Chapter 13 Service Supply Relationships McGraw-Hill/Irwin Service 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 Disposal Recycling/Remanufacturing After-sales Service Information Transfer Material Transfer 13-3

Customer-Supplier Duality in Service Supply Relationships (Hubs) 13-4

Single-Level Bidirectional Service Supply Relationship Category Customer -Supplier >Input Output> Provider Minds Student >Mind Knowledge> Professor Bodies Patient >Tooth Filling> Dentist Belongings Investor >Money Interest> Bank Information Client >Documents 1040> Tax Preparer 13-5

Two-Level Bidirectional Service Supply Relationship Category Customer -Supplier >Input Output> Provider Provider’s Supplier Minds Patient >Disturbed Treated> Therapist >Prescription Drugs> Pharmacy Bodies >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 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 13-9

Impact of Service Supply Relationships (cont.) 13-10

Professional Service Firms Body of Knowledge Cognitive knowledge (know-what) Advanced skills (know-how) Systems understanding (know-why) Self-motivated creativity (care-why) 13-11

Professional Service Firms Operational Characteristics Profit-per-Partner Productivity 13-12

Profitability Tactics 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 Drop unprofitable services Drop unprofitable customers Increase Volume Increase utilization Lower Variable Costs Leverage Improve engagement management Increase leverage of professionals Increase the use of paraprofessionals 13-13

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 Process 13-15

Taxonomy for Outsourcing Business Services 13-16

Outsourcing Considerations 13-17

Outsourcing Considerations 13-18

Outsourcing Considerations 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

Interactive Exercise The class divides into small groups and members come up with examples of multilevel bidirectional service relationships (i.e, service supplier relationships with three or more levels). Be prepared to argue why such service relationships are so rare. 13-21

Boomer Consulting How does The Boomer Technology Circle illustrate the concept of the bidirectional service supply relationship? How has Boomer Consulting made the client a coproducer in the service delivery process? How is the concept of “leverage” achieved by Boomer Consulting? Can the Boomer Technology Circle be applied to other industries? What are some of the risks in pursuing this strategy? 13-22

Peapod – Smart Shopping for Busy People Where are opportunities for bidirectional optimization at Peapod? How can Peapod manage service perishability? How can Peapod manage productive capacity? Suggest reasons why Peapod has not yet become profitable. 13-23