What is in this article?:
- Services Supply Chain Management: An Untapped Opportunity
- Address Your Weaknesses
Service sector business currently accounts for about two-thirds of the U.S. Gross Domestic Product, and about 8% of economic growth. A recent CAPS Center for Strategic Supply Research study found that purchased services averaged 39% of total purchasing spending. However, about 69% of the supply chain management professionals surveyed indicated that purchasing services is more difficult than purchasing goods.
In light of the increasing trend towards outsourcing business processes and the likelihood of moving these business processes to offshore locations, it is prudent for organizations to focus on improving the means for obtaining these services. First, there are a number of barriers to address if service purchasing is to be improved.
- Lack of resources focused on services -- The CAPS survey mentioned above found that the average buyer of direct material is responsible for 36 active suppliers. The average buyer of direct services is responsible for about 105 active suppliers. These buyers are responsible for approximately the same level of total spending. The dilution of the services buyers' time makes it difficult for the buyers to be proactive with their suppliers.
- Lack of Information Technology support -- Services buyers are less likely to be supported by technology and information systems, and often have to use software provided by the service suppliers for making services purchases and tracking services spending and supplier performance.
- Knowing when to outsource -- Overdependence on service providers because of reliance on supplier-specific assets, such as ordering and information systems, decreases the power that the buyer has over the supplier. This opens the door for opportunistic supplier behavior.
- Understanding of cost drivers and structures -- There is limited understanding of the cost drivers and underlying cost structures of the services supplied. Part of the problem with this lack of understanding is that it can create misaligned incentives, as the buyer might think that the supplier wants higher volume when the supplier really desires more certainty in its volume.
- Lack of a holistic view of services spending -- In the CAPS study, less than 60% of services spending flows through formal systems and processes. The spending on services is fragmented across many functions and locations, and often flows through decentralized structures. In addition, it frequently involves non-standard services unlike the more refined processes for purchasing goods.
- Growing supply base -- In the CAPS study, 58% reported an increase in the number of offshore services suppliers, while only 4% reported a decrease. The supply base is growing larger, and the suppliers now are more difficult to manage with differing cultural nuances.
These barriers are critical because services spending is growing as a percentage of total spending as firms outsource more activities, such as back-office operations, that used to be performed entirely in-house. In addition, because services has not been managed as closely, services now presents a greater opportunity for potential cost savings than does the purchase of materials and components. The latter areas of spending have been closely scrutinized by most firms over the past decade or more so that the low-hanging fruit has already been harvested.