ISM 270Service Engineering and

ManagementLecture 8: Service Supply Chains

and Outsourcing

Airong Cai and Nuri Gokhan Airong Cai is currently a Senior Science Engineer at Demandtec,

Inc. She received her PhD in Business Statistics from University of Illinois at Chicago. She got her bachelor degree in Statistics from Fudan University in Shanghai, China. She is particularly interested in time series analysis and multivariate model analysis.

Nuri M. Gokhan holds an Optimization Scientist position at DemandTec, Inc. He received his PhD in Industrial Engineering from the University of Pittsburgh following his M.S. and B.S. degrees in Industrial Engineering from Sabanci University and Istanbul Technical University, respectively. His research interests include pricing, demand modeling, product design, supply chain management, and sustainable development. He is a member of IIE and INFORMS.

Announcements

Homework 4 today Littlefield Lab Next week

$15 checks to ‘Responsive Learning Technologies’

Projects due following week

Project Presentation 20 minutes – 15 min presentation, 5 min

questions Clear presentation of service idea

Prototype demonstration/screenshot/outline Differentiate from competition Give market estimation

• How many potential customers?• How will you make money?• What are the risks?

Argue why this will lead to successful service business

Littlefield

360 days total (currently paused on 30) 1 real minute = 3 days (total time 110 mins

remaining) Manage

Contract terms Machines Queueing rule Order quantities for supplies

Littlefield Lab

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

Due in class final week

Supply Chain for Physical Goods

Material transfer Information transfer

Suppliers

Process and Product Design

Manufacturing Distribution Retailing Customer Customer Service

Recycling/Remanufacturing

Customer-Supplier Duality in Service Supply Relationships

(Hubs)

Material transfer Information transfer

Supplier

Service Design

Service Provider Customer

Single-Level Bidirectional Service Supply Relationship

ServiceCategory

Customer-Supplier

>InputOutput>

ServiceProvider

Minds Student >MindKnowledge>

Professor

Bodies Patient >ToothFilling>

Dentist

Belongings Investor >MoneyInterest>

Bank

Information Client >Documents1040>

Tax Preparer

Two-Level Bidirectional Service Supply Relationship

ServiceCategory

Customer-Supplier

>InputOutput>

ServiceProvider

>InputOutput>

Provider’sSupplier

Minds Patient >DisturbedTreated>

Therapist >PrescriptionDrugs>

Pharmacy

Bodies Patient >BloodDiagnosis>

Physician >SampleTest Result>

Lab

Belongings Driver >CarRepaired>

Garage >EngineRebuilt>

MachineShop

Information HomeBuyer

>PropertyLoan>

MortgageCompany

>LocationClear 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

Element or Link Before After Channel Structure Functional silos Process orientation Service Recipient Passive Active as a co-producer Channel Integration Vertical (own the channel to

integrate) Virtual (IT and other mechanism permit integration without ownership)

Flow of Service Available waiting for demand Activated upon demand Flow of Information (upstream)

Pull: manual reporting of demand data results in delayed management response.

Push: high level of connectivity and transparency with fast or instantaneous access to most recent demand data.

Flow of Information (downstream)

Little or no knowledge of resource deployment

Real-time tracking and dispatching

Business Processes

Predominantly in-house; locally optimized for efficiency

In-house for key processes, others out-sourced for flexibility; integrated and synchronized to match supply with demand

Demand Management Limited to use of appointments and reservations.

Proactive involving customer in scheduling to achieve bi-directional optimization

Impact of Service Supply RelationshipsElement or Link Before After

Capacity Management Limited to use of part-timeemployees

Creative use of cross-trainedemployees, outsourcing, andcustomer self-service.

Facilitating Goods High; in anticipation ofdemand

Lower; owing to processtransparency

Service Delivery Inflexible; standardized andimpersonal

Flexible; personable withcustomization possible.

Routing and scheduling Static; fixed daily schedules Dynamic; based on systemconnectivity and processvisibility

New Service Design Marketing initiatives based onfirm's perception of customerneeds

Virtual value chain design withcustomer data base informationdriving new services

Pricing Fixed Variable; yield managementpromotes off-peak demand andavoid idle capacity

InternationalOperations

Focus on domestic market Global reach with Internet

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

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

Importance of Service Low High

Property

Focus

Facility Support: -Laundry -Janitorial -Waste disposal

Equipment Support: -Repairs -Maintenance -Product testing

of PeopleEmployee Support: -Food service -Plant security -Temporary personnel

Employee Development: -Training -Education -Medical care

Service Process

Facilitator: -Bookkeeping -Travel booking -Packaged software

Professional: -Advertising -Public relations -Legal

Outsourcing ConsiderationsFocus 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 ConsiderationsFocus 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 ConsiderationsFocus 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

Expansion Strategies Single Service Multiservice

Focused service: Clustered service:Single * Dental practice * Stanford UniversityLocation * 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 TrainingBrand NameNational AdvertisingAcquisition of Proven BusinessEconomics of Scale

Issues for the FranchisorFranchisee AutonomyFranchise ContractConflict Resolution

Generic International Strategies

 

TransnationalStrategy

GlobalStrategy

Multi-domesticStrategy

NoInternational

Strategy

Low High

Force Towards Local Responsiveness

Force Towards GlobalIntegration

High

Low

 

Multinational Development The Nature of the Borderless World (Triad)

Customers - information has empowered Competitors - nothing stays proprietaryCompany - fixed costs require large marketsCurrency - become currency neutralCountry - deprive competitor of home market

Planning Transnational OperationsCultural TransferabilityWorker NormsHost Government Policy

International Strategic Service Vision

 

Service DeliverySystem

Operating Strategy Service Concept Target 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