Industrial Services and Supply Chain Management

Transcription

1 Challenges for going downstream Jaana Auramo, Timo Ala-Risku Department of Industrial Engineering and Management Helsinki University of Technology Corresponding author: Address: Jaana Auramo Department of Industrial Engineering and Management P.O. Box 9555 FIN TKK FINLAND Phone: Fax:

2 Challenges for going downstream Jaana Auramo, Timo Ala-Risku Department of Industrial Engineering and Management Helsinki University of Technology Abstract Manufacturing companies are increasingly offering services related to the products they supply and building capabilities to better exploit the installed base. This move downstream requires new skills to understand and manage the demand-supply networks of industrial services. However, there is not much published research on demand and supply management of such services. As it seems that leading edge companies are ahead of the academic work on industrial service provision, we approached the topic through an explorative study and interviewed representatives from five companies to find out their conceptions of the demand-supply network management of industrial services. The interviews showed that although companies are providing industrial services, many aspects related to the supply and demand of the services are still poorly understood. This paper presents the issues raised by the company representatives that should be addressed with further research. Key words: industrial services, demand management, supply chain management, installed base, after-sales services Introduction Manufacturers are moving downstream as the demand for products has stagnated (Matthyssens and Vandenbemt, 1998). They are integrating value-added services related to the tangible products they supply or even moving from products to solutions (ibid). Exploiting the downstream opportunities, though, requires a new way of thinking about customer needs and the means to satisfy those needs. The manufacturers need to understand and manage the demand-supply network (DSN) of services, i.e. they need to have knowledge of both the processes that create demand for industrial services and the supply network structure needed to provide those services. A lot has been written about themes such as service marketing, new service development, and service quality (Gronroos, 1998, Parasuraman, 1998, Loomba, 1998, Goldstein et. al., 2002). Most of these papers are related to consumer services or professional services. There are fewer papers that deal with the specific problems related to industrial services i.e. services provided by a manufacturing company to organizational customers (Homburg and Gabe, 1999), and only some of them discuss service delivery systems (and their efficiency) or operations management of industrial services. There seems to be an imbalance between the economic importance of service operations management and the amount of research in the field (Roth and Menor, 2003). Frohlich and Westbrook (2002) asked in their paper if demand chain management matters at all in services. They commented that inventory build-up is a bane in physical product business due to the bullwhip effect in supply chains. What about services that are simultaneously produced and consumed and cannot thus be stored? If something cannot be stored, does the bullwhip effect apply? Discussions with the industry representatives show that in practice many issues related to demand chain management of industrial services are fuzzy, unstructured, multidimensional, and complex. Our observations show that even though leading edge companies have developed successful industrial services, and are ahead of the research in the field (Meredith & Roth, 1998), the transformation from product suppliers to service suppliers, on average, has been slow and business benefits have been limited. This observation is supported by Michael Hammer who in his recent HBR article (Hammer, 2004) states that operational innovations seem to be extremely hard to be imitated, contrasting the commonly spread misconception that operational innovations do not easily pay off because they are not considered to provide a sustainable source of a competitive advantage. Therefore, we argue that there is a need for research that would enable new operational innovations related to industrial services especially now when the rapid development of information technology gives new tools to be utilized in service DSN management. 2

3 This paper addresses the above-mentioned issues by means of an explorative study. The aim of this paper is to present the most relevant focus areas for future research to improve the understanding of industrial service provision. To identify the focus areas the following research question was formulated: How do manufacturing companies approach the demand-supply network management of industrial services? The paper is organized as follows. First, relevant literature on the themes of this study is reviewed, followed by the description of the methodology used in this study. Next, the results are discussed and, finally, conclusions of the study are put forward. Literature review Going downstream Companies are moving away from the transactional business imperative and offering more integrated and value-adding services to their customers (Matthyssens and Vandenbemt, 1998). Various product suppliers are increasingly offering supplementary services related to the tangible products they supply (Lovelock, 1994; Gadesh and Gilbert, 1998; Wise and Baumgartner, 1999). Thus industrial services are defined as services provided by a manufacturing company to organizational customers (Homburg and Gabe, 1999). Mathieu (2001) has developed the idea further and proposes a distinction between those services supporting the product (for example maintenance services) and services supporting clients actions. The main goal of a service supporting the supplier s product is to ensure the proper functioning of the product and/or facilitate the client s access to the product. In contrast, by offering a service supporting the client s action, suppliers explore how services support particular client initiatives and advance the mission of customer organization (Mathieu, 2001). Three reasons have been identified for this shift in enterprise rationale: First, substantial and more stable revenue can be generated from an installed base of products with a long life cycle (Knecht et al., 1993; Hull and Cox, 1994; Goffin, 1999, Wise and Baumgartner, 1999). Second, in many businesses the customers are demanding more in services when concentrating on their core competences and seeking cost savings possibilities (Prahalad and Hamel, 1994; Parasuraman, 1999, Goepfert, 2002). Third, services can be a sustainable source of competitive advantage (Hull and Cox, 1994; Matthyssens and Vandenbemt, 1998; Goffin, 1999; Parasuraman, 1999, Youngdahl and Loomba, 2000, Oliva and Kallenberg, 2003). In particular, it is argued, companies that operate in mature industries should be looking for service opportunities to achieve new growth and profitability (Wise and Baumgartner, 1999). In many industries, the number of units in the installed base is an order of magnitude greater that the number sold annually. The combination of stagnant product demand and an expanding installed base has pushed economic value downstream. In many manufacturing sectors, revenues from downstream activities are % higher that annual dollar volumes of product sales. Downstream markets have higher margins and require fewer assets than product manufacturing. They offer steady servicerevenue streams and are often counter cyclical. Additionally, as demand for products in many areas has stagnated, the installed base of products has expanded. For example, the ratio of installed base to annual sales for cars in the US is 13 to 1, for tractors 30 to 1, and for civil aircraft 150 to 1 (Wise and Baumgartner, 1999). Thus the management of installed base is an important element when developing downstream business opportunities. How to provide reliable visibility to installed base and furthermore how to exploit the visibility in industrial service operations management are challenging issues. When creating new service concepts Wise and Baumgartner (1999) encourage companies to look at the value chain from the customer s perspective: what activities does the customer perform in using and maintaining a product throughout its life cycle i.e. from sale to disposal? This analysis helps the companies to see the broader downstream opportunities. Additionally, when considering the changes in the value offering it is important to look at the demand and supply simultaneously. Holmström s (1999) conceptual demand supply network model (DSN-model) highlights three important issues: First, it shows that it is important to understand the demand networks, i.e. what are the processes that create demand for specific products or services, and how can these processes be used to create new service offerings. Second, the DSN model helps to outline the network needed to meet the identified types of demand: who are the main parties, what are their roles, and where is the value created. Third, it enables to specify the value offering points (VOP) that the company wants to 3

4 target. The value offering point is a complementing concept to the order penetration point (OPP). While the OPP is the point where the product or service is allocated to a specific customer (Sharman, 1984), the VOP is the point in the customer s demand chain at which the customer allocates the demand to a specific supplier (Holmström et al., 1999). These two concepts help understand customer value chains, and that can be used in illustrating possibilities for increasing visibility to the customer demand and also to the installed base (Auramo et al. 2004). Demand-supply network management in service vs. product business As the aim of this paper is to identify relevant focus areas of DSN management research related to industrial services it is useful to look at some reported differences between service business and product business. Furthermore, it has been noted that in designing effective service supply chains, operations managers often look for guidance to physical product supply chains, where extensive know-how has accumulated over the past 10 years (Akkermans and Vos, 2003, Kathawala & Abdou, 2003). Some argue, though, that service operation management ought to be studied in different ways, using different theories, skills, competences and language as manufacturing-oriented operation management (Nie and Kellogg, 1999). There is not enough knowledge available on to what extent lessons from product business are applicable when moving downstream. Taking the DSN viewpoint, there are obvious similarities but also differences between service and product businesses. Let us first consider the issue from the supply management point of view. Basically, in the product business you need the right product at the right time at the right location. The DSN for products can be viewed as a network of value-adding material-processing stages each defined with supply input, material transformation, and demand output, where the material, information and finance flows are managed to create customer value for maximizing the profitability over the whole demand-supply network (Holmström et al., 1999). In industrial service business also the right persons and competences need to be synchronized with products to the particular locations. This brings an additional element to DSN management. Horizontalisation is another major difference, as service business is often very horizontal, meaning that you have to service also competitors products. Additionally, in service business, various, often specialized third party service providers are needed and the companies need new competences in managing the network of participating companies. Therefore we feel it is justified to state that there is additional complexity in managing the supply of industrial services compared to managing pure product supply. The companies need to consider also the management of demand for their products and services. Uncertainty in product business arises from three sources: supplier delivery performance, manufacturing reliability, and customer demand (Fitzsimmons and Fitzsimmons, 2004). Are these all valid also for industrial services? Our literature review did not uncover many published research results that would cover these topics from the viewpoint of industrial services. Additionally, there seems to be conflicting research results regarding the importance of demand chain management for services in general. Frohlich and Westbrook (2002) questioned the need for demand chain management with services. They commented that demand chain management is relevant with physical products when trying to control inventory levels burdened with the bullwhip effect. Services however cannot be stored. Therefore, does the bullwhip effect apply to services? They concluded that if there is a significant bullwhip effect in services, demand chain management probably makes sense. Anderson & Morrice (2000) have illustrated through simulation games that bullwhip effect is created also in service provision. Akkermans and Vos (2003) studied relevant root causes and associated countermeasures of the amplification phenomenon in service supply chains by conducting a case study in a service supply chain that was a part of a major U.S. telecom company. This chain was primarily responsible for providing new telecom services to customers and it had experienced severe order backlog and workload fluctuations in the past. They found out that not all causes known in manufacturing sector were valid in services. Their research indicated that there is a new root cause for amplification that is relevant for services: interactions of high workloads and reduced process quality that start reinforcing each other once workloads pass certain threshold. It would be interesting to know if these findings would be valid also for industrial services. Generally, service operations have unique characteristics that are rarely found in product business including customer participation, intangibility, inseparability of production and consumption, heterogeneity, perishability, and labour intensity (Nie and Kellogg, 1999). Most of these issues are also relevant to industrial services. Additionally, supplying industrial services requires organisational 4

5 principles, structures and processes that are new to the product manufacturers (Olivia & Kallenberg, 2003). The business model changes from transaction-based to relationship-based (ibid) are presumed to have an impact on the DSN of industrial services. Summary of the literature review The discussion above shows that the challenges for DSN management of industrial services differ from product business in many ways, but published research papers that deal with the specific challenges of industrial services are scarce. Nevertheless, some of the leading edge companies have been very successful in exploiting the downstream opportunities (Meredith and Roth, 1998, Cohen et al., 2000). Knowledge of these best practises would be helpful to many companies, when building the necessary capabilities to move to downstream operations. Also the technological development, especially related to IT, has created new opportunities that have not yet been exploited in service DSN management. We believe that there is a need for more rigorous research on the demand-supply network management of industrial services, as manufacturing companies are increasingly looking for service opportunities to achieve new growth and profitability. Methodology The aim of our explorative study was to increase our understanding of how do the companies perceive the demand-supply network management of industrial services and what challenges they can identify. A case study approach was selected due to the nature of the research. Case studies have been recognised as a valuable method for explorative research looking for new variables and relationships not identified earlier (McCutcheon and Meredith, 1993; Voss et al. 2002). Also, the case study approach is considered a good choice when little previous empirical research is available on the subject (Eisenhardt, 1989). We selected five case companies that were in different phases in repositioning themselves to downstream operations. We had two cases, a process machinery supplier Alpha and an electronics manufacturer Beta, that are looking for service opportunities to achieve new growth and profitability, and two machine manufacturing cases, Delta and Epsilon that are already well known for their service offerings. In addition, one independent service provider, Gamma that has no own product manufacturing was included in the study. Semi-structured interviews were conducted between October-December We interviewed personnel that were in charge of developing the service concepts as well as personnel that were more involved with the actual service operations management. Three topics related to the DSN of industrial services based on our literature review were discussed during the interviews: The first topic was customer value chains and their roles in industrial services. This included also issues such as life-cycle thinking and development of industrial service concepts. The second topic was demand management of industrial services, where especially the issues related to the installed base were highlighted. The third topic dealt with supply network management of industrial services. Although the interviews were designed to establish a description of how manufacturers currently manage industrial services, the results were more a series of research topics that should be addressed to support manufacturers providing industrial services. We will next discuss the results of the interviews. Results Customer value chains Discussions with the company representatives highlighted that the knowledge of the customer value chains is important when developing industrial service concepts. Interviewees agreed that it is important to understand customers value creating mechanisms to be able to better focus company s service offerings. It was also pointed out that different customers to the same physical product might have different needs for supporting services. The process machinery supplier Alpha can be used as an example: One of its customers considers maintenance of process machinery as its own core competence areas and orders only spare parts and occasional services from Alpha. Another s business strategy is to concentrate on the manufacturing process, which it sees as its own core competence. This customer purchases necessary support services such as maintenance and 5

6 development work from Alpha, who is the supplier of the process machinery. So Alpha must understand this variety in customers value chains when developing industrial service to match its offering accordingly. Unfortunately, in practise this is not always the case. Some industrial services are based on manufacturing company s own view and not enough attention is paid to the customers value chains. This is where the VOP and OPP concepts applied to industrial services could give powerful support for understanding the various service opportunities created by the installed base of products. When discussing the decision to move to providing services that support the company s products, lifecycle issues of the products were often brought up. Some companies even talked about life-cycle services i.e. services that are aimed at providing customer support throughout the entire life-cycle of the products they have supplied. Interviewees commented that if we view after-sales opportunities only as potential for additional sales (e.g. sales of spare parts and product supplies), life-cycle issues are not so critical. However, if we look at maintenance service contracts, where the suppliers offer to run the process machinery on behalf of the customers or various performance improvements that are continuously supplied for the installed base, life-cycle issues become more important. During the interviews it became clear that when developing industrial service concepts suppliers should ask from themselves what the aim of the service is. The aim can be to support their products to ensure the proper functioning during its lifetime or the supplier can offer a service supporting the client s action, for example paper production during the entire life cycle of the plant. If the supplier chooses the second strategy, it increases the need to understand the customers value chains. Knowledge about customers value chains was seen as an important element of DSN management of industrial services, but further research on how this knowledge can be exploited in practise is needed. Demand management of industrial services Demand management of industrial services was the second topic that was discussed during the interviews. We asked why demand management of industrial services is important, what type of challenges can be identified related to demand management and what type of demand management practises companies have implemented. The interviewees put forth a view that the demand for industrial services can be divided into two groups: predictable demand that is based on various service contracts and demand related to the acute machinery failures that is difficult to forecast. Of course, this division gives a very simplified picture of the reality, but it illustrates that there are different challenges to the demand management of industrial services depending weather the service demand can be predicted or not. All of the companies commented that management of installed base is crucial to demand management of industrial services. Managing the installed base includes staying informed on the condition of the products, i.e. knowing the past services performed on and the present service needs of each individual product. This is important to be able to satisfy customers expectations on the product s performance. However, having reliable information available on all the relevant products in the installed base can be very challenging. The interviewees raised issues with both technical and organisational dimensions, such as how to make the maintenance information that resides in other organisations available for the manufacturer, and how to ensure that such information is accurate and up-to-date. Creating this kind of visibility to the installed base is especially difficult in industries where the service business is very horizontal as it means that the installed base includes also competitors products. Future research was hoped to address the challenges related to the visibility to the installed base, as it forms the basis for demand management of industrial services. We were able to identify some good practises from the two companies, Delta and Epsilon, that are already well established in industrial service business. Delta has been successfully using information from the maintenance agreements. All the maintenance agreement information is in their ERP system and the base demand for services is created from these agreements. Unavoidable emergency works are added to the base load. The company has a salary structure that encourages the service staff to work overtime during the peak demands, so most of the unexpected demand peaks can be managed fairly smoothly. However, as their business has become more and more horizontal, the management of installed base has become more challenging. The other experienced industrial service provider, Epsilon, does not directly offer maintenance agreements to their customers (it is done through a separate business unit within the company), but it has segmented after-sales support to the installed base according to the maturity of the products. The products in their installed base are divided into four product categories: in production, full maintenance, repair servicing, and limited support, 6

7 depending on the strategic role of the particular product family. Different service levels or service concepts are offered to customers based on the category the customer s product belongs to. This categorisation of installed base has helped Epsilon in estimating the demand for various services. However, according to the company interviews, there is still a lot to be done regarding the demand management of services. Even companies that have succeeded in building demand management processes for physical products are struggling with the challenges of service demand management. What does it really mean? How should it be done? What are the consequences if demand management for services fails? And most of all, how can visibility to installed base be improved and then exploited? Supply network management of industrial services Supply network management of industrial services deals with the question, how the service can be delivered competitively. Similar to manufacturing strategy logic, the service design choices must build on competitive capabilities that are aligned with the service concept. Effective design of service operations is an important condition for performance increases in the industrial service sector. Company representatives commented that supplying industrial services require organisational principles, structures and processes that are new to the product manufacturers. Additionally, there seem to be external challenges in addition to internal challenges. External challenges are related to the management of various partners that are needed in the service process while internal challenges refer to the management of own service resources, their expertise and location. According to our interviews service supply networks often include multilevel outsourcing. For example in the case of Alpha, the customer has outsourced the management of the maintenance operations of a pulp mill to Alpha. Alpha has several additional service providers under its service umbrella. There is a company that provides general maintenance personnel, several specialist companies and a logistics service provider that distributes spare parts from a central distribution centre to the customer mill site. Service supply relations are thus more like hubs, rather than chains, since the service provider acts as the agent for the customer when dealing with outside suppliers. There is a need for systems that make sure that relevant information is distributed to those parties that need it. This again raises the issue of trust. Can one company trust the information provided by another party? Company representatives saw, that there is a need for an effective communication not only between the customer and the supplier, but between all the parties involved in the service supply chain. Manufacturing of products takes place at factories that are specifically designed for effective production. Industrial services are mainly produced at customer sites, where the environment is not planned for operations of the service provider. Additionally, the numbers of locations where the production of industrial services take place are numerous. For example in the case of Beta that is currently in the transition from product business to more service oriented business, the physical products come from a few factories but the service production is spread to hundreds or thousands of sites globally. This difference to its product business must be taken into account in the service supply network management of Beta. The company representatives also commented that in the service supply chain environment, it is challenging to make sure that the right experts are synchronized with products and equipment in the particular locations. Companies have learned from product business where products and production control are related that when producing unique products, control is challenging. Modularity and platforms have been used for scaling and improving control. Can this be applied to services? How about a service Bill-of- Materials, modular services or service platforms? It seems that when industrial services have been developed, production control issues have not been taken into consideration. Although companies are taking the future service needs into account when developing new products (i.e. easy access to critical components, modularity etc.), company representatives agreed that issues related to how the service will be delivered have not been considered as part of the product development phase. How to design the service supply chain in accordance with the product and service package would be an attractive research topic for manufacturers moving downstream. Service capacity was seen analogous to inventory. Company representatives commented that there are many situations where the demand for industrial services cannot be smoothed very effectively. 7

8 Therefore the control must come from adjusting service capacity to match demand. Companies were able to identify several strategies that could be used to achieve this goal: work shift scheduling, increasing customer participation (as implemented in Case Alpha: customers operation personnel has been trained to perform many daily maintenance checks during normal work routines), creating adjustable capacity (as in Case Delta: payment structure encourages for over time work in peak demands or modularity of services), sharing capacity, and cross training employees (for example, Cases Alpha and Epsilon have highly specialized service competences: what opportunities are there for cross training service personnel?). Yield management was also considered a potential means for smoothing the service demand: Are there possibilities for selective pricing in industrial services, similar to airlines that offer discount on fares to fill the aircrafts? The need for more operations research for industrial services was evident in the interviews. Several topics on supply network management were raised in addition to the ones already discussed. For example, how should the service supply chain be designed to provide long-term support? If the product business is global, should the downstream operations be locally or globally oriented? These questions relate to the management and location of expert resources. The company representatives were interested in how the information about the installed base could be used when deciding on the location of the service resources? When planning the service operations, companies need to analyse what type of resources must be near the customers and what could be provided from more centralized service locations. Conclusions In this paper we have elaborated through an explorative case study the challenges associated with the demand-supply network management of industrial services. In the process we have created more additional questions than answers to our original research question: How do manufacturing companies approach the demand-supply network management of industrial services? However, we have attempted to highlight specific issues for research that would help to improve the understanding of demand-supply network management of industrial services. Conceptual frameworks would help companies to see more clearly, what opportunities there are to improve the performance level of the industrial service operations. In addition to conceptual work, we call for more research on various enabling technologies that are necessary building blocks of DSN of industrial services. For example, the rapid development of information technology gives new tools to be utilized in improving the visibility to the installed bases. The presented research topics are not intended to form an exhaustive listing. Nevertheless, we hope that the issues raised here will stimulate further discussion and also motivate research on at least some aspects of DSN management of industrial services. References: Akkermans, H. & Vos, B., (2003), Amplification in service supply chains: an exploratory case study from the telecom industry, Production and Operations Management, Vol. 12, No. 2. pp Anderson, E.. & Morrice, D, (2000), A simulation game for teaching service-oriented supply chain management: does information sharing help managers with service capacity decisions, Production and Operations Management, Vol. 9. No. 1., pp Auramo, J., Tanskanen, K., Smaros, J. (2004), Increasing operational efficiency through improved customer service: process maintenance case, Forthcoming in International Journal of Logistics, Research and Applications. Cohen, M., Cull, C. Lee, H., Willen, D. Saturn s supply-chain innovation: High value in after-sales service, Sloan Management Review Summer 2000 Eisenhardt, K. M. (1989), Building theories from case study research, Academy of Manaqgement Review, Vol. 14. No. 4, pp Fitzsimmons, J. A. & Fitzimmons, M. J. (2004), Service Management Operations, Strategy, and Information Technology, New York, Irwin/McGraw-Hill Frohlich, M. and Westbrook, R. (2002), Demand chain management in manufacturing and services: web-based integration, drivers and performance, Journal of Operations Management, Vol. 20, pp Gadesh, O. and Gilbert, J.L., (1998), Profit pools: a fresh look at strategy, Harward Busisness Review, Vol. 76 No. 3, pp Goepfert, J. (2002), Transformational outsourcing, helping companies adapt to a volatile future, An IDC White Paper. 8

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