ISM 270 Service Engineering and Management Lecture 8: Service Supply Chains

Announcements  Homework 5 due next week Should help for Littlefield! Should help for Littlefield!  Littlefield Lab Next week  Projects due following week

Project Presentation  20 minutes – 15 min presentation, 5 min questions  Clear presentation of service idea Prototype demonstration/screenshot/outline Prototype demonstration/screenshot/outline Differentiate from competition Differentiate from competition Give market estimation Give market estimation How many potential customers?How many potential customers? How will you make money?How will you make money? What are the risks?What are the risks? Argue why this will lead to successful service business Argue why this will lead to successful service business

Some key concepts for capacity management  Economic Order Quantity  Queueing Dynamics

Supply Chain for Physical Goods

Customer-Supplier Duality in Service Supply Relationships (Hubs)

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

Two-Level Bidirectional Service Supply Relationship ServiceCategoryCustomer-Supplier >Input Output>ServiceProvider Output>Provider’sSupplier MindsPatient >Disturbed Treated>Therapist >Prescription Drugs>Pharmacy BodiesPatient >Blood Diagnosis>Physician >Sample Test Result> Lab BelongingsDriver >Car Repaired>Garage >Engine Rebuilt>MachineShop InformationHomeBuyer >Property Loan>MortgageCompany >Location Clear Title> TitleSearch

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

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

Outsourcing Process

Taxonomy for Outsourcing Business Services

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

The bull-whip effect  Variations in demand are amplified as one moves upstream in the supply chain (further from the customer)  Small uncertainty at one end can lead to large uncertainty at the other end of a supply chain  Good method to nullify is based on demand-driven forecasting where all information is shared through supply chain

Managing Facilitating Goods FactoryWholesalerDistributorRetailerCustomer Replenishment order Replenishment order Replenishment order Customer order Production Delay Wholesaler Inventory Shipping Delay Shipping Delay Distributor Inventory Retailer Inventory Item Withdrawn

Role of Inventory in Services  Decoupling inventories  Seasonal inventories  Speculative inventories  Cyclical inventories  In-transit inventories  Safety stocks

Considerations in Inventory Systems  Type of customer demand  Planning time horizon  Replenishment lead time  Constraints and relevant costs

Relevant Inventory Costs  Ordering costs  Receiving and inspections costs  Holding or carrying costs  Shortage costs

Inventory Management Questions  What should be the order quantity (Q)?  When should an order be placed, called a reorder point (ROP)?  How much safety stock (SS) should be maintained?

Inventory Models  Economic Order Quantity (EOQ)  Special Inventory Models With Quantity Discounts Planned Shortages  Demand Uncertainty - Safety Stocks  Inventory Control Systems Continuous-Review (Q,r) Periodic-Review (order-up-to)  Single Period Inventory Model

Economic Order Quantity  Consider a process that uses raw material Fixed known demand rate D (per minute/day/year) Fixed known demand rate D (per minute/day/year) Orders are in batches, costing: Orders are in batches, costing: Fixed cost S for each batchFixed cost S for each batch Unit cost per item c in batchUnit cost per item c in batch Unit storage/holding cost H to have extra supplyUnit storage/holding cost H to have extra supply Cost (penalty) p for missing order due to stock-outCost (penalty) p for missing order due to stock-out 1. When do you place an order? 2. How big should the batch be?

Inventory Levels For EOQ Model 0 Units on Hand Q Q D Time

Annual Costs For EOQ Model Annual Costs For EOQ Model

EOQ Formula  Notation D = demand in units per year H = holding cost in dollars/unit/year S = cost of placing an order in dollars Q = order quantity in units  Total Annual Cost for Purchase Lots  EOQ

Economic Order Quantity  Variations: Lead-time from order to arrival of batch Lead-time from order to arrival of batch Uncertain/varying demand Uncertain/varying demand Option to back-order Option to back-order

Annual Costs for Quantity Discount Model , C = $20.00C = $19.50C = $18.75 Order quantity, Q Annual Cost, $

Inventory Levels For Planned Shortages Model Q Q-K 0 -K T1T2 TIME T

Formulas for Special Models  Quantity Discount Total Cost Model  Model with Planned Shortages

Values for Q* and K* as A Function of Backorder Cost B Q* K* Inventory Levels undefined Q*

Demand During Lead Time Example = u=3 ROP s s Four Days Lead Time Demand During Lead time

Safety Stock (SS)  Demand During Lead Time (LT) has Normal Distribution with  Demand During Lead Time (LT) has Normal Distribution with  SS with r% service level  Reorder Point

Continuous Review System (Q,r) Average lead time usage, d L Reorder point, ROP Safety stock, SS Inventory on hand Order quantity, EOQ EOQ d1d1 d 2 d3d3 Amount used during first lead time First lead time, LT 1 Order 1 placed LT 2 LT 3 Order 2 placed Order 3 placed Shipment 1 received Shipment 2 receivedShipment 3 received Time

Periodic Review System (order-up-to) RP Review period First order quantity, Q1 d1d1 Q2Q2 Q3Q3 d2d2 d3d3 Target inventory level, TIL Amount used during first lead time Safety stock, SS First lead time, LT 1 LT 2 LT 3 Order 1 placed Order 2 placed Order 3 placed Shipment 1 received Shipment 2 received Shipment 3 received Time Inventory on Hand

Inventory Control Systems  Continuous Review System  Periodic Review System

ABC Classification of Inventory Items AB C

Inventory Items Listed in Descending Order of Dollar Volume Monthly Percent of Unit cost Sales Dollar Dollar Percent of Inventory Item ($) (units) Volume ($) Volume SKUs Class Computers , A Entertainment center ,000 Television sets ,000 Refrigerators , B Monitors ,000 Stereos ,000 Cameras ,000 Software , C Computer disks ,000 CDs ,000 Totals 305,

Single Period Inventory Model Newsvendor Problem Example D = newspapers demanded p(D) = probability of demand Q = newspapers stocked P = selling price of newspaper, $10 C = cost of newspaper, $4 S = salvage value of newspaper, $2 C u = unit contribution: P-C = $6 C o = unit loss: C-S = $2

Single Period Inventory Model Expected Value Analysis Stock Q p(D) D Expected Profit $31.54 $34.43 $35.77 $35.99 $35.33

Single Period Inventory Model Incremental Analysis E (revenue on last sale) E (loss on last sale) P ( revenue) (unit revenue) P (loss) (unit loss) (Critical Fractile) where: C u = unit contribution from newspaper sale ( opportunity cost of underestimating demand) C o = unit loss from not selling newspaper (cost of overestimating demand) D = demand Q = newspaper stocked

Critical fractile for the newsvendor problem P(D<Q) (C o applies) P(D>Q) (C u applies ) 0.722

Retail Discounting Model  S = current selling price  D = discount price  P = profit margin on cost (% markup as decimal)  Y = average number of years to sell entire stock of “dogs” at current price (total years to clear stock divided by 2)  N = inventory turns (number of times stock turns in one year) Loss per item = Gain from revenue S – D = D(PNY)

Growth and Global Expansion

Expansion Strategies Single Service Multiservice Focused service: Clustered service: Single * Dental practice * Stanford University Location * Retail Store * Mayo Clinic * Family restaurant * USAA Insurance Focused network: Diversified network: Multisite * Federal Express * Nations Bank * McDonald’s * American Express * Red Roof Inns * Accenture

Franchising   Benefits to the Franchisee Management Training Brand Name National Advertising Acquisition of Proven Business Economics of Scale   Issues for the Franchisor Franchisee Autonomy Franchise Contract Conflict Resolution

Generic International Strategies Transnational Strategy Global Strategy Multi-domestic Strategy No International Strategy LowHigh Force Towards Local Responsiveness Force Towards Global Integration High Low

Multinational Development   The Nature of the Borderless World (Triad) Customers - information has empowered Competitors - nothing stays proprietary Company - fixed costs require large markets Currency - become currency neutral Country - deprive competitor of home market   Planning Transnational Operations Cultural Transferability Worker Norms Host Government Policy

International Strategic Service Vision Service Delivery System Operating StrategyService ConceptTarget Market Segments Available technology? Infrastructure? Utility service? Labor market norms and customs? Space availability? Interaction with suppliers? Educating customers? Appropriate managerial practice? Participative? Autocratic? Labor market institutions? Government regulations? Unions? Host government policies? Language? Front office? Back office? What are customer expectations? Perception of value? Service ethic? Service encounter? Language? Acceptance of self-serve? What are the usage patterns? Cultural transferability? What are the market segments? Domestic? Multinational? Tourist? What are important cultural differences? Language? Life style? Disposable income? What are the workforce demographics? Skills? Age distribution? Attitudes? Work ethic?

Considerations in Selecting a Global Service Strategy Globalization Global Service Strategies Factors Multicountry Importing Follow Your Service Beating the Expansion Customers Customers Offshoring Clock Customer Train local Develop foreign Develop Specialize in Provide Contact workers language & foreign back- office extended cultural sensitivity customers office service hours of skills components service Customization Usually a Strategic Re-prototype Quality and More need for standard opportunity locally coordination reliability & service coordination Complexity Usually Strategic Modify Opportunity for Time routine opportunity operations focus compression Information Satellite On site advantage Move Training Exploit Intensity network experienced investments opportunity managers Cultural Modify Accommodate Could be Cultural Common Adaptation service foreign guests necessary to understanding language achieve scale necessary Labor Intensity Reduced Increased labor Hire local Reduced labor Reduced labor labor costs costs personnel costs costs Other Government Logistics Inadequate Home office Capital restrictions management infrastructure employee investments morale

Goodwill Industries International Who are Goodwill’s customers and how have their demographics changed over time? How should the introduction of for-profit thrifts affect Goodwill’s decisions about the role of customer service? How can Goodwill differentiate itself from the competition?

Goodwill Industries International Sources of Revenue

Littlefield  360 days total (currently paused on 30)  1 real minute = 3 days (total time 110 mins remaining)  Manage Contract terms Contract terms Machines Machines Queueing rule Queueing rule Order quantities for supplies Order quantities for supplies

Littlefield Lab  Maximum one page per team: Review your strategy for the service game Review your strategy for the service game What did you watch closely? Did it work? What did you watch closely? Did it work? Suggest what you would do different next time Suggest what you would do different next time  Due in class next week