Materials management in service industries

Engineering Costs and ProductionEconomics, 19 ( 1990) 157- 163 Elsevier Science Publishers B.V.. Amsterdam - Printed in The Netherlands

MATERIALS

MANAGEMENT

157

IN SERVICE INDUSTRIES

R. Van Dierdonck and G. Brandt Vlerick School of Management,

University of Ghent, Ghent (Belgium)

ABSTRACT The purpose of this paper is to contribute to the transfer to service organisations of managements concepts developed in manufacturing. We assume that the reader is aware of the classical materials management concepts and tech-

niques. What we want to do is to provide a conceptual framework describing various situations of different service organisations which helps to see where and how these concepts and techniques are applicable.

1. INTRODUCTION

2. THE NATURE OF SERVICES AND ITS IMPLICATION ON THE MATERIALS MANAGEMENT FUNCTION

Whenever we talk about “materials management” we have the tendency to associate it with manufacturing industries and not with the service industries. After all, one of the typical characteristics of a service, distinguishing it from a “manufactured” good, is its “intangibility” meaning lack of material content [ 11. However, there are actually very few “pure” services, i.e., services without material content. Most services are a bundle of material and non-material components. The result is that, even when one limits the definition of materials management to the supply or inventory control of purchased goods, in many service industries there are tremendous opportunities for improvement. In many of these industries the relative investment in such goods measured as a percentage of sales or total assets is higher than in some manufacturing industries as is illustrated in Table 1.

We propose three dimensions to be used to characterise materials management in a service organisation. A first dimension is the material content of the final product. The second one is the degree of overlap between production and consumption ( = the degree of simultaneity). The third one is the degree of customisation. The first two dimensions are particular for service organisations, the third one is not. The distinction between the customised and non-customised products, and the implication on the appropriate materials management system is equally relevant for manufacturing organisations. Therefore we will not pay specific attention to it in this paper. The relevance of the two remaining dimensions for the materials management functions can be explained as follows. 2.1 Degree of intangibility The higher the tangible component of the service the more important the material re-

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0 1990 Elsevier Science Publishers B.V.

158 TABLE la The importance

managed carefully and tied to sales forecasts translated into a master production schedule using MRP-type processes.

of inventory by industry

Industry

Inventories/ Assets

Inventory turnover

Hotels/motels Communicat services Education Personal finance services Hospitals Transportation Miscellaneous service Retail Wholesale Motor vehicles

0.012 0.02 1 0.042 0.043 0.055 0.056 0.106 0.248 0.289 0.183

48.6 15.2 7.1 9.9 13.8 14.2 6.3 6.0 7.4 7.4

TABLE lb Details on inventories Industry

Advertising agencies Equipment rental Recreation Data processing Automotive repair Computer programming & software Cleaning 8~ Maintenance Personal Research & Development Management consultants Motion picture productions

Miscellaneous

service

Inventories/ Assets

Inventory turnover

0.025 0.028 0.036 0.045 0.048 0.053

25.6 8.2 11.9 16.5 17.9 9.5

0.087 0.112 0.119 0.129 0.173

33.1 8.5 4.5 2.0 3.9

Source: Wieters [ 91.

sources will be. Having the right material at the right place at the right time is of strategic importance not only to reduce costs but also to improve the competitive positions otherwise (e.g., flexibility). It is therefore not surprising that most examples of application of classical materials management techniques and concepts can be found in firms belonging to the “high material content”-category and that the materials management function has a relative high status in these organisations. When the material content is high, supplies of raw materials and semi-finished products are

2.2 Simultaneity contact

or degree

of customer

According to Chase [ 2 ] the characteristic which makes the management of service operations different from the management of manufacturing operations is the (partial) simultaneity between production and consumption. The presence of customers reduces the degrees of freedom in the design and operation of the operating system. Therefore service organisations should be distinguished according to their degree of customer contact ranging from low contact firms to high contact firms. This dimension leads to the distinction between the so-called back-office operations, which can be performed without the customer being present, and the front office operations which require the presence of the customer. Back-office operations are usually not different from typical manufacturing operations and therefore the materials management problem is, at least where there is a high tangible component, very similar as well. By definition the production at the back-office is either done to stock or to order. In the former case “semifinished” products are inventoried, in the latter case there is a backlog of orders from which the back-office starts to work. It is clear that in the first case the materials management systems which are used in an “assembly-to-order” manufacturing situation are easily transferable to service organisations, while in the second case the systems used in “manufacturer-to-order situations” are transferable. The front-office operations are often similar to the final assembly operations of an organisation that is “assemblying to customer order”, i.e., combining (standard) modules to-

159

some specific with customer gether components to a final customised service. Examples can be found in hospitals and restaurants. Final assembly scheduling, modular and generic bills of material are all concepts which are applicable here [ 3,4]. Another particular point related to the frontoffice is the fact that, given that the final product cannot be stored and yet that customers sometimes request fast delivery, active demand management rather than merely reactively forecasting the demand is critically important for a service organisation. An intensive interaction at the “master production scheduling” level between marketing and sales on the one hand, and operations on the other hand is therefore very important. This has consequences for the organisational design [ 5 1. Until now we have focused on the material flow and the related information flow. In the front-office there is another flow to which we can apply some of the classical materials management concepts and techniques, i.e., the flow of customers. In a service organisation incoming customers should be viewed as “raw materials” which gradually are “processed” as the service is provided into satisfied customers (finished products). Waiting customers can be considered to be inventories. While the “out-of-pocket” cost of carrying these “inventories” might appear to be low, the psychological cost of waiting might be very high. As Maister [ 61 states: “... the waiting-line experience in a service facility significantly (effects) our overall perceptions of the quality of the service provided. Once we are being served, our transaction with the service organisation might be efficient, courteous, and complete, but the bitter taste of how long it took to get attention pollutes the overall judgement that we make about the quality of service”. Moreover just as inventories in a manufacturing organisation should be considered to be “waste” and covering up a lot of deficiencies in the manufacturing system, waiting lines of

customers in front of or within the service delivery system should also be considered as “waste” and covering up a lot of deficiencies. It is clear that “waiting lines” have drawn a lot of attention in the operations management field. As Mabert [ 71 has shown about 50% of the publications in service operations are dealing one way or the other with such problems*. Many of them use queuing and/or simulation theories to solve queuing problems (e.g., determining the “optimal” capacity of a service station or “optimal” priority or scheduling rules). 3. CONCEPTUAL

FRAMEWORK

Splitting up the two dimensions into a high/ low-category gives the traditional two by two matrix which enables us to describe four situations as shown in Fig. 1. Hotels, schools or airlines are examples of industries belonging to the low tangibility/high simultaneity category (note that in each of these industries the degree of customisation may vary). Retailing or catering firms at the other hand are examples of firms belonging to the high tangibility/low simultaneity category (the degree of customi-

i

Haute Cuisine” restaurant

HIGH

Hospitals

Fi iJ : : Y

Hotels

LOW

Schools Airlines

-I HIGH

SIMULTANEITY

Fig. 1. Conceptual framework. *Mabert [ 7 ] made an overview of all articles published prior to 1982 in the service operations field. When we add up the articles on customers/job sheduling, service capacity planning, and service system design we come to 47.6Oh of all articles.

160

sation is usually low). A bank for most of its services belongs to the low tangibility/low simultaneity category. A “haute-cuisine” restaurant and a hospital come close to a high tangibility/high simultaneity situation. However as we argued elsewhere [ 8 ] one should be careful in classifying whole industries in a particular category. Rather than putting an industry into one of the four categories it is better to use the framework to determine the relative position of one particular firm. The four different types as shown in Fig. 1 will now be discussed. Type I (Fig. 2a) is the situation where catering firms and fast food restaurants find themselves in. A relatively large back-office and a high material component indicates that in these organizations next to the application of JIT-

concepts, MRP-type systems might be usefully applied. In the case of high volume repetitive business one might even think about RANBAN like systems (e.g., some fast food restaurants). The master production schedules typically are expressed in back-office final products, which are the material input to the front-office. Often, however, the possibility exists to tie items purchased outside and supplied directly to the front-office (such as packaging material) to these MPS-items due to the dependent nature of the demand for these products. The materials management system has to be complemented by a “final assembly schedule”-module to deal with the front-office operations. Type II (Fig. 2b) is the situation with which hospitals and more classical restaurants are T A N G I B I L I T Y

SIMULTANEITY a

: Fast Food Restaurant

t

SIMULTANEITY b

Fig. 2. Description

: Haute Cuisine Restaurant

of the four different types as shown in Fig. 1.

c SIMULTANEITY c : Bank, Insurance company

T A N G I 6 I L I T Y SIMULTANEITY d

: Hotels, Schools, Airlines

161 faced. Materials management in most of these organisations is typically at best supply oriented. This means that materials management is concerned with the “input” side of the total materials flow linking purchasing and inventory control of the purchased materials, using classical (i.e., for independent demand items) inventory control techniques, possibly computer supported. Various case studies have indicated that one can go further than this and by doing so not only reduce inventories but also improve “customer service”. Christy [ 41 has developed an interesting “just-in-time” system for hospital surgery units. This system involved a Kanban-system for inventory retrieval. Medical supplies are delivered to the point of usage (i.e., the operating rooms or nurses stations) in sufficient quantity to fill a material cart by using an exchange cart system for the more common materials, or to conduct a single surgical procedure using a case cart system for the more specific surgical procedure. The system has been extended to the suppliers as in classical in a typical JIT-application. Finally this case illustrates how the dynamic interactive relationship between a KANBANsystem and a JIT-environment can be set to work in a hospital as well. Wieters [ 91 has also given some insights in how JIT can be applied in hospitals. It is clear that as more hospitals in the U.S.A. and elsewhere are implementing the DRG-systern (Diagnostic Related Groups) for cost control purposes, they will start to use the same system for operations and material planning and control purposes. It is not very difficult to determine a bill of materials and even a bill of capacity and labour for a certain DRG. This provides the necessary infrastructure for an integrated operations planning system and a material planning cost control system and a billing system. The same can be done for the restaurant industry as described by Wacker [ 3 ] and by Heizer [ 10 1. Wacker has demonstrated how in

a classical restaurant a typical MRP-system not only can be applied but even be extended to include material and capacity resources in the BOM leading to a state of the art system (even for manufacturing industries). This can be done thanks to the relative simplicity of the pure bill-of-material (not unlike the situations which exist in process-industries). Type III organisations (Fig. 2c) are organisations where the material component is not important, but which have a large back-office. The output of the back-office is typically paper, either in a standard format or document (e.g., a bank or insurance company) or a report (e.g., a consulting firm). Large organisations such as banks do have large absolute amounts of materials purchases and investments in inventories. Therefore it is important to control the inventory. However, we find that it is seldom worthwhile to integrate the materials planning and control function with the other operations planning functions. Materials should therefore be managed independently using the well-known techniques for inventory planning and control. Quazi and Khan [ 111 have described how doing this has helped a large US-bank to reduce its inventories substantially. Fagan [ 12 ] has done the same for an electrical utility organisation. However, some of the more advanced concepts of materials management can be applied to the information flow. By applying JIT-concepts including TQC it has been demonstrated that in banks and insurance companies the throughput time of the total process can be substantially reduced. One could even argue that the more sophisticated manufacturing planning and control systems used in companies that produce highly-customised and complex equipment can be used for operations planning and control in engineering software development and consulting firms. In addition, many manufacturing firms should adapt some of the systems developed in such service organisations to plan and control their service department or “hidden factories” [ 13 1.

162 Type IV organisations (Fig. 2d) are organisations in which the tangible or material component of the service is low and in which there is a large degree of customer interaction. This is the archetype of a service organisation where classical materials management concepts are most difficult to apply. The operations planning control system involves mainly managing the service capacity. To manage the service capacity different strategies are available [ 141. They can be grouped into two categories: the ones that affect the demand of capacity and the others that affect the supply of capacity. All of these strategies apply at the master production schedule level and none of them have anything to do with materials. 4. TRANSFERABILITY

OF THE MATERIALS MANAGEMENT CONCEPTS TO THE SERVICE INDUSTRY

When one analyses the various strategies as described above, it is striking that many appear to be applications of the JIT-philosophy: improve the environment such as to reduce the materials management problem. Everybody who has studied the implementation of the JITphilosophy realises that increasing the stability of the demand at the one hand and increasing the flexibility of the supply at the other hand are two impo~ant comer stones of such a philosophy. However, the transferability of the materials management concepts goes even further. It is clear for instance that the critical ratio concept of the newsboy problem for instance can be used to determine optimal capacity or to determine overbooking policies, to account for no shows, and so on. Furthermore such classical concepts as economic order sizes can be applied in many services. This has been illustrated in the case of the Benihana chain of restaurants [ 151. Considering the time and the cost of the cook and the equipment, customers are “batched” in lot sizes of maximum of eight persons to optimise the utilisation of the cook

and the equipment on the one hand and the waiting time of the customers on the other hand. As stated earlier JIT and ~NBAN-systems can be applied to analyse and improve the flows of customers. Equally, although we are not aware of any application of the OPT-system in a service organisation, it does not require a lot of imagination to apply to OPT-phiiosophy and the OPT-rules to analyse the customer-interactive part of a service delivery system. The OPT-philosophy is oriented towards throughput maximalisation and the central concern is the critical resources or the bottlenecks. Given the inherent, uncertainty in the customer interactive part of most service organisations, one of the most interesting features of OPT might be the way it determines the amount and location of safety of both materials and capacity in the system. An interesting example of an implicit application of this principle can be found in Shouldice Hospital [ 161. The bottleneck is the number of rooms. It is the most expensive part, the least easily adjustable and for which income does not cover the expenses. The hospital is managed such that the room turnover is very high and that the other parts of the systems have excess capacity such as not to limit the high utilisation of the bottleneck. 5. CONCLUSIONS

Service organisations have not waited until today to deal effectively with their materials management problem. We should not forget that the work “logistics” has come to manufacturing from a service organisation: the army. Many of our traditional inventory management concepts for instance might have been applied very early in such organisations as the army or the rail roads. However the application of materials management concepts has usually been limited to the supply side or input side of the materials flow. We have argued in this paper that most service organisations can go further and apply also some of the more advanced concepts and techniques which have

163 proven to be successful in many manufacturing organisations. We have provided a framework that might help a service organisation to classify itself. It is clear that when one moves from Type I to Type IV the less ready the materials management concept can be transfered. However, even for type IV organisations, it is worthwhile to study what is happening in this field, as many of the more advanced concepts can, with some creativity, be applied to improve the customer flow and by doing so increase at the same time customer satisfaction and the capacity utilisation. It is equally clear that we should spend more attention to service organisations, not only for the benefit of the service organisation but also for the benefit of manufacturing organisations.

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