Chapter 17

Services

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Goods Versus Services Spend

Goods Services

Manufacturing firms (N = 59) 61% 39%

Service firms (N = 23) 19% 81%

Governmental organizations (N = 34) 19% 81%

Total (N = 116) 38% 62%

Source: Harold E. Fearon and William A. Bales, Purchasing of Nontraditional Goods and Services,Tempe, AZ: Center for Advanced Purchasing Studies, 1995.

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Dollars Spent for Purchase of Services

Total and Top 10 Categories Percent of TotalPercent of Total

ServicesPercent of Dollars by

Purchasing

Total services 54.0% 100.0% 27%

Utilities 4.8 9.0 26

Insurance 4.4 8.2 6

Sales/promotion 3.9 7.2 48

Health benefits plans 3.3 6.1 5

Travel: air tickets 3.1 5.8 12

Construction 2.6 4.9 42

Consultants 2.6 4.8 55

Transport of goods 2.5 4.7 33

Banking 2.2 4.2 0

Copying 2.0 3.6 19Source: Harold E. Fearon and William A. Bales, Purchasing of Nontraditional Goods and Services, Tempe, AZ: Center for Advanced Purchasing Studies, 1995.

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Reasons for Lack of Purchasing Involvement in Service Acquisition

• Complexity of specifying service needs and analyzing potential service provides means that the user has greater expertise than purchasing

• The buying of services involves more of a personal relationship between the supplier and user.

• Many services in the past have been available only in a regulated environment, in which price and service-delivery was essentially the same for all suppliers

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What Makes Services Different?

• Intangible- Cannot touch it

• Perishable- no inventories

• Heterogeneous: The “service package”- high levels of customization

• Customer participation in the production process• Simultaneous production and consumption• Difficult to measure quality

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A Framework for Analyzing Services

• Value of the service- high, medium low- Pareto/ABC analysis

• Degree of repetitiveness- repetitive versus unique

• Degree of tangibility- Low versus high

• Direction of the service- Directed towards people or assets

Source: William B. Martin, Quality Service: The Restaurant Manager’s Bible, Ithaca, NY: Cornell University,School of hotel Administration, 1986.

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A Framework for Analyzing Services

• Production of the service- People, equipment or people and equipment- Skill level of people

• Nature of demand- Continuous, periodic or discrete

• Nature of service delivery- Location, time

• Degree of standardization- Standard or customized

• Skills required for the service

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The Acquisition Process for Services

1. Need recognition and specification- Key questions:

• Why is this service necessary?• What is important about this service?• What represents good value?• How is quality defined for the service?• How is the service produced?• How do we know we received what we expected?

- Developing the statement of work (SOW): Describes the needs and becomes the basis of the contract

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The Acquisition Process for Services

2. Analysis of supply alternatives- sourcing, pricing, other terms and conditions, source options

and make or buy

3. Purchase agreement- Short versus long term; standard versus custom- Service level agreement (SLA): means, method, organization,

processes and material requirements- Pricing structure- Special provisions

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The Acquisition Process for Services

4. Contract administration- Follow-up- Quality control- Payment- Records maintenance- Supplier management and evaluation

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Service Quality Evaluation

• Reliability: Ability to perform the promised service dependably and accurately

• Responsiveness: Willingness to help customers and provide prompt service

• Assurance: Knowledge and courtesy of employees and their ability to inspire trust and confidence

• Empathy: Caring, individualized attention the firm provides its customers

• Tangibles: Physical facilities, equipment and appearance of personnel

Source: A. Prasuranman, V.A. Zeithaml and L.L. Berry, “A Conceptual Model of Service Quality and Its Implicationsfor the Future”, Journal of Marketing, Fall 1985, p. 41-50.

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Process for Obtaining Results in Service Acquisition

1. Do the people now in the purchasing department have the skills needed for purchasing services?

2. Do they have the time? Can they make the time?

3. Obtain data on what services are bought by whom and dollar amount.

4. Take one area at a time.

5. Establish the team: user(s) possibly finance, quality and purchasing

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Process for Obtaining Results in Service Acquisition

6. Determine if the buying service satisfies the user and represents effective spending.

7. Purchasing should ensure the use of a logical process and arrive at the contract or agreement.

8. All parties must agree on the specification

9. Explain why any changes are required in supplier, specification, price, terms, etc., to users and senior management

10. Do not interfere with effective service acquisition activities handle by other departments

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Summary of Service Characteristics and Acquisition Process Implications

Service

Characteristic

Acquisition

Process

Need Recognition,

Description

Sourcing

Alternatives

Pricing, Analysis

Agreement,

Contract Provisions

Contract Admin., Follow-up, Q.C., Payment, Records

Value

High high attention

careful

price sensitive

make or buy

likely negotiatedhigh attention

Low lesser attentionlow acquisition cost

local sourcestandard if possible low attention

Repetitiveness

High develop standard test standard longer term standardize

Low seek expert assistance seek expert assistance custom or one shot custom

Tangibility

High specs important pretest, samplessimilar to product purchase

control for physical characteristics

Lowreferences

user involvementpersonalities important specific persons User involvement high

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Summary of Service Characteristics and Acquisition Process Implications

Service

Characteristic

Acquisition

Process

Need Recognition,

Description

Sourcing

Alternatives

Pricing, Analysis

Agreement,

Contract Provisions

Contract Admin., Follow-up, Q.C., Payment, Records

Direction of

equipment equipment familiarity equipment familiarityspecified equipment

performancecontrol process quality

people user involvement high user involvement high people skills importantcontrol quality at user

interface

Production by

equipmentspecify equipment

capability

specify equipment

capability

specify equipment

performance

conditional on

equipment use

peoplespecify people

capabilityworry about capacity specify availability user provides

Demand

continuous continuityreliability and

continuitycomplete coverage

control quality by

sampling

discreteavailability during

need

availability during

needspecify delivery

control quality by

delivery

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Summary of Service Characteristics and Acquisition Process Implications

Service

Characteristic

Acquisition

Process

Need Recognition,

Description

Sourcing

Alternatives

Pricing, Analysis

Agreement,

Contract Provisions

Contract Admin., Follow-up, Q.C., Payment, Records

Delivery

at purchaseruser interface

important

user interface

importantaccess clauses in-house Q.C.

at seller good description locationpurchase access and

progress reports

concern over service

completeness

Customizationhigh user specification custom capability special contract

quality control very

specific and may

withhold a large %

of payment

low standard specs competitive bid standard contract standard Q.C.

Skillshigh user specification specify specific persons

availability of

individuals

professional standards, regulations, user involvement

low standard specs competitive bidding standard contract minimize use hassle