ISM 270

1. ISM 270 Service Engineering and Management Lecture 8: Service Supply Chains and Outsourcing

2. AirongCai and NuriGokhan • AirongCai 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. • NuriM. 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.

3. Announcements • Homework 4 today • Littlefield Lab Next week • $15 checks to ‘Responsive Learning Technologies’ • Projects due following week

4. 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

5. 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

6. 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

7. Supply Chain for Physical Goods

8. Customer-Supplier Duality in Service Supply Relationships (Hubs)

9. Single-Level Bidirectional Service Supply Relationship

10. Two-Level Bidirectional Service Supply Relationship

11. 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

12. Impact of Service Supply Relationships

13. Impact of Service Supply Relationships

14. 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

15. 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

16. Outsourcing Process

17. Taxonomy for Outsourcing Business Services

18. 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

19. 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

20. 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

21. 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

22. 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

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

24. 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

25. Service Delivery System 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? International Strategic Service Vision

26. Considerations in Selecting aGlobal Service Strategy GlobalizationGlobal 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