Why Service Is A Verb, Not A Noun
By: Kevin Smith, Chief Operating Officer
Can we continue to deliver solutions in the models we’ve done for the last 15 to 20 years? 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 42% of total purchasing spending. However, about 72% of the supply chain management professionals surveyed indicated that purchasing services is more difficult than purchasing goods.
In light of the continued trend towards outsourcing business processes and the likelihood of moving these business processes to offshore locations, it is prudent for our own industry to focus on improving the means for obtaining the services that keeps our businesses running. 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 33 active suppliers. The average buyer of direct services is responsible for about 125 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 or other third parties for making services purchases and tracking services spending and supplier performance.
Knowing when to outsource
Overdependence on local internal assets (i.e. Onsite Managers) and their knowledge decrease the power that the buyer has over the overall solution.
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 goals, as the buyer might think that the supplier wants higher volume when the supplier really desires more profit certainty within its volume serviced..
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.
These barriers are critical because services spending are 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 are still largely segmented, services now presents a greater opportunity for potential cost savings than does the purchase of materials and components.
Addressing Our Opportunities
Service Supply Chain Management (and those identified as SCCM companies) will likely dominate discussions in Retailer boardrooms across the country as a more engaged, service solution is demanded. SSCM isn’t about outsourcing all of your services. It is defined by a motivation towards a more robust solution across each individual trade, defining a clear line between retailer and service partner where goals are more aligned together. But to take that journey, opportunities need to be overcome.
Understand the magnitude of the services purchasing spending
Without an understanding of the total spending, it is difficult to assess the potential for savings and difficult to make a business case for pursuing SSCM solutions.
Segment the purchasing spending based on value and risk.
This will allow you to set priorities, and allocate time so as to reduce the risk while maximizing potential rewards.
Allocate appropriate resources relative to economic return to the area of services supply management.
If there is a big opportunity, it is sensible to dedicate more resources.
Increase the professionalism of the services purchasing area.
A professionally trained service buyer can help control both overbuying and overspending. Services supply managers should have either focused college degrees or additional training on buying, negotiations, cost management, and the particular type of services that they are buying (can we do more within our own industry to train people better?).
Measure effectiveness and ensure proper business controls.
This can help reduce risk and improve compliance to Sarbanes Oxley. What gets measured gets done.
Put the best people in services supply management.
This will help to increase the level of accountability for services spending.
Even though the purchasing of services is growing in importance and magnitude, the resources to manage it are not. Because of the current state of services purchasing, it appears that there are untapped opportunities for organizations to improve their services purchasing in terms of both cost and value by dedicating more, and perhaps different, resources to services purchasing.
Bank of America reports in their annual statements that Supply Management is involved in 100% of its services it purchases. But they also share that the responsibility of these services is still kept in the hands of the users (Service Supply Chain) rather than Supply Chain as the users will be much more aware of whether the supplier is performing to expectations.
Ignoring the value of Supply Chain Management processes in a service solution is ignoring the future of our industry. As a supplier, we need to be aware of the systematic changes to our business and be prepared to be relevant in the future. As a Facility Manager, understanding what SSCM is and how it will be a required component of future business decisions will ensure your own relevance in your company’s business.
Dedicating skilled resources to establishing new systems for better managing the purchase of services could result in a tremendous return on investment and improvement in value of services for the dollars spent. Developing an outstanding capability to purchase, and manage the purchase of, services could truly be the next frontier for improved supply chain and organizational performance. The questions remains as an industry, can we help get ourselves there together?
|Kevin Smith is the Chief Operating Officer at Ferrandino & Son, Inc. You can reach Kevin at 866-571-4609 ext 1185 or by emailing firstname.lastname@example.org|