Supply chain versus service

A second important tension that has long existed, but will become even more acute as companies seek to create more resilient global supply chains, involves the setting of customer service levels. How speedy should deliveries be? Should some customers receive orders faster than others? What levels of product availability should be guaranteed? In our experience, companies traditionally leave these decisions to the sales function, which often makes service-related decisions without understanding the operational implications or costs involved.

When these groups work together to analyze the full impact of a service decision, they avoid this pitfall—a lesson learned by a chemical company whose sales personnel were pushing its logistics team to reduce delivery times to two days, from three. The company achieved this goal, but only by using more warehouse space and labor and by loading its delivery trucks less efficiently than it otherwise would have. All this increased distribution costs by 5 percent.

While this trade-off might have been acceptable under the right circumstances, a closer examination by the heads of the supply chain and sales groups revealed that most customers didn’t mind if deliveries arrived in two, three, or even five days. The real breakpoint when service was most highly valued was 24 hours. By extending the delivery window for normal orders back to three days, the company returned its distribution costs to their original levels. Meanwhile, it launched a special 24-hour express service for critical deliveries, for which it charged a premium. The move ultimately raised the company’s costs slightly, but this was more than offset by the new business it generated.

As supply chains splinter and companies diversify production to hedge against uncertainty, the importance of making smart trade-offs about service levels and speed can only grow. Companies seeking to cope will have to strengthen partnerships between the leaders of the supply chain, sales, and service.