Chapter 09 - Service Supply Relationships

CHAPTER 9
SERVICE SUPPLY RELATIONSHIPS

TEACHING NOTE
The physical supply chain for goods is receiving considerable attention by operations managers
because taking a total systems view of the entire process has allowed firms to realize efficiencies
beyond the factory walls. We explore the concept of a customer-supplier duality that leads to a
view that services are better understood as relationships instead of a chain. Sources of value in the
service relationship include bi-directional optimization, management of productive capacity, and
management of perishability. Social media such as Facebook and Twitter are recognized as
elements in service strategy. Students will identify with the professional service firm material
because many aspire to positions in accounting or consulting firms. The chapter concludes with a
discussion of the issues associated with service outsourcing.

SUPPLEMENTARY MATERIALS
Case: Laura Ashley and FedEx Strategic Alliance (HBS 9-693-050)
Laura Ashley, a global clothing and furnishing retailer, is faced with a disastrous distribution
system resulting in simultaneous high inventories and frequent stock outs. Turning to FedEx's
Business Logistics Services, a strategic alliance is formed that results in FedEx performing the
entire distribution function for Laura Ashley.
Case: Otis Elevator: Managing the Service Force (HBS N9-191-213)
The high margin service business of Otis Elevator is under attack from small local providers. Poor
communications have resulted in nonproductive travel and preventive maintenance is being
shortchanged because of unscheduled callbacks. Emerging communications technologies and
scheduling software provide an opportunity to improve the productivity of the field force
significantly.

LECTURE OUTLINE
1. Supply Chain Management

Network model (Figure 9.1)

Managing uncertainty (Table 9.1)

2. Service Supply Relationships

Customer-supplier duality (Figure 9.2 and Table 9.2)

Service supply relationships are hubs, not chains (Table 9.3)

Service capacity is analogous to inventory

Customer supplied inputs can vary in quality

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3. Managing Service Relationships

Bidirectional Optimization (Table 9.4)

Productive Capacity

Perishability

4. Social Media in Services

Social Media as a Competitive Strategy

Social Media and Customer Convenience

5. Professional Service Firms

Attributes of Professional Services

Service Consulting (Figure 9.3)

Operational Characteristics (Table 9.5)

6. Outsourcing Services

Benefits and Risks of Outsourcing Services (Figure 9.4)

Classification of business services (Table 9.6)

Managerial Considerations with Service Outsourcing (Table 9.7)

TOPICS FOR DISCUSSION

1. How can effective goods supply chain management support environmental sustainability?
Sustainability is defined as the ability to meet present needs without compromising those of future
generations (http://www.wikipedia.com). With Figure 9.1 in mind, one can see opportunities for
environmental sustainability. For example, the design of products for ease in remanufacturing will
avoid disposal and waste of resources. Finally, demand transparency by manufacturers will avoid
the waste of overproduction.
2. Explain why the goods analogy of a supply chain is inappropriate for services.
For physical goods the analogy of a chain ideally captures the linear hand-off of inventory between
players in the distribution of product from supplier, to manufacturer, to distributor, to retailer, to the
final consumer. The chain can be rather short for a Dell Computer that sells direct but substantially
longer for an automobile manufacturer selling through independent dealers. The simultaneous
production and consumption nature of services does not lend itself to the chain analogy, instead, the
service encounter is the essence of the service experience. The service provider can in turn have
suppliers but the visual analogy is a hub rather than chain.

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3. Discuss the implications of service outsourcing for employees, stockholders, customers, and host-
country economy when a firm outsources a call center overseas.
Employees of the firm will lose their jobs resulting in personal hardships, a loss of a tax base for
the local economy, and unemployment expenses for the government.
Stockholders probably will see some initial improvement in profits owing to cost savings but this
will dissipate when competition follows the outsourcing practice.
Customers might be unaware of the change but could be put off if the outsourced call center is less
responsive to customer needs. For example, Dell Computer gave up its overseas call center for its
high dollar business clients following complaints of poor service.
The host country economy and its citizens should benefit from the creation of new jobs.

4. How has social media affected the growth of the service industry in the past five years?

We can see the recent explosive growth of social media by looking at the popularity of Facebook,
LinkedIn, and other such groups. Their growth in membership has been exponential. The blending
of technology and social interaction results in numerous service innovations where firms try to
outperform each other, especially in the service industry where innovations typically are not
patentable.

5. What features of social media have service firms leveraged in developing their competitive
strategies?

Service firms have leveraged the following features of social media in developing their competitive
strategies:
 Outreach: social media expands widely through multiple points of production and
consumption.
 Immediacy: news travels instantaneously in the social media and generates immediate
reactions.
 Access: generally, social media venues are available readily to the public at little or no
cost.
 Easy to use: Web sites such as Facebook and LinkedIn need little or no specialized training
to use.
 Easy to change: social media Web sites can be altered by quick comments and editing.

6. Identify areas within a few selected service industries (e.g., health care and hospitality) that can
benefit from external consultants.

The health care industry engages external consultants mostly for productivity improvement and
cost cutting where necessary expertise is not available within the firm. However, there are
examples, such as Mayo Clinic, where a very strong internal consulting group is available for most
projects. With the increasing use of electronic media and information technology in medical
practices, IT consultancy is gaining ground in health care. Generally, niche expertise in external
consulting, and a demonstrated internal track record need to be balanced against current cost and
potential return on investment in measures such as patient safety and staff morale.

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In the hospitality industry such as hotels, restaurant and entertainment, external consultants
are engaged for strategic and operational goals. Human relations development is an important
strategic and operational goal. So are quality improvement, yield management, and facility/layout
planning. IT expertise might, also, be necessary for control systems, dispatching, and office
automation. Overall, high customer satisfaction that leads to increased loyalty is the primary
objective employing outside consultants.

7. How would you train yourself to be a successful consultant in the service sector?

To be successful in any sector, service or manufacturing, one needs to possess good analytical
skills. Such skills can be applied at different stages of the consulting cycle, such as proposal
development, problem analysis, solution development, performance measurement, change
implementation, and report generation. The question of whether these skills can be developed
better in a classroom or in on-the-job training is debatable, but certainly, a combination of a good
business school curriculum and internships in outside organizations will serve anyone well. Other
important factors to success in the service industry are to develop good “people” skills and an
ability to communicate effectively.

8. Identify activities that compare Walmart’s vertical integration efforts with maintaining an arm’s-
length relationship with suppliers.

Walmart is a good example of a balance between vertical integration and maintaining an arm’s-
length relationship with suppliers. In its coordination efforts with its suppliers, Wal-Mart developed
a standardized interface between tasks where requisite information is highly codified on price,
volume, and arm’s-length delivery schedules. On the other hand, Walmart developed vertical
integration for high strategic control, where significant investment is made in highly durable
relationship-specific assets that include co-location of specialized facilities, investment in brand
equity, and long-term investments in some R&D programs. Finally, Walmart has developed
appropriate intellectual property protection with its suppliers for difficult-to-imitate technology.

INTERACTIVE CLASS EXERCISE

The class divides into small groups and members come up with examples of multi-level bi-directional
service relationships (i.e., service supplier relationships with three or more levels). Be prepared to
argue why such service relationships are so rare.

Unlike in manufacturing where a physical item can be inventoried without feelings, services
generally have humans as participants who have little tolerance for being passed from one service
operation to another. The exceptions are services that are directed at a customers belongings (e.g.,
repairs) or information-based (e.g., investments).

CASE: BOOMER CONSULTING

1. How does The Boomer Technology Circle illustrate the concept of the bidirectional service supply
relationship?
The Boomer Technology Circle is a clever application of bidirectional consulting that is cost
effective to deliver and rich in information transfer. Bringing clients with similar interests together
quarterly for a day and one-half conference maximizes the valuable time of L. Gary Boomer and

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enriches the participants’ experiences by sharing problems in small groups in self-led seminars.
Using Figure 9.5 as a guide, we can modify the first row to show The Boomer Technology Circle as
a single-level bidirectional service supply relationship:
Service Customer- >Input/ Service
Supplier
Category Output> Provider
Minds Client >Experience/Knowledge> L. Gary Boomer and
other circle clients

2. How has Boomer Consulting, Inc., made the client a coproducer in the service delivery process?
The Boomer Technology Circle is built on the concept of “round tables” where clients share
common concerns and solutions. In breakout sessions, five-to-seven participants share the most
pressing issues in their firm and the solutions they are pursuing with facilitation by BCI staff.
Presentations are participant-led with accountability promoted by a 90-day game plan and later
progress reports motivated by peer pressure.
3. How is the concept of “leverage” achieved by Boomer Consulting?
Leverage is achieved in several ways. First, the reputation of L. Gary Boomer as a recognized
leading authority on technology and firm management and being named by Accounting Times as one
of the 100 most influential people in accounting, gives credibility to Boomer Consulting. Second,
the positive word-of-mouth from existing Circle members about how they have built innovative and
profitable service delivery systems draws new clients to Boomer Consulting. Finally, leverage is
illustrated by the Boomer Technology Circles where clients come to Kansas City to hear the latest
developments in technology from L. Gary Boomer and are facilitated by the Boomer Consulting
staff in small group seminars.
4. Can the Boomer Technology Circles be applied to other industries? What are some of the risks in
pursuing this strategy?
The Boomer Technology Circles target a large market of small to medium CPA firms. Similar
markets that might benefit include independent and small restaurant or motel/hotel firms. An
independent consulting firm fashioned after Boomer could focus on one of these industries.
However, because franchising is common in these industries, the franchiser could perform the
Boomer function for their franchisees. The existence of McDonald’s University, for example,
suggests that such an approach would be easy to implement. For Boomer Consulting, the most
critical risk is the singular dependence on L. Gary Boomer, the founder and credible expert in the
field of technology. Additional experts need to be recruited and given the visibility with clients to
ensure the sustainability of the firm. Finally, imitators are a threat because the concept is very
transparent.

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CASE: EVOLUTION OF B2C E-COMMERCE IN JAPAN

1. What features of the 7-Eleven Japan distribution system illustrate the concept of the bidirectional
service supply relationship?

Figure 9.6 captures the central role 7-Eleven center plays in coordinating the customer order,
payment, and delivery to store for pickup. The customer’s input is via an Internet website with
output the delivery of the purchased item.
2. Does the 7-Eleven Japan distribution system exhibit scalability economies?
The ability to consolidate goods ordered by different customers and make delivery on established
routes to Konbinis exhibits scalability because each additional order represents negligible variable
costs of shipping and handling.
3. How does the 7-Eleven example of B2C E-commerce in Japan illustrate the impact of culture on
service system design?
Culture (i.e., desire to pay with cash), geography (i.e., population density speeds delivery), and
commuting (i.e., use of trains with access to convenience stores in stations) all had an effect on the
design.
4. Will the 7-Eleven “Konbini and Mobile” system be adopted in the United States?
The United States eventually might reach an equally high penetration of wireless devices and
acquire an abundant number of content providers and e-tailers that target mobile users. At one
time, it was hard to imagine, however, that people in the U.S. would spend at least one hour daily
looking at their cellular phones, a phenomenon that has been seen on commuter trains in Japan for a
long time. Perhaps the legacy effect of excellent landline telephone service in the United States
has delayed the rapid adoption of M-commerce as witnessed in other countries.
CASE: MORTGAGE SERVICE GAME1
The Mortgage Service Game is played under two main strategies: decentralized and new-
application-starts information strategy. In the decentralized strategy each stage operates
autonomously and makes its capacity decisions based on its own backlog. In the new-application-
starts information strategy each stage makes capacity decisions based on its own backlog and the
new applications rate. In other works, each stage gains more visibility by being able to observe
end-user demand in each time period.

In the experimental use of the game, each team of students manages only the survey stage in the
chain, leaving the computer to manage the remaining stages. Teams are assigned to an intermediate
stage in the supply chain in order to illustrate the dynamics resulting from information and capacity
adjustments lags. In order to mitigate the perception of the computer performing “black box”
functions, we provide students with the complete details about the operations of the game at all
stages. In fact, the only information the students were not given was how and when the demand
stream changed (i.e., teaching strategy used in the classic “beer game”).

The Mortgage Service Game is used to demonstrate two main points. The first point is to illustrate
the supply chain dynamics resulting from information and capacity adjustment lags. The second
point is to illustrate the impact of end-user demand information. Therefore, during the class, each
team performs two exercises with the Game: one is to manage capacity and backlogs at one of the

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stages (i.e., Credit Check, Appraisal, Survey, or Title Check) without new applications information
and the other is to manage the same stage with that information. The play instructions are
reviewed before the Game commences. Hence, the students are given complete information on
what they are to do and what the computer would do with respect to each exercise. The results
show that with the parameters used, rational decision making behavior will lead to improved
performance with new applications information. Both exercises can be conducted in one 75-minute
class period.

Graphical User Interface

“Target Lead Time” and “Capacity Adjustment” are displayed in the top left-hand corner of the
screen. Players cannot change these parameters. Just above are listed the four stations: Credit
Check, Appraise, Survey, and Title Check. The “Target Capacity” box allows players to control the
target capacity. The “Run” button advances each round. The “Summary Data” button opens a
window that provides summary data at the end of each game. Two tables appear below the “Status
Graphs.” The table on the left contains: Arrival Rate, Completions Rate, Backlog, and Capacity for
the stage under player management. The table on the right contains salary costs, backlog costs,
hiring and firing costs, and totals.

Game Instructions

The game is played with groups assuming the role of the survey company. The game is played
twice with some groups starting with no new- applications information scenario and the second
round with new applications information provided. Other groups play the scenarios in reverse
order beginning with new-application information provided. The target lead-time is two weeks (10
working days) and capacity adjustment time equals four weeks. For the computer-controlled
stages, the weight α on the new-application rate will be equal to zero when no new-applications
information is provided and 0.5 when new-applications information is provided. New-applications
will begin at 20 per day but then will change by an unspecified amount at an unspecified point in
time. Hence, there is no reason to anticipate the change or timing from the previous round. The
entire supply chain is in equilibrium with each stage beginning with a backlog of 200, capacity of
20 per day, and target capacity of 20 applications per day. Each game will be played for a period of
50 weeks.

Mathematical Relationships Embedded in Game

Mathematically, the structure for each processing stage (Credit Check, Survey, Appraisal, and Title
Search) of the mortgage service chain is:

Bi ,t 1  Bi ,t  ri  1,t  ri ,t (1)

ri ,t min(C i ,t , Bi ,t  ri  1,t ) (2)

where B(i,t), C(i,t), and r(i,t) refer respectively to the backlog, capacity, and completion rate at
stage i on day t. Because each employee has a productivity rate of one application per day, the
completion rate of applications at any stage is constrained to the minimum of the backlog plus any
inflow from the previous stage (if available work is the constraint) or the capacity.
At the beginning of each week, each stage (company) can change its target capacity by
deciding to hire or lay off employees. However, it takes time to advertise, interview, and hire
employees; so the rate of capacity change is given in Equation (3).

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1 *
C i ,t 1 C i ,t 
(C i ,t  C i ,t ) (3)

The target capacity C*(i,t) set by the player is restricted to be nonnegative. The capacity
adjustment time, τ, is set to one month or 20 business days. In essence, each day’s capacity will
close one twentieth of the remaining gap from its current value to its target in an exponentially
decreasing manner. Thus, capacity change is not achieved all at once but over several days. This
translates into an average lag for hiring (or firing employees) of 20 days. If the player makes
another change before the original adjustment is reached, the old target will be discarded, and
capacity will begin to adjust the following day from its current value advancing towards the new
target.
For stages operated by the computer, the target capacity decision will be made using
Equation (4) in the scenario when no new application information is available.

Bi ,t
C i*,t  if (t modulo 5) = 0 (4)

C i*,t C i*,t  1 otherwise

Thus, each week the target capacity for each stage will be set directly proportional to the stage’s
current backlog B(i,t) and inversely proportional to the nominal service delay time λ. For the
scenario when new-application-starts information is known, Equation (4) changes to:

Bi , t
C i*,t ro ,t  (1   ) , if (t modulo 5) = 0 (5)

C i*,t C i*,t  1 otherwise,

where 0<α<1.

Equation (5) has simply used the concept of exponential smoothing with parameter, α, to revise the
capacity gradually (see Chapter 17 for a discussion of exponential smoothing). The condition “if ( t
modulo 5) = 0” in Equation (4) and (5) guarantees that capacity is only reset once a week on
Fridays (i.e., because the day divided by 5 yields a zero). These computer equations are not meant
to be an optimal policy in any sense; however, it seems to reflect reasonably well how players
make capacity management decisions.

1 From Edward G. Anderson and Douglas J. Morrice, “A Simulation Game for Service-Oriented Supply
Chain Management: Does Information Sharing Help Managers with Service Capacity Decisions?” The
Journal of Production and Operations Management, vol. 9, no. 1, 2000, pp. 40-55.

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CHAPTER QUIZ QUESTIONS

True/False
1. In the physical goods supply chain, information moves to the left and material to the right.
(T)
2. Customer demand variability is the most difficult factor to determine in a goods supply
chain. (T)
3. In the past, the flow of goods in a physical supply chain was described as a pull system. (F)
4. Information moves in both directions in the service chain for mobile-workers. (T)
5. Knowledge management is a strategy to retain skilled workers. (F)
6. Bidirectional optimization could be considered an example of a win-win outcome. (T)
7. The service inventory-hedging strategy benefits the firm by directing skill-enhancing
activities into idle time slots. (T)
8. Service tangibility increases as the focus of the service moves from property to people to
process. (F)
9. Product postponement is the strategy of stocking a product in generic form for later
customization. (T)
10. The bullwhip effect is a phenomenon in the physical supply chain that describes the
inventory stocking levels at various stages. (F)
11. A good supply chain management strategy places a strong emphasis on promotional
pricing. (F)
12. Reactive forecasting was used for capacity planning before the implementation of physical
goods supply chain management. (T)
13. Conversion is a primary value component of service chain management. (F)
14. Customer-supplier duality acknowledges the customer inputs in a service relationship. (T)
15. A bank is an example of a service provider with a single-level bi-directional service supply
relationship. (T)
16. Transfer enhances productive capacity by enabling customer self-service. (F)
17. Need identification is the first step in the outsourcing process model. (T)
18. The flow of service is activated upon demand as a result of effective service chain
management. (T)
19. Outsourcing can provide access to the latest technology without investment. (T)
20. Outsourcing can expose a firm to data security and customer privacy issues. (T)

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21. The Walmart and Procter & Gamble experience illustrates the unintended consequences of
independent decision making in a goods supply chain. (T)
22. Profit-per-partner is the multiplication of “margin” and “productivity.” (F)
23. Outsourcing a service incurs transaction costs such as loss of employee loyalty. (F)

24. Social media blends technology and social interaction for the co-creation of value.
(T)
25. The link between payment histories and risky driving behavior is used to price
insurance policies. (T)
Multiple Choice
1. The physical goods supply chain contains all but one of the following elements:
a. competitor.*
b. distributor.
c. retailer.
d. customer.
2. The impact of the production element on physical goods supply chain management was _____
before and _____ after.
a. push , pull
b. inflexible, flexible*
c. vertical, virtual
d. multinational, global
3. Sources of value in service chain management include all but one of the following:
a. bidirectional optimization.
b. management of productive capacity.
c. management of mobile workers.*
d. management of perishability.

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4. Strategies to improve productive capacity include all but one of the following:
a. embellishment.
b. transfer.
c. replacement.
d. bidirectional optimization.*
5. The impact of pricing on service chain management was _____ before and _____ after.
a. high, low
b. passive, active
c. static, dynamic
d. fixed, variable*
6. All but one of the following is a reason for outsourcing services.
a. Avoids coordination expenses and delays*
b. Allows the firm to focus on its core competence.
c. Provides access to latest technology.
d. Leverages benefits from supplier economies of scale.
7. The two-way classification for the taxonomy for outsourcing business services contains six
cells. Which one of the following is not a descriptive title for one of the cells?
a. Facility support
b. Professional
c. Employee*
d. Facilitator

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8. When outsourcing facilitator services, which one of the following is not a consideration?
a. Knowledge of alternate vendors is important.
b. Involvement of end user in vendor identification.
c. Experience with particular industry is important.*
d. Detailed specification written by user.
9. Making knowledge available to customers at low cost is called:
a. embellishment.
b. transfer.*
c. replacement.
d. co-production.
10. The cell category titled "employee development" in the taxonomy for outsourcing business
services includes all but one of the following services:
a. Food service*
b. Training
c. Education
d. Medical care
11. Which of the following is not a source of uncertainty in managing a supply chain?
a. Supplier delivery performance
b. Manufacturing reliability
c. Customer demand
d. Quality control*
12. Removing the kitchen from Taco Bell outlets to a central location resulted in all of the
following benefits, except:
a. Reduction in waste
b. Consolidation of demand
c. Shorter customer wait times
d. Make-to-order customization*

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13. _______ is not part of the service chain concept.

a. Conversion
b. Distribution
c. Inventory management*
d. Knowledge management
14. Which of the following service providers likely would be involved in a single-level bi-
directional service supply relationship?
a. Pharmacy
b. Professor*
c. Garage
d. Mortgage company
15. All but one of the following is a managerial implication of bi-directional relationships:
a. Vendor selection based on reputation*
b. Service supply relationships are hubs
c. Service capacity analogous to inventory
d. Quality variation of customer inputs
16. The “employment support” category in the taxonomy for outsourcing business services falls
under _________ importance of service and __________ focus of service.
a. high, people
b. low, process
c. high, process
d. low, people*
17. Travel booking is a service that falls in the _________ category of outsourcing business
service.
a. facility support
b. employee development
c. facilitator*
d. professional

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18. All but one of the following is a caution when considering outsourcing services:
a. Loss of direct control over quality.
b. Jeopardize employee loyalty because of job-loss fears.
c. Costs might increase.*
d. In-house capability to perform service will atrophy.
19. All but one of the following depicts the impact of service chain management:
a. Proactive demand management.
b. Variable pricing.
c. Real-time tracking.
d. Pull system for flow of information.*
20. Which one of the following depicts the impact of goods supply chain management?
a. EDLP*everyday low price
b. Functional silos
c. Reactive forecasting
d. Push system
21. _________ is not a reason for outsourcing services.
a. Leveraging benefits from a supplier
b. Allowing the firm to focus on core competence
c. Providing access to latest technology
d. None of the above*
22. ________ is(are) the highest level of professional body of knowledge.
a. Advanced skills
b. System understanding
c. Self-motivated creativity*
d. Cognitive knowledge

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23. _________ costs are considered a transaction cost associated with outsourcing a service.
a. Search
b. Bargaining
c. Enforcement
d. Training*
24. A ________ project is not project category for a professional firm.
a. routine*
b. brains
c. grey hair
d. procedure

25. _________ is a characteristic of social media that is not useful to service firms.

a. Easy access
b. Requiring specialized skills*
c. Immediacy
d. Flexibility
26. Social media “netiquettes” includes all but one of the following:
a. disclosure.
b. discrimination.
c. honesty.*
d. reciprocation.

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