Service Inventory and Supply Chain Management Service inventory

management;Service supply chains; Processes in Service Supply Chain;

Data Envelopment Analysis; Simulation as a tool for design of services;
Use of simulation software for modelling; Nature of design issues
addressed using simulation; Simulation Applications in Service System
Design; Vehicle Routing and Scheduling; Inventory Pooling.

Explicate the importance of managing Service inventory.

Service Inventory

• A Service product can be viewed as a bundle of goods and services.

• Inventory plays a very important role in services. Most of the services

take goods or materials as inputs.

• Unlike in manufacturing sector where inventory

decouples(differentiates) production unit and customer, in service
customer interacts and part of service encounter.

• Providing inadequate service or no service due to unavailability of

output material may result in loss of customer forever. In services, there is
no option of backordering. There is always a risk of losing customer to
competitor.

Types of Inventory in Services

Service inventory can be of two types as shown in the Figure

Facilitating goods are the materials or items purchased or consumed by

the buyer and/ or provided by the customer, for example are food items in
airplane and legal documents to real estate. Facilitating goods are the
goods which are given as or along with the core service. Some of the
examples are mentioned in Table;

Work storage based on information is a type of inventory where some

amount of work can be completed and stored for the customer before the
customer arrives and demands for the service. It reduces the waiting time
of a customer. Some of such examples are shown in in the Table.

Unlike in manufacturing where physical resources are stored, the service

inventory is based on work storage is viewed as all process steps required
to be completed before the arrival of a customer. These steps are
completed in the anticipation of customer demand.

Forms of Service Inventory

• The service organizations can have inventory as input service inventory

which is processed to produce output service inventory. Both forms can
have inventories of facilitating goods type and/or information based work
storage inventory type.

• In services the input form and output form of service inventory can be of
same type or may have different types;
Managing Inventory in services versus managing inventory in
manufacturing sector

In service sector it is very difficult to anticipate the exact demand of customer. It is very difficult to
predict what kind of service or queries or problems a customer will have before the actual arrival of
customer to service organization. There are differences in managing inventories in manufacturing
sector and service sector which are the following;

Inventory in Manufacturing Inventory in Service

Organizations Organizations
After the product is ready as Service inventory is used on the
finished good customer can use customer directly during
the product production of service that is service
encounter
In situation of running out of Due to unavailability of facilitating
inventory, the risk of losing a goods or materials, the service
customer is lower than service organization may lose a customer
organization. Backorders are forever.
possible
Inventory can be stored for later Inventory cannot be stored always.
use The airline flying with empty seats,
cannot transfer the empty seats to
next flight
Utilizes mostly machine intensive Utilizes mostly people intensive
resources resources
Managing Inventory of Facilitating Goods in Services
The facilitating goods inventory can be managed using the inventory
models available for managing inventory in manufacturing industries
which are based on following factors.

Types of customer demand

• Based on demand having are trends, cycles or seasonality.

• Based on whether the demand occurs in discrete units or in continuous

units.

• Highly varying demand e.g. a supermarket may face some days of no

demand for a particular product and bulk demand for the same product on
some other day.

Planning time horizon

• Indefinite stocking of inventory for example respiratory supports in

hospital.

• Temporary stocking of items based on the season, perishability or expiry

dates.

Lead Time

• Deterministic lead time

• Stochastic lead time

• In deterministic models, the output of the model is fully determined by

the parameter values and the initial conditions. • Stochastic models
possess some inherent randomness. The same set of parameter values
and initial conditions will lead to combination of different outputs.

Manage Information Based work Storage service inventory

• In services it is possible to store some amount of work or perform some

process steps before the customer arrives in the form of databases or
decision support.

• This some amount of stored or compiled work acts as buffer of resources

to match supply with demand.
• It helps to achieve faster response time and customers do not have to
wait for long to get the service done.

Examples of Service Inventory based on work storage

• The registration forms at hospitals generated by the system

automatically

• The tools required to set up and run online auctions like eBay Inc.

• In the Insurance sector, the life insurance agents have tools equipped
with software (algorithms/formulae), which after entering the age of client
and the policy period requested by the client generates automatically the
sum assured and returns. Service inventory in the form of database
presents extreme economies of scale. For any service creative database
can be very expensive, but once the database is ready the incremental
cost of adding records to established database provide extreme
economies of scale.

Define Service Supply Chain and major issues associated with the
concept.

Any service delivery system can be viewed as a chain or network of

activities, which involves number of participants. Just like supply chain in
manufacturing, in services also we can see that all the participants are
related to each other. The objective of achieving efficiency and or
responsiveness is equally important and relevant in the whole network of
participants involved in delivery service called service supply chain. The
structure of supply chain can vary from a simple serial supply chain to a
broad network of supply chain entities.

Specific issues in service supply chains

It is very important to understand the reasons which make service supply

chain different form that of goods supply chains. Some of them are
discussed below.

Customer-supplier duality
In services, the service activity is initiated by the customers. Service is an
act or deed performed on the customer’s mind, body, belongings or
information provided by the customer. Hence, customer acts like a
supplier to the service provider who provides something to get the service
done. This dual role of customer, of being supplier also, in service
exchange is called as customer-supplier duality. The customer-supplier
duality is also known as bidirectional relationships between service
provider and customer as shown in the Figure;

In single level bidirectional relationship, customer provides inputs to the

service provider and service provider performs the service. The service
provider converts the inputs into an output in the service production
process and delivers to the customer.

SINGLE-LEVEL BIDIRECTIONAL RELATIONSHIP

In two-level bidirectional relationship service provider employs another

service provider (second level) or supplier who assists with the processing
of customer inputs. This is also analogous to situation where some service
providers (initial) outsource the repair work or any service to other service
provider, that is second level service provider. That means the initial
service provider acts as an interface between the second level service
provider and customer.

TWO-LEVEL BIDIRECTIONAL RELATIONSHIP

Pure services provide packaged service

Service providers of some of the pure services provide their respective

services in the form of packaged service. Packaged service is a set of
more than one service offered together by different service provider. It can
be widely seen in hospitality and tourism industry or holiday industry, how
travel agent through tour operator form link with hotels, airlines,
transportation and restaurants to provide customers with a complete
holiday experience as shown in the Figure;

Outsourcing
In recent past most of the organizations have started outsourcing their
internal functions to focus on core competencies. Service outsourcing is
also referred to as Business Process Outsourcing (BPO), which has become
specialist firms offering focused services. Most of the service companies
like banking, financial services, and insurance (BFSI) and
telecommunication service providers are outsourcing their in-house
service products to outsource to IT and ITeS (IT enabled) companies.

Managing suppliers in service supply chains

Manufacturing and services sectors have always focused more on

purchasing of goods which is easy to manage and control. It is more
difficult to control the purchasing of services like real estate, travel or
transportation, advertising, software solutions and legal services seem
lacking and difficult to control. One such difficulty which companies face is
the overbilling in a variety of service contracts, differences in defining
service levels by vendors, relating purchasing with real worth of
purchased service etc.

Simultaneous production and delivery

Services are created and consumed simultaneously in service. There is no

option of return or exchange of service product unlike in manufactured
goods. Example When a company hires IT service provider for network
configuration or for any other hardware service and the service provider
fails to perform as per client’s satisfaction, the client cannot return the
service product for a refund. Infact client might have to spend more
money to rework or to perform additional work. But the client will be so
locked in with such service provider that they will not be able to hire or
switch to another service provider.

Short service supply chain

Service supply chains are generally very short for some of the services.
For example service providers like dry cleaners and shoe repair hardly
have many tiers of suppliers.
Challenges in managing service supply chains

Human element in services

In services human capital is the most contributory asset. Each human

being is unique regardless of training given to them. Each employee works
differently even if standardized procedures prevail in organization. Due to
varying outcome of each employee, managing and controlling
performance of service SC becomes a challenging task. The other factor
impacting the performance of service supply chain is the influence of local
environment which in broad sense will become more varying from global
perspectives. Most of the service organizations have presence globally.

Difficulty in measuring performance of service supply chain

The output or outcomes of services which are measured in terms of

‘service level agreements’ are not as precise as the clear specifications
exist in goods supply chain. In service delivery it is very difficult to
produce the complete service package in advance of the actual demand
realized, which further adds to the complexity in measuring the
performance of service. Generally, supply chain set responsiveness as
important performance measure. In service supply chain like repair and
servicing centre, even if the servicing employee is prompt and ready to
serve, the unavailability of parts can affect the responsiveness.

Varying output

In services, the output outcome or economic activity generated varies

greatly over time period, with region in which service is performed, with
human skill and capability, with the level of understanding of customer as
shown in the table;

Comment on the vivid Service supply chain processes.

Some of the processes in service supply chain are same as goods supply
chain. The context of these processes is different in services which are
presented below;

Demand Management

• Due to lack of buffer inventory it is difficult to manage uncertain

demand for services.

• Understand the capacity available and current workload.

• Possibilities of additional workload by hiring part time or by doing

overtime.

Customer Relationship Management

• Customer segmentation & monitoring relationship by understanding

customer needs and changing behaviour of customers.

Supplier Relationship Management

 Identification of requirements with clear specifications.

 Select suppliers & provide clear scope of work and statement of
work.
 Negotiate & sign contracts with appropriate service level
agreements to avoid in uncertainty from supply side.

Service Delivery Management

• Meeting customer’s expectations through statement of work or SLA.

• Enabling service providers to meet promises by monitoring SLA

compliance and payment terms.

Order Process Management

• Order processing function in which service organizations get orders from

customers.
• Check status of orders, communicate the status to customers, actual
filling the orders & make orders available to the customers.

• Order processing span over intersection of other functions of supply

chain management to perform sub processes like order preparation,
transmittal, entry, filling and status reporting.

Managing service supply chain flows

Service supply chain deals with flow of information, capacity and cash as
mentioned below:

Information Flow

It deals in sharing information among service supply chain entities on

 Service level agreements

 Scope of work
 Required skills of service provider
 Feedback
 Payment related terms

Capacity Flow

It deals in managing capacity in the form of material and human

resources. Service companies manage capacity flow by

 Investing in assets
 Recruiting quality staff
 Recruiting appropriate staff

Cash Flow

It deals in the flow of funds governed by payment terms based on the

performance towards agreed goals.

Determining appropriate timing and payment is a challenging issue in

services. The service supply chain is the network of suppliers, service
providers, consumers and other supporting units that performs the
functions of transaction of resources required to produce services,
transformation of these resources into supporting and core services, and
the delivery of these services to customers.

Service level agreements (SLAs)

 Forms of contracts agreed between service provider and the

customer or client.
 Important for managing the relationship between service supply
chain partners.
 Mostly prevail in Business-to-Business services.

An SLA defines the nature of the goods or services and the level of quality
to be provided. It helps in development and formalization of service
provider client relationship. It is comprised of following components.

Service specification

1. Key dimensions of performance such as response time, reliability,

availability, accuracy.

2. Setting the ways to measure performance of each dimension to reduce

the likelihood of disagreements at a later date about performance.

3. Set mutually agreed target for each dimension. It should be based on

the service provider’s cost and capability and client requirement regarding
ultimate users (internal and external customers of clients).

4. Define clearly who is responsible for measuring each dimension.

Describe theadvantages of Data Envelopment Analysis (DEA).

Data Envelopment Analysis Data envelopment analysis (DEA) is a

technique used to compare the performances of several units. These units
in the context of services can be various service organizations like banks,
hospitals, schools etc. This technique is used in places where a relative
performance of different units is to be compared and evaluated.

• DEA can be used to analyse the performance of several units to set a

benchmark.
• The analysis can be used to discover the inefficient operations or units
even for the most profitable organizations.

• DEA has an advantage over other analysis techniques as it can handle

complex relation between multiple inputs and multiple outputs and the
units are non-commeasurable.

• DEA techniques are based on linear algebra and are related to linear
programming concepts. The technique is similar to mathematical duality
relations in linear programming.

DEA process

DEA can be used to measure performance and evaluating the activities of

organizations such as business firms, government agencies, hospitals,
educational institutions. DEA measures the performance in the form of
ratio of Output and Input to some processes like efficiency and
productivity are measured. Productivity can be measure by two methods.

 Partial productivity measures

 Total factor productivity measures

Partial productivity measures does not consider all output and input
factors, whereas, total factor productivity measure can take into account
of all the outputs and inputs. Therefore the mistake of imputing gains to
one output that are attributable to another output in partial productivity
measures can be avoided using total factor productivity measures.

DEA: Single input and single output

In the given example with one input and one output of a chain of coffee
shops ‘Coffees and more’ located in eight locations from A to H as shown
in Table, The owner of the coffee shop wants to evaluate the efficiency of
the shops in one city. He considers the cups of coffee sold (per day) as
output and the number of employees in the store as inputs. The owner
wants to know which store is efficient and which store is inefficient. He is
also interested to benchmark the best store so that he can suggest
improvements for the inefficient stores by comparing inefficient stores
with efficient store.

The efficiency of each store is determined with the help of ratio of number
of cups sold and Number of employees as shown in Table below. It is clear
that most efficient store is B with an efficiency of 1 and the least being F,
with an efficiency of 0.4.

Advantages

1. DBA compares service units considering all resources used and services
provided, and identifies the most efficient units or best practice units
(branches, departments, individuals) and the inefficient units in which real
efficiency improvements are possible. This is achieved by comparing the
mix and volume of services provided and the resources used by each unit
compared with those of all the other units. In short, DBA is a very powerful
benchmarking technique.

2. DBA calculates the amount and type of cost and resource savings that
can be achieved by making each inefficient unit as efficient as the most
efficient - best practice -units.

3. Specific changes in the inefficient service units are identified, which

management can implement to achieve potential savings located with
DEA. These changes would make the efficient units performance approach
the best practice unit performance. In addition, DEA estimates the amount
of additional service an inefficient unit can provide without the need to
use additional resources.

4. Management receives information about performance of service units

that can be used to help transfer system and managerial expertise from
better-managed, relatively efficient units to the inefficient ones. This has
resulted in improving the productivity of the inefficient units, reducing
operating costs and increasing profitability. The above four types of DEA
information prove extremely valuable because they identify relationships
not identifiable with alternative techniques that are commonly used in
service organizations. As a result, improvements to operations extend
beyond any performance improvements management may have achieved
using other techniques.

SIMULATION

Simulation is a powerful technique for solving a wide variety of problems.

Simulation is an imitation of the operation of a real world processor
system over time. Simulation involves the generation of an artificial
history of a system and the observation of that artificial history to draw
inferences concerning of the operating characteristics of the real system.
Simulation is done either manually or using computers. Simulation is
basically an experimental technique. It is a fast and relatively inexpensive
method of doing an experiment on the computer.

The basic idea behind simulation include

 Model the given system by means of some equations.

 Determine its time dependent behaviour.

The simplicity of approach when combined with the computational power

of the high speed digital computer makes simulation a power full tool.

Simulation is mostly used when

• An exact analytic expression for the behaviour of the system under

investigation is not available

• The analytic solution is too time consuming or expensive.

Simulation modelling can be used as

• An analysis tool: To predict the effect of changes to the effect of changes

to existing system.

• A design tool: to predict the performance of new systems under varying

set of circumstances.

Examples of simulation applications in services

 Simulating aircraft delay absorption

 Runway schedule determination by simulation optimization
 Modelling ship arrivals in ports
 Modelling and simulation of telephonic call centre
 Baggage screening at airports
 Telecommunication billing system
 Modelling front office and patient care in ambulatory health care
practices
 Project management
 Scheduling of police patrols
 Hazardous waste handling

System

A system is defined as a group of objects that are joined together in some

regular interaction or interdependence toward the accomplishment of
some purpose. System can be categorized as discrete or continuous.

State of a system

The state of a system is defined to be a collection of variables necessary

to describe the system at any time relative to the objective of the study. In
case of banking the possible state variables are a number of busy tellers,
the number of customers waiting in line or being served, and the arrival
time of the next customer.

Discrete system
A discrete system is one in which the state variables change only at a
discrete set of points in time. The number of customer waiting in line in a
bank is an example of discrete system.

Continuous systems

A continuous system is one in which the state variables change

continuously over time. An example is arrival time of the next customer in
a bank.

Model of a system

A model of a system is defined as a representation of a system for the

purpose of studying the system.

Types of model

Models can be classified as being mathematical model or physical as

categorized in Figure

Static simulation models

It represents a system at a particular point in time. It is otherwise called

as Monte Carlo simulation.

Dynamic simulation models

It represents systems as they change over time. Example: The simulation

of a bank from 9 A.M. to 4 P.M for the time of arrival of customers.

Deterministic simulation models

Simulation models that contain no random variables are classified as
deterministic. Deterministic models have a known set of inputs which will
result in unique set ofoutputs. Example: deterministic arrivals would occur
at a dentist’s office if all patients arrived at the scheduled appointment
time.

Stochastic simulation models

A stochastic simulation model has one or more random variables as

inputs. Random inputs lead to random outputs. Since the outputs are
random they can be considered only as estimates of the true
characteristics of the model. Example: the simulation of a bank would
usually involve random interval times and random service times. Thus in a
stochastic simulation, the output measures like the average number of
people waiting, the average waiting time of a customer, must be treated
as statistical estimates of the true characteristics of the system.

Discrete event system simulation

It is the modeling of systems in which the state variables change only at a

discrete set of points in time. The simulation models are analyzed by
numerical methods rather than by analytical methods. Analytical methods
employ the deductive reasoning of mathematics to solve the model. For
example, differential calculus can be used to compute the minimum cost
policy for some inventory models. Numerical methods employ
computational procedure to solve mathematical models.

The process of system simulation is presented in Figure

MONTE CARLO METHOD

A Monte Carlo method is a stochastic technique that involves use of

random numbers and probability statistics to solve the problems. This
method can be used in many areas from economics, nuclear physics to
regulating the flow of traffic. To call something a "Monte Carlo"
experiment, all you need to do is use random numbers to examine some
problem. The Monte Carlo method analyses uncertainty propagation,
where the goal is to determine how random variation, lack of knowledge,
or error affects the sensitivity, performance, or reliability of the system
that is being modelled.

Dimensions in Quality, Service Quality Five Gap Model; Kano’s Model;

Measuring Service Quality – SERVQUAL, Walk-through Audit; Service
Recovery – Service Guarantees, Service encounter – triad, service culture,
Service profit chain – Service consolidation; Critical Fractiles: The
Newsvendor Model (Optimal Service Levels).

Process behaviour – environmental dimensions – framework; Facility

design – nature, objectives, process analysis – process flow diagram,
process steps, simulation; Service facility layout; Service Facility Location
– considerations, facility location techniques – metropolitan metric,
Euclidean, centre of gravity, retail outlet location, location set covering
problem; Ford’s Auto collection concept; Product Support – Customer
Centric strategy, repairable parts inventory management, Performance
based logistics.

Service Improvement – a mini-consulting project. It involves use of the

methodologies introduced in class to analyze a real life service operations
system, diagnose its problems, identify opportunities for improvement and
quantify potential costs, benefits, risks and service impacts (at a nearby
service station or Car dealership or automobile workshop or the like)