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2009

Commonalities and differences between and manufacturing supply chains: Combining studies with

Ming Zhou San Jose State University, [email protected]

Taeho Park San Jose State University, [email protected]

John Yi Saint Joseph's University

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Recommended Citation Ming Zhou, Taeho Park, and John Yi. "Commonalities and differences between service and manufacturing supply chains: Combining operations management studies with supply chain management" California Journal of Operations Management (2009): 136-143.

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Commonalities and Differences between Service and Manufacturing Supply Chains: Combining Operations Management Studies with Supply Chain Management

Ming Zhou • Taeho Park San Jose State University, San Jose, CA

John Yi Saint Joseph's University, Philadelphia, PA

The service sector of the US economy has been gaining importance. As the service sector evolves, the study of service supply chain starts to gain attention. In this study, we conduct an exploratory review on the studies of manufacturing and service supply chains. We focus on the studies that explore the differences and commonalities between manufacturing and service supply chains. We combine operations management literature with supply chain studies in order to provide an inter­ disciplinary framework that brings up both the operational and strategic views on the management commonalities and differences between the two types of supply chains.

I. INTRODUCTION (Sampson, 2000; Frohlich and Westbrook, 2002; Ellram et al., 2004). Service firms also transact The study of services has lagged the with their suppliers and serve their downstream study of manufacturing. When Fred Harvey customers. This very much resembles the classic proposed that services can be standardized and manufacturing supply chain structure. In managed systematically, standardization and addition, service outsourcing becomes systematic management had been applied in the increasingly common a practice (Allen and manufacturing sector by pioneers such as Eli Chandrashekar, 2000; Adler, 2003; Crockett and Whitney and Frederick Taylor. The first Ante, 2004). Hence, service supply chain is of business school course that focused on service great strategic importance in today’s business. management was not introduced until 1973 Despite the large amount of research on (Heineke and Davis, 2006). Despite the lag of service supply chains, studies that academic attention, the service sector has been comprehensively elaborate the commonalities gaining importance as the US economy becomes and differences between manufacturing supply more and more service-centric. According to the chains and service supply chains are still scant. US Census Bureau, the service sector accounts Furthermore, the success of any supply chain for fifty five percent of the US economic management tightly hinges on the operational activities in 2007 (Services Annual Survey, efficiency of supply chain partners. Although a 2007). Along with the evolvement of service couple of extant studies already attempted to industries, service research starts to catch up and identify the commonalities or differences from a variety of aspects of service management are conventional supply chain management identified and explored. In recent years, one perspective, insights from operations aspect of service management, the service management are yet to be integrated. In another supply chain, has attracted research attention words, an inter-disciplinary perspective is not

Volume 7, Number 1, pp 136-143 California Journal of Operations Management © 2009 CSU-POM Zhou, Park and Yi Commonalities and Differences between Service and Manufacturing Supply Chains: Combining Operations Management Studies with Supply Chain Management witnessed in existing literature. In this study, an people’s belongings, act on people’s information exploratory review is conducted in order to etc. bridge the above gaps and provide a preliminary In the next section, the commonalities of framework that better enhances our manufacturing and service supply chains are understanding of the service supply chain. summarized and discussed. In section three, the Please note that we are making no attempt to particularities of service supply chains are exhaust the existing literature relevant to service identified and analyzed. In the last section, we supply chains. Instead, the purpose of this paper conclude the article and discuss future research. is to identify and discuss major findings that contrast service and manufacturing supply II. SERVICING AND MANUFACTURING chains as well as adding an operations COMMONALITIES management perspective to existing understandings. The commonalities between manufacturing Before we can proceed to compare supply chain and service supply chain have not service supply chains with manufacturing supply been discussed much in extant literature. This is chains, a definition of services should be natural given that servicing and manufacturing provided. Frohlich and Westbrook (2002) used share so much similar processes and the ultimate the standard industry classification (SIC) system goals are both operational and/or financial to define service industries. As defined by the success. A survey by Nie and Kellogg (1999) US Census Bureau, the US economy can be shows that many operations management segmented into good-producing industries and educators who are manufacturing operations non-good producing industries, where retail researchers are unwilling to accept the idea that , wholesale trade and service industries all service should be studied “in different ways, fall under the non-good producing sector. Such a using different theories, skills, competencies, classification is constructive in understanding and language…” One reason for the denial to the structure of the US economy and where the have service studies as a new field is that service industry is positioned. Unfortunately, it manufacturing and servicing really does not provide much meaningful information have a lot in common. The set of commonalities as to what service is. Sampson (2000) are very likely much larger than the set of specifically discussed what service is. One set of differences. Hence, we will not and can not definitions focuses on the intangibility of exhaust the commonalities in this section. We services. However, intangibility is only an highlight some of the studies that identified important characteristic of services. Sampson commonalities between manufacturing and (2000) argues that services have tangible part as service settings. Since commonalities often well. A second definition describes services as a suggest transferability of techniques and solitary unit that fails to reveal the dynamic managerial insights developed under aspect of services. For instance, Levitt (1972) manufacturing, we believe the commonalities defines services as a personal performance. are worth discussing. These definitions over-amplify one or more Some manufacturing supply chain elements of the whole service supply chain. The insights have been documented to fit the service definition that Sampson (2000) supported took supply chains. For instance, Hurkens et al. the process view and included the whole (2006) documented a case where a service firm, process, which certainly better fits the study of Carglass, needed to procure physical goods. The service supply chains. Hence, we use Sampson’s authors showed that many aspects and definition of services where services act on evaluation processes are very similar to the people’s mind, on people’s bodies, and on decisions under manufacturing

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137 Zhou, Park and Yi Commonalities and Differences between Service and Manufacturing Supply Chains: Combining Operations Management Studies with Supply Chain Management settings. As a result, the idea of total cost of Information sharing here is a classic ownership (TCO) that is traditionally used in countermeasure developed in the manufacturing manufacturing settings (Degraeve and supply chain. Sengupta et al. (2006) compared Roodhooft, 1999) can be applied here as well. effects of strategic practices on the performance The case served as documented evidence to of supply chains. Their correlation analysis show there are many decisions that exist both in suggested that information sharing positively service industries and manufacturing industries. correlates with the financial performance in both Such commonalities imply that manufacturing service and manufacturing supply chain. techniques can be easily transferred to service Akkermans and Vos (2003) specifically studied settings, such as TCO. Another research that can the bullwhip effect in a service supply chain. attest to this point is the study by Stewart and Using case study method, they identified the root Chase (1999). They applied the Generic Error causes and countermeasures of bullwhip effect Modeling System (GEMS) that has been used in along a service supply chain. They found that manufacturing settings (MacCarthy and Wilson, demand signaling due to the distance between 2001) to study service failures. They showed upstream players and end consumers also plays that GEMS can be applied to identifying failures an important role in service supply chains. Price in the service delivery process, where the steps variation due to promotion and marketing of the delivery process are tangible. campaign is another cause of bullwhip effect that On strategic and operational level, applies to the service supply chain. Table one management commonalities still exist between summarizes this section. manufacturing and service supply chains. Overall, the management of Demirkan and Cheng (2006) showed that the manufacturing supply chain and service supply idea of letting the entity that is the closest to the chain shares commonalities at various levels. demand coordinate the supply chain also Tactically, the existence of physical aspects generates more profits for all partners in a along a service supply chain certainly justifies service supply chain. Anderson and Morrice the commonalities. Strategic-wise, coordination (2000) revised the classic beer game in along service supply chain is also needed. Many manufacturing supply chain and fitted the game issues bothering manufacturing supply chains into a service supply chain. More specifically, a surely are applicable to service supply chains. mortgage supply chain was simulated where the whole mortgage generation process was III. SERVICING AND MANUFACTURING coordinated by four steps, initialing, credit DIFFERENCES checking, surveying and titling. A class of MBA students played the game and the authors Although we believe that the manufacturing and concluded that sharing of end-user demand service supply chains share a lot more in information throughout the supply chain common than how much they differ, it is the contributed to the reduction of bullwhip effect. smaller set, the differences, that ultimately

TABLE 1: SUMMARY OF COMMONALITIES Article Commonality Hurkens et al. (2006) Procurement decision Stewart and Chase (1999) Causes of errors in delivery process Demirkan and Cheng (2006) SCM coordination - information Anderson and Morrice (2000) Existence of Bullwhip effect Akkerman and Vos (2003) Causes of bullwhip effect - demand signaling

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138 Zhou, Park and Yi Commonalities and Differences between Service and Manufacturing Supply Chains: Combining Operations Management Studies with Supply Chain Management determines how a service supply chain can be commonalities, as the service supply chain effectively and efficiently managed. Some of the progresses, may be only temporary in nature. For instance, a regression analysis rejected the their employees. This imposes another level of hypothesis that information sharing may have a difficulties. causal effect on performance for both • Customer involvement and service manufacturing and service supply chains heterogeneity: customer often plays a critical (Sengupta, Heiser, and Cook, 2006). The result role in service delivery process or sometimes is worthy of further exploration since the data set even the service initiation process itself, for is not longitudinal and the size of their data is example, electronics repair service. The fairly small. However, this serves as a good impact of customer involvement easily leads to example where a commonality fails to hold after service heterogeneity and impacts service further inspection. In this section, we start with quality (Ellram et al., 2004). The distinctive presenting the major particularities of service needs by customers essentially change the industries. Then, we discuss the strategic and content of each service product offered, which operational differences identified by extant makes service quality hard to measure and studies and how the differences can be related to monitor (Zeithaml et al., 1996). the service industry particularities. The • Intangibility: service provided is often differences can be summarized in Table 2. intangible, such as education. Sampson (2000) The inherent particularities of service believes that intangibility leads to three issues, industries can be generally summarized as namely, difficulty to store, difficulty to follows: labor intensive, customer involvement account for, and difficulty to identify and service heterogeneity, intangibility, suppliers. An intangible good can be stored simultaneity of production and consumption, and probably only in scientific novels. This customer-supplier duality: characteristic significantly shifts the focus of • Labor intensive: delivery of service products management from buffering by inventory to often involves many manual processes that managing capacity and ensuring capacity require the interaction of human beings. flexibility (Sengupta, Heiser, and Cook, 2006; Hence, solutions that use standardization and Akkermans and Vos, 2003). Ellram et al. automation to improve operational efficiency (2004) found that one of the ways that service are less applicable in the service industry procurement can be better controlled is to (Sengupta, Heiser, and Cook, 2006). implement two way match of service receiving Furthermore, labor intensive industries often process. The invoices and a purchase require a more advanced scheduling system in document are matched upon receiving, where order to better coordinate the preferences of such process includes the matching of an TABLE 2: SUMMARY OF DIFFERENCES Article Differences Sengupta, Heiser, and Cook (2006) Labor Intensive Ellram, Tate, and Billington (2004) Customer involvment and Service Heterogeneity Zeithaml et al. (1996) Service quality is hard to measure and monitor Sampson (2000) Intangibility Akkerman and Vos (2003) Capacity versus Inventory Sampson (2000) Simultaneity of Production and Consumption Sampson (2000) Customer-supplier duality

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139 Zhou, Park and Yi Commonalities and Differences between Service and Manufacturing Supply Chains: Combining Operations Management Studies with Supply Chain Management invoice, purchase order, and shipping supply side, and a low level of integration. In documents in manufacturing. Unfortunately, their attempt to link the models with firm counting physical goods is missing in the performance, only the hypothesis that low service receiving process. The difficulty to integration leads to inferior performance is identify suppliers makes the start of the supported for both the manufacturing and procurement process extremely cumbersome. service supply chains. While a manufacturing Ellram et al. (2004) documented that a service firm that fully integrates on both sides of the buyer is often not sure of the specification of supply chain outperforms those that integrated the service being procured. Furthermore, due less, no statistical evidence was found to draw to the intangibility of service, the service the same conclusion for a service firm. quality is hard to measure. Unfortunately, both Moreover, they found that a manufacturer that aspects play critical roles in evaluating integrates on only one side of the supply chain potential suppliers. performs better than low integrators, but still • Simultaneity of production and consumption: worse than those that fully integrated. In the unlike manufactured goods, services are service case, only demand side integration created and consumed at the same moment. generates a performance that fall in the middle There is not a lead time in the middle to buffer of a full integration and a low integration. against uncertainties. Sampson (2000) even Supply side integration, however, did not called this essentially a JIT system. Combined have the same positioning effect. The authors with difficulty to store, it is then not surprising argue that the results may be due to the lagged to see that a flexible capacity is critical to the development of service management. Similarly, success of a service supply chain. Sengupta, Heiser, and Cook (2006) also studied • Customer-supplier duality: The best example supply chain strategies and performance. The for the duality is the electronics repair service. performance metrics are classed into operational In that case, a customer supplies the and financial performances. Their regression malfunctioning electronics and receives the results suggest that manufacturing supply chain service to fix it. Sampson (2000) summarized performance is impacted by strategic practices four implications of the duality: such as hedging, relationship development, and - Service can not start until the supply of supplier network. In the service supply chain inputs from customers. case, information sharing, distribution network, - Service tends to be heterogeneous. and product customization are identified as - Service has to be labor intensive. significant influencers instead. Hence, the - Service location is closer to customers. service supply chain calls for distinctive Hence, there does not exist the time of strategic considerations. Integration along the distribution and warehousing as in whole supply chain seems not to benefit the manufacturing to prepare for the final service firms. Demand side integration, that consumption. Instead, once the customer- more likely focus on customers, is more likely to supplier provides the input, the service starts. generate positive returns for a service firm. This This certainly challenges a manager’s ability of can be mostly attributed to the inherent scheduling and . characteristics of service products as we These structural characteristics certainly discussed above. More interestingly, both influence the strategies to manage a service studies believe that manufacturing supply chain supply chain. Frohlich and Westbrook (2002) management is in a more advanced stage that is classified web-based integration model into four capable of taking advantage of new initiatives. categories, an integration on both supply and On the other hand, service supply chains are less demand sides, integration on either demand or developed. Thus, the idea of a full integration or

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140 Zhou, Park and Yi Commonalities and Differences between Service and Manufacturing Supply Chains: Combining Operations Management Studies with Supply Chain Management hedging may have their applications for the management of service procurement is far service supply chains in the future. lagging the practices in manufacturing firms or Other than strategic level differences, in the case of procuring physical goods. They operational level differences are also identified. documented that service contracts lacks One of the best known phenomena along a specification and the specification can be hard to supply chain is the bullwhip effect. Despite the develop. Unfortunately, managers usually do not doubt on its existence along the service supply recognize the existence of such problems. chain (Frohlich and Westbrook, 2002), Service particularities also influence how Akkermans and Vos (2003) specifically studied the performances of a service supply chain can a service supply chain to identify the root causes be evaluated. For instance, Meters et al. (1999) of bullwhip effect and applicable studied the widely used data envelopment countermeasures. Their results suggest that analysis (DEA) in service settings. Different batching ordering and shortage rationing are not from traditional manufacturing supply chain, root causes in the service supply chain. Batching service firms often have a large number of ordering refers to the practice of ordering in branches or local establishments. They argue large quantities and shortage rationing refers to that a manufacturing firm may have at the the overstating of demand by buyers in maximum hundreds of facilities, while a procurement of scarce supplies. Among the commercial bank can have thousands of local well-known root causes of bullwhip effect in branches. This surely complicates the structure manufacturing supply chains, only demand of service supply chains, put it another way, it is signaling and price variation are identified as a more complicated network. Furthermore, applicable. Price variation is driven by different from the manufacturing setting where marketing campaigns/promotions and demand all facilities are guided under consistent signaling leads to forecasting demand based on strategies, each local branch can have its own orders received from downstream buyers, but strategic priorities, such as serving a certain kind not on the actual demand. More interestingly, of customers or providing a particular type of their case study reports that overloaded process services. Combined with the labor intensive in a service supply chain does not prolong the nature and high customer involvement in lead time; instead, it deteriorates service quality. services, measuring performances of the service In order to reduce the amplification along the supply chain, such as the commercial banking in supply chain, their study finds that capacity this case, can be a very challenging task. reservation is not feasible due to the delays Although DEA seems to have its natural appeal caused by hiring and training. Every day low in such cases, they suggest that one has to price is also less likely to maintain due to the exercise caution in applying the method in strong resistance received from marketing. evaluating service performances. For instance, it Sharing information, contrary to Anderson and is hard to draw a mutually exclusive list of Morrice’s simulation result (2000), only inputs for each of the outputs since a service generates limited benefits since capacity can not firm often offers multi-products using generic be easily adjusted accordingly. More plausible inputs. The generic inputs can be even solutions are endeavors to reduce lead time and uncountable. Moreover, the inconsistency of enforce a strict quality control process. strategic emphasis should be appropriately Managers in their case study reveal that reflected in DEA weights, which can be hard to upstream quality issues often cascade down to determine. As a result, there are many affect and very likely delay later processes. operational details specific to service supply Ellram et al. (2004) focused on the service chains that a manager has to be aware of before procurement process. They realize that the making decisions.

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141 Zhou, Park and Yi Commonalities and Differences between Service and Manufacturing Supply Chains: Combining Operations Management Studies with Supply Chain Management IV. CONCLUSION AND DISCUSSION manage a service supply chain. Some strategies that are applicable and effective in Given the increasing importance of the service manufacturing settings may not be transferable sector in the US economy, service spending will to the service supply chains. only increase. The spending will not only This point is well demonstrated by the include transactions within the service industry, previous research that attempted to link supply but also the manufacturing services being traded chain strategies with supply chain or firm in the market. Yougdahl and Loomba (2000) performance. We do not feel that we can draw argued that even factory personnel should the conclusion that those that are found to be not actively participate in design and deliver affecting performance by current research are services beyond their core production to internal surely trivial factors for the service supply chain. and external customers. Hence, more research This is due to the lagged development of service attention will be needed in order to improve management and the dynamic nature of our supply chain management effectiveness and business world. Furthermore, just as many operational efficiencies. Overall, the goal is factors that are believed to be order winners always to generate more values for the ultimate reduces to order qualifiers in manufacturing customers. Thus, both the practitioners and the supply chains, existing influencing factors may academics will need to better understand the be just order qualifier for the service supply service supply chain for the service sector to chain in the future. From an operations gain and sustain competitive advantages. By management point of view, many operational integrating operations management literature level practices are in urgent need to be with the existing service supply chain studies, understood, changed, and improved. As we presented and discussed both the operational discussed by Ellram et al. (2004), the less than level and the strategic level commonalities of satisfactory state of service procurement service and manufacturing supply chains. management may simply suggest the need to Differences between manufacturing supply establish a service appropriate procedure using chains and service supply chains are also the manufacturing system as a blueprint and then elaborated. We believe this paper expands the improve on it. The establishment process itself discussion of service supply chains and enriched will require a thorough understanding of the our current knowledge of service supply chains. service supply chain operations, not to mention Our review suggests that there are many what it takes to improve the service supply commonalities of service and manufacturing chains. supply chains. The tangible aspects of service supply chains can be considered as a service REFERENCES extension of the traditional manufacturing supply chain, and thus can be managed in Adler, P.S., “Making the HR Outsourcing similar manners. As long as structural or Decisions,” MIT Sloan Management fundamental similarities exist between the two Review, Fall, 2000, 53 – 60. supply chains, managerial strategies and tactics Anderson, E. G. and D. J. Morrice, “A should be compatible to a certain extent, if not Simulation Game for Teaching Service- completely. However, one can not isolate the Oriented Supply Chain Management: Does discussion of commonalities from the existence Information Sharing Help Managers With of inherent differences. Besides the well- Service Capacity Decision?” Production and recognized service particularities, such as labor Operations Management, Vol. 9(1), 2000, 40 intensive operational and strategic differences – 55. profoundly influences how we should view and

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