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
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
Service
Category

Customer
-Supplier
>Input
Output>
Service
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
Service
Category
Customer
-Supplier
>Input
Output>
Service
Provider
>Input
Output>
Providers
Supplier
Minds Patient >Disturbed
Treated>
Therapist >Prescription
Drugs>
Pharmacy
Bodies Patient >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
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 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
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Partners
Staff
Staff
Fees
Fees
ofit
Partner per ofit
Pr
Pr
( )( )( ) Leverage oductivity in M Pr arg =
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Staff
Hours
Hours
Fees
Staff
Fees
oductivity Pr
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13-12
Profitability Tactics
Tactic 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 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
Need Identification
Probl em Defi ni ti on
"Do-versus-Buy" Anal ysi s
Invol ve Interested Parti es
Speci fi cati on Devel opment
Information Search
References
Personal Contact
Recommendati ons
Trade Di rectory
Vendor Selection
Experi ence
Reputati on
References
Cost
Locati on
Si ze
Performance Evaluation
Identi fy Eval uator
Qual i ty of Work
Communi cati on
Meet Deadl i nes
Fl exi bi l i ty
Dependabi l i ty
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 People
Employee 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
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
1. How does The Boomer Technology Circle
illustrate the concept of the bidirectional
service supply relationship?
2. How has Boomer Consulting made the client
a coproducer in the service delivery process?
3. How is the concept of leverage achieved
by Boomer Consulting?
4. 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
1. Where are opportunities for
bidirectional optimization at Peapod?
2. How can Peapod manage service
perishability?
3. How can Peapod manage productive
capacity?
4. Suggest reasons why Peapod has not
yet become profitable.

13-23