LECTURE 1 SERVICE INVENTORY MANAGEMENT

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1 LECTURE 1 SERVICE INVENTORY MANAGEMENT

2 Learning objective To discuss the role of service inventory and types of inventories in service sector 10.1 Service Inventory A Service product can be viewed as a bundle of goods and services. Inventory plays a very important role in services. Most of the services take goods or materials as inputs like food-joints, maintenance and repair services to provide service bundle. Unlike in manufacturing sector where inventory decouples production unit and customer, in service customer interacts and part of service encounter. Providing inadequate service or no service due to unavailability of output material may result in loss of customer forever. In services, there is no option of backordering. There is always a risk of losing customer to competitor Types of Inventory in Services Service inventory can be of two types as shown in Figure 10.1.

3 Service Inventory Facilitating Goods Work Storage based on Information FIGURE 10.1: TYPES OF SERVICE INVENTORY Facilitating goods are the materials or items purchased or consumed by the buyer and/ or provided by the customer, for example are food items in airplane and legal documents to real estate. Facilitating goods are the goods which are given as or along with the core service. Some of the examples are mentioned in Table TABLE 10.1 FACILITATING GOODS IN SERVICE ORGANIZATION Service Organization Retailers Airline Restaurant Maintenance and Repair Stores Facilitating Goods Consumer Goods Food and Beverages Prepared or ready to eat food, beverages Consumer goods and repair parts

4 Work storage based on information is a type of inventory where some amount of work can be completed and stored for the customer before the customer arrives and demands for the service. It reduces the waiting time of a customer. Some of such examples are shown in Table Unlike in manufacturing where physical resources are stored, the service inventory is based on work storage is viewed as all process steps required to be completed before the arrival of a customer. These steps are completed in the anticipation of customer demand. TABLE 10.2 SERVICE INVENTORY AS WORK STORAGE BASED ON INFORMATION Service Organization Work Storage Real estate Legal documents Publisher Books, Magazines Consulting Forms and reports Forms of Service Inventory The service organizations can have inventory as input service inventory which is processed to produce output service inventory. Both forms can have inventories of facilitating goods type and/or information based work storage inventory type.

5 In services the input form and output form of service inventory can be of same type or may have different types as shown in table TABLE 10.3: FORMS OF SERVICE INVENTORY FOR DIFFERENT SERVICE SECTORS Same form of Input and Output Service Inventory Service Industry Input Output Type of service Inventory PVR Movie Theaters Tickets Tickets Information based Banks Cash or Gold Cash or Gold Facilitating goods Real Estate Real Estate Real Estate Facilitating goods Different forms of Input and Output Service Inventory Restaurant Raw food Cooked Food Facilitating goods Newspaper or Paper, Ink Newspaper, Information based

6 Publishers Magazines Managing Inventory in services versus managing inventory in manufacturing sector In service sector it is very difficult to anticipate the exact demand of customer. It is very difficult to predict what kind of service or queries or problems a customer will have before the actual arrival of customer to service organization. There are differences in managing inventories in manufacturing sector and service sector which can be seen in Table TABLE 10.4: DIFFERENCES IN MANAGING INVENTORY IN SERVICE SECTOR AND MANUFACTURING SECTOR Inventory in Manufacturing Organizations After the product is ready as finished good customer can use the product In situation of running out of inventory, the risk of losing a customer is lower than service organization. Backorders are possible. Inventory can be stored for later use Inventory in Service Organizations Service inventory is used on the customer directly during production of service that is service encounter Due to unavailability of facilitating goods or materials, the service organization may lose a customer forever. Inventory cannot be stored always. The airline flying with empty seats, cannot

7 transfer the empty seats to next flight Utilizes mostly machine intensive resources The number of products or SKU s to be produced by any manufacturer are a few hundred or few thousand Utilizes mostly people intensive resources The number of products to be kept in inventory by service organizations like supermarkets and spare parts stores can be in lakhs or millions of SKU s 10.2 Managing Inventory of Facilitating Goods in Services The facilitating goods inventory can be managed using the inventory models available for managing inventory in manufacturing industries which are based on following factors Types of customer demand Based on demand having are trends, cycles or seasonality. Based on whether the demand occurs in discrete units or in continuous units. Highly varying demand e.g. a supermarket may face some days of no demand for a particular product and bulk demand for the same product on some other day Planning time horizon Indefinite stocking of inventory for example respiratory supports in hospital. Temporary stocking of items based on the season, perishability or expiry dates Lead Time Deterministic lead time

8 Stochastic lead time Based on the above factors various inventory models can be used like Economic Order Quantity (EOQ) models, periodic review policy, continuous review policy, Newsboy model Manage Information Based work Storage service inventory In services it is possible to store some amount of work or perform some process steps before the customer arrives in the form of databases or decision support. This some amount of stored or compiled work acts as buffer of resources to match supply with demand. It helps to achieve faster response times and customers do not have to wait for long to get the service done. Examples of Service Inventory based on work storage The registration forms at hospitals generated by the system automatically The tools required to set up and run online auctions like ebay Inc. In the Insurance sector, the life insurance agents have tools equipped with software (algorithms/formulae), which after entering the age of client and the policy period requested by the client generates automatically the sum assured and returns. Service inventory in the form of database presents extreme economies of scale. For any service creative database can be very expensive, but once the database is ready the incremental cost of adding records to established database provide extreme economies of scale.

9 When and how much work regarding service inventory can be stored? When a service can be delivered through the application of common process. For example when the process is standardized but the transaction details are different. A service organization entertains frequent and repeat customers. The information regarding the repeat customers can be stored and utilized from one customer to another. Amazon records the reviews about the product provided by the customer and the details of all the products bought by the some customer. This information can be utilized as suggestion to other similar customer looking for some products. Service organizations having web portals can store inventory by adding records at very small marginal costs.

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