to perform the contract on time.
• To exert some control over the manner in which the contract is
performed
• To persuade the supplier to give maximum cooperation to the buyer’s
company
• To develop a sound and continuing relationship with a competent
supplier
Negotiating the Best Deals
Preparation
▪ Set the objectives
▪ Determine negotiating venue
▪ Select Team
▪ Relevant information
▪ Analysis of Seller and Buyer’s positions
▪ Time to negotiate
▪ Concessions
Negotiation Philosophies
1. Win-Win (Co-operational)
• Both parties have high degree of concern for their own and the
other’s outcome
• Done between partners and both parties want to do business with
each other
2. Win-Lose (Adversarial)
• Low degree of concern for own outcome while high degree of
concern for the other’s outcome, approach will be yielding or
accommodating
• Both parties have moderate degree of concern for their outcomes,
approach will be compromising. Both parties will normally split the
difference.
3. Lose-Lose (Confrontational)
• Both have low degree of concern for each other
• Occurs when both parties are forced to negotiate because of
circumstances beyond their control
Negotiation Tactics
(1) Prioritize issues for discussion
• Major issues first before minor
• Most troublesome first, if the other issues will fall into place
• Least troublesome first, to get a feel for the supplier’s position
and evaluate the supplier’s negotiators
(2) Use Questions wisely
(3) Listen
(4) Maintain initiative
(5) Use Solid data
(6) Use Silence
(7) Avoid emotional reaction
(8) Make use of Time outs
(9) Do not be afraid to say NO
(10)
Beware of deadlines
(11)
Be aware of Body language
(12)
Keep an Open mind
(13)
Put it in writing
(14)
Appropriate concessions
(15)
Use “Missing person” tactic
(16)
Take it or Leave it
(17)
Use the “Bogey” tactic
(18)
Never negotiate beyond Physical or mental endurance
6 Rights (Essentials)
(1) Quality – Goods/Services that are of satisfactory quality and fit for
purpose
• Fundamental
• Conformance to specifications
• Fitness for use
• Process uses during manufacturing
(2) Quantity - Purchase sufficient quantity to meet demand and service
levels while minimizing excess the holding of stock
• Factors influencing the choice on how much to buy
• Minimum order quantities
• Economic order quantities
(3) Time - Deliver at the right time to meet demand, but not early nor
late which might incur unnecessary inventory or penalty costs
• Lead time
• Internal – identifying the need to issue a complete
purchase order
• External – receipt of the supplier to delivery of the
product or service
• Seasonality
• Urgency or need
(4) Place - Deliver to the right place, packed and transported in a way
as to secure safe arrival in good condition
• Transport and handling cost
• Selecting the right place to acquire the materials
(5) Desired Price - Reasonable price, fair, and competitive
• Cost of ownership
Total Cost of Ownership = Purchase Price + Cost of Acquisition
+ Cost of Operation + Cost of Disposal
• Supplier’s pricing methodology
• Material and production cost
• Extent of competition/market condition
• Customer perceived value
• Attractiveness of the customer’s business
(6) Supplier
• Selection, accreditation, qualification
• Negotiation
• Supplier performance
Finding Qualified Sources
A good supplier is one who is at all times honest and fair in his dealings with
the customers, his own employees, and himself; who has adequate plant
facilities, and know-how so as to be able to provide materials that meet the
purchaser’s specifications, in the quantities required, and at the time
promised; whose financial position is sound; whose prices are reasonable
both to the buyer and to himself; whose management policies are
progressive, who is alert to the need for continued improvement in both his
products and his manufacturing processes; and who realizes that, in the last
analysis, his own interests are best served when he best serves his customers.
(Dr. Wilbur England, Harvard University)
Levels of Supplier Relationship
(1) Preferred Suppliers
(2) Partnered Suppliers
(3) Certified Suppliers
(4) Pre-qualified Suppliers
CATEGORY
Suppliers
Supplier Location
Supplier Relations
Contract Period
Quantity Delivered
Transportation
Deliveries
Quality
Communications
Inventory
Design
Production
Storeroom
Price
Cost Improvement
Seller Approach
TRADITIONAL BUYING
Adversaries (many – more is better)
Scattered widely
Short or Long Term
Short
Large
Full load, single item
Monthly
Inspect and re-inspect
Purchase Order (Sporadic)
An Asset
Make Print, get quote
Large lots
Large, Automated
Competitive Bidding
Sporadic
Selling
SUPPLY CHAIN MGT
Partners (few – single source)
As close as possible
Long Term
Long
Small
Full load, many items
Weekly/Daily
No incoming inspection
Electronic/Verbal Release (Continuous)
An Evil – Reduce
Seek early supplier input; then make print
Small lots
Small flexible
Cost based negotiation
Continuous-driving material cost down
Improving products for both parties
(b) Demand and Replenishment
• Demand is the number of units that our customers ordered, not
necessarily the number of units that we shipped or sold.
• Demand is determined at every stock location across the different
members/ levels of the supply chain, that would best represent the
actual consumer order.
Data Sources and Level
• Sales History
• Demand History
o At Corporate Consolidated Level
o At Distribution Center Consolidated Level
o At Distributor Level
o At Retailer Level
o At Consumer or Point of Sales Level
Demand Data Problems
• Inflated Demand
o Results from back orders that are recognized as part of real
orders.
o Use of Sales in historic records which distorts demand when stocks
run-out (out of stock)
• Outright Errors
o Occurs when a customer orders the wrong quantity of the right
item, or the right quantity of the wrong item.
• Sales increases unexpectedly
o Due to extensive marketing or selling campaign
o Due to unexpected external environmental conditions
Demand Data Corrective Actions
• Eliminating Inflated Demand
o Use Actual Order Data
o The first time a customer orders an item that we are out of stock;
we count the order in demand.
o The second time the same customer orders the same quantity of
the same item, we do not count that order in demand.
o If the customer orders a higher quantity than he had ordered
originally, we count the additional quantity.
o If the customer repeatedly orders the same quantity week after
week while the item is still out of stock, we do not count that
demand until the item is back in stock or until the same period of
time has expired.
• Outright Errors
o The transaction for the wrong order quantity or wrong item is
reversed, and the correct item or quantity is captured to correct
the items demand data.
• Unusual Demand
o If the demand in the last three months is more than 200% of the
prior three months’ demand, and more than 200% of the same
three months of last year; this would certainly be an unusual
demand pattern requiring review.
o The best thing to do with an unusual demand pattern is to prompt
the planner or buyer to review the items demand data to explain
the factor(s) that may have caused it. Consequently, the
demand data is flagged as unusual with the attached
explanation for future demand data consideration.
Definition of Forecasting
Forecasting is the Art and Science of predicting future events (Roger C
Schroeder)
Forecasting Characteristics
• Forecasts will be wrong.
• Forecasts are most useful with an estimate of error.
• Forecasts are more accurate for larger groups of items.
• Forecasts are more accurate for shorter periods of time.
Components of Past Demand Pattern overtime
Framework for selecting a forecasting method
(1) User and system sophistication
• Methodology works best on the level of user knowledge and
sophistication
• Simpler models sometimes perform better
(2) Time and resources available
(3) Use or decision characteristics
(4) Data availability
(5) Data pattern
Forecasting Approaches
Forecasting Process
Phase 1: Developing the model
• Identify the best sources of demand data
• Collect and review the data
• Cleanse the data (e.g., to compensate for distortions)
• Produce a base statistical forecast
• Select the best forecasting fit
Phase 2: Testing and applying the Model
• Identify any factors that may cause past demand to need
adjustment, e.g.:
o Price changes
o Competitor activity
o Technological change
o Market research into consumer/user preferences
• Determine the potential impact of these factors
• Update the base statistical forecast taking these into account
Phase 3: Revise and Evaluate
• Regularly check actual demand against forecasts
• Understand the reasons for variances
• Identify and take any required actions, e.g.:
o Remedies to past problems
o Opportunities for improving performance or forecasting
accuracy
Purpose of Inventories
• To protect against uncertainties
• To allow economic production and purchase
• To cover anticipated changes in demand or supply
• To provide for transit
Inventory Management
• Decision on qty of inventory to hold and where are crucial in order to
meet:
o Customer service requirements
o Customer expectation
• Key is to get a balance between cost and right service
Financial Impact of Inventory
• Cost of money “tied up”
• Fixed storage costs
• Variable storage costs
• Inventory Management costs
• Stock deterioration, loss and obsolescence
Inventory Manager’s role
• Optimize inventory levels
• Reducing holding costs and parts variety
• Ensure proper documentation for traceability and control
• Maximize service levels and inventory turnover while minimizing error
rates
Inventory Cost Structures
• Item cost
• Ordering (or setup) cost
• Carrying (or holding) cost:
o Cost of capital
o Cost of storage
o Cost of obsolescence, deterioration, and loss
• Stock out cost
Safety Stock
Protection against risk and uncertainty specifically, when a higher rate of
demand is experienced than what was forecasted; and/or a delay in the
delivery of goods occur.
Inventory Level with Constant Demand and Constant Lead Time
Stockout
• Another critical costs in inventory decision is Stockout costs
• Whenever a product is unavailable to meet demand. Three
activities can occur:
(1) Customer is willing to wait (backorder)
• Costs is incurred associated with processing and extra
shipping needed
(2) Customer purchases a competitor’s product (Lost Sale)
• Direct loss of profit and revenue
(3) Customer permanently switch to the competitor (Lost
Customer)
• Loss of future profit and revenue
• If the stock-out comes from the Raw material side of the firm
o Manufacturing may need to shut down a section or the entire
facility until the material is made available.
• Solution = increase stock level to meet uncertain demand increases.
• Hold stock for safety
• Increase inventory costs mitigates costs of stockouts
• Question: How much safety stock to hold?
• Cost of Stockout:
o Identify consequences of stockout
▪ Backorder
▪ Lost sale
▪ Lost customer
o Calculate each of the resulting expense
o Estimate the cost of a single stockout
(c) Logistics and Distribution Management
Distribution Management
• Typically, movement of Goods from source to their destination, point of
use or sale.
• This involves use of various resources such as storage facilities, handling
equipment and transport vehicles.
Role of Warehouses
(1) Provide buffer to smooth variation between supply and demand
(2) Enable economies of long production runs
(3) Buffer between different manufacturing operations
(4) Procurement savings (large purchases)
(5) Seasonal fluctuations
(6) Wider range of products from different suppliers
(7) Cover for planned or breakdown
Warehouse Operations
Order Picking concepts
• Key factors in picking performance
1. Accuracy
2. Completeness
3. Timeliness
• Information required to perform task
1. Picking location
2. Sequence of picking
3. SKU to be picked
4. Quantities to pick
Cross dock and flow thru
Flow Through (or Break Bulk or pick to Zero)
Cross dock and Flow Thru - Benefits
• Reduced cost of resources
• Improves capital asset utilization
• Decreases inventory
• Increases Velocity Thru-put Cycle Time
• Improves Customer Service
• Improves Warehouse capacity
Delivery Standards: Key Functions and Operations
Pre-Departure Checks: Many untoward incidents can be avoided through
proper Pre-departure Checks
Delivery Standards
(a) Fundamental
• Complete
• On-Time
• Right Quality
(b) Security and Documentation
• Pre-Filled up
• All parties sign and keep copy
• Locks & Seals intact and properly opened
(c) Presentation
• Professional Personnel Behavior
• Professional Attire
(d) Health and Safety
• With proper handling equipment
• With proper transport equipment
• With proper safety equipment
• Safe handling of goods
Yard Operations Cycle
1. Truck comes in
2. Truck parks
3. Truck is cleared for loading
4. Truck moves to dock
5. Truck loads/unloads
6. Truck is cleared
7. Truck leaves
Properly Managing the yard operations cycle
o Keep it short, do proper planning & scheduling
o Keep it accurate, do proper document management
o Keep it orderly, there is a place for everything and everyone. This
is enforced through good communication, clear accountability
and consistent discipline
o Do MWA – Management by Walking Around
Dispatch Operations Cycle
1. Delivery Documents as well as Truck Plan is received
2. Stocks checked against plan
3. Picks are confirmed at the staging area
4. Trucks are checked against bookings at call time
5. Dock assignments are made
6. Trucks are checked for clearances (i.e. weighbridge as well as
pre-departure inspections) and directed to the proper docks
Trucks are cleared for departure (includes documentation and
seals, as applicable)
In-Transit Management
• Monitor the progress of deliveries for all trucks through communications
like Radio’s, Cellphones (specially SMS), Telephones, GPS
• Need to manage incidents or adjustments. Some possible incidents:
• Accidents / Spills
• Traffic violations
• Breakdowns
• Consignee cannot or will not receive
• Unusual unloading requirements
• Returns / Rejects
• Some possible adjustments
• Cross dock
• Rescue
• Contamination Cleanup/Isolation
• Legal intervention
• Consignee coordination for schedule changes
• Backhaul
• Media Relations
• Exceeds 8hrs, may extend until early morning as some deliveries take
longer
Network Planning
Channel selection criteria
• To make products readily available to the targeted market consumers
• To enhance prospect of sales to occur
• To achieve cooperation to relevant distribution factors
o Minimum order size
o Product handling characteristics
o Delivery access
o Delivery time constraints, etc
• To achieve a given level of service
• To minimize Logistics and total costs – selected channel cost must be in
relation to the type of product offered and service required
• To receive fast and accurate information feedback
o Sales trends
o Inventory levels
o Service levels
o Damage reports
Third Party vs. Own Operations
Major drivers for and against the use of third party vs. own distribution
operation:
A. Cost Factors
• Capital cost advantage
• Day to day operating cost savings because the operation
is more efficient
• Economies of scale
• Cost lag or cushion effect
• Change-over costs of moving from own-account
distribution to third party distribution
B. Organizational factors
• Focus on core competencies
• Loss of control over the delivery operations
• Loss of control over the company’s logistical variables
• Product and business knowledge
• Service level considerations
• Shift of balance of power
• Distribution and logistics expertise
• Coordination between third party and sales services
• Influence at the point of delivery
• Brand Integrity
• Confidentiality of information
• Cultural compatibility
C. Physical factors
• Greater flexibility
• Industrial relations problems
• Drop characteristics
• Vehicle characteristics
• Basic delivery systems
• Products compatibility
Critical Factors in the choice of third-party distribution company
(a) Service
(b) Quality of People
(c) Cost
(d) Country wide capability
(e) National transport capability
(f) Sector experience
(g) Dedicated service capability
(h) Size
(i) Shared user capability
Contingency Planning Definition
To determine in advance what courses of action is required if a given
unanticipated change in requirements or circumstance occurs.
Perfect Storm of Contingencies
Lean supply chains. "Supply chains are getting leaner and distances are
growing longer," says Randy Strang, vice president, consulting services for
UPS Supply Chain Solutions. "Lean supply chains eliminate inventory that in
the past created some buffer for unexpected events. Without that
inventory, dealing with unexpected events and supply chain
inconsistencies grows more urgent."
Outside risks. Natural disasters such as earthquakes and hurricanes are
always a threat, for example, as are labor issues including strikes, lockouts,
and other work stoppages. And, with the increasing globalization of many
supply chains, terrorism, geopolitical unrest, trade regulation, currency
exchange rates, and supplier dependability also become factors to
consider.
10 Ways to Stay Ahead of Potential Disruptions
(1) Assess risk. When deciding where to buy or manufacture product, or where
to locate DCs and which ports or other transportation options to use, keep
these risk factors in mind: political and labor issues; physical and geographic
risks, including weather and logistics/utilities infrastructure; and economic
and market risks, including fuel prices, currency, and inflation. Run scenarios
in your organization to initiate thinking about how to respond when one of
these risks becomes a threat.
(2) Create a response team. You don't want people acting and reacting on their
own, without thinking through possible consequences. Establish a team that
will be responsible for making decisions during a crisis, and communicate
their responsibilities through the supply chain.
(3) Give yourself options. Establish and maintain relationships with alternate
suppliers and logistics networks. Use multiple carriers, ports, and transport
modes.
(4) Test your plan regularly. Besides testing and exercising your own contingency
plan, demand contingency plans from your suppliers and logistics providers,
then review and update these plans regularly.
(5) Keep documentation up to date. Make detailed processes and
authorizations readily available for the alternate and backup brokers and
suppliers you use in the event of an emergency.
(6) Track current events. Continually monitor the countries or regions impacting
your supply chain for threats or trends including weather, labor issues, fuel
prices, inflation, or political changes.
(7) Stress cross-training. Develop a cross-trained workforce that can react
quickly and be moved to a variety of functional areas within your operations.
(8) Be knowledgeable and prepared. If you are in a hurricane zone, keep an
eye on the weather forecasts and understand alternative transportation
options and rates.
(9) Save time and avoid congestion. Where possible, use customs facilities that
enable you to obtain and finalize clearances at a location other than the
port of entry.
(10) Back up your files. Ensure that all trade-related documents are backed up
and saved in electronic format at an off-site location.
(d) Customer Service and Order Management
Importance of Customer Service (7 Rs of Customer Service)
(1) Right Product
(2) Delivered at the right place
(3) Right time
(4) Right condition and packaging
(5) Right quantity
(6) Right cost
(7) Right customer
Components of Customer Service
(a) Transactional-related elements
Before delivery – service factors that arise prior to the actual transaction
• Written customer service policy
• Accessibility of order personnel
• Single order contact point
• Organizational structure
• Method of ordering
• Order size constraints
• System flexibility
• Transaction elements
During delivery – related to the physical transaction and those
commonly concerned with Distribution and Logistics
• Order cycle time
• Order preparation
• Inventory availability
• Delivery alternatives
• Delivery time
• Delivery reliability
• Complete order delivery
• Condition of goods
• Order status information
After delivery
• Availability of spares
• Call-out time
• Invoicing procedures
• Invoicing accuracy
• Product tracing/warranty
• Returns policy
• Customer complaints and procedures
• Claims procedure
(b) Functional attributes
• Time – order fulfillment cycle time
• Dependability – guaranteed fixed delivery times of accurate,
undamaged orders
• Communications – ease of order taking and queries response
• Flexibility – ability to recognize and respond to a customer’s
changing needs
Quality of Customer deliveries
• Meeting Customer expectation and producing buyer value
• Must be able to show actual performance versus customer
expectation
• Use of Customer feedback
• Questionnaire survey
• Social media blogs
Resulting problems of an ineffective Order to Cash process
1. High Error order taking rates
2. High order-fulfillment error rates
3. High Days outstanding sales rates (Customers unable/unwilling to
pay terms)
4. High Cost of dispute resolution
5. Inefficient/ineffective collection process
6. High level of Customer defection
Efficient Order to Cash process
1. Invest capital in higher value-added activities
• Excess outstanding A/R have minimal return on capital
invested
2. Reduce level of external financing
3. Decrease administrative effort and cost to manage collection
process
4. Increase collection due to Days Sales Outstanding (DSO)
reduction
• Older receivables difficult to collect
• The longer a receivable remain unpaid,
• higher the risk the customer being unable to pay
Perfect order
1. Delivered complete versus ordered quantities
2. Delivered exactly to date and time requested
3. No delivery problems (damage, shortage, refusal)
4. Accurate and complete documentation
5. Accurate invoicing
8. FINANCIAL IMPACT
Return on Investment (ROI)
• Maximizes Profit
o Sales
▪ On Time In Full (OTIF)
▪ Service Levels
▪ Customer Relationships
▪ After Sales
o
•
Cost
▪
▪
▪
▪
▪
▪
Inventory Holding
Storage
Transport
Labor efficiency
Depot Location
Obsolescence
Minimizes Capital Employed
o Inventory
▪ Raw Materials
▪ Work In Process
▪ Finished Goods
▪ Stock Location
▪ Inventory Control
▪ Inventory Turn
▪ Economic Order Quantity
▪ Systems
o Cash and Receivables
▪ Cash to cash cycle
▪ Order cycle time
▪ Invoice accuracy
o Fixed Assets
▪ Warehouses
▪ Depots
▪ Transport
▪ Handling Equipment
▪ Network Optimization
▪ Outsourcing
9. DIFFICULTIES IN SUPPLY CHAIN
Global optimization is made even more difficult because supply chains need to
be designed for, and operated in, uncertain environments, thus creating
sometimes enormous risks to the organization. A variety of factors contribute to
this:
(a) Matching Supply and Demand: It is a major challenge:
Example: Boeing Aircraft announced a write-down of $2.6 Billion in October
1997 due to “Raw Material Shortages internal and supplier parts shortages
and productivity inefficiencies”.
(b) Inventory and back - Order levels fluctuate considerably across the supply
chain, even when customer demand for specific products does not vary
greatly. To illustrate this issue, in a typical supply chain, distributors orders to
the factory fluctuate far more than the underlying retailer demand.
(c) Forecasting does not solve the problem: Indeed, we will argue that the first
principle of forecasting is that “Forecasts are always wrong”. Thus, it is
impossible to predict the precise demand for a specific item, even with the
most advanced forecasting technique.
(d) Demand is not the only source of uncertainty: Delivery lead times,
manufacturing yields, transportation times, and component availability
also can have significant chain impact.
(e) Recent trends such as lean manufacturing, outsourcing and offshoring that
focus on cost reduction increases risk significantly. In the event of an
unforeseen disaster, such as the September ‘11 terrorist attacks, Port strikes,
January 26, 2001 earthquake in India, state of Gujarat, etc, JIT is not
maintainable.
1.5 CUSTOMER RELATIONSHIP MANAGEMENT
1. DEFINITION
CRM is a business strategy comprising process, organizational and technical
change whereby a company seeks to better manage its enterprise around its
customer behaviors. It entails acquiring and developing knowledge about
customers and using this information across the various customers touch points to
increase revenue and achieve cost reduction through operational efficiencies.
The adoption of CRM is being fuelled by a recognition that long-term relationships
with customers are one of the most important assets of an organization.
It entails all aspects of interaction that a company has with its customers, whether
it is sales or service-related. CRM is often thought of as a business strategy that
enables businesses to:
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Understand the customer
Retain customers through better customer experience
Attract new customers
Win new clients and contracts
Increase profitably
Decrease customer management costs
CRM is an integrated approach to identifying, acquiring, and retaining customers.
By enabling organizations to manage and coordinate customer interactions
across multiple channels, departments, lines of business and geographies, CRM
helps organizations maximize the value of every customer interaction and drive
superior corporate performance.
2. PARTS OF CRM
In order for any action in CRM to be successful it requires consistent data about
customers which will be accessible to every employee of a company. That is also
highly demanding on a technology providing CRM in a company.
(a) Analytical CRM
The purpose of analytical CRM is customer data analysis, its evaluation,
modeling and prediction of customer behavior. In real life situations the
analytical CRM can for example gather all the data about customers
inquiring about a specific product by using data mining (tool for data
gathering), what services they purchased right away and what services
they purchased eventually. It can find patterns in their behavior and
propose next steps during upselling or cross-selling. It can evaluate
efficiency of a marketing campaign, propose prices or even develop and
propose new products. This way analytical CRM serves as some sort of help
during decision making, e.g. manuals for employees working in services
concerned with how to react to certain customer’s behavior.
(b) Operative CRM
Operative CRM mainly supports the actual contact with customers
conducted by front office workers and general automation of business
processes including sales of products, services, and marketing. All
communication with the customer is tracked and stored in the database
and if necessary it is effectively provided to users (workers). The advantage
of this approach being the possibility to communicate with various
employees using various channels but creating the feeling that the
customer is being taken care of by just one person. It can also minimize the
time that the worker has to spend typing the information and administering
(the data is shared). This allows the company to increase the efficiency of
their employees' work and they are then able to serve more customers.
(c) Collaborative CRM
Collaborative CRM enables all companies along the distribution channel,
as well as all departments in a company, to work together and share
information about customers, and even speaks about partner relationship
management (PRM). But sometimes we might see a rivalry between
departments that undermines efforts of CRM to share relevant data
throughout the whole company (e.g. information from helplines can help
the marketing department choose a point on which it will focus during the
next campaign). The goal of collaborative CRM then is to maximize sharing
of relevant information acquired by all departments with the focus on
increasing the quality of services provided to customers. The ultimate
outcome of this process should be an increase in the customer's utility and
his loyalty.
3. PREREQUISITES OF CRM
(a) Information technology plays an important role in the concept of CRM
(b) Companies must be willing and able to adopt the whole philosophy which
puts the main focus on the customer. It must adopt the strategy focused on
establishing and supporting long-term relationships with customers. Strategy
leads to a failure of the whole CRM implementation.
4. TECHNOLOGICAL ASPECTS AND PRINCIPLES OF CRM
5. OBJECTIVES FOR USING CRM APPLICATIONS
(a) To support the customer services
(b) To increase the effectiveness of direct salesforce
(c) To support of business to business activities
(d) To support of business to consumer activities
(e) To manage the call center
(f) To operate the in-bound call center
(g) To operate the out-bound call center
(h) To operate the full automated (i.e. no CRM involvement, “lights out”)
6. ADVANTAGES AND DISADVANTAGES OF CRM
Advantages
(a) Satisfied customers
(b) Product development according to current customer needs
(c) Increase in quality of products and services
(d) Sell more products
(e) Optimization of communication costs
(f) Proper selection of marketing tools (communication)
(g) Trouble-free run of business processes
(h) Greater number of individual contacts with customers
(i) More time for customer
(j) Differentiation from competition
(k) Real time access to information
(l) Fast and reliable predictions
(m)
Communication between marketing, sales and services
(n) Increase in effectiveness of teamwork
(o) Increase in staff motivation
Disadvantages
(a) Proper implementation and running of CRM is very difficult (technology,
people - employees, initial money investment etc.)
(b) The safety of information that companies keep about their customers,
sharing information with third party and its overall protection
7. DEFINITION OF CRM RISKS
(a) Impacts that a CRM initiative may have on an organization:
● Increased expectations from senior management to increase
revenues, reduce costs, increase market share and increase
business flexibility may put tremendous pressure on the organization
and may potentially compromise the internal control structure
● Increased complexity of managing multiple channels, technologies,
customer relationships and customer definitions
● Vital and confidential customer information may be transmitted and
shared across new networks, systems, and platforms
● Significant changes to the organization, attitudes and beliefs,
placing heavy reliance on the organization’s employees for the
successful adoption of the solution.
These factors introduce many risks to the organization, for instance, the
potential disruption of vital operations; violations to customer privacy and
confidentiality; ineffective, inconsistent or inefficient processes; lack of
internal business controls; poor customer service; incorrectly targeted sales
and marketing efforts; non acceptance of new systems and processes; and
security breaches.
However, since CRM is still an evolving area and the type of CRM projects
can vary so vastly between organizations (e.g. data mining, salesforce
automation, web-enabling sales, call center consolidation), there are
many different definitions of CRM risks. When survey respondents were
asked their definition of CRM risks, the definitions ranged from customer
dissatisfaction, data corruption, privacy, legal, loss of competitive
advantage and business benefits as listed below:
(b) Definition of Risks Impacting a CRM Solution
(1) Customer dissatisfaction/loss of customers
● CRM risks can be very simply defined to be the risk of losing
customers to competitors’ better business practices and
strategies and the consequent loss of customer satisfaction
and relationship continuance
● Inadequate understanding of CRM and wrong system
implementation will cause customer dissatisfaction
(2) Data integrity os compromised/security
● Customer data is mismanaged and misused in a way that
corrupts data or erodes customer satisfaction or Opinion
● CRM risks are those that damage customer’s privacy and
confidentiality
(3) Inability to meet objectives/benefits not realized
● The main risk that the implementation of the CRM may cause
is the high expectation generated by the potential tool versus
the actual possibility of attaining functionality.
● The implemented solution does not meet the expectation
and organization objectives
(4) Risks to the business in general
● CRM risks are risks to the business (especially in sales, service
and marketing areas) in terms of financial risk, operational risk,
commercial risk and profitability risk, arising from failure to
adopt the right processes and technologies.
● CRM risks amount to the overall operational impact that the
new CRM system will bring about to the entire organization
(5) Events and circumstances that could affect the implementation
● Any event, action or circumstance that inhibits the
achievement of the business objectives related to the
Customer and his interactions with the business
● CRM risks are events or circumstances hindering the
successful and/or timely completion of the CRM project
(6) Loss of competitive advantage
● CRM risks are risks emanating from customer service and
competitive advantage of the overall goal of the
organization
● The biggest CRM risk is the loss of competitive advantage
(7) Legal considerations
● CRM risks of an engagement could result in legal problems
● With CRM, the organization runs the risk of negative
profile/impaired credibility leading to public criticism and
erosion of statutory role
(8) Lack of controls
● The risk involves the ability to identify any control weaknesses
● The risk of reintroducing or not controlling traditional, manualbased controls for lack of incorporating appropriate controls
or mitigating the risk in redefined or automated CRM
processes
(9) Negative impact on business reputation
● These are risks that affect the reputation of the bank such as
fraud or rumors from customers that can cause a run on the
bank
● One risk is the negative impact on revenue and organization
image
(10)
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(11)
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Loss of market share
It is the risk that poor customer service will result in loss of
market share
CRM risk is not knowing exactly the expectation levels of
customers and ultimately losing market share.
Acceptance of CRM within the organization
The risk here is the inability of the organizational structure to
support the CRM system
Acceptance of the system and added value to the business
are key CRM risks
But regardless of the definition used to describe CRM risks, one thing
is apparent: risk management is considered an important aspect of
the success of CRM projects.
(c) Determining Risk Tolerance
The statistical analysis methods also varied significantly, but some of the
more common methods include:
● Ratio of potential losses to the potential plus actual sales revenues
generated
● Grade of impact multiplied by the number of times of one action
● Risks multiplied by the costs to prevent the risks
● Cost of total risks divided by the total revenue
● Probability multiplied by impact by timescale to equal risk priority
● Multiplying a factor of the probability of the risk happening and the
qualitative estimate of the damage it will cause
● Proper weighing of the qualitative impact that risks will create for the
organization
Other methods for determining risk tolerances include determining the
maximum acceptable financial risks, scenario analysis, customer
responses/feedback and benchmarking.
1.6 CUSTOMER PROFITABILITY ANALYSIS
1. CUSTOMER PROFITABILITY
To examine further the profitability of distribution channels and customers.
This guideline provides details of company experiences in examining the causal
relationships between the drivers of customer satisfaction and customer revenues
as well as in measuring the profitability and costs of servicing existing customers.
2. USEFULNESS
● Increasing customer focus
● Increasing shareholder value
● Customer satisfaction, loyalty, and value
● Analyzing Customer Profitability
3. BENEFITS
● Protecting existing highly profitable customers
● Reprising expensive services, based on cost-to-serve
● Discounting to gain business with low cost-to-serve customers
● Negotiating win-win relationships that lower service costs to cooperative
customers
● Conceding permanent loss customers to competitors
● Attempting to capture high-profit customers from competitors
4. ISSUES
● How to develop reliable customer revenue and customer cost information
● How to recognize future downstream costs of customers
● How to incorporate a multi-period horizon in the analysis
● How to recognize different drivers of customer costs
This requires a broader examination of the costs associated with customer service.
For example, post - sale customer service cost must be included in any analysis of
customer costs. Some customers require substantially more postsale services than
others. Revenues can vary among customers due to variations in volume levels
and differences in price structures, products, and services.
Costs can also vary depending on how customers use the company’s resources
such as marketing, distribution, and customer service. Unless a complete analysis
of the benefits and costs of customer relationships is undertaken, companies will
unknowingly continue to service unprofitable customers. Only after a thorough
analysis of the costs and benefits, can a firm decide which customers to service
and strategically price its products and services.
5. HIDDEN COSTS
There are many costs that are often hidden within the production, support,
marketing, and general administration areas.To better understand customer
profitability these costs should be examined and assigned appropriately using
ABC Methods. These currently hidden customer costs may include items such as:
● Inventory carrying costs
● Stocking and handling costs
● Quality control and inspection costs
● Customer order processing
● Order picking and order fulfillment
● Billing, collection and payment processing costs
● Account receivable and carrying costs
● Customer service costs
● Wholesales service and quality assurance costs
● Selling and marketing costs
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