Service Supply Relationships chapter 15 15. 15-2 Learning Objectives Contrast the supply chain for physical goods with the customer-supplier duality

Service Supply Relationshipschapter 15

Service Supply Relationshipschapter 15

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Learning ObjectivesLearning Objectives

Contrast the supply chain for physical goods with the customer-supplier duality of services.

Discuss the challenge of managing service supply relationships.

Classify business services based on the focus of the service and its importance to the outsourcing organization.

Discuss the managerial considerations to be addressed in outsourcing services.

Discuss the challenges of delivering services in the field.Prepare a delivery route using the Clarke-Wright algorithm.

Rajeev Sawhney,

Western Illinois University

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Definition of Supply-ChainDefinition of Supply-Chain

All the activities involved in delivering a product from raw material through to the customer includingSourcing raw materials and partsManufacturing and assemblyWarehousing and inventory trackingOrder entry and order managementDistribution across all channelsDelivery to the customer Information systems necessary to monitor all activities

Rajeev Sawhney,


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Functions of supply-management department

Functions of supply-management department

Sourcing: strategic planning, location of sources of supply, assuring continuity of supply, reducing risk of supply disruptions

Purchasing decision making: make or buy, supplier certification, value analysis, order releasing, supplier capacity planning, and supplier development

Contracting: source selection, soliciting bids, cost-price analysis, negotiations, evaluating supplier performance

Inventory management: transportation, receiving, lot size determination, purchased inventory control, material handling, scrap disposal, material return.

Rajeev Sawhney,


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Forces Driving Changes Forces Driving Changes

• Impact of globalization World redefined – opening up of economies EU, NAFTA, SAFTA and other such bodies promoting free trade Emergence of China and India

Need to streamline production operation and outsource for maximum efficiency

• Fuel price increase – 11.6 cents per mile in 1976 to 24.6 cents per mile in 1985 and de-regulation Logistical solutions

• Environmental issues – reduce waste and conserve energy Container management Reverse logistics Waste management - cradle to cradle design issues

Rajeev Sawhney,


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Continued…..Continued…..

• Cost-plus system, pull-system, make-to-order (mass production to mass customization) – all require more active supply-chain involvement

• Total quality management, just-in-time manufacturing, ERP – all require integrated supply chains for best results.

• Greater computing power allowing more sophisticated inventory planning systems.

• Technology – electronic networking and automating repetitive tasks to allow more time for value added work

• Business school interests

Supply Chain ManagementSupply Chain Management

Unreliable deliveries either increase inventory investments in safety stocks or result in unsatisfied customers and lost sales

Success is achieved only by formation of effective partnerships and cooperation among participants throughout the entire supply chain

Bullwhip effect – when a small change in retail order is magnified as we move back up the supply chain to the distributor and finally to the customer – due to overreaction caused by lack of integration and trust

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Network modelNetwork model

The physical goods supply chain can be viewed as a network of value adding material processing stages each defined with supply input, material transformation, and demand output.

Fig. 15.1 shows these stages as suppliers, manufacturing, distribution, retailing and recycling – depicting the flow of material by an arrow, with inventory stocks at each stage.

Information transfer is in the opposite direction – shown by dashed lines. Lack of proper information flow creates uncertainty and results in inventory holding.

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Supply Chain for Physical Goodsfig. 15.1

Supply Chain for Physical Goodsfig. 15.1

Material transfer Information transfer

Suppliers

Process and Product Design

Manufacturing Distribution Retailing Customer Customer Service

Recycling/Remanufacturing

Managing UncertaintyManaging Uncertainty

Uncertainty in supply chain arises from three major sources: Supplier delivery performance Manufacturing unreliability Customer demand

Inventory is traditionally used to match uncertainty

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Supply chain strategic planningSupply chain strategic planning

Strategic initiatives can lessen the impact of uncertainty and thus improve customer service

Improve manufacturing reliability through TQM

Dependable transportation modes

Modular design – allowing postponement of final customization – thus increasing responsiveness without holding too much inventory ; ex. 110 volts versus 220 volts – need changes according to geographic regions, so distribution centers add value by making this customization as the last step

Information technology allows tracking the movement of goods through the supply chain from the factory to the retailer – greater transparency in the logistics system reduces uncertainty

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Impact of Service Supply Relationshipstable 15.1 & 15.4


Element or Link Before After Channel Structure Functional silos Process orientation Service Recipient Passive Active as a co-producer Channel Integration Vertical (own the channel

to integrate) Virtual (IT and other mechanism permit integration without ownership)

Flow of Service Available waiting for demand

Activated upon demand

Flow of Information (upstream)

Pull: manual reporting of demand data results in delayed management response.

Push: high level of connectivity and transparency with fast or instantaneous access to most recent demand data.

Flow of Information (downstream)

Little or no knowledge of resource deployment

Real-time tracking and dispatching

Business Processes

Predominantly in-house; locally optimized for efficiency

In-house for key processes, others out-sourced for flexibility; integrated and synchronized to match supply with demand

Demand Management

Limited to use of appointments and reservations.

Proactive involving customer in scheduling to achieve bi-directional optimization

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Element or Link Before After Capacity Management

Limited to use of part-time employees

Creative use of cross-trained employees, outsourcing, and customer self-service.

Facilitating Goods High; in anticipation of demand

Lower; owing to process transparency

Service Delivery Inflexible; standardized and impersonal

Flexible; personable with customization possible.

Routing and scheduling

Static; fixed daily schedules

Dynamic; based on system connectivity and process visibility

New Service Design Marketing initiatives based on firm's perception of customer needs

Virtual value chain design with customer data base information driving new services

Pricing Fixed Variable; yield management promotes off-peak demand and avoid idle capacity

International Operations

Focus on domestic market Global reach with Internet

Service Supply RelationshipsService Supply Relationships

Service can be considered as acting on people’s minds (e.g. education, entertainment), bodies ( e.g. lodging, health care), belongings ( e.g. auto repair, dry cleaning), and information ( e.g. insurance, legal) – thus all services act on something provided by the customer.

Therefore, customers are acting as suppliers in the service exchange – called the customer-supplier duality (see fig. 15.2). There is a bidirectional relationship between the service delivery firm, its supplier, and the customer (see table 15.2).

Table 15.3 shows examples of two-level service supply chains. In each case, the service provider requires the assistance of a third party supplier to complete the service.

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Single-Level Bidirectional Service Supply Relationship

Single-Level Bidirectional Service Supply Relationship

Service

Category

Customer

-Supplier

>Input

Output>

Service

Provider

Minds Student >Mind

Knowledge>

Professor

Bodies Patient >Tooth

Filling>

Dentist

Belongings Investor >Money

Interest>

Bank

Information Client >Documents

1040>

Tax Preparer

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Two-Level Bidirectional Service Supply Relationship

Two-Level Bidirectional Service Supply Relationship

Service

Category

Customer

-Supplier

>Input

Output>

Service

Provider

>Input

Output>

Provider’s

Supplier

Minds Patient >Disturbed

Treated>

Therapist >Prescription

Drugs>

Pharmacy

Bodies Patient >Blood

Diagnosis>

Physician >Sample

Test Result>

Lab

Belongings Driver >Car

Repaired>

Garage >Engine

Rebuilt>

Machine

Shop

Information Home

Buyer

>Property

Loan>

Mortgage

Company

>Location

Clear Title>

Title

Search

Managerial Implications of Bidirectional Relationships

Managerial Implications of Bidirectional Relationships

Service supply relationships are hubs, not chains Simultaneous consumption and production makes services more

like hubs than chains (in sequence) Table 15.3 – where supply chain can be extended to include a

supplier to the service provider, where service provider acts as an agent for the customer when dealing with outside supplier

Service capacity is analogous to inventory For goods supply chains, inventory is used to buffer the variations

in final customer demand Services cannot be inventoried, excess capacity must be held in

reserve

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continuedcontinued

Customer supplied inputs can vary in quality

Thus impacting delivery performance of service provider

Effective communication is ,therefore, very important

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Sources of Value in Service Supply Relationships

Sources of Value in Service Supply Relationships

Value in service supply relationship depends on

bi-directional optimization

Management of productive capacity

Management of perishability

Bidirectional OptimizationBidirectional Optimization

Bi-directional Optimization implies the possibility of doing what is the best from the customer’s perspective while doing the best for the service enterprise

It is simultaneous optimization of both supply and demand for the service

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Management of Productive CapacityManagement of Productive Capacity

Strategies to improve productive capacity of the service worker are follows: Transfer: make knowledge available to customers so that value

can be transferred with very low cost. Example, web based FAQ database can be used instead of human resources to answer questions

Replacement: substitute technology for server (e.g. digital blood pressure device)

Embellishment: enable self-service by teaching (e.g. change surgical dressing)

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Management of PerishabilityManagement of Perishability

Reduce idle time of workers because that is lost capacity

If you can communicate with workers then you can change their schedule to optimize capacity. If no communication is available then you have to work with a fixed schedule and cannot deal with uncertainties in the best possible way.

Managing perishability also involves training and extending skills and capabilities of workers to work at more than one station – to match changing needs

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Dr. Rajeev Sawhney

Relationship between stakeholders – how is service purchasing different?


Simultaneous production and consumption, thus requiring user participation.

Inability to store services – implying that the timing of service delivery must coincide with the end users consumption needs. Therefore, the end user must communicate the needs to the purchasing manager very precisely – otherwise the consequences of improper timing may be serious and costly.

Inability to store services creates quality assurance difficulties. It may not be possible to inspect a service before its delivery. Therefore, services have to be continuously monitored by the end user.

Dr. Rajeev Sawhney



The need-recognition and description stages of acquisition process offer the greatest opportunity to add value through strong collaborative relationship with internal users. Otherwise, the organization will fail to realize the full contribution in managing its service spend. Therefore, purchasing managers must become business partners with major users of the services.

Greater effort upfront in identifying and documenting for intangibles will facilitate supplier search and selection, administration, and quality control.

Dr. Rajeev Sawhney

Relationship between stakeholders in a service purchasing environment


Purchasing services directly by the end user is not recommended because often they are inadequately prepared to apply a methodical, structure, and strategic sourcing process to the purchase.

Purchaser has the skills to put the entire package together – in terms of timing (preventing rush orders), coordinating the entire needs of the organization, exploring the inter-relationship between different services and their suppliers, and procuring them at the best price.

Typically when qualified procurement personnel are involved in the planning and procurement of services, savings of approximately 25 % are enjoyed with equal or improved quality and service.

Dr. Rajeev Sawhney



There is a greater intangible component in services than in manufacturing. Therefore, early involvement of service suppliers can often provide value, especially when the service is complex and technical.

Dr. Rajeev Sawhney

Key questions that help in need recognition and description of service

Key questions that help in need recognition and description of service

1. Why is this service necessary?

2. What is important to know about this service?

3. How is this service produced?

4. Where is the service being delivered?

5. How is quality defined for this service?

6. How do we know we received what we expected?

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Outsourcing ServicesOutsourcing Services

Benefits- allows the firm to focus on its core competence- service is cheaper to outsource than perform in-house- provides access to latest technology- leverage benefits of supplier economy of scale

Risks - loss of direct control of quality - jeopardizes employee loyalty - exposure to data security and customer privacy - dependence on one supplier compromises future negotiation leverage - additional coordination expense and delays - atrophy of in-house capability to perform service

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Outsourcing Process fig. 15.3Outsourcing Process fig. 15.3

Need Identification

Problem Definition"Do-versus-Buy" AnalysisInvolve Interested PartiesSpecification Development

Information Search

ReferencesPersonal ContactRecommendationsTrade Directory

Vendor Selection

ExperienceReputationReferences

CostLocationSize

Performance Evaluation

Identify EvaluatorQuality of WorkCommunication

Meet DeadlinesFlexibilityDependability

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Taxonomy for Outsourcing Business Services, table 15.5

Taxonomy for Outsourcing Business Services, table 15.5

Importance of Service Low High

Property Focus

Facility Support: -Laundry -Janitorial -Waste disposal

Equipment Support: -Repairs -Maintenance -Product testing

of People

Employee Support: -Food service -Plant security -Temporary personnel

Employee Development: -Training -Education -Medical care

Service Process

Facilitator: -Bookkeeping -Travel booking -Packaged software

Professional: -Advertising -Public relations -Legal

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Outsourcing ConsiderationsOutsourcing Considerations

Focus on Property Facility Support Service • Low cost • Identify responsible party to evaluate performance • Precise specifications can be written Equipment Support Service • Experience and reputation of vendor • Availability of vendor for emergency response • Designate person to make service call and to check that service is satisfactory

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Focus on People Employee Support Service • Contact vendor clients for references • Specifications prepared with end user input • Evaluate performance on a periodic basis Employee Development Service • Experience with particular industry important • Involve high levels of management in vendor

identification and selection • Contact vendor clients for references • Use employees to evaluate vendor performance

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Focus on Process Facilitator Service • Knowledge of alternate vendors important • Involve end user in vendor identification • References or third party evaluations useful • Have user write detailed specifications Professional Service • Involve high level management in vendor

identification and selection • Reputation and experience very important • Performance evaluation by top management