Service Supply Relationships chapter 15

Learning 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.

Definition of Supply-Chain Rajeev Sawhney, Western Illinois University Definition of Supply-Chain All the activities involved in delivering a product from raw material through to the customer including Sourcing raw materials and parts Manufacturing and assembly Warehousing and inventory tracking Order entry and order management Distribution across all channels Delivery to the customer Information systems necessary to monitor all activities

Functions of supply-management department Rajeev Sawhney, Western Illinois University 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.

Forces Driving Changes Rajeev Sawhney, Western Illinois University 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, Western Illinois University 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 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

Network 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.

Supply Chain for Physical Goods fig. 15.1

Managing Uncertainty Uncertainty in supply chain arises from three major sources: Supplier delivery performance Manufacturing unreliability Customer demand Inventory is traditionally used to match uncertainty

Supply 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

Impact of Service Supply Relationships table 15.1 & 15.4

Impact of Service Supply Relationships table 15.1 & 15.4

Service 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.

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

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

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

continued Customer supplied inputs can vary in quality Thus impacting delivery performance of service provider Effective communication is ,therefore, very important

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 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

Management 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)

Management 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

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

Relationship between stakeholders – how is service purchasing different? 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

Relationship between stakeholders in a service purchasing environment 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 Why is this service necessary? What is important to know about this service? How is this service produced? Where is the service being delivered? How is quality defined for this service? How do we know we received what we expected? Dr. Rajeev Sawhney

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

Outsourcing Process fig. 15.3

Taxonomy for Outsourcing Business Services, table 15.5

Outsourcing Considerations

Outsourcing Considerations

Outsourcing Considerations