2. Chapter 17 Services

3. 17 - 3 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Goods Versus Services Spend GoodsServices Manufacturing firms (N = 59)61%39% Service firms (N = 23)19%81% Governmental organizations (N = 34)19%81% Total (N = 116)38%62% Source: Harold E. Fearon and William A. Bales, Purchasing of Nontraditional Goods and Services, Tempe, AZ: Center for Advanced Purchasing Studies, 1995.

4. 17 - 4 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Dollars Spent for Purchase of Services Total and Top 10 CategoriesPercent of Total Percent of Total Services Percent of Dollars by Purchasing Total services54.0%100.0%27% Utilities4.89.026 Insurance4.48.26 Sales/promotion3.97.248 Health benefits plans3.36.15 Travel: air tickets3.15.812 Construction2.64.942 Consultants2.64.855 Transport of goods2.54.733 Banking2.24.20 Copying2.03.619 Source: Harold E. Fearon and William A. Bales, Purchasing of Nontraditional Goods and Services, Tempe, AZ: Center for Advanced Purchasing Studies, 1995.

5. 17 - 5 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Reasons for Lack of Purchasing Involvement in Service Acquisition Complexity of specifying service needs and analyzing potential service provides means that the user has greater expertise than purchasing The buying of services involves more of a personal relationship between the supplier and user. Many services in the past have been available only in a regulated environment, in which price and service-delivery was essentially the same for all suppliers

6. 17 - 6 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. What Makes Services Different? Intangible -Cannot touch it Perishable -no inventories Heterogeneous: The “service package” -high levels of customization Customer participation in the production process Simultaneous production and consumption Difficult to measure quality

7. 17 - 7 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. A Framework for Analyzing Services Value of the service -high, medium low -Pareto/ABC analysis Degree of repetitiveness -repetitive versus unique Degree of tangibility -Low versus high Direction of the service -Directed towards people or assets Source: William B. Martin, Quality Service: The Restaurant Manager’s Bible, Ithaca, NY: Cornell University, School of hotel Administration, 1986.

8. 17 - 8 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. A Framework for Analyzing Services Production of the service -People, equipment or people and equipment -Skill level of people Nature of demand -Continuous, periodic or discrete Nature of service delivery -Location, time Degree of standardization -Standard or customized Skills required for the service

9. 17 - 9 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. The Acquisition Process for Services 1.Need recognition and specification -Key questions: Why is this service necessary? What is important about this service? What represents good value? How is quality defined for the service? How is the service produced? How do we know we received what we expected? -Developing the statement of work (SOW): Describes the needs and becomes the basis of the contract

10. 17 - 10 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. The Acquisition Process for Services 2.Analysis of supply alternatives -sourcing, pricing, other terms and conditions, source options and make or buy 3.Purchase agreement -Short versus long term; standard versus custom -Service level agreement (SLA): means, method, organization, processes and material requirements -Pricing structure -Special provisions

11. 17 - 11 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. The Acquisition Process for Services 4.Contract administration -Follow-up -Quality control -Payment -Records maintenance -Supplier management and evaluation

12. 17 - 12 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Service Quality Evaluation Reliability: Ability to perform the promised service dependably and accurately Responsiveness: Willingness to help customers and provide prompt service Assurance: Knowledge and courtesy of employees and their ability to inspire trust and confidence Empathy: Caring, individualized attention the firm provides its customers Tangibles: Physical facilities, equipment and appearance of personnel Source: A. Prasuranman, V.A. Zeithaml and L.L. Berry, “A Conceptual Model of Service Quality and Its Implications for the Future”, Journal of Marketing, Fall 1985, p. 41-50.

13. 17 - 13 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Process for Obtaining Results in Service Acquisition 1.Do the people now in the purchasing department have the skills needed for purchasing services? 2.Do they have the time? Can they make the time? 3.Obtain data on what services are bought by whom and dollar amount. 4.Take one area at a time. 5.Establish the team: user(s) possibly finance, quality and purchasing

14. 17 - 14 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Process for Obtaining Results in Service Acquisition 6.Determine if the buying service satisfies the user and represents effective spending. 7.Purchasing should ensure the use of a logical process and arrive at the contract or agreement. 8.All parties must agree on the specification 9.Explain why any changes are required in supplier, specification, price, terms, etc., to users and senior management 10.Do not interfere with effective service acquisition activities handle by other departments

15. 17 - 15 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Summary of Service Characteristics and Acquisition Process Implications Service Characteristic Acquisition Process Need Recognition, Description Sourcing Alternatives Pricing, Analysis Agreement, Contract Provisions Contract Admin., Follow-up, Q.C., Payment, Records Value Highhigh attention careful price sensitive make or buy likely negotiated high attention Lowlesser attention low acquisition cost local source standard if possiblelow attention Repetitiveness Highdevelop standardteststandard longer termstandardize Lowseek expert assistance custom or one shotcustom Tangibility Highspecs importantpretest, samples similar to product purchase control for physical characteristics Low references user involvement personalities importantspecific personsUser involvement high

16. 17 - 16 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Summary of Service Characteristics and Acquisition Process Implications Service Characteristic Acquisition Process Need Recognition, Description Sourcing Alternatives Pricing, Analysis Agreement, Contract Provisions Contract Admin., Follow-up, Q.C., Payment, Records Direction of equipmentequipment familiarity specified equipment performance control process quality peopleuser involvement high people skills important control quality at user interface Production by equipment specify equipment capability specify equipment capability specify equipment performance conditional on equipment use people specify people capability worry about capacityspecify availabilityuser provides Demand continuouscontinuity reliability and continuity complete coverage control quality by sampling discrete availability during need availability during need specify delivery control quality by delivery

17. 17 - 17 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Summary of Service Characteristics and Acquisition Process Implications Service Characteristic Acquisition Process Need Recognition, Description Sourcing Alternatives Pricing, Analysis Agreement, Contract Provisions Contract Admin., Follow-up, Q.C., Payment, Records Delivery at purchaser user interface important user interface important access clausesin-house Q.C. at sellergood descriptionlocation purchase access and progress reports concern over service completeness Customization highuser specificationcustom capabilityspecial contract quality control very specific and may withhold a large % of payment lowstandard specscompetitive bidstandard contractstandard Q.C. Skills highuser specificationspecify specific persons availability of individuals professional standards, regulations, user involvement lowstandard specscompetitive biddingstandard contractminimize use hassle