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
