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Home , Managerial economics

MANAGERIAL AND CUSTOMER SATISFACTION

by Edgar P. Watkins The Ohio State University Columbus, Ohio

-- Margin Uses examples to illustrate the -- Present analysis trade-offs to be made between -- Discounted rate of return operating efficiency and customer -- Analysis of uncertainty satisfaction, -- Measurement of -- Linear programming -- Replacement decision making Will a food distribution organization -- Lease or own decisions which concentrates on operating efficiency -- segmentation and cost reduction achieve first place in -- Location analysis the hearts of customers? Managers of re- tail stores, and of organizations operating The use of such tools and techniques is these stores are frequently troubled because a necessary part of managing the food business. customers do not always respond to the well As food distribution companies grow in size designed stores operating in an efficient, and complexity, the economics and systematic way. Management may well be required for planning, for reporting, for pulled in different directions by two some- tend to become more formalized. In times conflicting objectives . The economics the process of formalizing these techniques of the business demands that be cut and implementing planning, exercising con- and and operating efficiency increased. trol, and executing the reporting procedure Thus, the managerial economics aspect. cus- there is evidence that translation of oper- tomers, on the other hand, may well respond ating efficiency, cost control and pricing to a much broader program in which cost at retail tends to overwhelm meeting the cutting and efficiency are only an integral total needs of customers as they see these part of a total marketing mix. Hence, the needs at the retail store level. customer satisfaction aspect. To reason why meeting the needs of Mana erial economics has been defined customers maybe overwhelmed, or overlooked, by Haynesf as economics applied in decision it may be useful to examine considerations making. The tools of managerial economics customers feel are important when choosing a are well known. Some variations of these food store. The needs of customers, as iden- tools are widely used in food distribution. tified by a continuing series of trading area Included are such diverse subjects as: analyses, are associated with a broad range of interests. The range of customer consid- -- demand erations in choosing a food store are closely -- Sales forecasting identifiedby four major segments in trad”ng -- Analysis of fixed and vari- area analyses at The Ohio State University. $ able costs -- Breakeven analysis and its (1) Store Related application Cleanliness -- Cost functions Shopping convenience -- Relation of Location convenience functions to cost curves Out-of-stocks -- Incremental reasoning in pricing

Journal of Food Distribution Research February 73/page 65 (2) Price & Related utors (defined as small and medium sized Price unaware food retailers). Expectation of lower Expectation of competitive 3. Progressive fringe distributors prices rely on unique store decor, highly motivated Expectation of specials personnel and innovative merchandising pro- Acceptance of promotion pro- grams . grams 4. Fringe distributors had gross mar- (3) Product Related gins in the retail function of 2 to 5 per- Meat quality and freshness centage points less than the core distribu- Wide choice of items tors . Produce quality and fresh- ness Additional evidence regarding retailing General quality level efficiency is found in operating information Recognized brands as reported in leading grocery publications. In 19704 only one of the core firms was in (4) Employee & Related the top ten of the 50 largest chains having Courteous, friendly, helpful the best return on net worth. Only one of employees the core firms was in the top ten as reported Quick check out as having the best margin. Only one Miscellaneous services was in the top ten reporting the largest gain in earnings over the previous year. When the listing of economic tools that managers find useful is compared with the In spite of lower cost to the store- listing of considerations customers find door over the past decade, the core distrib- useful in choosing a retail food store, and utors have just about maintained their share the quantitative increases related to both of the market. In 1960 the top ten chains are examined, it becomes fairly apparent had 28.2 percent of the total grocery store that managers have relatively few numerical sales . In1970 this figure was 28.5 percent. measures of performance related to those things customers feel are important. In the Recently, the growth of food distrib- areas of customer concern, the planning, utors has been greatest in the small to reporting and control aspect of the business medium size firms. The sales gains of chains may indeed become cloudy or unsure. Yet, with 50-99 stores was 16.2 percent in 1970 the successful use of these economic tools over 1969.5 requires satisfying customers from their point of view. Change in Food Chain Sales By Number of Stores There is evidence that some of the efficiencies and of an organi- Sales Gain zation which accrue up until the time of Chains 1970 Over 1969 the retail sale may indeed be lost in the retail function of the business. Handy and 500 stores or more 8 .6% Padberg3 explore a conceptual model of the 250 - 499 stores 9.2 food industry. These points are made in 100 - 249 12.9 relation to the food distribution sector: 50 - 99 16.2 25 - 49 12.7 1. Core distributors (defined as the 11 - 24 10.0 ten largest retail food chains) have a pre- retailing advantage pertaining to cost and efficiency, not product quality. If Handy and Padberg are right in their observations about pre-retailing efficiency 2. This pre-retailing advantage may as compared to retailing efficiency, the account for 2.4 to 3.0 percent lower store- fringe distributors’ and independents’ record door merchandise costs than fringe distrib- seems to indicate that somehow they are able

February 73/page 66 Journal of Food Distribution Research to balance higher store- door costs with some Chain A felt they based most of the measure of retail efficiency. Customer sat- decision making on economic facts. For isfaction may account for some of this dif- example, most of the produce from distant ference at retail. This retailing efficiency producing areas was shipped by railroad may be gained by increased customer satis- rather than truck because of freight savings. faction resulting in higher sales volume. They seldom mixed loads because of increased charges. The stores ordered ten days ahead One evidence of customer satisfaction with no adjustments in orders permitted a can be observed by comparing avera e store week before deliveries. They operated on a sales volume. Handy and Padberg E report two day distribution center cooler supply as that only two of the top ten chains had a safety stock. Supervisors hadtherespon- average supermarket sales of $2,000,000 or sibility for balancing supplies between more in1961, while 55 of the 11-100 largest stores . Stores were locked into a two or chains had sales of this size. three times a week delivery schedule depen- dent upon location and store size. The In 1970two (20 percent) of the top ten major emphasis for retail managers was im- chains had average store sales of $3,000,000 plementing company policy. or more per year. Forty-five percent of the 11-100 largest chains had average store sales Chain B favored truck delivery to the of $3,000,000 or more per store per year. distribution center on all items possible. Sales per square foot would give a greater While acknowledging a higher transportation degree of precision to this comparison. cost, they cited 2-4 days quicker delivery to the distribution center from shipping Food distributors have had fewer tools points and amore reliable delivery schedule to measure customer satisfaction than those from production areas to the distribution related to pricing, efficiency, and cost center , Wide use was made of mixed loads to reduction. Observations suggest that man- secure fresh shipments of low sales volume agement of firms operating in a more com- items , They operatedon a policy ofan empty pact trading area may be better able to cooler at the distribution center. Stores maintain contact with stores on customer submitted their orders one week in advance oriented information not necessarily related and were permitted, although not encouraged, directly to historical information concern- to make adjustments up until the evening be- ing operating efficiency, cost reduction, fore shipping to the stores. Stores could and pricing efficiency. receive deliveries daily although most chose a three day schedule. Store managers and ~Some of this dichotomy of interest be- department managers were expected to manage tween efficiency, costs, price, and customer their store within broad policy guidelines. satisfaction can be illustrated with two brief cases. The first case compares two Chain B’s store-door costs were higher operations, one of which places emphasis on than Chain A. However, on many high sales efficient internal operations and cost re- volume items Chain B had four to six days duction. The other operation is highly less elapsed time than in Chain A between orientedto freshness and quality at retail. production point shipping and when customers The second case illustrates that efficiency picked most items out of the display and translated to the customer as price reduc- carried them home. Chain B had readily ob- tions may not attract additional customers servable freshness differences in stores. if the store or organization falls short of Customers in this area rated Chain B’s providing other elements related to customer produce tops in quality. Which company had satisfaction. the stores that really scored with customers?

The first could well be labeled ‘rThe Case No. 2 will be labeled “The Price Cost Reduction Trap.” In this instance, we Dilemma.” This store is a one store inde- are concerned with two chains’ produce oper- pendent. Extension and distributor manage- ation. One was a division ofa large chain, ment programs have reached this retailer in one a medium size chain. Both operated over recent years. His net had increased over about the same geographical area. Both had the past four years from .14 percent to 1.35 about 50 stores. percent of sales with a steady increase in

Journal of Food Distribution Research February 73/page 67 sales volume. A national chain competitor each store be designed for and operated to moved to discounting, the third competitor meet the needs of the customers in its to do so over a three year period. An addi- trading area. The implementation of this tional competitor had by far the largest recommendation hasnot been a major achieve- sales volume in the market and was not dis- ment of the food industry. At the present counting. The latest chain move to a dis- time, customer analysis seems to be used count program convinced this store owner he most often in feasibility studies and site had to meet discount pricing schedules, location work, which he implemented largely by deep price cuts on high volume items. A customer anal- Leed8 has developed a technique that ysis of that trading area shortly before in- enables managers to sample customers in their dicated that 40 percent of the trading area trading area for opinions related to some customers were not oriented stronglyto price ten aspects of store operations and of com- comparisons . Can you predict the result for petitors in their trading area. this store’s operation? The net plunged back to where it had been four years before while Skinner9 has been active in promoting sales were stagnant. In the process, some seminars which concentrate on the management very desirable changes affecting store oper- of external factors, including customer ations were postponed because of financial evaluations, of store operations. problems. Both Watkins ’IOand Vastine’sll work on This latter case illustrates that prob- trading area analysis suggests that customers lems of tuningin customers are not those of evaluate one or more major aspects of store large organizations vs. small organizations operations different” y than does management but ones of meeting customer needs in each in every study made. store’s trading area. This procedure may become more complicated for large sized Most customer or:ented evaluations seem organizations but is not limited to them. more difficult to express than standard oper- Food distributors must be concerned with at ing ratios, possibly because of less managerial economics. But they also must practice and less experience with this kind be concerned with satisfying customers. of information. The sum of customer exper- iences and impressions, however, has a major When operating ratios indicate poor and long-lasting impact on the operating performance and employees are pressured to statement, and on the firm’s efficiency. improve, the wrong button may be pushed. An overly narrow interpretation of effi- A more complete management information ciency related ratios may call for an in- system for the future calls for not only crease in sales per man hour, perhaps through sophisticated financial and operating infor- job consolidation or through a quota in the mation but also a systematic approach to number of labor hours allowed. The real customer motivations, opinions, and values. problem in this case could well be merchan- The challenge at the present time is one of dising the store for satisfied customers implementing measurement techniques related which can result in a higher customer count to customer satisfaction and integrating this and a larger sales volume. Putting unreal- measurement into the total system. istic pressure on employees may well push sales volume the wrong direction as store cleanliness declines, employee courtesy and lW. W. Haynes, Managerial Economics, friendliness disappear, and out of stocks Business Publications, Inc., Austin, Texas, rise resulting in customers being turned P, ~. off instead of tuned in. ‘Edgar P. Watkins, Retail Food Store An analysis of customer satisfaction Market Analysis, Cooperative Extension Ser- of each store’s trading area is used only vice/Department of & infrequently to identify problem areas and Rural Sociology, ESO No. 5, The Ohio State opportunities . The Kroger-Donnely Study7 University, Columbus, Ohio several ‘years ago strongly recommended that

February 73/page 68 Journal of Food Distribution Research 3C, R. Handy and D. L. Padberg, “A 8Dr. Ted Leed, “RiverCityFood Shopping Model of Competitive Behavior in Fo-o”dIn- Survey: ACase Study,” University of Massa- dustries, ” American Journal of Amicultural chusetts, Amherst, Massachusetts. Economics, Vol. 53, No. 2, May, 1971.

4 Supermarketin~, October, 1971, p. 57.

5Progressive Grocer, April, 1971, p. 81. 10Ed Watkins, “Store Image: A Manage- 61bid. ment Tool,” Journal of Food Distribution, Contributed Papers Issue, September, 1971. 7“ConsumerDynamics in the Supermarket,” Progressive Grocer in cooperation with Reuben llWilliam Vastine, paper presented at H. Donnely Corporation and the Kroger Com- National Association of Retail Grocers pany, 1966. Annual Meeting, June, 1972.

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WHAT IS THE FOODDISTRIBUTION RESEARCHSOCIETY?

In May 1960, a group of interested edu- Research cators , government researchers, and food in- dustrypeople met to discuss theirmany mutual The Society encourages research by de- problems. The open, frank discussion sparked fining research problems of the industry; by the enthusiasmof those involved and annually providing guidelines and direction for de- thereafter, the group informally sponsored veloping ,and implementing food distribution the Food Distribution Research conference at research; by coordinating efforts of research various universities throughout the United workers; by feeding back research needs to States. researchers.

The need for more formal organization Information , was recognized and at the 1967 conference the Food Distribution Research Society was The Society serves as an information officially formed. clearinghouse for past, current, and future food distribution research, and provides The need to coordinate food distribution channels for exchange of information. research and its implementation has brought together, as members of the society, a group Implementation of concerned persons dedicated to progress in this particular industry, The Society encourages implementation of research findings through communication Purposes of of research results to users, through train- the Organization ing, and through encouragement of application and implementation research. The Society organizes and holds confer- ences, meetings, symposiums, etc. of leaders Professional Advancement in the field of food distribution research, and provides an atmosphere wherein ideas, A major goal of the Society is to gain methods, technical developments, and problems increased recognition for the field of food can be freely discussed, distribution research, thereby enhancing the roles of those involved in it. >’<9<*9<9<$<

Journal of Food Distribution Research February 73/page 69