1. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Practice 18. Facility management and buying services

2. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Program Trends and developments in the service sector Purchasing and facilities management Towards more effective purchasing in a facilities environment Buying services: definitions and typology What can we learn from the way services are sold? Purchasing services: service level agreement

3. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Trends and developments in the service sector The service sector is becoming a dominant economic activity in many European countries. Service sector includes companies operating in: Transportation and distribution Communications Banking and other financial services Professional services Factors explain the rapid growth of service companies: Focus on core competencies and outsourcing the rest Reallocation of manufacturing companies to developing countries Introduction of new technologies (ICT) Leasing

4. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Trends and developments in the service sector Civil employment in services as a share of total employment for a selection of OECD countries in percentages of total employment (OECD, 1999) Country19871997 France 62,269,9 Germany 55,460,2 Japan 57,961,6 Netherlands 68,374,1 Sweden 66,371,3 UK 64,871,3 USA 69,973,4 G7 63,968,2 EU15 59,065,2

5. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Characteristics of services:  Intangibility: cannot be seen, tasted, felt, heard or smelled  Inseparability: service cannot exist separately from its providers  Variability: quality of service depends on time and provider  Perishability: services cannot be stored Most important characteristic is the absence of a physical transformation. Also, a clear relationship between input, throughput and output is frequently absent. Trends and developments in the service sector

6. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Other characteristics: Large part of the costs of service companies is related to labour Service companies generally represent a large value added Relative purchasing spend is rather low Because of severe international competition in the service sector companies try to reduce operational costs. In general, a trend towards a higher degree of concentration in the service sectors can be perceived. Trends and developments in the service sector

7. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) S ervice companies are lagging behind industrial companies with regard to their purchasing operations. However, this picture is changing for three reasons: Tendency to outsource support activities (security, catering, cleaning services, maintenance activities) Integration of support activities in a facility management organization (facilitation of the co-operation between purchasing and other support areas) Increased scale of operations (formation of a specialized purchasing department) These developments have increased the need for a professional purchasing approach Trends and developments in the service sector

8. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Purchasing and facilities management Purchase-to-sales ratio is low in service companies (10% - 50%), compared to industrial companies (50% – 80%). Purchasing savings will only have a limited financial impact. Purchasing for the primary process almost does not exist, since service companies by definition do not have a production process. Cost considerations are not prime to internal customers Given the specialized nature of most investment buying the user plays a dominant role in decision making leaving administrative matters, at best, to the purchasing department.

9. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Buildings, installation and Infrastructure Real estate Restructuring and renewal Maintenance Technical installations Security Systems Office furniture System walls Temporary buildings Housekeeping Energy Catering Cleaning services Green keeping Removal services Security Garbage removal Clothing Technical support materials Temporary labor Hiring of temporary personnel Interim managers Consultants IT programmers, analysts and project managers Services Transport services Travel Accommodation Training and education Search and recruitment Market research Media Events Factoring IT & Telematics Mainframes and software Midrange systems PCs Peripherals Data communication networks Telephone switching equipm. Infrastructure IT projects Outsourcing Office supplies and printing Copying Office equipment Office supplies Paper Packaging material Printing Representation Books and subscriptions Major categories of expenditure Purchasing and facilities management

10. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Purchasing and facilities management The increased concentration in the service industry affects the purchasing operations in several ways:  Increased outsourcing of support activities (e.g. security, catering, cleaning, maintenance)  Integration of support activities in a facility management organization  Increased scale of operations  This represents a big opportunity for more professional approach to purchasing.

11. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Purchasing and facilities management  A professional approach to purchasing can result in savings of between 5 - 20%.  However this is not a simple matter. Top management will often fail to provide support, and buyers will get recognition only by providing a superior service to their internal departments.  Purchasing managers should therefore be service driven rather than cost driven!

12. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) 1.Delivery reliability On time Right quantity 2.Right quality 3.Fast response time and feedback 4. High accessibility 1.Delivery reliability On time Right quantity 2.Right quality 3.Fast response time and feedback 4. High accessibility 1.Low price 2.Good contract 3.Objective supplier selection 1.Low price 2.Good contract 3.Objective supplier selection Perceived by internal departments Perceived by purchasing department Expectations levels with regard to purchasing are not always identical Towards more effective purchasing in a facilities environment

13. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Towards more effective purchasing in a facilities environment Success factors for a purchasing department as formulated by customer departments:  Easy access (both by telephone and personally)  Fast reaction to questions and problems  Prompt delivery of goods ordered  Short delivery times  Consistent quality of goods delivered  Immediate feedback in case of (unforeseen) order changes Provided these requirements are met, users are willing to allow purchasing to take a more pro-active role and involve them at earlier stages in the purchasing process.

14. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Towards more effective purchasing in a facilities environment To improve the customer orientation of the purchasing department, the following approach may be useful: 1.Analyze and document internal product/customer combinations step-by-step 2.Asses internal customer satisfaction 3.Target setting and action planning 4.Cross functional buying teams and organizational structure 5.Develop supply and commodity strategies 6.Implementation and monitoring

15. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Towards more effective purchasing in a facilities environment Department ADepartment BDepartment CTotal value Computer hardware Computer supplies Office equipment Temporary labour Services Total volume Customer product group matrix a) Total purchasing volume b) Purchasing expenditure c) Market share purchasing d) Expected volume

16. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Towards more effective purchasing in a facilities environment Improvement measures with regard to the purchasing customer interface  Joint efforts aimed at reducing number of products (standardization)  Joint efforts aimed at supplier reduction  Improve accessibility and customer orientation Internal measures to improve purchasing  Improve product and market knowledge  Improve purchasing technique and skills  Simplifying ordering system (e.g. e-procurement)  Delegate routine buying to internal customer

17. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Towards more effective purchasing in a facilities environment  In discussing the optimal structure for a purchasing department within a service company, several options exist as guiding principle:  Customer characteristics  Product characteristicsmost often encountered  Service characteristics  Supply market characteristics  The basic dilemma is how to secure an effective internal customer orientation in combination with knowledge or products and supply markets.

18. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Buying services: definitions and typology Definition (Grönroos, 2000) “A service is a process consisting of a series of more or less intangible activities, that normally (but not necessarily always) take place in interactions between the customer and service employees, and/or physical resources or goods and/or systems of the services provider, which are provided as solutions to the customers problems.” Since they relate to human exchange of knowledge and expertise, services are intangible and cannot be made on stock. Services relate to the performance of a predefined activity that is executed in cooperation with the customer. A difficulty is to separate what is considered to be the supplier’s responsibility and the customer’s responsibility.

19. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Buying services: definitions and typology Intangible Heterogeneous Production, distribution and consumption are simultaneous processes More difficult to demonstrate before the purchase Cannot be transported An activity or a process Core value produced in the interaction between buyer and seller Intangible Heterogeneous Production, distribution and consumption are simultaneous processes More difficult to demonstrate before the purchase Cannot be transported An activity or a process Core value produced in the interaction between buyer and seller Tangible Homogeneous Production and distribution are separate from consumption Can be demonstrated before the purchase Can be transported An item Core value produced in facility Tangible Homogeneous Production and distribution are separate from consumption Can be demonstrated before the purchase Can be transported An item Core value produced in facility ServicesGoods Pure services offerings Pure products offerings Combined product- Service offerings

20. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Buying services: definitions and typology The OECD service typology differentiates between  Facility services (e.g. cleaning, catering, security)  Financial services  Information and communication technology services  Business organization services (e.g. consultancy)  Research and development and technical services  Transportation and distribution services  Human resource development services (e.g. training)  Marketing services (e.g. advertising, reselling)

21. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) What can we learn from the way services are sold?  Wetzels et.al. (1999) present a framework to understand business service relationship trust and commitment. They claim that trust and commitment depend on:  Service quality  Supply market  Relationship characteristics  Direct contact and interaction between supplier and the end-user in the customer firm seems to play a vital role.  The decision to remain in a certain relationship will be based on affective (e.g. positive feeling) and calculative (e.g. high switching costs) motivations.

22. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Purchasing services: service level agreement Purchasing process related to services: 1.Pre-qualification of service provider of prime importance 2.Secure supplier capacity and capabilities 3.Check upon key personnel 4.Availability of working space and other working conditions 5.Defining and managing expectations beforehand 6.Contractual arrangements 7.Performance based contract

23. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Purchasing services: service level agreement Many buyers increasingly try to make arrangements through using Service Level Agreements (SLA)  SLA is a performance based agreement with a supplier  Service level is defined in very specific terms by using key performance indicators (KPI)  SLA will also outline the resources that will be used by both supplier and customer  There are two scenario’s for the supplier:  When able to meet the SLA  supplier will receive full payment  When unable to meet SLA  supplier will be paid less

24. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Purchasing services: service level agreement  Service levels may be specified in the following ways (Axelsson and Wynstra, 2002) Specifying inputs: describing resources that will be used by the supplier to deliver the service required (e.g. temp labor) Specifying throughput: based on a general work description the range of activities that will be performed by the supplier is described (e.g. construction) Specifying output: describing the final result. The functionality of the service is stressed rather than the activity itself (e.g. maintenance) Specifying outcome: In this method the value rather than the functionality of the service is stressed (e.g. purchasing consultant)

25. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Purchasing services: service level agreement Contracting for services: some suggestions…  Specify performance or outcome rather than activities  Describe when and where the service need to be provided  Describe who will benefit from the service and in what way  Check the supplier reputation, expertise and qualifications  Ask for CV’s of key personnel and secure their availability  Analyze supplier service process and quality system: assess and discuss weaknesses and threats and major risks  Invite supplier to present Business Case based upon work description  Assess ‘cultural fit’ between buying company and supplier  Pursue performance based contract (i.e. SLA)  Agree on what financial, human, technical and information resources will be made available by the customer  Allow for detailed inspection and quality procedures  Discuss and agree on dispute resolution procedures  Agree on performance based payment schedules  Describe communication structure and make working arrangements