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Services Supply Management THE NEXT FRONTIER EOR IMPROVED ORGANIZATIONAL PERFORMANCE Lisa M Ellram Wendy L Tate Corey Billington he services sector economy is growing in leaps and bounds as more companies outsource business processes and professional services Survey data obtained from benchmarking research shows that pur chasing services is vievved as more dif cult than purchasing goods In addition while the amount of money spent on purchasing services is grow ing the resources to manage the purchasing are not There are huge opportuni ties for organizations to improve in this area in terms of cost and value In particular many of the resources that are devoted to managing purchases of goods can be reallocated to purchasing services This is especially true in organi zations vvith vvellestablished methods for managing the cost and value of pur chased goods Developing an outstanding capability for managing the purchase of services could truly be the neXt frontier for improved organizational performance Background In recent years services have become increasingly important as the dri ving force in the US economy There was a hollovving of manufacturing in the 19805 and 19905 as much was outsourced to Asia Mexico South America and Eastern Europe Today service sector business accounts for about twothirds of US gross domestic product and nonfarm privatesector employment1 The service sector accounts for about 80 of US economic growth2 Yet from a practical standpoint the emphasis in purchasing and supply is still highly skewed towards the manufacturing sector The authors wouId IIIlte to thank CAPS Center for StrategIc SuppIy Research for IuhdIhg that made thIs research possIbIe 44 CALIFORNIA MANAGEMENT REVIEW VOL 49 NO 4 SUMMER 2007 Servrces Supply Management The Next Erontierfor lmproyed Organizational Performance Historically the service sector has received less attention than the manu facturing sector because the US economy was built on the manufacturing and farming sectors During the last half century the importance of marketing specif ically for services has been growing Numerous textbooks have been written on the topic such as Services Marketing and Services Marketing People Technology Strat egy3 Several prestigious academic journals exist today speci cally to advance services marketing theory and practice including the Journal ofServices Marketing and the Journal ofService Research While services have more recently become an area of focus in operations management very little work has been done in ser vice supply chain management Within supply chain management this lack of attention extends to the purchase of services Services may be more dif cult for people to visualize and to measure In general servicelevel agreements and statements of work have not been as precise and nely tuned as Sped cations for mamlfaaured gOOdS39 Lisa M Ellram is the Allen Professor of Business and There is a general belief that service qual Chalroftne Departmentof ManagementatColorado my and performance are not as easy to State University ltLisaEllramcolostateedugt measure and specify objectively as prod Wendy L Tate is an Assistant Professor at the wt quality and performance Thus ser University of Tennessee in the Marketing and Logistics Department ltWendyTateutlltedugt v1ce suppliers are frequently relied upon to create the statements of work These Corey Billington is Professor of Operations Management and Procurement at lMD and was faCtOIS haVe added to the mYStique 0f formerly Vice Presidentof Supply Chain Services at buying services and have slowed HewlettiPacKard where he managed procurement progress in research related to improving and central engineering ltCoreyBillingtonimdcngt services management This has also cre ated an opportunity for savvy marketing and sales people to take advantage of those who aren t able to articulate their services needs or are simply uncomfort able purchasing services by selling them more or different services than they actually need This article uses data from a recent CAPS Center for Strategic Supply Research Study to illustrate some of the problems with the way that many orga nizations manage services purchasing today4 The study investigated current trends in services supply management and included responses from 163 organi zations located primarily in the United States Survey respondents held positions in supply management across a number of different industries in both public and privatesector rms The Scope of the Problem quot5 indicates Another recent CAPS Research study entitled Indirect Spend that there are many types of service purchases in which supply management has limited participation as seen in Figure l6 The size of each circle represents the relative amount of spending The areas of limited participation include real estate legal facilities and advertising Within these areas of limited supply man agement participation the parties that use the services within the organization CALlEORNlA MANAGEMENT REVlEW VOL 49 NO 4 SUMMER 2007 4S Services Supply Management The Next Erontierfor lmproved Organizational Performance FIGURE I Supply Management lnvolvement l Senices Purchases Portion Controlled by Formal Supply Mgmt Controls in Outsourced Senices Travel Tam POWW lnformation Professional ResoU mes Real Estate Advertising Researcn amp Development 0 20 40 60 80 l 00 Degree of Outsourcing generally procure services for their own purposes without the bene t of an established purchasing process or input from supply management professionals Data show that there is a strong belief that purchasing services is more dif cult than purchasing goods with 69 of supply management professionals surveyed indicating that purchasing services is dif cult to much more difficult than purchasing goods see Figure 27 The standard process for purchasing of goods involves ve steps as shown in Figure 33 In practice the number of steps varies though all of the ve key activities must be conducted This process tends to be very formal for purchasing of goods with an understanding of the roles that each party plays at each step Historically there has not been a similarly standard process for purchasing services The marketing literature provides insights into some of the key differ ences between services and goods that have created the perception that services are more dif cult to manage and are best managed by the user without supply management involvement Services are considered to be more intangible het erogeneous perishable and inseparable from their source of production9 In general this means that goods are more readily speci ed and measured than services The units of measure and the expectations tend to be clearer for goods 46 UNlVERSlTY OECALlEORNlA BERKELEY VOL 49 NO 4 SUMMER 2007 Servrces Supply Management The Next Erontierfor lmproved Organizational Performance FIGURE 2 Dif culty in Purchasing and Managing Servrces vs Goods D Purchasing I Managing Percent of Respondents Very Easy About the Dif cult Very Easy Same Dif cult FIGURE 3 The Purchasing Process Receive gt Plan gt Source gt Order gtgt and Pay gt Manage gt Plan Anticipate tne serVice needed and clarify speci cations Source Market Research and evaluate potential suppliers Order Supplierselection completion of order process Receive and Pay lnternal users sign off on completion and authorize payment Manage Ongoing measurement to Verify compliance and identify improvement opportunrties than services see Table 1 For example in the category of heterogeneity Table 1 shows that quality is easier to prespecify and measure for goods Whereas quality perceptions for services may be user dependent Within the realm of services purchasing there is also little reference to What others Within the company are doing This lack of a uni ed approach makes it dif cult to understand the true scope of services purchases or to improve the management of services purchases A decentralized approach Without good processes exposes the organization to unnecessary risk in terms CALlEORNlA MANAGEMENT REVlEW VOL 49 NO 4 SUMMER 2007 47 Serywces Supp y Management The Next Frontwerfor mproyed Organwzatwona Performance TABLE I Charactenstxcs of GoodsVersus Servxces that Add Comptexxty to Servxces Purchasxng Impact of Service Attribute on Attribute Purchasing Goods Services ntangwbwhty Expectatwons Specw catwons are precwse Vague serywce eye agreements Predwctab rty of Dependent on the accuracy Vary wwtn project scope Demand of forecasts for na customer demand Prob em Reso utwon Format processes dear Lack of set processes more subjectwyrty responswbwhtwes Cost Preenegotwated per unrt Easy Dependent on cnangwng scope and determwne n advance requwrements srtuatwon specw c often s renegotwated or changes wrtn scope Payment Matcn recewpts wrtn Bst subm rtted wrtnout tangwb e purchase orders yen abte eywdence pay as you go Ven catwon of Pnyswcat Eywdence n nterna Swgn Off Contract Snwpment Comptetwon Heterogenewty Quatrty Measurab e Preespecw ed Subjectwye User Dependent Conswstency of C ear specw catwons twgnt Serywces yary wrtn tne proywder utput quatrty contro Broader specw catwons wwtn a range of acceptab e outcomes Pensnab rty nterface Between P annwng and nyentory aHow Requwres more communwcatwon cant royt ers for eastertransrtwons store serywces nyentory Pohcwes Buffer demand uctuatwons wwtn nyentory Buffer demand uctuatwons wwtn capacrty nseparabihty Pownts of Contact Few pownts of contact usuaHy purcnaswng or project manage merted to no customer contact ncreases tne nteractwons both from a B2B perspectwye and a BZC perspectwye Pnyswcat Separatwon erm and Proywder FacHrtwes Pnyswcat dwstance between buyer and seHer Serywce s created at pownt of use twgnt couphng Sec rrty of nformatwonData ngn due to pnyswcat separatwon More dwf cu t to contro due to tow pnyswcat proxwm Source Adapted From Akkermans andVos ZODIAHEn and Chandrasnekan 2000 Chase 38 and 996 EHram Tate and BwHwngton 2004 Love ock 983 Sampson ZOOO Vargo and mm 2004 48 UN VERSFFY OF CAUFORN A BERKELEY VOL 49 NO 4 SUMMER 2007 Services Supply Management The Next Frontierfor lmproved Organizational Performance of supplier stability service supply interruption and compromise of the organi zation s reputation and it may be in Violation of SarbanesOxley10 An important problem with the lack of supply management s participa tion in key areas of services spending is that there are missed opportunities for improved management and control of the services supply chain Because of the relatively immature state of services purchasing there is more opportunity to save money and improve processes in services purchases than there is in the purchase of materials Recent news highlights the potential problems of not controlling and managing the services spending For example PriceWaterhouse Coopers KPMG Bearing Point and Ernst and Young recently settled lawsuits which cost them tens of millions of dollars for overbilling their clients for travel11 Companies such as HewlettPackard and others have discovered serious problems with controls and overbilling in a variety of service contracts includ ing professional services12 These problems would not be signi cant were it not for the fact that companies spend a sizeable amount of money on services The 2006 CAPS Cen ter for Strategic Supply Research study respondents reported mean sales of the rms were 55 billion with purchases averaging approximately 384 of total sales Purchased services averaged 39 of total purchasing spending with some rms indicating that their services spending is nearly 90 of their total purchas ing spending Compounding the situation services spending has been growing rapidly for numerous rms services and indirect procurement spending is approximately equal to direct spending and growing13 Outsourcing of professional services such as accounting and information technology is also expected to accelerate rapidly over the next ve years and beyond14 Further the growth in offshore outsourcing of services adds to the complexity of sourcing and managing services Thus understanding and manag ing the services spending and the services supply chain will continue to grow in importance in the foreseeable future Current Pitfalls in Services Purchasing Management There are a number of barriers that need to be addressed to improve services purchasing Lack ofResoarces Focused on Services In the purchase of tangible goods such as components and materials there are many excellent controls and processes in place within most manufac turing organizations For example organizations such as Honda of America Manufacturing Deere 8 Company and Intel build models of their supplier s costs They have cost engineers and nancial professionals who work handin hand with supply to the u of supplier s quoted cost versus price and they provide data to facilitate improvement and factbased negotiations Materials suppliers are selected in a relatively objective manner and are professionally managed based on data and ongoing performance results CALlEORNlA MANAGEMENT REVlEW VOL 49 NO 4 SUMMER 2007 49 Servtces Supply Management The Next Frontierfor improved Organizational Performance TABLE 2 Average Number ofActive Suppliers and Spending Direct Indirect Onshore Offshore Materials Materials Services Services Average Number ofActive Suppliers per Supply Management Employee 36 lOl lOS 7i Average Spending per Supply Management Employee in Millions 25 l3 25 S l 5 Source CAPS Center for Strategic Supply Research 2006 Because they apply structured cost analytics these organizations save money yearafter year in the purchase of materials15 This focus on cost manage ment of materials is a common approach among leading manufacturers in all sectors and it has proven to be very successful Yet fevv organizations dedicate commensurate resources to improving the purchasing and management of ser vices CAPS Research data from 2002 indicates that the average buyer of direct materials manages 32 active suppliers While the average buyer of services man ages more than twice that many 74 active suppliers In a more recent study 2006 the ratio of suppliers to buyers in services has gotten worse The average buyer of direct materials is responsible for 36 active suppliers While the average buyer of domestic services is responsible for approximately 105 active suppliers Both the buyers of direct materials and onshore services are responsible for an average of 25 million in annual spending At the same time services marketing and the bundling of goods and services into total solutions is growing see Table 216 This dilution of services buyers time makes it dif cult for them to be proactive in managing service suppliers creating an unending cycle of services suppliers who are not well managed The dilution of the buyers time and effort among so many suppliers may also perpetuate the myth that services buyers do not add signi cant value to the purchasing of services However the lack of apparent valueadded may be due to a lack of time rather than a lack of capability This paucity of resources tools and skills within services supply manage ment departments can create expensive problems As shown in Figure 1 there are many services such as real estate marketing and human resources vvhere supply management still has limited control and involvement Services are fre quently purchased by the end user with limited input from supply professionals17 Lack oflnformutz39on Technology Support Further services buyers are less likely to be supported by information systems than direct materials buyers as illustrated in Table 313 Partially because of the heavy workload and the lack of information systems support buyers and internal functions may utilize software tools provided by service providers For 50 UNlVERSlTY OFCALlFORNlA BERKELEY VOL 49 NO 4 SUMMER 2007 Services Supply Management The Next Erontierfor improved Organizational Performance TABLE 3 Use of Software to SupportVanous Spending Categories Direct Indirect Onshore Offshore Materials Materials Services Services ERP such as SAR Microsoft Peoplesoft Epicor 7i 3 66 4 58 5 48 0 B2B or Supply Chain Software such as OracleSAPAPO IZ Manugistics 36 8 308 27 7 l65 PSM such as Ariba Perfect Commerce Rearden SABRE Chimes 34 6 39 3 36 8 25 9 CustomLegacy 48 0 39 0 34 4 2 l 7 Source CAPS Center for Strategic Supply Research 2006 example package shipping companies and temporary labor rms provide their customers with systems for them to use to purchase their shipping or labor ser vices Adoption of supplier tools may bias users toward these service providers because of their familiarity with the buying tools The bias toward particular service providers is just one of the factors that should be considered when deter mining when it is appropriate to outsource Knowing When to Outsource The theory of transaction cost economics TCE provides insight into when rms should perform a task internally versus when it is more economical to outsource a task TCE advises against outsourcing when the rm is at risk of becoming dependent on a supplier because the supplier either has or develops speci c assets such as information and ordering systems that the rm needs and does not itself possess19 TCE suggests that such dependence creates the pos sibility of suppliers behaving opportunistically through over charging reducing services and generally exerting power over the buying rm Such dependence also raises the cost of switching suppliers It seems likely that the availability of supplier tools that are superior to internal tools also encourages internal clients to bypass formal purchasing systems thereby encouraging rogue spending TCE also advises against outsourcing in situations of uncertainty such as when the rm cannot adequately judge whether the supplier is performing as promised or when it cannot clearly specify what it wants in terms of outcomes20 It is likely that the supplierprovided tools and systems support the measurement on which the supplier wants the buyer to focus not necessarily the measures most impor tant to the buyer This creates further possibility for opportunistic supplier behavior Cost Drivers and Structures Often there is very limited understanding of the cost drivers and struc tures associated with procured services21 The complexity of service cost struc tures and delivery models coupled with resource shortages in services supply CALlEORNlA MANAGEMENT REVlEW VOL 49 NO 4 SUMMER 2007 Si Services Supply Management The Next Erontierfor lmproved Organizational Performance management departments may cause overworked services buyers to depend on the supplier s sales staff and reporting systems to understand costs and cost dri vers Because of misaligned incentives these dependencies may reduce the administrative cost of the supply management group at the eXpense of unfavor able prices producing a higher total cost of ownership Fragmented Spending The decentralized nature of the services buying community users creates an opportunity to place orders With an unapproved supplier or for the supplier to deliver a nonstandard service In contrast such de ciencies are exceptional When procuring direct materials due to wellestablished systems of control such as supplier quali cation processes With the decentralized and fragmented state of services purchasing for many service categories less than 60 of spending ows through formal systems and processes That appears to be improving as participants in this study22 indi cate that they manage or control approximately 68 of the services purchasing spending Services purchasing is also more likely to be decentralized or hybrid than direct materials purchasing The CAPS study indicates that among the rms studied over 50 utilize a decentralized or hybrid approach for services pur chasing in contrast to around 40 that use such an approach for direct material purchases23 Decentralization along With increased levels of outsourcing and offshoring create an increasingly challenging job for services supply manage ment staff Adding this to the fact that many organizations do not have the sys tems to truly capture the magnitude of services spending outside of the supply management function it is dif cult to build a case for change There is little incentive for suppliers Who are the bene ciaries of this rogue spending to track or report such spending Within their systems Yet buying organizations often rely upon their suppliers to help track services spending Under such circumstances a lack of clear servicelevel agreements and ultimately scope creep is inevitable Which favors the supplier24 Growing Supply Base Another symptom of the dif culty service supply managers face is the size of the supply base Supply base rationalization generally meaning supply base reduction has been a common improvement practice in direct materials for the past 10 to 20 years Supply base reduction creates opportunities to leverage costs work on improvement opportunities build internal and supplier relation ships and reduce the administrative burden of managing a huge supply base Among the rms in the 2006 CAPS study 58 reported an increase While only 4 reported a decrease in the number of offshore services suppliers25 Thus it appears that there is a movement towards a less manageable rather than a more manageable services supply base This is likely a product of the decentralized nature of services spending 52 UNlVERSlTY OECALlEORNlA BERKELEY VOL 49 NO 4 SUMMER 2007 SerCeS Supply Management The Next Erontierfor lmproved Organizational Performance Summary ofCurrent Pitfalls A variety of factors contribute to the current state of relative neglect of professionally managed services purchases These include everything from lack of resources and information technology to support improved services purchas ing to lack of understanding of when to outsource and lack of understanding of cost structures Coupled with fragmented services spending and a growing services supply base the results of poor services purchasing management can have harmful affects on the organization s performance Outcomes of Poor Management of Purchased Services The negative results of poorly managed purchasing spending are both nancial and non nancial in nature and harmful to the overall performance of the rm Financial Implications To get a better understanding of the implications of not properly manag ing services a nancial services company reported after extensive auditing that their actual temporary labor prices were 62 higher than contracted This range is typical of procured services CAPS data shows that procured services typically account for 39 of total procurement expenditure and 146 of revenue26 It is not unusual for procured services to represent more than 60 of a rm s revenueZ7 Using these data a typi cal rm could expect overbilling in services TABLE 4 Example of EinanCial lmplications of lmproper Management of SerVices 000 s l0000000 Total Revenue procurement to cost them around one percent 0 O b11 14 60 S l 460000 SerVices Spending l4 6 of of total revenue 62 A over 1 ing 0 Total Revenue serv1ces spending as a percentage of revenue 90520 unearned Excess Semces For a company with a 20 pro t margin this Billing s 2 orSemces one percent loss of revenue is equivalent to Spendingleqwalem TO lOSt nearly a 5 loss in total pro t see Table 4 prom This has signi cant pro tability implication 55 2000000 20 Prom Marg 4 53 Pro t Reduction due to This amount is material in virtually all organi zations and it would be addressed aggressively if the loss potential were transparent Opportunistic Supplier Behavior Excess SerVices Billing 905202000000 Following are examples of behaviors that services suppliers exhibit that result in economic loss to their customers As posited by TCE suppliers may behave opportunistically in situations where the buyer has limited information or cannot detect that the supplier is taking advantage For example suppliers can usurp procurement leverage by keeping rebates and special pricing them selves and by diverting available stocks in times of shortage the bene ts of which otherwise would have been captured by their customers29 An example reported in the Wall Street Journal and elsewhere31 indicated that the US CALlEORNlA MANAGEMENT REVlEW VOL 49 NO 4 SUMMER 2007 Services Supply Management The Next Erontierfor lmproved Organizational Performance government and others led suit that certain audit rms systematically billed clients full fare for airline tickets hotels and car rental while pocketing undis closed rebates and volume discounts Another related behavior is for consulting rms to arrange with airlines to charge higher prices for client paid and signi cantly lower rates for nonclient travel There is a high level of complexity in many services contracts This makes it dif cult to clearly specify the servicelevel agreements and control the large number of loopholes that exist in services rela tionships32 Given the wide scope of responsibility of services buyers it is little wonder that most services supply management groups are unable to adequately protect their supply chains Another challenge for services supply management departments is ensur ing that what was contracted for is actually delivered This gives rise to a further type of common opportunistic supplier behavior replacing more capable labor with less capable This behavior is typically very hard to specify detect and pre vent33 especially given that many services supply management departments are understaffed Substitution can often increase risks to the buyer which is also dif cult to measure For example reducing the staff quality of a software project will often lead to project delays and cost overruns These expenses are rarely perceived as a cost caused by a defect in the supply management process34 While the marketing literature warns that opportunistic supplier behavior can damage ongoing buyersupplier relationships35 such behavior often goes unde tected today Process Flaws Other costly supply management process defects are caused by the com mon practice of summary invoicing for services36 Unlike direct materials that can be controlled via threeway matching invoice purchasing order receiving documents services are often controlled using a twoway match invoice and purchase order with summary invoices lacking objective physical evidence of delivery 37 Summary invoices which provide few details of activities performed are used to reduce the resource burden in the services procurement and accounts payable groups at the risk of increased costs The examples offered above are not unique to service providers How ever the lack of formal processes to oversee services exacerbates the problems and allows them to remain undetected and uncontrolled In many cases these behaviors can be mitigated by increasing the resource base of services supply management departments and adopting better tools and processes In some situations the loss of economic value appears as higher than warranted pricing However the loss of value may also occur due to failure to secure nonmonetary advantages and the burden of increased risk Controlling these service supplier behaviors during the supplier selection contracting and delivery management phases can be time consuming and expensive but they are more expensive to ignore in the long run 54 UNlVERSlTY OECALlEORNlA BERKELEY VOL 49 NO 4 SUMMER 2007 Services Supply Management The Next Frontierfor improved Organizational Performance Summary ofRisk Implications The previous sections on pitfalls and outcomes highlight the risks involved in purchasing services today Risk is de ned in many ways and generally encompasses negative outcomes or the factors that lead to negative outcomes As mentioned above risk factors associated with buying services may include hidden costs contractual dif culties diminished quality of services and increased cost of service Some dynamics that lead to these risk factors include a lack of knowledge of the intricacies of the activity a lack of experience in managing the activity opportunistic behavior by the supplier measurement problems and asset speci city39 In some situations it may be necessary for the buying company to assume some risk to reduce costs For example when the costs of contracting for contingencies associated with transaction uncertainty are high versus the per ceived loss potential the buyers may choose to face the potential consequences of problems after the fact40 In other situations it may be prudent to reduce risk through accurate delineation of expectations in service contracts41 As predicted by TCE transactions with perceived greater size speci c assets uncertainty and complexity give rise to more extensive written contracts42 and therefore a clearer delineation of expectations to the supplier There is evidence in the con tracting literature related to both goods and services that characteristics of trans actions and the characteristics of the transaction partners are related to the extensiveness and the structure of the contracts43 Barriers to Improving the Services Purchasing Resource Bind A failure to reallocate resources to functions where they can be used most effectively has been documented in numerous organizations A possible cause called the contingent power model is recognized in the organizational design literature44 The basic premise of this model is that organizations adapt imper fectly to organizational threats When an organization faces an environmental threat it promotes and provides resources to people who can address the threat These individuals consolidate and reinforce their positions within their organiza tions creating a power base that has a bias towards individuals with similar skills Unfortunately once the environmental threat has diminished these individuals may refuse to relinquish power and resources limiting the ability of the organization to address future threats Historically supply management resources have focused on purchasing direct materials Such empirebuilding behaviors though human cause rms to be slow at mobilizing resources to address new challenges such as the rapid rise of services and outsourcing For example when faced with signi cant legal challenges a company will often appoint a lawyer as their CEO The legal department then has increased stature power and resources that allow the rm to address its legal challenges A dif culty is that the CEO may not see the need to step down in favor of someone with skills that can address the rm s next challenge This same phenomenon could be blocking the movement of appropriate resources to services purchasing CALlEORNlA MANAGEMENT REVlEW VOL 49 NO 4 SUMMER 2007 SS Services Supply Management The Next Erontierfor lmproved Organizational Performance Reliance on a Flawed Competitive Bidding Process While a competitive bid sourcing process can provide good insight to the current market pricing for a prede ned service it rarely provides insight into the underlying dynamics of the supplier s cost structure or the relative costs of the various activities the supplier is taking on In essence competitive bidding may tell you what a service does cost but it does not tell you what a service should cost This lack of visibility to the inner workings of a services supplier leads to limited winlose negotiations typically focused on price and market com petition alone Priceonly negotiations stem from the premise that a supplier s operation is ef cient and that supply management s valueadd is focused on identifying the most ef cient supplier by eliminating the excess profit from supplier proposals This approach is short sighted particularly when procuring services and ignores the very real fact that suppliers incur costs for and charge for certain activities that may not be relevant or even add value to an organiza tion s speci c situation Focusing on price without understanding the underlying cost drivers can cause supply managers to sacri ce important value increasing costs when the contract must be renegotiated later Lack of visibility and control may result in the rm not getting what was paid for or in getting a competitively inferior price The rm may lose the oppor tunity for effectively exploring alternative sources when users are strongly in u enced by the service providers Lastly lack of adequate resources and processes may prevent rms from fully exploring supplier s ideas to improve service deliv ery value and cost thus losing potential advantage Resistance to Supply Manugementlnvolvement by Budget Owners When presented with all of the evidence that services purchasing is man aged improperly it is possible that some enlightened groups will welcome supply management participation to support the purchase of services Other functions may not They may see supply management involvement as a way to usurp their budgetary freedom Supply management needs to be exible in the way that it participates with key internal stakeholders What is the type of support that the stakeholders need How could they bene t from direct supply manage ment involvement in the areas in which they are spending their budgets The model for the most effective involvement in services purchasing may not mirror the model for the most effective involvement in purchasing direct materials For example Bank of America reports that supply chain management is involved in 100 of their services purchases45 Why Bank of America views supply man agement referred to as supply chain management as performing an essential valueadded service The internal user must build a business case for why it needs to make a major purchase Supply management provides support in terms of supplier identi cation contract development and creating a model for sup plier management Supply management provides training to the internal user who then performs the daytoday management of services suppliers Thus 56 UNlVERSlTY OECALlEORNlA BERKELEY VOL 49 NO 4 SUMMER 2007 Services Supply Management The Next Erontierfor improved Organizational Performance supply management does not simply take over services purchasing Each func tion uses its strengths to support services purchasing and supplier management PuttingThings Right What to Do While there are a growing number of examples where services supply management is viewed as an important activity and is supported by suf cient resources there are still many opportunities for improvement at most organiza tions We have six main suggestions on how to improve the services supply management These should be implemented roughly in the order in which they are presented However some steps may have to be revisited Step 1 Understand the magnitude of the services purchasing spending The rst step is to understand the organization s total services spending This should consider total spending by category which business units functions and individuals are spending their bud gets on services where the services spending is being approved and the level nature and timing of supply management participation in the various spending categories As is true with any change data are required to support the potential oppor tunity for improvement If it appears that the spending is already being consoli dated across businesses and that supply management has heavy involvement early in the purchasing process things may be in good shape at your organiza tion There may be a small number of categories that still need attention but you may be well on your way to a professionalized services purchasing approach If you nd that supply management feigns involvement but really just signs off on decisions that are already made by budget holders there is likely signi cant opportunity for improvement in both costs and your organization s level of risk exposure This information is essential before proceeding to the next step Step 2 Segment the purchasing spending based on value and risk In the realm of purchases of direct materials not all purchases are of equal importance so not all receive equal attention and management The same holds true in the realm of services The users of services possess a certain level of expertise regarding their needs a level of expertise that a buyer might not have On the other hand a buyer should have an expertise regarding the buying process supplier management and creating proper supplier measure ment and control systems The relative expertise of both parties is shown in Table 5 A suggested framework for determining the relative involvement and input of supply management versus the internal user is shown in Table 6 and Figure 4 The importance of each of the steps varies depending on what is being CALlEORNlA MANAGEMENT REVlEW VOL 49 NO 4 SUMMER 2007 S7 Seryices Supply Management The Next Erontierfor lmproyed Organizational Performance TABLE 5 Relative Expertise of Supply Management Professionals and internal SerVices Users Providing a comprehensive competitive process for managing selection Supply Management Professionals Bring discipline to process Obiectiye third party lntegrrty Consistency in analysis methods Internal Service Users Deep understanding oftrue needs Plan Identify opportun itiessou rces ldentify multiple quali ed sources to consider Sourceq ualify supplier Educate managementteam on importance of choosing right supplier as well as ongoing analysis Knowledge of some key suppliers and past perfonnance issues Articulate needs including timing duration speci c ski is Source Aiding in selection of sources Run competrtiye process Market analysis Qualrtatiye and quantitative issues Understand true cost picturetotal cost of ownership Proyide maior input into supplier selection criteria Maioryoice in selecting supplier Execute Developing and negotiating the contract and ordering Commercial skills Negotiate relationshi breadthse ryicesperformance Contract processmanagem ent Gain sharing arrangements Proyide speci cations for contract terms related to seryice performance Receipt and Payment Specify in the contract the terms and condrtions under which payment occurs Work wrth Accounts Payable and users to set up payment system t at conforms to contract With proper controls Superyisebene t from the work Ensure that work is performed to contract before approying payment Manage Identifying potential relationship issues and ongoing monitoring management Set up measurement process and systems identify potential bene ts and risks Train userto identify issues and manage the supplier Manage supplier relations if maior issues arise Manage strategic risks Support rersourcing relationship if needed Manage ongoing relationship Proyide supplier performance feedback Manage the operating risks communicate wrth supplier Manage dayetoeday supplier relations 58 UNlVERSlTY OECALlEORNlAi BERKELEY VOL 49 NO 4 SUMMER 2007 SerVices Supply Management The Next Erontierfor improved Organizational Performance FIGURE 4 ideal Management of SerVices Purchases High Example RampD Legal Example informationTecnnoiogy some logistics 9 SM involved in selection train usento mana e L 9 SM involved in periodic 0 E reViews of performance 1 0 V O Egtlttra control built in 3 H g 3 g Q Muitipie Levels oprprovai through accoumng 9 393 393 z E 3 Example Printing Copying Example Call Center Real Estate g Temporary Staf ng g D 9 Supply management O ContractTempiate oversight in selection train userto manage 9 Pecard Low Insigni cant Important Cumulative Annual Spending purchased For lowdollar lowvalue items that are infrequently purchased it is probably not costbene cial to do an extensive search and analysis of suppliers The best way to manage these items is to have a standard services contract tem plate available online for users and to have the users select the supplier and manage the contract themselves Once the purchase exceeds a certain dollar threshold determined to be signi cant by the rm or once there is a certain level of perceived risk or improvement opportunity associated with a purchase supply management should begin to play a role see Figure 4 and Table 6 The depth and breadth of that role varies with the situation For example in virtually all situations where it is cost bene cial supply management should be involved in the plan and source steps and the majority of the execute step providing both process knowledge and supply market research knowledge Supply management will work with the user on creating the right ordering system and on communicating to the supplier that it has won the business The user must do the actual receiving of the service and authorize the payment The user is often in the best position to know whether the supplier really performed to the contract or not Supply management can also assist the user in developing metrics to assess supplier performance and provide training to users on giving suppliers feedback and managing the rela tionship stepping in only as needed when the user has a situation he or she CALiEORNiA MANAGEMENT REViEW VOL 49 NO 4 SUMMER 2007 S9 Servwces Supply Management The Next Erontierfor improved Organizational Performance TABLE 6 Relative involvement of Supply Management and internal User Based on Type of Purchase Overall Process Identi Example Identification NeedSources Selection Very Low Printing Copying Use purchasing card User User Value Low pecar Risk LowValue Temporary Staf ng Supply Management User User Low Risk SpecialSnorteTerm SM provwdes contract tem plate HigherValue Real Estatejanrtorial SM provwdes process Botn User wrtn SM input Low Risk Call Centers HighValue information SM provwdes process Botn User wrtn SM input High Risk Technology Some LOngllCS LowValue RampD Legal SM provwdes process Primarily user SM is User wrtn SM input High Risk warranted cannot manage This approach also ts well when the supplier relationship does not span multiple businesses and budgets When the organization is dealing with a service that spans multiple busi ness units a team or purchasing council approach is generally warranted with user participation from the concerned budget areas A difference to the process presented immediately above is that the individual users would provide manage ment of the supplier representatives with whom they interact All the supplier performance metrics would be rolled up across businesses with a corporate level relationship with the supplier as well This overall relationship could be managed by supply management or by the purchasing council made up of users with support from supply management as needed Step 3 Allocate appropriate resources relative to economic return to the area of services supply management Based on the ndings in the rst two steps the conclusion may be that services purchasing is poorly managed and the right level or type of staf ng is lacking Now it is a matter of setting priorities Looking at the spending analysis in Step 1 which are the biggest categories of services spending Which are the most fragmented Ideally nding a spending category that is large fragmented and not extremely controversial is a good place to begin your services supply management transformation An example of an ideal service might be contin gent labor for of ce support that is currently purchased on a sitebysite basis This will create an early success which will pave the way for involvement in 60 UNlVERSlTY OE CAUEORNlA BERKELEY VOL 49 NO 4 SUMMER 2007 Servwces Supply Management The Next Erontierfor improved Organizational Performance TABLE 6 Relative involvement of Supply Management and internal User Based on Type of Purchase continued Contract Development Receipt amp Payment Ongoing Mgmt Very Low User User User Value Low Risk LowValue User wrth SM Usenfollowwng SM User Low Risk template established procedures HigherValue SMWth user input User authorize according to User manage dayrtoeday SM manages Low Risk contract overall relationship leverage High Value SM user input User authorize according to Usenwwth SM oversight to revwew risk High Risk contract posrtion and manage leveraged aspects of contract LowValue SM user input User authorize according to Usenwwth SM oversight to revwew risk High Risk contract posrtion other areas This approach has been successfully undertaken by numerous com panies as they transform their services supply management Clearly improve ment will be limited without the right level of and type of staf ng In most cases improving services supply management will be an incremental process whereby supply management proves itself and is thus awarded more resources Step 4 Increase the professionalism of the services purchasing area In some ways this means making the handling of services purchases more like the handling of materials purchases This includes creating service shouldcost models similar to lean manufacturing This takes time Organiza tions should begin in areas where they have some information and they believe that there is opportunity to improve These models should be used for bench marking services supplier quotations and opening a dialogue with services sup pliers about services cost and value improvement Top management support is also needed here to disallow services purchasing without the involvement of service professionals to help develop contracts servicelevel agreements and supplier performance metrics This top management policy has supported the success of supply management involvement in services purchasing at Bank of America and other rms As presented in Step 2 above the organization must segment services purchases by risk and value and focus on where supply man agement can add value versus involvement for involvement s sake CAUEORNlA MANAGEMENT REVlEW VOL 49 NO 4 SUMMER 2007 6i Services Supply Management The Next Erontierfor improved Organizational Performance Step 5 Measure effectiveness and ensure proper business controls This is a matter of getting the right tools developed and in place It includes conducting periodic supplier audits to correct compliance errors Such audits should not simply be punitive but should address the underlying issues that create the errors As indicated earlier services purchases are much less likely to be supported by internal information technology than materials pur chases Organizations should install systems to inspect services transactions to control compliance errors as they have done for materials In addition many organizations would bene t greatly from developing better services contracts that include elements such as speci c payment milestones clear servicelevel agreements and measurements and clear delineation of the meaning causes and penalties of noncompliance Step 6 Put the best people in services supply management Without this commitment to getting the best people in services supply management failure is inevitable Any organization needs some trailblazers to set the standard people who know what is possible and can develop a vision for formalizing services Leveraging existing experienced materials buyers to apply their skills to services purchasing is one alternative Hiring from other companies and industries that have effectively taken control of services purchas ing is another common alternative The key is to begin to take steps to better manage services spending Dedicating skilled resources to establishing new sys tems for better managing the purchase of services should result in a tremendous return on investment and improvement in value of services for the dollars spent Purchasing of services could truly be the next frontier for improved supply chain and organizational performance Bene ts The potential bene ts of increasing the professionalism and support for services supply management are numerous Supply managers are professionally trained in processes to best understand the requirements for a purchase develop these requirements into clear statements of work identify screen and select suppliers who can meet those needs and then manage and measure these sup pliers Bringing a suf cient number of supply management professionals into services purchasing can help the organization to increase the value it receives from its services purchasing spending Professionally trained salespeople are skilled at selling more services than people really need An objective third party like supply managers can help prevent this overbuying and associated overspending while working to ensure that real needs are met In addition professional services purchasing should reduce the organization s risk exposure putting the company in compliance with that aspect of SarbanesOxley There is also the potential for substantial cost reduction simply by catch ing errors that result in overbilling Further cost reduction may be forthcoming by reducing the supply base and leveraging purchases from the best available sources across businesses As a company gains leverage and visibility as a cus 62 UNlVERSlTY OECALlEORNlA BERKELEY VOL 49 NO 4 SUMMER 2007 Services Supply Management The Next Erontierfor improved Organizational Performance tomer there is increased opportunity for improved customer service Better buyersupplier relationships may be pursued as the buying and supplying rms become more important to each other Due to improved supplier relationships and better Visibility services supply management may develop a better under standing of services costs and work more effectively with services suppliers to improve the cost of services purchases Increasing professional supply management involvement in services pur chases will also improve the level of accountability for services spending When business units realize that there are corporate policies for executing and manag ing services spending they are likely to control their own services spending more carefully In order to develop clear statements of work business units will need to clearly de ne their own requirements which forces a more thor ough review and understanding of actual needs Conclusions and Future Directions As services continue to increase in importance to the organization there is a tremendous opportunity for organizations to improve their services supply management by dedicating more resources and the right resources to services purchasing Supply managers can improve cost controls minimize value leak age and assure that rms are receiving more value as well as competitively priced offerings Skilled personnel should be shifted to services purchasing from areas of direct materials and component purchasing that are currently under control and well managed This shift is needed in order to leverage the expertise of experienced buyers in managing cost and value as well as their ability to establish new systems to better manage the purchase of services The realloca tion of these skilled resources will likely favorably impact the rm s return on investment as well as improve the value of services for the dollars spent Marketing and sales are years if not decades ahead of supply manage ment in terms of identifying the unique potential and value of viewing and sell ing services differently than goods Supply managers have been left out of the services purchasing group in part because the sales forces of services rms have been successfully selling directly to the users Yet when supply management was brought in to the process for purchasing marketing services at a large con sumer products rm it was able to reduce service costs by 3050 in some areas simply by unbundling services and bringing in competition Supply management provided the purchasing process expertise while marketing played the role of subject matter expert and ongoing relationship manager Lack of supply management involvement in services supplier identi ca tion screening and selection exposes the organization to new risks Is the sup plier nancially viable What does the organization know about the supplier s parent company and other customers Is there a potential for con ict of inter est Does the contract adequately protect the buying rm from liability Sar banesOxley requires that companies have such knowledge of their key business partners Clearly this by itself is a call to increased attention to services buying CALlEORNlA MANAGEMENT REVlEW VOL 49 NO 4 SUMMER 2007 63 Services Supply Management The Next Frontierfor improved Organizational Performance Universities should also give attention to the service sector and services supply management in educating future practitioners and in conducting research The area of services supply management affords great research opportunities Currently many rms are showing a strong shift toward offshoring services Organizations and researchers need to consider whether offshoring will further compound the current problems with services control It is important for rms to understand the impact that services supply manage ment has on their pro tability and their competitive advantage This should not be a backroom operation or left to chance Successfully managing services buy ing is a new frontier and it may be the next leap in improved supply chain and organizational performance Notes 1 9 quot 9 v1 0 9 gt0 9 US Department of Commerce International Trade Administration Of ce of Service Indus tries available at ltwwwitadocgovtdsifabouthtmgt March 2003 and June 2004 accessed on May 11 2006 US De artment of Commerce Bureau of Economic Analysis 2005 ltwwwbeagovbeadihometradehtmgt accessed on May 11 2006 Bureau of Economic a ysis o 39 V Zeithaml MJ Bitner D Gremler Services Marketing Integrating Customer Focus across the Firm Boston MA McGrawHillIr39win 2 5 Lovelock and J Wirtz Services Marketing People Technology Strategy New York NY PrenticeHall 2003 S Center for Strategic Supply Research Trends in Services Purchasing and Outsourc ing Tempe AZ 2006 CAPS Research is jointly sponsored by the Institute for Supply Man agement ISM and the WP Carey School of Business at Arizona State University P Carter S Beall C Rosetti and E LeDuc Indirect Spend CAPS Research Tempe AZ September 2003 CAPS Research Benchmarking Study De ning and Determining the Services Spend in Today s Services Economy CAPS Research Tempe AZ 2002 CAPS Research Benchmang Study Managing Your Services Spend in Today s Services Economy CAPS Research Tempe AZ 2003 Ibid The purchasing process was developed through information obtained in R Hand eld G Ragatz K Petersen and R Monczka Involving Suppliers in New Product Development California Management Review 421 Fall 1999 5982 L Ellram and W Tate Managing and Controlling the Services Supply Chain at Intuit CAPS Research PractiX wwwcapsresearchorggt 004 R Moncz nt and R Hand eld Purchasing and Supply Chain Management 3rd Edition Cincinnati H ThomsonSouthWester39n 2005 D B D Do er and S Starling World Class Supply Management The Key to Supply Chain Man agement Boston MA McGrawHillIr39win 2003 R Gregory Source Selection A Matrix Approach Journal ofPurchasing and Materials Management 222 Summer 1986 2429 Ram Nar imhan An Analytical Approach to Supplier Selection Journal ofPurchasing and Materials Management 194 Winter 1983 2732 Marcia Robinson and Ravi Ka akota Offshore Outsourcing Business Models ROI and Best Practices Alpharetta GA Mivar Press Incor porated 2004 See for example C Lovelock Classifying Services to Gain Strategic Marketing Insights JournalofMarketing 473 Summer 1983 920 R Chase The Customer Contact pproa to Services Theoretical Bases and Practical Extensions Operations Research 294 JulyAugust 1981 698706 S Vargo and R Lusch The Four Service Marketing Myths R ants of a GoodsBased Manufacturing Model Journal ofService Research 64 May 2004 324335 T Metty Going Where We ve Never Gone Before Inside Supply Management 171 January 2006 2 WebCPA staff ch to Pay 41M in TravelBilling Suit WebCPA June 2 2005 ltwwwwebcpacomarticlecfm7articleid13250gt accessed March 21 2006 Reuters KPMG BearingPoint Settle Suit on Overbilling Forbes April 5 2004 UNlVERSlTY OECALlEORNlA BERKELEY VOL 49 NO 4 SUMMER 2007 9 09quot V NNNNNNNNNN Oooxlmvldkth O w w quot 9 www Pawquot 02 N as 00 Services Supply Management The Next Frontierfor lmproved Organizational Performance ltwwwforbescommarketsnewswire20040405rtr1323285htmlgt accessed March 21 2006 NYSSCPAorg News Staff Ernst 8 Young Cap Gemini in 20M Dealquot NYSSCPAorg September 20 2004 39 39 p 39 sion16htmgt accessed March 21 2006 J Amaral C Billington and A Tsay Safeguarding the Promise of Production Outsourcing Interfaees 363 MayJune 2006 220233 L Ellram and C Billington Managing Profes sional Services Costs quot CAPS Researeh Tempe AZ 2002 CAPS Center for Strategic Supply Research 2006 op cit P Engardio A Bernstein M Kripalani F Balfour B Grow and J Green Is Your Job Nextquot Business Week February 3 2003 pp 5059 Intel Annual Report 2003 ltwwwintelcomintelannua103ar03pdfgt accessed October 6 2004 Robert W Lane Chairman 8 Chief Executive O cer Deere 8 Company remarks at the 2004 Annual Meeting of Shareholders Moline IL February 25 2004 ltwwwdeerecomeniUScompinfospeeches2004040225ilane1htmlgt accessed Septem ber 30 2004 SW Brown The Move to Solutions Providers quot Marketing Management 91 Spring 2000 10 l l L Ellram W Tate and C Billington Understanding and Managing the Services Supply Chainquot Journal ofSupply Chain Management 404 Fall 2004 1732 CAPS Center for Strategic Supply Research 2006 op 39t OE Williamson Markets and Hierarehies Analysis anaAntitrustImplieations New York NY Free Press 1975 OE Williamso eonomie Institutions ofCapitalism New York NY The Free Press 1985 OE Williamson The Logic of Economic Organizationquot Journal ofLaw Eeonomits Organization 41 Spring 1988 6593 Ibid Ellram and Billington 2002 op cit CAPS Center for Strategic Supply Research 2006 op cit Ibid Ellram Tate and Billington 2004 op cit Ibi Ibid Ibid Williamson 1975 1985 1988 op cit Ellram Tate and Billington 2004 op cit J Weil and C BryanLow Audit Firms Overbilled Clients for Travel Arkansas Suit Allegesquot Wall Street Journal September 17 2003 quot w i 39 B 240000htmgt accessed on December p 7 2004 Big Four Firms Charged With Overbilljngquot Aeeounting Today September 18 2003 ltwwwwebcpacomartidecfmarticleid37278seardiTermOver20billinggt accessed January 12 2005 Ellram Tate and Billington 2004 op cit Ibid Ibid F Dwyer P Schurr and S Oh Developing BuyerSeller Relationshipsquot Journal of Marketing 512 April 1987 1127 R Morgan and S Hunt The CommitmentTrust The ory of Relationship Marketingquot Journal ofMarketing 583 July 1994 2039 T Noordewier G John and J Nevin Performance Outcomes of Pur asing Arrangements in Industrial BuyerVendor Relationshipquot Journal ofMarketing 544 October 1990 8093 Ellram Tate and Billington 2004 op cit William Atkinson Managing the Business Services Spend Effectively Purchasing Magazine February 17 2005 pp 4748 Ellram and Billington 2002 op cit BA Aubert M Patry and S Rivard Assessing the Risk of 11 Outsourcingquot System Seienees Proceedings of the 3lst Hawaii International Conference on System Sciences January 69 1998 Ibid SW Anderson and HC Dekker Management Control for Market Transactions The Rela tion Between Transaction Characteristics Incomplete Contract Design and Subsequent Performancequot Management Scienee 5112 December 2005 17341752 Ibid CALlEORNlA MANAGEMENT REVlEW VOL 49 NO 4 SUMMER 2007 65 Services Supply Management The Next Frontierfor improved Organizational Performance 42 Ibid P Mjlgrorn and J Roberts Eoonornz39o Organization and Management Englewood Cliffs NJ Prentice Hall 1992 WL Currie and LP Willcocks Analyzing Four 39IyPes of IT Sourcing Decisions in the Con text of Scale ClientSupplier Interdependency and Risk Mitigationquot Information Systems Journal 82 1998 119143 GR ncik and J Pfeffer Who Gets Poweriand How They Hold On to It A Strategic Contingency Model of Powerquot in ML 39I ushrnan and WL Moore eds Readings in thoMan agomont ofInnoVatz39on 2nd edition New York NY HarperBusiness 1988 J Bossi Services Spend at Bank of America presentation at the CAPS Center for Strategic Supply Research Best Practices Conference Phoenix AZ October 13 2005 4 4 4 v1 Gailllomla Management llavlaw University of California F501 Haas School of Business 1900 Berkeley CA 947201900 510 6427159 fax 510 6421318 email cmrhaasberkeleyedu web site cmrberkeleyedu CopyrighfofCalifornia K iw P P quot 39 K iwumi i may P39 J quot J 39 P J 39 39 copyright holder39s express written permission However users may print download or emall I articles for individua use
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