PuSm - Lecture 4 - Chapter 4 - Slides - Online - Cópia

Graz University of Technology
1 Institute of Business Economics and Industrial Sociology

Industrial Marketing, Purchasing and Supply Management (IMPS)
Assoc. Prof. Priv.-Doz. Dipl.-Ing. Dipl.-Ing. Dr.techn. Bernd M. Zunk
Purchasing and Supply Management

Lecture 4.
Buying business services
Prof. Dr. Bernd M. Zunk
Course no. 373.551, 4.5 ECTS, Lecture
Winter Semester 2020/21 (Online)
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk
www.bwl.tugraz.at
For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
2 Learning objectives
After this lecture you should understand the following:

• The increasing importance of the buying of services.
• The differences between buying services and buying goods.
• Different views on buying services and the implications for the
purchasing process.
• The importance of stakeholder management for buying
services.
• Specific areas of attention in specifying services, and selecting
and contracting service providers.
• The importance of professional contract management.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
3 Introduction: On the path to purchasing excellence (1/2)
Today, companies increasingly buying services instead of goods.
• Traditionally, transportation companies

would buy trucks and negotiate an attractive
acquisition price with the manufacturer.
Today these companies seek integrated truck lease solutions by
negotiating the best all-in rate per kilometre. These include
 a guaranteed flawless transportation capacity during the contract period
 costs for services, maintenance, insurance (and eventually fuel).
• Buyers of copy machines no longer want to

arrange deals on the acquisition price – they
negotiate a price per copy or print (including
a - by the supplier guaranteed & predefined
service level - all maintenance, and service
costs during the lifetime of the contract).
4 Introduction: On the path to purchasing excellence (2/2)
Also manufacturing companies are increasingly buying services, e.g.

• Philips Electronics has outsourced parts of the
production of consumer electronic products to
contract manufacturer in Far East. In this case
manufacturing becomes a service and therefore
a fundamental part of Philips’ value proposition to the customers.
• Global brands like NIKE etc. focus on
designing and developing exciting new
products, whilst outsourcing their manufacturing.
• Railway companies (like the Austrian ÖBB) who are
buying services from a cleaning company to clean the
train coaches, buy a service that is a fundamental part
of their own value proposition. This because the cleaned seats in
the railcar etc. influences the traveller’s perception of quality of the
transportation service provided by the railway company.
5 Introduction: Professional purchasing and purchasing excellence
At this stage it becomes clear, that in recent times a number of service

companies made significant progress in achieving purchasing
excellence.
• Purchasing excellence explains how to professionalize purchasing,
making use of two types of processes
– strategic management processes
– enabling processes.
• The increasing popularity of outsourcing and offshoring has led to
the fact, that many large service companies nominated a Chief
Procurement Officer (CPO) to head up their (global) procurement
operations.
→ Service companies have become aware of the necessity to put

professional purchasing and contract management in place.
6 Introduction: Case study – Buying marketing services at a
European telecom provider
*Note:
The full text of this case study you may find in the primary literature for this
course, the textbook “Purchasing and Supply Management“ written by Arjan
van Weele (2018), 7th edition, p. 80.
7 Introduction: Case study – Buying marketing services at a
European telecom provider (remarks)
The introductory case is illustrative of what may happen when

buying marketing services.
In many cases in practice …
• … the services buyer has to deal with a wide range of internal
customers who are spread out over the entire organization, each
having their own wishes and preferences.
• … it is not simple to translate all wishes into a specification that is
clear and fully accepted by every internal stakeholder.
• … demand is highly dispersed throughout the organization and so
it is difficult to
 gain an idea of the volume of services expenditure
 identify the actual users and decision-makers
 find out with which service providers the company does business
The remarks on the introductory case study refer to: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 80.
8 Increasing importance of services (1/2)
• Nowadays, services were increasingly contracted from outside

providers that make up an important part of the company’s value
proposition to its customers.
• Examples are…
 … pharmaceutical companies who are contracting services from
external research laboratories to test pharmaceutical products
among international samples of patients. This influences the time to
market of new medicines.
 … logistics providers, such as UPS, DHL, FedEx etc. affect the
service delivery of the products that are shipped by them on behalf
of their customers.
 … international banks that outsource the management of their
electronic banking and payment systems to outside IT providers.
9 Increasing importance of services (2/2)
• The purchasing to sales ratio for …

– … industrial companies may range between 60% and 80%.
– … service companies usually amounts to 10% – 50%
• The largest part of the total cost within the service providing
company is related to personnel, e.g. consultants, cleaning staff.
• Services are actually produced in close collaboration and

interaction between buyer and supplier. Therefore, when buying
services relationships were deemed more important than cost
considerations.
• As a consequence, professional services-buying is rising on the

corporate agenda.
10 Differences between goods and services (1/2)
• Services are defined as “[…] the management of a series of more or

less tangible activities, which take place in the interaction between
customer and supplier employees, that either or not in combination
of physical goods or solutions are offered as an integrated solution to
customer problems […]”.
• Since services involve people and every person is unique, service
exchanges can not be standardized. Services relate to the exchange
of knowledge, expertise and capacity that are embedded in human
beings.
• Therefore, the actual exchange will be different depending on the
individuals a buyer deals with. This explains why it is so difficult to
produce and buy services at a consistent quality (Ellram et al., 2004).
• It is a fact that services are produced and consumed at the same
time. This happens in a continuous interaction between employees
of the customer and the supplier.
11 Differences between goods and services (2/2)
12 Towards a classification of services (1/2)
For a first classification of services the purchasing portfolio approach

(see Chapter 7 in detail)* can be used.
 This portfolio consists of four quadrants (i.e. leverage products,
strategic products, routine products and bottleneck products).
 The portfolio approach can be based upon two criteria: financial impact
and supply risk.
 A purchasing portfolio serves to develop four differentiated supplier

strategies.
* see: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 176.
13 Towards a classification of services (2/2)
However, a more popular way is to classify services upon their physical

characteristics. Here, a distinction is made between:
 Facility services (e.g. contract catering, security)
 Financial services (e.g. leasing, insurance)
 Professional services (e.g. legal services, management consultancy)
 ICT services (e.g. computer help desk, software development)
 R&D and technical services (e.g. technical maintenance, engineering)
 Transportation and distribution services (e.g. warehousing)
 Human resource services (e.g. training, recruitment)
 Marketing services (e.g. advertising, sales support)
→ This classification is based upon the functional environment in which

the service is consumed.
→ It can be used to explain what specialists will be involved in
purchasing decision-making.
14 Classifying services as portfolio: Example
Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 86.
15 Pre-contractual stage
The pre-contractual stage (= tactical purchasing process) consist of

 Specifying: Defining the scope of work for service providers
 Selecting service providers
 Contracting for services
16 Specifying: Defining the scope of work for service providers
• Prior to the actual supplier selection decision it is often difficult to

determine what the service provider should exactly accomplish.
• As a first step - to make the situation clearer and more concise –
three types of service specifications can be differentiated.
17 Types of service contracts
• Input-based and
throughout based
contracts are usually
referred to as classical
purchasing contracts or
behavioural contracts.
• Output-based and
outcome-based contracts
are referred to as
performance contracts as
they focus on the
performance to be
delivered by the contractor.
Outcome relates to the
economic value that is
generated by the provider
for the customer.
Taken from: van Weele, A. (2018), Purchasing and
Supply Management, 7th edition, p. 88.
18 Selecting service providers (1/2): Introductory remarks
• If the scope of a specific service cannot be defined, it will be difficult

to define what a future supplier should be able to meet.
• The more intangible the service, the more time it takes to prequalify
and preselect the future service provider.
• The preliminary prequalification will cover an assessment of the
 provider’s organization and operational processes
 expertise and capacity
 quality of the staff and management involved
• In case of an
– input specification certificates or diplomas are of interest for the buyer.
– output specification the buyer will be interested in positive references.
• Suppliers for complex services and projects need to be selected
carefully. In recent years “Best Value Procurement and Vested
Outsourcing” has been developed to do just that.
19 Selecting service providers (2/2): Best Value Procurement and Vested
Outsourcing
20 Contracting for services (1/2)
• When buying services, it is often not so clear when the contracted

performance has been delivered by the service provider.
– Example: What will happen if an architect delivers a design that meets
the technical criteria of the customer, but which does not meet the
customer’s personal taste?
– In such cases a contract probably will not give the answer. It is almost
impossible to formulate clauses in a contract that deal with ALL possible
misunderstandings that may arise in service contracts.
• When the service is to be delivered within the physical premises of
the buying company: (1) sufficient office space and (2) access to
internal information & administrative systems should be provided.
• The assessment of the quality of the service provided (based on
specific KPIs as a key component of Service Level Agreements -
SLAs) is the foundation for the supplier’s payment.
• To make such service contracts work, the buyer needs to periodically
report on the supplier’s performance.
21 Contracting for services (2/2)
22 Post-contractual stage (1/5)
• In reality, many problems emerge at this stage.

• Example: Outsourcing of the IT help desk
– Situation: The IT helpdesk is now operated by new staff → more strict
and formal than the “old” staff → leading to more paperwork and
frustration among internal employees.
→ Supervision made clear:
• Need of active management of the relationship is the task of the
buying organization.
• KPIs and bonus/incentive arrangements (that highly influence
supplier behaviour) have not been appropriately established and
formulated in the contract (there is an emphasis on uptime of the
servers; but nothing has been said about internal customer
satisfaction).
• Having the server uptime in the focus it is likely, that the support of
the supplier will end as soon as the server starts causing
difficulties.
In general, inside the buying organization …

– … it is to accept that the buying organisation and the service provider
should actively collaborate to establish a successful service delivery.
– … the way how services should be executed by a service provider
should get as much attention as e.g. how to pay for it.
– ... an effective link between the tactical purchasing process and the
operational stages of the project should be established.
– … the anticipation of different types of problems (e.g. inappropriate
KPIs) at early stages in the discussion with a future service provider is
crucial before drafting a contract with service providers.
– … contract execution means that operational staff members should be
consulted at an early stage about how activities actually take place.
– … it is wise to differentiate between the person who
• supervises the quality of the services provided by the service provider.
• is responsible for selecting the right contract, contract negotiation and
contract compliance by buyer and seller (contract manager).
Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, pp. 93-94.
27 Involvement of purchasing in contracting for services
• Traditionally, buyers were involved in low importance services e.g.

travel, print or courier.
• Increasingly buyers are involved in high importance services like
marketing and ICT.
• These types of services may not be contracted for by the purchasing
department, but by the respective functional departments using their
own contacts.
• When tight interpersonal relationships between internal customer and
supplier exist, it will be difficult for any buyer to interfere.
• The best a buyer can do in such situations is to provide superior
transparency to internal customers in terms of the
– (i) purchasing spend related to services,
– (ii) number of service providers the company works with and
– (ii) actual quality provided by the suppliers involved.
28 Brief summary
• Traditionally, services buying was limited to contracting for

facility services.
• Buying services requires specific expertise and close
collaboration with internal experts in the company especially if an
internal customer has strong personal relationships with the service
provider.
• Challenges include:
– deciding on the specification of services.
– objective selection criteria.
• Service-level agreements stimulate internal customers to express
the key performance indicators.
• Purchasing management control and good governance in
service supplier relationships may help to professionalize service
buying in order to get superior value for the money spend.
29 Lecture 4: Self-assessment (Individual work)
Preliminary remark:
The aim of this exercise is to reflect on the content presented in this
lecture and to prepare for the final exam at an early stage.
Work order:
1. Answer the self-assessment questions given on the following slide(s).
2. Take approx. 15 minutes per question.
Final note: To answer/discuss/reflect on the questions on the following slide(s), please

consult the primary as well as the relevant literature of this course we have listed for you on
the TUGrazTeachCenter learning platform (see: course-detailed view -> further information ->
recommended reading). Of course, you are also welcome to use further sources.
30 Lecture 4: Self-assessment
4.1 Traditionally services and goods buying differ in four aspects.

What are these aspects and what is the relevance of each to the
services buyer?
4.2 Three ways to specify services have been described in this

lecture/chapter. Could you apply each of these three types to
contracting for cleaning services (offices)? And also to contracting
purchasing consultancy services?
4.3 Buying marketing services is usually done by the marketing

department. You are recruited as a marketing services buyer. You
reside within the purchasing department. How would you proceed to
professionalize the buying of all marketing services?
31 Supplementary literature (Lecture 4) (1/2)
Axelsson, B. and Wynstra, J.Y.E (2002), Buying Business Services, Chichester,

UK: Wiley.
Ellram, L.M., Tate, W.L. and Billington, C. (2004), Understanding and managing
the services supply chain, Journal of Supply Chain Management, 40(4):17-32.
Jackson, R.W, NeidelI, L.A. and Lunsford, D.A. (1995), An empirical investigation
of the differences in goods and services as perceived by organisational buyers,
lndustrial Marketing Management, 24:99-108.
Li, M. and Choi, T. (2009), Triads in services outsourcing: bridge, bridge decay
and bridge transfer, Journal of Supply Chain Management, 45(3):27-39.
Patel, R. (2005), Walking a tightrope, CPO Agenda, 1(3):44-9.
Schiele, J. (2005), Meaningful involvement of municipal purchasing departments
in the procurement of consulting services: case studies from Ontario, Canada,
Journal of Purchasing & Supply Management, 11(1): 14-27.
Smeltzer, L.R. and Ogden, J.A. (2002), Purchasing professionals’ perceived
differences between purchasing materials and purchasing services, Journal of
Supply Chain Management, 38(1): 54-70.
32 Supplementary literature (Lecture 4) (2/2)
Stradford, D. and Tiura, D. (2003), Keeping the savings you thought you were
getting in services sourcing: paper given at 88th Annual International Supply
Management Conference Proceedings, ISM, Tempe, AZ.
Van der Valk, W. (2007), Buyer-seller interaction during ongoing service
exchange. Doctoral Dissertation, Erasmus Research Institute of Management,
RSM Erasmus University, Rotterdam.
Wynstra, E., Axelsson, B. and Van der Valk, W. (2006), An application-based
classification to understand buyer-supplier interaction in business services,
International Journal of Service Industry Management, 5(17): 474-496.
Wynstra, E., Robbe, T., Rooks, G., Türksever, H. and Van der Valk, W. (2012),
Three is a crowd, but in which ways? Performance based contracting in buyer-
supplier-customer triads, IPSERA 2012 Conference Proceedings, Part C:
Competitive Papers. CP41.
Graz University of Technology
33 Institute of Business Economics and Industrial Sociology
Industrial Marketing, Purchasing and Supply Management (IMPS)
Assoc. Prof. Priv.-Doz. Dipl.-Ing. Dipl.-Ing. Dr.techn. Bernd M. Zunk
Purchasing and Supply Management

Lecture 4.
Buying business services
Prof. Dr. Bernd M. Zunk
Course no. 373.551, 4.5 ECTS, Lecture
Winter Semester 2020/21 (Online)
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk
www.bwl.tugraz.at
For use with Purchasing and Supply Chain Management 7 th Edition

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Graz University of Technology

1 Institute of Business Economics and Industrial Sociology

Purchasing and Supply Management

Prof. Dr. Bernd M. Zunk

Course no. 373.551, 4.5 ECTS, Lecture

Winter Semester 2020/21 (Online)

After this lecture you should understand the following:

Today, companies increasingly buying services instead of goods.

• Traditionally, transportation companies

• Buyers of copy machines no longer want to

Also manufacturing companies are increasingly buying services, e.g.

At this stage it becomes clear, that in recent times a number of service

→ Service companies have become aware of the necessity to put

The introductory case is illustrative of what may happen when

• Nowadays, services were increasingly contracted from outside

• The purchasing to sales ratio for …

• Services are actually produced in close collaboration and

• As a consequence, professional services-buying is rising on the

• Services are defined as “[…] the management of a series of more or

For a first classification of services the purchasing portfolio approach

 A purchasing portfolio serves to develop four differentiated supplier

However, a more popular way is to classify services upon their physical

→ This classification is based upon the functional environment in which

The pre-contractual stage (= tactical purchasing process) consist of

• Prior to the actual supplier selection decision it is often difficult to

• If the scope of a specific service cannot be defined, it will be difficult

• When buying services, it is often not so clear when the contracted

• In reality, many problems emerge at this stage.

In general, inside the buying organization …

• Traditionally, buyers were involved in low importance services e.g.

• Traditionally, services buying was limited to contracting for

Final note: To answer/discuss/reflect on the questions on the following slide(s), please

4.1 Traditionally services and goods buying differ in four aspects.

4.2 Three ways to specify services have been described in this

4.3 Buying marketing services is usually done by the marketing

Axelsson, B. and Wynstra, J.Y.E (2002), Buying Business Services, Chichester,

Purchasing and Supply Management

Prof. Dr. Bernd M. Zunk

Course no. 373.551, 4.5 ECTS, Lecture

Winter Semester 2020/21 (Online)

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