ISM 270ISM 270

Service Engineering and Service Engineering and ManagementManagement

Lecture 8: Service Supply ChainsLecture 8: Service Supply Chains

AnnouncementsAnnouncements

Homework 5 due next weekHomework 5 due next week Should help for Littlefield!Should help for Littlefield!

Littlefield Lab Next weekLittlefield Lab Next week Projects due following weekProjects due following week

Project PresentationProject Presentation

20 minutes – 15 min presentation, 5 min 20 minutes – 15 min presentation, 5 min questionsquestions

Clear presentation of service ideaClear presentation of service idea Prototype demonstration/screenshot/outlinePrototype demonstration/screenshot/outline Differentiate from competitionDifferentiate from competition Give market estimationGive 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 Argue why this will lead to successful service businessbusiness

Some key concepts for capacity Some key concepts for capacity managementmanagement

Economic Order QuantityEconomic Order Quantity Queueing DynamicsQueueing Dynamics

Supply Chain for Physical Supply Chain for Physical GoodsGoods

Material transfer Information transfer

Suppliers

Process and Product Design

Manufacturing Distribution Retailing Customer Customer Service

Recycling/Remanufacturing

Customer-Supplier Duality in Customer-Supplier Duality in Service Supply Relationships Service Supply Relationships

(Hubs)(Hubs)

Material transfer Information transfer

Supplier

Service Design

Service Provider Customer

Single-Level Bidirectional Single-Level Bidirectional Service Supply RelationshipService Supply Relationship

ServiceService

CategoryCategory

CustomerCustomer

-Supplier-Supplier

>>InputInput

Output>Output>

ServiceService

ProviderProvider

MindsMinds StudentStudent >>MindMind

Knowledge>Knowledge>

ProfessorProfessor

BodiesBodies PatientPatient >>ToothTooth

Filling>Filling>

DentistDentist

BelongingsBelongings InvestorInvestor >>MoneyMoney

Interest>Interest>

BankBank

InformationInformation ClientClient >>DocumentsDocuments

1040>1040>

Tax PreparerTax Preparer

Two-Level Bidirectional Service Two-Level Bidirectional Service Supply RelationshipSupply Relationship

ServiceService

CategoryCategory

CustomerCustomer

-Supplier-Supplier

>>InputInput

Output>Output>

ServiceService

ProviderProvider

>>InputInput

Output>Output>

Provider’sProvider’s

SupplierSupplier

MindsMinds PatientPatient >>DisturbedDisturbed

Treated>Treated>

TherapistTherapist >>PrescriptionPrescription

Drugs>Drugs>

PharmacyPharmacy

BodiesBodies PatientPatient >>BloodBlood

Diagnosis>Diagnosis>

PhysicianPhysician >>SampleSample

Test Result>Test Result>

LabLab

BelongingsBelongings DriverDriver >>CarCar

Repaired>Repaired>

GarageGarage >>EngineEngine

Rebuilt>Rebuilt>

MachineMachine

ShopShop

InformationInformation HomeHome

BuyerBuyer

>>PropertyProperty

Loan>Loan>

MortgageMortgage

CompanyCompany

>>LocationLocation

Clear Title>Clear Title>

TitleTitle

SearchSearch

Sources of Value in Service Sources of Value in Service Supply RelationshipsSupply Relationships

Bi-directional OptimizationBi-directional Optimization Managing Productive CapacityManaging Productive Capacity

- - TransferTransfer: make knowledge available (e.g. web : make knowledge available (e.g. web based FAQ database)based FAQ database)- - ReplacementReplacement: substitute technology for server : substitute technology for server (e.g. digital blood pressure device)(e.g. digital blood pressure device)- - EmbellishmentEmbellishment: enable self-service by teaching : enable self-service by teaching (e.g. change surgical dressing)(e.g. change surgical dressing)

Management of PerishabilityManagement of Perishability

Impact of Service Supply RelationshipsImpact 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 RelationshipsImpact of Service Supply Relationships

Element or Link Before AfterCapacity Management Limited to use of part-time

employeesCreative 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

Outsourcing ServicesOutsourcing Services BenefitsBenefits

- - allows the firm to focus on its core competenceallows the firm to focus on its core competence- service is cheaper to outsource than perform in-house- service is cheaper to outsource than perform in-house- provides access to latest technology- provides access to latest technology- leverage benefits of supplier economy of scale- leverage benefits of supplier economy of scale

RisksRisks - loss of direct control of quality - loss of direct control of quality - jeopardizes employee loyalty - jeopardizes employee loyalty - exposure to data security and customer privacy - exposure to data security and customer privacy - dependence on one supplier compromises future - dependence on one supplier compromises future negotiation leveragenegotiation leverage - additional coordination expense and delays - additional coordination expense and delays - atrophy of in-house capability to perform service - atrophy of in-house capability to perform service

Outsourcing ProcessOutsourcing Process

Need Identification

Problem Definition"Do-versus-Buy" AnalysisInvolve Interested PartiesSpecification Development

Information Search

ReferencesPersonal ContactRecommendationsTrade Directory

Vendor Selection

ExperienceReputationReferences

CostLocationSize

Performance Evaluation

Identify EvaluatorQuality of WorkCommunication

Meet DeadlinesFlexibilityDependability

Taxonomy for Outsourcing Taxonomy for Outsourcing Business ServicesBusiness 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 ConsiderationsOutsourcing 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 ConsiderationsOutsourcing 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 ConsiderationsOutsourcing 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

The bull-whip effectThe bull-whip effect

Variations in demand are amplified as one Variations in demand are amplified as one moves upstream in the supply chain moves upstream in the supply chain (further from the customer)(further from the customer)

Small uncertainty at one end can lead to Small uncertainty at one end can lead to large uncertainty at the other end of a large uncertainty at the other end of a supply chainsupply chain

Good method to nullify is based on Good method to nullify is based on demand-driven forecasting where all demand-driven forecasting where all information is shared through supply chaininformation is shared through supply chain

Managing Facilitating Managing Facilitating GoodsGoods

Factory Wholesaler Distributor Retailer Customer

Replenishment order

Replenishment order

Replenishment order

Customer order

Production Delay

WholesalerInventory

Shipping Delay

Shipping Delay

DistributorInventory

RetailerInventory

Item Withdrawn

Role of Inventory in ServicesRole of Inventory in Services

Decoupling inventoriesDecoupling inventories Seasonal inventoriesSeasonal inventories Speculative inventoriesSpeculative inventories Cyclical inventoriesCyclical inventories In-transit inventoriesIn-transit inventories Safety stocksSafety stocks

Considerations in Inventory SystemsConsiderations in Inventory Systems

Type of customer demandType of customer demand

Planning time horizon Planning time horizon

Replenishment lead timeReplenishment lead time

Constraints and relevant costsConstraints and relevant costs

Relevant Inventory CostsRelevant Inventory Costs

Ordering costsOrdering costs

Receiving and inspections costsReceiving and inspections costs

Holding or carrying costsHolding or carrying costs

Shortage costsShortage costs

Inventory Management Inventory Management QuestionsQuestions

What should be the What should be the order quantity (Q)order quantity (Q)?? When should an order be placed, called a When should an order be placed, called a

reorder point (ROPreorder point (ROP)?)? How much How much safety stock (SS) safety stock (SS) should be should be

maintained?maintained?

Inventory ModelsInventory Models

Economic Order Quantity (EOQ)Economic Order Quantity (EOQ) Special Inventory Models Special Inventory Models

With Quantity DiscountsWith Quantity DiscountsPlanned ShortagesPlanned Shortages

Demand Uncertainty - Safety StocksDemand Uncertainty - Safety Stocks Inventory Control SystemsInventory Control Systems

Continuous-Review (Q,r)Continuous-Review (Q,r)Periodic-Review (order-up-to)Periodic-Review (order-up-to)

Single Period Inventory Model Single Period Inventory Model

Economic Order QuantityEconomic Order Quantity

Consider a process that uses raw materialConsider 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

1.1. When do you place an order?When do you place an order?

2.2. How big should the batch be?How big should the batch be?

Inventory Levels For EOQ Inventory Levels For EOQ ModelModel

0

Un

its o

n H

an

d

Q

Q

D

Time

Annual Costs For EOQ ModelAnnual Costs For EOQ Model

0100200300400500600700800900

Order Quantity, Q

An

nu

al C

ost

, $

Holding CostOrdering CostTotal Cost

EOQ FormulaEOQ Formula

NotationNotationD = demand in units per yearD = demand in units per yearH = holding cost in dollars/unit/yearH = holding cost in dollars/unit/yearS = cost of placing an order in dollarsS = cost of placing an order in dollarsQ = order quantity in unitsQ = order quantity in units

Total Annual Cost for Purchase LotsTotal Annual Cost for Purchase Lots

EOQEOQ TCp S D Q H Q ( / ) ( / )2

EOQDS

H

2

Economic Order QuantityEconomic Order Quantity

Variations:Variations: Lead-time from order to arrival of batchLead-time from order to arrival of batch Uncertain/varying demandUncertain/varying demand Option to back-orderOption to back-order

Annual Costs for Quantity Annual Costs for Quantity Discount ModelDiscount Model

0 100 200 300 400 500 600 700

22,000

21000

20000

2000

1000

C = $20.00 C = $19.50 C = $18.75

Order quantity, Q

An

nua

l Co

st, $

Inventory Levels For Planned Inventory Levels For Planned Shortages ModelShortages Model

Q

Q-K

0

-KT1 T2

TIME

T

Formulas for Special ModelsFormulas for Special Models Quantity Discount Total Cost ModelQuantity Discount Total Cost Model

Model with Planned ShortagesModel with Planned Shortages

TC CD S D Q I CQqd ( / ) ( / )2

TC SD

QH

Q K

QB

K

Qb

( )2 2

2 2

QDS

H

H B

B*

2

K QH

H B* *

Values for Q* and K* as AValues for Q* and K* as AFunction of Backorder CostFunction of Backorder Cost

B Q* K* Inventory Levels

B

0 B

B 0

2DS

H

2DS

H

H B

B

undefined

QH

H B*

Q*

00

0

0

Demand During Lead Time Demand During Lead Time ExampleExample

++ + =

u=3

15.

u=3 u=3 u=3

15. 15.

L 3

dL

12 ROP

s s

Four Days Lead Time Demand During Lead time

15.

Safety Stock (SS)Safety Stock (SS)

Demand During Lead Time (LT) has Normal Demand During Lead Time (LT) has Normal Distribution with Distribution with

SS with r% service levelSS with r% service level

Reorder PointReorder Point

Mean d LTL( ) ( )Std Dev LTL. .( )

SS z LTr

ROP SS dL

Continuous Review System Continuous Review System (Q,r)(Q,r)

Average lead time usage, dL

Reorder point, ROP

Safety stock, SS

Inventory on hand

Ord

er q

uant

ity, E

OQ

EOQ

EOQ

d1 d2

d3

Amount used during first lead time

First leadtime, LT1

Order 1 placed

LT2 LT3

Order 2 placed Order 3 placed

Shipment 1 received Shipment 2 received Shipment 3 received

Time

Periodic Review SystemPeriodic Review System(order-up-to)(order-up-to)

RP RP RP

Review period

First order quantity, Q1

d1

Q2Q3

d2

d3

Target inventory level, TIL

Amount used duringfirst lead time

Safety stock, SS First lead time, LT1 LT2 LT3

Order 1 placed Order 2 placed Order 3 placed

Shipment 1 received Shipment 2 received Shipment 3 received

Time

Inventory on Hand

Inventory Control SystemsInventory Control Systems

Continuous Review SystemContinuous Review System

Periodic Review SystemPeriodic Review System

EOQDS

HROP SS LT

SS z LTr

2

RP EOQ

TIL SS RP LT

SS z RP LTr

/

( )

0102030405060708090

100110

Percentage of inventory item s (SKUs)

Perc

enta

ge o

f dol

lar

volu

me

ABC Classification of Inventory ABC Classification of Inventory ItemsItems

A B C

Inventory Items Listed in Inventory Items Listed in Descending Order of Dollar VolumeDescending Order of Dollar Volume

Monthly Percent of Unit cost Sales Dollar Dollar Percent of Inventory Item ($) (units) Volume ($) Volume SKUs Class

Computers 3000 50 150,000 74 20 AEntertainment center 2500 30 75,000

Television sets 400 60 24,000Refrigerators 1000 15 15,000 16 30 BMonitors 200 50 10,000

Stereos 150 60 9,000Cameras 200 40 8,000Software 50 100 5,000 10 50 CComputer disks 5 1000 5,000CDs 20 200 4,000

Totals 305,000 100 100

Single Period Inventory ModelSingle Period Inventory ModelNewsvendor Problem ExampleNewsvendor Problem Example

D = newspapers demandedD = newspapers demanded

p(D) = probability of demandp(D) = probability of demand

Q = newspapers stockedQ = newspapers stocked

P = selling price of newspaper, $10P = selling price of newspaper, $10

C = cost of newspaper, $4C = cost of newspaper, $4

S = salvage value of newspaper, $2S = salvage value of newspaper, $2

CCuu = unit contribution: P-C = $6 = unit contribution: P-C = $6

CCoo = unit loss: C-S = $2 = unit loss: C-S = $2

Single Period Inventory Model Single Period Inventory Model Expected Value AnalysisExpected Value Analysis

Stock Qp(D) D 6 7 8 9 10

.028 2 4 2 0 -2 -4

.055 3 12 10 8 6 4

.083 4 20 18 16 14 12

.111 5 28 26 24 22 20

.139 6 36 34 32 30 28

.167 7 36 42 40 38 36

.139 8 36 42 48 46 44

.111 9 36 42 48 54 52

.083 10 36 42 48 54 60

.055 11 36 42 48 54 60

.028 12 36 42 48 54 60

Expected Profit $31.54 $34.43 $35.77 $35.99 $35.33

Single Period Inventory Model Single Period Inventory Model Incremental AnalysisIncremental Analysis

E (revenue on last sale) E (loss on last sale)

P ( revenue) (unit revenue) P (loss) (unit loss)

P D Q C P D Q Cu o( ) ( )

1 P D Q C P D Q Cu o( ) ( )

P D QC

C Cu

u o

( )

(Critical Fractile)

where: Cu = unit contribution from newspaper sale ( opportunity cost of underestimating demand) Co = unit loss from not selling newspaper (cost of overestimating demand) D = demand Q = newspaper stocked

Critical fractile for the Critical fractile for the newsvendor problemnewsvendor problem

0 2 4 6 8 10 12 14

New spaper dem and, Q

Prob

abili

tyP(D<Q)(Co applies)

P(D>Q)(Cu applies)

0.722

Retail Discounting ModelRetail Discounting Model

S = current selling priceS = current selling price D = discount priceD = discount price P = profit margin on cost (% markup as decimal)P = profit margin on cost (% markup as decimal) Y = average number of years to sell entire stock of “dogs” at Y = average number of years to sell entire stock of “dogs” at

current price (total years to clear stock divided by 2)current price (total years to clear stock divided by 2) N = inventory turns (number of times stock turns in one year)N = inventory turns (number of times stock turns in one year)

Loss per item = Gain from revenueS – D = D(PNY)

)1( PNY

SD

Growth and Global Growth and Global ExpansionExpansion

Expansion StrategiesExpansion 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

FranchisingFranchising Benefits to the Franchisee

Management TrainingBrand NameNational AdvertisingAcquisition of Proven BusinessEconomics of Scale

Issues for the FranchisorFranchisee AutonomyFranchise ContractConflict Resolution

Generic International StrategiesGeneric International Strategies

 

TransnationalStrategy

GlobalStrategy

Multi-domesticStrategy

NoInternational

Strategy

Low High

Force Towards Local Responsiveness

Force Towards GlobalIntegration

High

Low

 

Multinational DevelopmentMultinational 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 International Strategic Service VisionVision

 

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

Goodwill Industries International

1. Who are Goodwill’s customers and how have their demographics changed over time?

2. How should the introduction of for-profit thrifts affect Goodwill’s decisions about the role of customer service?

3. How can Goodwill differentiate itself from the competition?

Goodwill Industries International Goodwill Industries International Sources of RevenueSources of Revenue

65%

15%

6%

5%4%5%

Donated Goods

TemporaryServices

SubcontractServices

Public Support

Grants

Miscellaneous

LittlefieldLittlefield

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

remaining)remaining) ManageManage

Contract termsContract terms MachinesMachines Queueing ruleQueueing rule Order quantities for suppliesOrder quantities for supplies

Littlefield LabLittlefield Lab

Maximum one page per team:Maximum one page per team: Review your strategy for the service gameReview 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 timeSuggest what you would do different next time

Due in class next weekDue in class next week