ISM 270

1
ISM 270

• Service Engineering and Management
• Lecture 8 Service Supply Chains

2
Announcements

• Homework 5 due next week
• Should help for Littlefield!
• Littlefield Lab Next week
• Projects due following week

3
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

4
Some key concepts for capacity management

• Economic Order Quantity
• Queueing Dynamics

5
Supply Chain for Physical Goods
6
Customer-Supplier Duality in Service Supply
Relationships (Hubs)
7
Single-Level Bidirectional Service Supply
Relationship
8
Two-Level Bidirectional Service Supply
Relationship
9
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

10
Impact of Service Supply Relationships
11
Impact of Service Supply Relationships
12
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

13
Outsourcing Process
14
Taxonomy for Outsourcing Business Services
15
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
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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
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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 Professio
nal Service Involve high level management in
vendor identification and selection Reputation
and experience very important Performance
evaluation by top management
18
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

19
Managing Facilitating Goods
Replenishment order
Replenishment order
Customer order
Replenishment order
Factory
Wholesaler
Distributor
Retailer
Customer
Production Delay
Shipping Delay
Shipping Delay
Item Withdrawn
Wholesaler Inventory
Distributor Inventory
Retailer Inventory
20
Role of Inventory in Services

• Decoupling inventories
• Seasonal inventories
• Speculative inventories
• Cyclical inventories
• In-transit inventories
• Safety stocks

21
Considerations in Inventory Systems

• Type of customer demand
• Planning time horizon
• Replenishment lead time
• Constraints and relevant costs

22
Relevant Inventory Costs

• Ordering costs
• Receiving and inspections costs
• Holding or carrying costs
• Shortage costs

23
Inventory Management Questions

• What should be the order quantity (Q)?
• When should an order be placed, called a reorder
  point (ROP)?
• How much safety stock (SS) should be maintained?

24
Inventory Models

• Economic Order Quantity (EOQ)
• Special Inventory Models With Quantity
  Discounts Planned Shortages
• Demand Uncertainty - Safety Stocks
• Inventory Control Systems Continuous-Review
  (Q,r) Periodic-Review (order-up-to)
• Single Period Inventory Model

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Economic Order Quantity

• Consider a process that uses raw material
• Fixed known demand rate D (per minute/day/year)
• Orders are in batches, costing
• Fixed cost S for each batch
• Unit cost per item c in batch
• Unit storage/holding cost H to have extra supply
• Cost (penalty) p for missing order due to
  stock-out
• When do you place an order?
• How big should the batch be?

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Inventory Levels For EOQ Model
Units on Hand
Q
0
Q
Time
D
27
Annual Costs For EOQ Model
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EOQ Formula

• NotationD demand in units per yearH holding
  cost in dollars/unit/yearS cost of placing an
  order in dollarsQ order quantity in units
• Total Annual Cost for Purchase Lots
• EOQ

29
Economic Order Quantity

• Variations
• Lead-time from order to arrival of batch
• Uncertain/varying demand
• Option to back-order

30
Annual Costs for Quantity Discount Model
22,000 21000 20000 2000 1000
C 20.00
C 19.50
C 18.75
Annual Cost,
0 100 200 300
400 500 600
700
Order quantity, Q
31
Inventory Levels For Planned Shortages Model
Q-K
Q
TIME
0
-K
T1
T2
T
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Formulas for Special Models

• Quantity Discount Total Cost Model
• Model with Planned Shortages

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Values for Q and K as AFunction of Backorder
Cost
B Q K
Inventory Levels
0
0
0
undefined
Q
0
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Demand During Lead Time Example




u3
u3
u3
u3
ROP
s s
Demand During Lead time
Four Days Lead Time
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Safety Stock (SS)

• Demand During Lead Time (LT) has Normal
  Distribution with
• SS with r service level
• Reorder Point

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Continuous Review System (Q,r)
Amount used during first lead time
Inventory on hand
EOQ
Reorder point, ROP
Order quantity, EOQ
d3
Average lead time usage, dL
d1
d2
EOQ
Safety stock, SS
First lead time, LT1
LT2
LT3
Time
Order 1 placed
Order 3 placed
Order 2 placed
Shipment 1 received
Shipment 2 received
Shipment 3 received
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Periodic Review System(order-up-to)
Inventory on Hand
Review period
RP
RP
RP
Target inventory level, TIL
First order quantity, Q1
Q3
Q2
d3
d1
Amount used during first lead time
d2
Safety stock, SS
First lead time, LT1
LT2
LT3
Time
Order 2 placed
Order 3 placed
Order 1 placed
Shipment 1 received
Shipment 3 received
Shipment 2 received
38
Inventory Control Systems

• Continuous Review System
• Periodic Review System

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ABC Classification of Inventory Items
A
B
C
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Inventory Items Listed in Descending 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 A Entertainment center
2500 30
75,000 Television sets 400
60
24,000 Refrigerators 1000
15 15,000
16 30
B Monitors 200
50 10,000 Stereos
150
60 9,000 Cameras
200 40
8,000 Software
50 100
5,000 10 50
C Computer disks 5
1000 5,000 CDs
20
200 4,000 Totals

305,000 100
100
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Single Period Inventory ModelNewsvendor Problem
Example

• D newspapers demanded
• p(D) probability of demand
• Q newspapers stocked
• P selling price of newspaper, 10
• C cost of newspaper, 4
• S salvage value of newspaper, 2
• Cu unit contribution P-C 6
• Co unit loss C-S 2

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Single Period Inventory Model Expected Value
Analysis


Stock Q p(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
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Single Period Inventory Model Incremental Analysis
E (revenue on last sale) E (loss on
last sale) P ( revenue) (unit revenue) P
(loss) (unit loss)
(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
44
Critical fractile for the newsvendor problem
P(DltQ) (Co applies)
P(DgtQ) (Cu applies)
0.722
45
Retail Discounting Model

• S current selling price
• D discount price
• P profit margin on cost ( markup as decimal)
• Y average number of years to sell entire stock
  of dogs at current price (total years to clear
  stock divided by 2)
• N inventory turns (number of times stock turns
  in one year)

Loss per item Gain from revenue S D D(PNY)
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Growth and Global Expansion
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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
McDonalds
American Express Red
Roof Inns Accenture
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Franchising

• Benefits to the Franchisee Management
  Training Brand Name National Advertising Acquis
  ition of Proven Business Economics of Scale
• Issues for the Franchisor Franchisee
  Autonomy Franchise Contract Conflict Resolution

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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
50
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

51
International Strategic Service Vision
 
 
52
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
53
Goodwill Industries International

• Who are Goodwills customers and how have their
  demographics changed over time?
• How should the introduction of for-profit thrifts
  affect Goodwills decisions about the role of
  customer service?
• How can Goodwill differentiate itself from the
  competition?

54
Goodwill Industries International Sources of
Revenue
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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

56
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 next week