SERVICE OPERATIONS MANAGEMENT -
SERVICE SUPPLY RELATIONSHIPS
STRUCTURE
• Supply Chain Management
• Service Supply Relationships
• Managing Service Relationships
• Professional Service Firms
• Outsourcing Services
Supply Chain Management
• A supply chain involves parties that are involved directly or
indirectly in fulfilling a customer’s request. The integral part
of a supply chain is indeed the customer. Earning profits
along with customer satisfaction is the primary objective of
the supply chain
• A supply chain is a network of facilities and distribution
options that performs the functions of procurement of
materials, transformation of these materials into
intermediate and finished products, and the distribution of
these finished products to customers.
• The supply chain thus begins with the customer’s order and
ends with the satisfied customer having paid for the
purchase made
TYPICAL STAGES OF A SUPPLY CHAIN
The supply chain has typical stages that are:
a) Customers
b) Retailers
c) Wholesalers / Distributors
d) Manufacturers
manufactu
distributor
Wholesale
customer
e) Suppliers (Raw material)
supplier
retailer
rer
r/
An example of Supply Chain
Customer to
3rd party
Reliance for
distribution Reliance Mall
Real Juice Packaged
center
Juice
Pulp Supplier Tetra pack Other food
ingredients
Timber
Paper Industry
Fruit Supplier
manufacturer
Bleach
manufacturer
A SUPPLY CHAIN
supplie
Supply Chain System
r
Distributo
Custom
Retailer
Depot/
supplie
manufacture
er
r
r
Raw
WIP FG stock FG stock FG stock
supplie
Material
r
stock
INVENTORIES
Scope of Typical supply Chain
Company
Suppliers Customers
supplier’s Eend
supplier customer
Procure Convert/Value add Distribute
Different Types of Typical Supply Chains
• 3 typical type of Supply Chains
Wholesaler
Manufacture Retailer Custom
r er
Manufacturer Retailer Customer
Manufacturer Customer
Supply Chain Network/WEB showing stages
Distributor
Supplier 1 Manufacturer 1 Retailer X Customer M
A
Manufacturer 2 Distributor Retailer Y Customer N
Supplier 2
B
Manufacturer 3 Distributor Retailer Z Customer P
Supplier 3
C
Flows in a supply Chain
• Supply chain is a dynamic process involving
the transfer of goods, information and funds
which are its most important attributes
• 3 types of flows
Information
Product
Funds
Supply Chain Value
• The main objective of a supply chain is to maximize the overall value
generated
• The value that a supply chain generates is the difference between the
worth of the final product to the customer and the effort that the supply
chain expends in fulfilling the customer’s request. This can be referred to
as the “Supply Chain Profitability.”
• Supply Chain Profitability = Revenue generated from the Customer - Cost
across the Supply Chain.
Supply Chain Management
Concerns for environmental sustainability have awakened manufacturers to the need
for product-life-cycle management. Thus, at end-of-life, we are seeing an increase in
the number of products designed to be recycled or remanufactured rather than
disposed of in a landfill.
For example, spent products such as old printer cartridges are remanufactured and
aluminum cans recycled because of their inherent value. Several governments in
Europe require automobiles to be designed for ease in recycling component materials.
Supply Chain Management
• Information flow example like , automobile
manufacturers often discover design flaws during
after sales service.
• Point-of-sale data at the retailer can be aggregated
at the distributor level to alert manufacturing in
planning production schedules that will avoid either
inventory buildup or lost sales.
• Networkk Model
Supply Chain Management
Managing Uncertainity
• Managing a supply chain would be straightforward except for the
uncertainty arising from three sources: supplier delivery
performance, manufacturing reliability, and customer demand.
Inventory is used as insurance in this uncertain world
• Any number of events can cause variability in supplier on-time
deliveries: storms delaying a shipment, quality problems, machine
failure, or late arrival of raw material supply.
• Over time, a distribution of delivery performance punctuality can be
established for each supplier and used in purchasing negotiations,
because the more reliable a supplier is, the smaller the safety stock
of materials required to protect the downstream operation.
Service Supply Relationships
• Customer-Supplier Duality
– Supply chain found in manufactured goods that depicts a
physical object passed from one entity to another
– The nature of services creates a customer-supplier duality
that results in service supply relationships
– Services can be considered as acting on people’s
• minds (e.g., education, entertainment, religion)
• bodies (e.g., transportation, lodging, health care)
• belongings (e.g., auto repair, dry cleaning, banking) and
• information (e.g., tax preparation, insurance, legal
defense).
Service Supply Relationships
• Thus, all services act on something provided by the
customer.
• So customers are also acting as suppliers in the
service exchange, that is, the customer-supplier
duality
• The customer-supplier duality emerges as
bidirectional relationships between the service
delivery firm, its supplier, and the customer.
The customer-supplier duality
Supplier
Service Design
Service
Provider Customer
Single-Level Bidirectional Service Supply
Relationships
Service Category Customer-Supplier > Input/Output > Service Provider
MINDS Student > Mind/Knowledge Professor
>
BODIES Patient > Tooth/Filling > Dentist
BELONGINGS Investor > Money/Interest > Bank
INFORMATION Client > Documents/1040 Tax preparer
>
Service Supply Relationships Are Hubs,
Not Chains
Two-Level Bidirectional Service Supply Relationships
Service Customer Input/Output Service Input/Output Provider’s
Category -Supplier Provider Supplier
MINDS Patient Disturbed/ > Therapist > Prescription/ Pharmacy
Treated Drugs >
BODIES Patient > Physician > Sample/Test Lab
Blood/Diagnosis result >
>
BELONGINGS Driver > Car/Repaired > Garage > Engine/Rebuilt Machine shop
>
INFORMATIO Home > Property/Loan Mortgage > Location/Clear Title search
N buyer > company title >
Supply Chain Hub and Spoke Model
Service Capacity Is Analogous to Inventory
• In care of Manufacturing safety Inventory is kept to take
case of demand uncertainity and also utilizing production
capacity
• For services, the customer supplied inputs are generally
random occurrences with expectations of immediate
processing.
• For example, visitors to a fast-food restaurant seldom will
wait more than a few minutes for service.
• Because services cannot be inventoried, excess capacity
must be held in reserve to accommodate expectations.
• Alternatively, when possible, reservations systems can be
used to schedule the arrival of customers to match capacity.
Customer Supplied Inputs Can Vary in Quality
• Customer inputs can be incomplete (e.g., tax
documents), unprepared (e.g., students), or have
unrealistic expectations (e.g., cancer patient)
• Complexity of customer hair for a barber ,blood
glucose level in patient , orginal skin in a beauty
parlour , condition of car for repair etc
• This lack of consistency in the quality of customer-
supplied inputs represents a challenge for the
service provider to deliver on promises when inputs
are questionable
Managing Service Relationships
• Cost of health care has been rising
• To lower costs Home health care is one approach to managing the cost
of care by treating patients in their home (Savings on hospitalization )
• Service providers (i.e., nurses, dietitians, and therapists) are mobile
servers because they travel to the customer
• Value in service supply relationship management arises from three
sources:
– Bidirectional optimization
– management of productive capacity and
– management of perishability
Managing Service Relationships- Bidirectional
Optimization
• Bidirectional optimization implies the possibility of doing what is
best from the customer’s perspective while doing the best for the
service enterprise
• Pateint is active participant in service
• Direct customer involvement facilitates bidirectional optimization, a
simultaneous optimization of both supply and demand for the service.
This translates into providing a highly individualized service for the
patient that is very cost effective for the organization.
• For mobile service, a “time window” is reserved for each customer to
be available for a service worker to perform the requested service.
Customers see generous time windows as a major inconvenience that
wastes their time for the benefit of an inefficient service provider.
Managing Service Relationships-
Productive Capacity
• A primary consideration of productive capacity for mobile workers is
the amount of time spent between jobs, which correlates with the
distance between jobs.
• Because value is created predominantly during the time that the
mobile worker is at the customer site, time spent traveling between
customer sites is lost productive capacity.
• This creates an opportunity to increase greatly the productive capacity
of the workforce by better management of the service relationship
resulting in more cumulative time for workers to be with customers.
• Strategies to improve productive capacity of the service worker
include
– Transfer
– replacement, and
– embellishment.
Managing Service Relationships-
Productive Capacity
• Transfer is an approach to make knowledge available to customers so
that value can be transferred with very low cost. One example is a
Web-based, frequently-asked-questions (FAQ) database.
• Replacement is a strategy of substituting technology for human
resources. Blood pressure measurement is one example. For patients
needing blood pressure measurements three times daily, an automated
measurement system might be substituted for a nurse visit.
• Embellishment of customer skills to enable self-service is a third
strategy to enhance the productive capacity of the home health care
system. Teaching a patient or family member to change a surgical
dressing is appropriate in some circumstances.
Managing Service Relationships- Perishability
• Management of perishability is the approach used in service chain
management to minimize the negative impact of idle time on the productive
capacity of the distributed service workforce.
• The productive capacity of a service worker is limited to the time he or she
is at the customer site with the right tools and skills and knowledge of the
customer’s requirements and preferences.
• The first mechanism is a time allocation system that offers time windows to
customers based on “best use” of workers. Usage of dynamic schedule
optimization software, schedules are constructed and revised up until the
very last possible moment before dispatch of a worker to a job
• Second is Service systems with mobile data communications, however, may
produce “real-time” schedules so that a worker learns of the next assignment
only after completing the current job. The dynamic allocation of jobs among
workers minimizes idle (i.e., perishable) time.
• Managing perishability also involves the process of training, refining, and
extending skills and capabilities of workers.
Professional Service Firms
• Examples of professional service providers include
– Architects
– lawyers
– Consultants
– accountants, and
– contracting engineers
– Financial Consultants
– Share Market Consultants
– Human Resource Consultants
Attributes of Professional Service
• Attributes of Professional Service : Professional services
describes a service delivered by knowledge workers and has
four distinguishing features
1. A high level of specialization and customization
2. Frequency and importance of face-to-face interactions
with customers/clients ,require special attention
3. Professional services are delivered by highly educated
professional people who represent the assets of the firm
4. Commands a body of knowledge that operates on four
levels of increasing importance
Attributes of Professional Service
4 .Commands a body of knowledge that operates on
four levels of increasing importance
– Cognitive knowledge (know-what) is the basic mastery of a discipline
achieved through extensive training and certification.Necessary but not
sufficient
– Advanced skills (know-how) translate “book learning” into effective
execution
– Systems understanding (know-why) is deep knowledge of the web of
cause-and-effect relationships underlying the discipline. Professionals
with know-why can anticipate subtle interactions and unintended
consequences
– Self-motivated creativity (care-why) consists of will, motivation, and
adaptability for success. Without self-motivated creativity, intellectual
leaders can lose their knowledge advantage through complacency.
Operational Characteristics
• Organized as partnerships instead of corporations
• The partners have equity in the firm
• The day-to-day work of the firm is performed by a staff of junior
professionals on salary.
• The economic success of a partnership is measured by profit-per-partner,
which is driven by three factors:
– margin,
– productivity, and
– Leverage Profit-per-partner =
• Margin = ( Profit )/Fees Margin * Productivity *
• Productivity = ( Fees/Staff ) Leverage
• Leverage = (Staff /Partners)
MARGIN,PRODUCTIVITY AND LEVERAGE
• Margins : Margin is equal to the percent of profit for each dollar of fees
charged, (i.e., margin is equal to fees minus costs as a ratio of fees)
• Productivity : Productivity can be further broken down into two factors
that affect the short- and long term success of the firm, realized fee-per-hour
(value) and utilization of professional staff as shown below:
Productivity = ( Fees / Staff ) – ( Fees/Hours) * (Hours/Staff)
• Leverage :Leverage is the ratio of the number of professional staff members
to the number of partners, an essential factor in determining the profit-per-
partner. Partners get profit from two sources: the high rates a senior staff
member charges for services, and, more important, the ability to hire
professional staff and bill them to customers at multiples of their salary. A
successful firm will maximize its leverage while still maintaining the ability to
complete projects successfully
PROFITABILITY TACTICS
• To improve profitability we need to improve
– Margins
– Productivity
– Leverage
• Various tactics can be adapted to increase
productivity depending upon the kind of service
providing company
TACTIC CATEGORY
Lower Fixed (Overhead) Costs Margin
Improve cash cycle
Reduce office space and equipment
Reduce administrative and support staff
Raise Prices and Differentiate Productivity
Specialize, innovate, add more value
Target higher value work
Invest in training
Invest in higher value services
Address Underperforming Projects Productivity
Drop unprofitable services
Drop unprofitable customers
Increase Volume Productivity
Increase utilization
Lower Variable Costs Leverage
Improve engagement management
Increase leverage of professionals
Increase the use of paraprofessionals
Outsourcing Services
• Outsourcing can be viewed at two levels –
– outsourcing of products and
– outsourcing of processes
• It can help a firm save substantially.
• It has emerged as a strategic necessity in an era when
opportunities offered by “low-cost” countries, such as China,
India or Mexico, are abound
• By allowing the companies to focus on their core
competencies, outsourcing allows faster turnaround of
resources thereby improving overall health of the economy.
THIRD PARTY LOGISTICS
• 3PL : A third-party logistics provider (abbreviated 3PL) is a
firm that provides outsourced or “third party” logistics
services to companies for part or sometimes all of their supply
chain management function
• It is important to differentiate the 3PL from the:
• 1PL, which are the shipper or the consignee
• 2PL, which are actual carriers
• 4PL, which are consulting firms
Reference : Warehouse Anywhere
Most Frequently Used 3PL services
Warehousing Outbound Freight Bill Inbound
Transportation Payment Transportation
Freight /Shipment Cross-Docking Product Product
consolidation Packaging/Labeling Returns/Repairs
Inventory Traffic Logistics Order Fulfillment
Management Management Information
Services
Order Entry / Order Customer Service Fleet Management Rate Negotiations
Processing Operation
Carrier Selection
THIRD PARTY LOGISTICS
• Smarter companies are much more likely to outsource parts of these
functions (the parts they are not good at or cannot manage
profitably) rather than the whole.
• Another change today is that with larger companies, with worldwide
supply sources and markets, outsourcing some of the logistics
functions, they are much more likely to demand a single vendor to
support their massive operations on a global basis
• Services Offered by Third-Party Providers
– Basic Service Providers: Physical distribution services such as warehousing,
order processing, order picking, and transportation
– Value Added Service Providers: Basic along with value added services such as
specialised pick/pack operations, cross docking, case marking and labelling,
order consolidation, EDI, management reporting
– Logistics Integrators: The third party provides basic and value added services
along with ensuring the seamless flow of products and logistics information
among themselves, their clients, and the customers.
3 PL Vs 4PL Example
• 3 PL or 3rd Party logistics are only partner Companies that take care of
the logistics and supply chain services of the main company.
• For e.g. If my e retailing company deals in producing and dispatching
packaged food /snacks in various cities.
• If I outsource my entire dispatching to a courier company like TCFI or
GATI or FedEx. Then these will be 3 PL for my business.
• Responsibility of this 3 PL is just to dispatch/shipping .
• My packaged food/snacks company also buys food raw materials like
oil ,besan ,salt etc ,stocks in warehouse ,manufactures the snacks in
automated line ,stock final snacks in bulk ,then packs in small ,bigger
packs .Also other related processes like price stamps etc.
3 PL Vs 4PL Example con..
• I am known for my recipes and new products in market.
• My core competence therefore is to develop new
recipes ,making them etc
• If I decide to do only these core activities and decide to sub
contract the supply chain to another company who will help
me in sourcing ,managing ,inventory ,finished good
replenishments ,my facility locations be and other supply
chain related problems. This another company would be 4 PL.
• 4 PL will therefore provide end to end supply chain solution
including managing 3PL .
• 3PL will only handle shipping ,warehousing etc.
BENEFITS OF OUTSOURCING
• Improve company focus on core business
• Access to world-class capabilities and new technology
• Accelerate reengineering benefits
• Share (pool) risks The risks associated with the capital investments an
organisation makes.
• Free-up resources
• Cash infusion
• Reduce and control operating costs
• Resources not available internally
• Eliminate labour problems
• Drive Flexibility and speed
RISKS IN OUTSOURCING
• Coordination costs
• Loss of internal logistics management
capability
• Reduced contact with final customer
• Biased choices of service providers
• Loss of voice in public policy issues
• Leakage of sensitive data and information
