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Service Supply Relationships

Learning Objectives

Contrast the supply chain for physical goods with the customer-supplier duality of services. Discuss the challenge of managing service supply relationships. 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. Discuss the challenges of delivering services in the field. Prepare a delivery route using the Clarke-Wright algorithm.

Supply Chain for Physical Goods

Suppliers Recycling/Remanufacturing

Process and Product Design





Customer Service

Material transfer

Information transfer

Customer-Supplier Duality in Service Supply Relationships (Hubs)


Service Design

Service Provider


Material transfer

Information transfer

Single-Level Bidirectional Service Supply Relationship

Service Category
Minds Bodies

Customer -Supplier
Student Patient

>Input Output>
>Mind Knowledge> >Tooth Filling>

Service Provider
Professor Dentist



>Money Interest>
>Documents 1040>

Tax Preparer

Two-Level Bidirectional Service Supply Relationship

Service Category

Customer -Supplier

>Input Output>
>Disturbed Treated> >Blood Diagnosis> >Car Repaired> >Property Loan>

Service Provider

>Input Output>
>Prescription Drugs> >Sample Test Result> >Engine Rebuilt> >Location Clear Title>

Providers Supplier








Machine Shop Title Search


Home Buyer

Mortgage Company

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

Impact of Service Supply Relationships

Element or Link Channel Structure Service Recipient Channel Integration Before Functional silos Passive Vertical (own the channel to integrate) Available waiting for demand Pull: manual reporting of demand data results in delayed management response. Little or no knowledge of resource deployment Predominantly in-house; locally optimized for efficiency After Process orientation Active as a co-producer Virtual (IT and other mechanism permit integration without ownership) Activated upon demand Push: high level of connectivity and transparency with fast or instantaneous access to most recent demand data. Real-time tracking and dispatching In-house for key processes, others out-sourced for flexibility; integrated and synchronized to match supply with demand Proactive involving customer in scheduling to achieve bidirectional optimization

Flow of Service Flow of Information (upstream)

Flow of Information (downstream) Business Processes

Demand Management

Limited to use of appointments and reservations.

Impact of Service Supply Relationships

Element or Link Capacity Management Before Limited to use of part-time employees After Creative use of cross-trained employees, outsourcing, and customer self-service. High; in anticipation of Lower; owing to process demand transparency Inflexible; standardized and Flexible; personable with impersonal customization possible. Static; fixed daily schedules Dynamic; based on system connectivity and process visibility Marketing initiatives based on Virtual value chain design with firm's perception of customer customer data base information needs driving new services Fixed Variable; yield management promotes off-peak demand and avoid idle capacity Focus on domestic market Global reach with Internet

Facilitating Goods Service Delivery Routing and scheduling

New Service Design


International Operations

Outsourcing Services

Benefits - allows the firm to focus on its core competence - service is cheaper to outsource than perform inhouse - 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

Outsourcing Process
Need Identification
Problem Definition "Do-versus-Buy" Analysis Involve Interested Parties Specification Development

Information Search
References Personal Contact Recommendations T rade Directory

Vendor Selection
Experience Reputation References Cost Location Size

Performance Evaluation
Identify Evaluator Quality of Work Comm unication Meet Deadlines Flexibility Dependability

Taxonomy for Outsourcing Business Services

Importance of Service Low Facility Support: -Laundry -Janitorial -Waste disposal Employee Support: -Food service -Plant security -Temporary personnel Facilitator: -Bookkeeping -Travel booking -Packaged software High Equipment Support: -Repairs -Maintenance -Product testing Employee Development: -Training -Education -Medical care Professional: -Advertising -Public relations -Legal Property Focus of People

Service Process

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

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

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

Topics for Discussion

What are some possible disadvantages associated with the product postponement strategy? Discuss the similarities and differences in the product postponement strategy used by Hewlett-Packard and Taco Bell? Discuss the implication of service outsourcing on employees, stockholders, customers, and host country economy when a firm outsources a call center overseas.

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.

Peapod Smart Shopping for Busy People

2. 3.


Where are opportunities for bidirectional optimization at Peapod? How can Peapod manage service perishability? How can Peapod manage productive capacity? Suggest reasons why Peapod has not yet become profitable.