"Services Supply Management: The Next Frontier for Improved Organizational Performance"
California Management Review
Summer 2007, pp. 44-66
Service sector business currently accounts for about two-thirds of the U. S. Gross Domestic Product, and about 80 percent 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 supply chain management professionals surveyed indicate that purchasing services is more difficult than purchasing goods. The authors of this article identify a number of "barriers" that need to be addressed if services purchasing is to be improved:
- Lack of resources focused on services—The CAPS survey 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
- Lack of Information Technology support—Buyers often have to use software provided by the service suppliers for making purchases
- Knowing when to outsource—The uncertainty about measures of results and quality contributes to this dilemma
- Cost drivers and structures—There is often limited understanding of the cost drivers and structures that are part of services supplied
- Fragmented spending—Much of the spending on services flows through decentralized structures, and involves non-standard services
- Growing supply base—In the CAPS study, 58% reported an increase in the number of offshore services suppliers, while only 4% reported a decrease. So aside from growing larger, the suppliers are more difficult to reach and manage
Some common outcomes of poor management of purchased services are:
- Financial losses—It is common for over-billing in services alone to cost about one percent of total revenue
- Opportunistic behavior by suppliers that is not in the best interest of the organization
- Process flaws—"summary invoices" do not allow the control that is found in direct materials purchasing
Steps to improve service supply management suggested in the article are:
- Understand the magnitude of the services purchasing spending
- Segment the purchasing spending based on value and risk
- Allocate appropriate resources relative to economic return to the area of services supply management
- Increase the professionalism of the services purchasing area
- Measure effectiveness and ensure proper business controls
- Put the best people in services supply management
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