Service Supply Relationships

McGraw-Hill/IrwinService Management: Operations, Strategy, and Information Technology, 6e

Copyright © 2008 by The McGraw-Hill Companies, Inc. All Rights Reserved.

Learning Objectives

Contrast the supply chain for physical goods with service supplier relationships.

Identify the sources of value in a service supply relationship.

Discuss the managerial implications of bidirectional relationships.

Identify the three factor that drive profitability for a professional service firm.

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.

13-2

Supply Chain for Physical Goods

Suppliers

Product and Process Design

Manufacturing Distribution Retailing Consumer

DisposalRecycling/Remanufacturing

After-salesService

Material Transfer Information Transfer

13-3

Customer-Supplier Duality in Service Supply Relationships (Hubs)

Material transfer Information transfer

Supplier

Service Design

Service Provider Customer

13-4

Single-Level Bidirectional Service Supply Relationship

ServiceCategory

Customer-Supplier

>InputOutput>

ServiceProvider

Minds Student >MindKnowledge>

Professor

Bodies Patient >ToothFilling>

Dentist

Belongings Investor >MoneyInterest>

Bank

Information Client >Documents1040>

Tax Preparer

13-5

Two-Level Bidirectional Service Supply Relationship

ServiceCategory

Customer

-Supplier

>InputOutput>

ServiceProvider

>InputOutput>

Provider’s

SupplierMinds Patient >Disturbe

dTreated>

Therapist

>Prescription

Drugs>

Pharmacy

Bodies Patient >BloodDiagnosis

>

Physician

>SampleTest

Result>

Lab

Belongings

Driver >CarRepaired>

Garage >EngineRebuilt>

MachineShop

Information

HomeBuyer

>PropertyLoan>

Mortgage

Company

>LocationClear Title>

TitleSearch

13-6

Service Supply Relationships

Customer-Supplier Duality Service Supply Relationships are

Hubs, not Chains Service Capacity is Analogous to

Inventory Customer Supplied Inputs Can

Vary In Quality

13-7

Sources of Value in Service Supply Relationships

Bi-directional Optimization Managing Productive Capacity

- Transfer: make knowledge available (e.g. web based FAQ database)- Replacement: substitute technology for server (e.g. digital blood pressure device)- Embellishment: enable self-service by teaching (e.g. change surgical dressing)

Management of Perishability

13-8

Impact of Service Supply Relationships

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

13-9

Impact of Service Supply Relationships (cont.)

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

13-10

Professional Service FirmsBody of Knowledge

Cognitive knowledge (know-what) Advanced skills (know-how) Systems understanding (know-

why) Self-motivated creativity (care-

why)13-11

Professional Service FirmsOperational

Characteristics Profit-per-Partner

Productivity

PartnersStaff

StaffFees

FeesofitPartnerperofit PrPr

LeverageoductivityinM Prarg

StaffHours

HoursFees

StaffFeesoductivityPr

nUtilizatioValue13-12

Profitability TacticsTactic Category

Lower Fixed (Overhead) Costs Margin

Improve cash cycle

Reduce office space and equipment

Reduce administrative and support staff

Raise Prices and Differentiate Productivity

Specialize, innovate, add more value

Target higher value work

Invest in training

Invest in higher value services

Address Underperforming Projects Productivity

Drop unprofitable services

Drop unprofitable customers

Increase Volume Productivity

Increase utilization

Lower Variable Costs Leverage

Improve engagement management

Increase leverage of professionals

Increase the use of paraprofessionals13-13

Outsourcing 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

13-14

Outsourcing ProcessNeed Identification

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

Information SearchReferencesPersonal ContactRecommendationsTrade Directory

Vendor SelectionExperienceReputationReferences

CostLocationSize

Performance EvaluationIdentify EvaluatorQuality of WorkCommunication

Meet DeadlinesFlexibilityDependability

13-15

Taxonomy for Outsourcing Business Services

Importance of Service Low High

Property

Focus

Facility Support: -Laundry -Janitorial -Waste disposal

Equipment Support: -Repairs -Maintenance -Product testing

of PeopleEmployee 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

13-16

Outsourcing 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

13-17

Outsourcing Considerations

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

13-18

Outsourcing Considerations

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

13-19

Topics for Discussion How can effective goods supply chain

management support environmental sustainability?

Explain why the goods analogy of a supply chain is inappropriate for services?

Discuss the implication of service outsourcing on employees, stockholders, customers, and host country economy when a firm outsources a call center overseas.

13-20