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 ManufacturingDistributionRetailing Consumer Disposal Recycling/Remanufacturing After-sales Service Material Transfer Information Transfer 13-3

Customer-Supplier Duality in Service Supply Relationships (Hubs) 13-4

Single-Level Bidirectional Service Supply Relationship Service Category Customer -Supplier >Input Output> Service Provider MindsStudent>Mind Knowledge> Professor BodiesPatient>Tooth Filling> Dentist BelongingsInvestor>Money Interest> Bank InformationClient>Documents 1040> Tax Preparer 13-5

Two-Level Bidirectional Service Supply Relationship Service Category Customer -Supplier >Input Output> Service Provider >Input Output> Provider’s Supplier MindsPatient>Disturbed Treated> Therapist>Prescription Drugs> Pharmacy BodiesPatient>Blood Diagnosis> Physician>Sample Test Result> Lab BelongingsDriver>Car Repaired> Garage>Engine Rebuilt> Machine Shop InformationHome 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 13-9

Impact of Service Supply Relationships (cont.) 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 13-12

Profitability Tactics TacticCategory Lower Fixed (Overhead) CostsMargin Improve cash cycle Reduce office space and equipment Reduce administrative and support staff Raise Prices and DifferentiateProductivity Specialize, innovate, add more value Target higher value work Invest in training Invest in higher value services Address Underperforming ProjectsProductivity Drop unprofitable services Drop unprofitable customers Increase VolumeProductivity Increase utilization Lower Variable CostsLeverage 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 13-15

Taxonomy for Outsourcing Business Services 13-16

Outsourcing Considerations 13-17

Outsourcing Considerations 13-18

Outsourcing Considerations 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