LECTURE – 2

SERVICE SUPPLY CHAIN

Learning Objective
1. To present supply chain issues specific to service industry
10.4 Service Supply Chain
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.

Example
A chemist shop in any hospital get the delivery of drugs from a distributor, who in turn get
the medicines or drugs from a pharmaceutical company. A chemist, distributor and
pharmaceutical company are participants of service supply chain as shown in Figure 10.2.

Flow of funds and information

Pharmaceutical
Distributor Chemist Customers
company

Flow of drugs and information service supply chain of drugs

FIGURE 10.2: PHARMACEUTICAL SERVICE SUPPLY CHAIN

In retail sector, the supermarket has to manage many different suppliers ranging over food
items, fashion jewellery, apparel, leather items etc. Handling and managing so many
suppliers are like managing a web or a network of so many participants in service supply
chains, where intermediaries play a very important role. Many insurance and financial
companies choose to sell their service products through brokers or agents. A supply chain is
the network or a chain linking focused organization with its suppliers, supplier’s supplies
and customers. Supply chain deals in the management of the flow of information, materials,
services and money among supply chain entities as shown in Figure 10.3.
 Tier 2 Tier 1 Manufactures Distributor
suppliers suppliers

Customer Retailer Wholesaler

Flow of resources (Inventory & funds) and information 

FIGURE 10.3: A TYPICAL SUPPLY CHAIN

Inventory and information play a very important role in any supply chain. A service supply
chain of a service product, which delivers bundle of goods and services, is also expected to
manage and maintain inventory effectively. Inventory is more important in such services to
increase service level and responsiveness.

Examples:-
We all understand how are the product availability on the shelves of supermarkets and
availability of spare parts at auto repair auto servicing center crucial for a successful service
delivery.

10.5 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.

10.5.1 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 Figure 10.4.
Customer as supplier too in 
Service bidirectional relationship 
Delivered 

Service
Customer
Provider Inputs provided by 
the customer  

(body, belongings 
and information) 

FIGURE 10.4:- BIDIRECTIONAL RELATIONSHIP BETWEEN SERVICE

PROVIDER AND CUSTOMER

The bidirectional relationship can be single-level bidirectional or two level bidirectional as

shown in Figure 10.5.

Service 
Service Provider  Customer 
Inputs  

A) SINGLE LEVEL BIDIRECTIONAL RELATIONSHIP

Service  Service 
Supplier to  Service 
the service  Customer 
Provider 
provider  Customer’s  Inputs  
Inputs  

B) TWO-LEVEL BIDIRECTIONAL RELATIONSHIP

FIGURE 10.5: (A) SINGLE LEVEL AND (B) TWO-LEVEL BIDIRECTIONAL

RELATIONSHIP
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. 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.

Various examples of Single-level and Two-level bidirectional relationships can be seen in

Table 10.5 and Table 10.6 respectively.

TABLE 10.5: SINGLE-LEVEL BIDIRECTIONAL RELATIONSHIP

Customer as Customer as
Service supplier customer
Type of Service Customer
Provider supplying receiving
inputs service

Themselves Transported
Transport Airline Passenger (bodies) and passengers and
luggage luggage

Educational Enlightened
Education Students Minds
institutions mind

Healthcare to Doctor or Body with Body without

Patient
remove tumor Surgeon tumor tumor
 TABLE 10.6: TWO-LEVEL BIDIRECTIONAL RELATIONSHIP

Customer supplying inputs to

Supplies of
Initial the initial service provider
Type of initial
service Customer who sends to the another
service service
provider supplier
provider
as supplier as customer

Doctor’s Blood and Test results and

Healthcare Laboratory Patient
clinic test request diagnosis

Insurance Insurance
Insurance Agent Risk Assurance
company seeker

Education Filled
Examination Examination Evaluated answer
(Entrance Students answer
coordinators centre sheets
Exams) sheets

10.5.2 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 Figure 10.6.
 Airlines

Hotels
Tour Travel Customer
Transportation Operator Agent
Providers

Tour Operator

Set of services 

FIGURE 10.6: TOURISM AND HOSPITALITY SUPPLY CHAIN

10.5.3 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 companies. IT and ITeS industry is poised to go beyond US$ 100
billion mark in 2012 with global BFSI clients accounting for over 40 per cent of Indian IT
vendors' revenues.

One advantage of BPO for any organization is to focus on core competency but other
important aspect is for the companies having global presence to outsource to the domestic
companies to capture the local demand of customers or clients. It helps in understanding the
local customer requirements better by outsourcing services like technical requirements and
customer service supporting. Outsourcing also helps in reducing employee base within an
organization and hence reduces operating cost of the organization which leads to economies
of scale. At the same time companies can get access to extra capacity and resources which
might be an expensive process to build in-house.

Examples
1. Allianz Life Insurance Company
Allianz Life Insurance Company of North America outsources a number of services to
many companies. Some of these companies with their type of service are given in Table
10.7.

Table 10.7: Services outsourced to various companies by Allianz group

Name of outsourced
Type of service
company
Infrastructure management, Data centers, Desktop and Help
IBM
desk support

Network-related services, Data communications as well as

Voice over IP (VoIP), Security in the form of network
AT&T
firewall management, Local area networks, Internet Protocol
telephony, Remote access, and Mobility management services

Tata Consultancy Backs up IBM from offshore and performing any legacy
Services system maintenance from India

Complements the larger suppliers by developing and

Accenture
maintaining new applications.

Apart from the above service providers Allianz has outsourced hosted services like data
management system and website services to ACS and Hewlett-Packard. Allianz negotiates
strict service level agreements (SLAs) with service providers and hosted services.

2. HMEL

HMEL is a joint venture (JV) between Hindustan Petroleum Corporation Ltd. (HPCL) and
Mittal Energy Investment Pte Ltd., Singapore. HMEL has sourced IBM analytics-based
software solution to manage financial and operations related activities. The new solution
helps HMEL to analyze important business processes like planned versus actual
investments, production, key performance indicators and provides an integrated view of
data.

10.5.3 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. In manufacturing
most of the buying is contributed by raw materials. In services it is not raw materials but
service organizations spend on materials, components, IT equipment & supplies, travel &
insurance, stationary, which approximately is 30-60 % of an organization’s turnover. From
the past many years, procurement is regarded as a high cost activity which involves
unnecessary paperwork, material costs and errors.

The other challenge in managing procurement function in services is to manage purchasing

activities of large number of branches and offices of a service company located in different
regions (countries) or locations. Service organizations like banks and insurance companies
have to have branches in all the states and cities. Service sectors like banks, hospitality and
ITeS companies are generally large employee base sectors. In India, IT and ITeS have
employed approximately 10 million Indians. IBM has its presence in 200 cities and towns
in India. To accommodate such huge employee base, companies spend more on real estate,
housekeeping, office supplies, desktops and other utilities. The control of purchasing of
goods is provided by the match of an invoice, purchase order and shipping document, which
is very common in manufacturing sector. The purchase of goods can also be seen as clear
per unit price charged by the supplier. But in services the purchasing control is governed by
invoice that is summary of whole service provided and purchase document. Tracking of
unsatisfactory service is very difficult in services. There are many suppliers in the market
which sign contract either for one of the above service or suppliers, which provide entire set
of activities like Jones Lang Lasalle.

Centralizing the purchasing through web or e-procurement channels helps reducing

overhead cost and reduces duplication of work. In an effort to centralize the purchasing,
service companies now a days are outsourcing purchasing activities to companies and prefer
to have same supplier for all the offices and branches.

To manage their suppliers, the companies follow strict Service Level Agreements and
continuously review their performance. Company like Allianz group outsource its major
chunk of services to IBM and AT&T. Allianz have a comprehensive balanced score card to
review performance of IBM every month based on some important key performance
indicators like system availability and response time to repair.

Example

Jones Lang Lasalle (JLL) is a financial and professional services provider specialized in real
estate services. JLL provides integrated facility management services to service sectors like
hotels, retail and ITeS. The major services they provide are Engineering services, soft
services, workplace solutions and space/occupancy services. JLL helps service companies
to optimize their resources across various offices and/or branches to reduce operating costs
and to improve productivity. The details of services under these major services are given in
table 10.8
TABLE 10.8: INTEGRATED FACILITY MANAGEMENT SERVICES PROVIDED
BY JLL

Engineering Workplace Space/occupancy

Soft services
services solutions services
 Reception
 HVAC
 Janitorial  Mail  Minor projects
 Electrical
 Cleaning  Reprographics  Space planning
 Lifts
 Landscaping  Catering  Moves/adds/
 Plumbing
 Security  Transport changes
 Energy
 Concierge  Headcount tracking
 Utilities
 Archiving

10.5.5 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 a 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.

10.5.6 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.
10.6 Challenges in managing service supply chains

10.6.1 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.

10.6.2 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.

10.6.3 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 Table 10.9.
 TABLE 10.9: DIFFERENT TYPES OF SERVICE OUTPUT

Service Output
Education Intellectual
Places of worship Spiritual
Movies Experiential

So, different outcomes demand for different supply chain models. The definition of supply
chain management is applicable to some services like retail sector or repair and servicing
centres. But for professional services, the service supply chain management can be defined
as “Managing information, processes, capacity, service performance and funds from
the earliest supplier to the ultimate customer (Ellarm et al., 2004)”.

In the above definition we see capacity coming into picture. In services there is transfer of
service capacity in the form of service provider’s assets and staff. In services, the capacity
plays the same role of buffering as inventory plays in goods supply chain. This buffering
effect of capacity may also result in responsiveness and flexibility in service supply chain.