Article Summary by Randy Burton for:
Service Supply Management:
The Next Frontier for Improved Organizational Performance
Lisa M. Ellram / Wendy L. Tate / Corey Billington
This article (mini novel) discusses the background, pitfalls, outcomes of poor service management and provides a path for improvement. The article uses data from CAPS Center for Strategic Supply Research Study to look at problems with services purchasing from 163 organizations (mostly US) and from across industries both public and private.
During the 1980 and 1990s as manufacturing was being outsourced services became a growing part of the US gross domestic product. Estimates project the services sector accounts for 80% of U.S. economic growth but we still often focus supply management towards manufacturing. This causes service-level agreements, services statements of work to not be as clear as specifications for manufactured goods. Pair this with the idea that measuring service quality and performance are hard if not impossible gets you into a position where sales and marketing people can take advantage and sell more or different services than actually needed.
The survey showed 69% of supply management professionals indicated services are difficult too much more difficult to purchase than goods. Some other numbers of interest were purchased services averaged 39% of total purchase spending and some firms reported it was nearly 90% of their total purchase spending. With the continued growth of outsourcing services expected to accelerate supply management needs to understand and manage service spending.
Issues: 1. Lack of resources for services. Purchasing goods often involves a structured cost analysis that save money year after year but few organizations dedicate the resources to apply similar actions to services. The average number of suppliers per supply management employee showed a buyer of direct materials handled 36 suppliers while an onshore service buyer handled 105 suppliers. This dilutes the time a buyer has to be proactive and builds a cycle of under managed service suppliers. This leads to end users doing the buying with little or no input from supply pros.
2. Lack of IT Support. Many software solutions do not support the tracking and management of services so buyers end up using tools provided by the service provider. This makes some buyers dependent on a supplier.
3. When to Outsource. Transaction cost economics (TCE) helps a firm know when it is economically to outsource a task. If outsourcing raises the risk of the buyer being too dependent on a supplier this creates an opportunistically environment for the supplier to over-charge or reduce service i.e.: using power over the buyer. TCE also suggests not outsourcing when one cannot judge performance or clearly specify what is needed in terms of outcomes.
4. Cost Drivers and Structures. Services often have hard to discover cost drivers and structures than goods do. Combined with overworked buyers often causes the buyer to rely on the supplier’s staff and reporting tools to see and understand costs. The fox watching the hen house!
5. Fragmented Spending. End users often buy the service resulting in unapproved suppliers and non-standard services. The survey found less than 68% of service spending flowed through a formal systems and processes. This means a lot of it is done outside systems making tracking hard and it difficult to build a case of change. Remember suppliers gain in this rogue spending so they may not always provide a way to track but still organizations will rely of the suppliers to track service spending.
6. Growing Supply Base. Supply base reduction as been a common practice in direct materials management to leverage costs, work on improvements, build relationships and reduce overhead. The survey found this not true with services as 58% reported an increase in service