The Service Industries Journal

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The Service Industries Journal

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A New Framework for Service Supply Chains

To cite this Article: , 'A New Framework for Service Supply Chains', The Service Industries Journal, 27:2, 105 - 124 To link to this article: DOI: 10.1080/02642060601122629 URL: http://dx.doi.org/10.1080/02642060601122629

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A New Framework for Service Supply Chains TUNCDAN BALTACIOGLU, ERHAN ADA, MELIKE D. KAPLAN, OZNUR YURT and Y. CEM KAPLAN

Despite the extensive amount of academic work devoted to supply chain management, today the structure of service supply chains still remains unexplored. The aim of this paper is to verify and explain this gap with regard to the unique nature of the services industry and the applicability of existing supply chain management literature to service businesses. This paper develops a new model for service supply chains and applies it to the healthcare industry. The results of this study are relevant both to practitioners in the services industry and to researchers conducting further studies in the field.

INTRODUCTION

In recent decades, supply chain management has become extremely important to companies operating in an increasingly competitive global marketplace. The need to improve operations, increasing levels of outsourcing, rising costs, competitive pressures, increasing globalisation, increasing importance of e-commerce and the complexity of the supply chain emerged as the main reasons for the development of the supply chain management approach [Stevenson, 2002]. However, despite the extensive amount of academic work devoted to supply chain management, which basically focuses on manufacturing supply chains, our knowledge of the structure of supply chains in service businesses is still scant. The aim of this paper is to explain this gap, emphasise the need for a distinctive supply chain model for services and develop a general framework, addressing the unique nature of service businesses. The organisation of this paper is as follows. As an introduction, we first describe and briefly examine the supply chain concept and services industry. In the next section, the distinctive nature of service supply chains is addressed briefly. The third part aims to develop a new model for service supply chains and management with regard to the unique nature of the industry. This part also enriches the existing

Tuncdan Baltacioglu and Oznur Yurt are in the Department of Logistics Management, Erhan Ada and Melike D. Kaplan are in the Department of Business Administration at Izmir University of Economics, Sakarya C, 156 Balcova, Izmir, Turkey. Y. Cem Kaplan is in the Faculty of Medicine, Department of Pharmacology at Dokuz Eylul University, 35340, Inciralti, Izmir, Turkey. Email: [email protected] The Service Industries Journal, Vol.27, No.2, March 2007, pp.105–124 ISSN 0264-2069 print=1743-9507 online DOI: 10.1080=02642060601122629 # 2007 Taylor & Francis


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literature with new constructs. In the last section, the proposed model is applied to the healthcare industry. Finally, the key conclusions from this paper are summarised with a number of recommendations for further research. SUPPLY CHAIN MANAGEMENT AND THE SERVICE INDUSTRY

Although the concept of supply chains and supply chain management is relatively new, supply chains in fact have existed throughout economic history. When there exists a need for raw and/or semi-finished materials for production, a production facility to produce goods and services, and consumers who are willing to buy these products, then there also exists a supply chain. However, the importance of supply chains and their effective management to reduce costs as well as providing the goods and services at the right time and place began to be emphasised only in recent decades. This is particularly due to the fact that effective management of a supply chain transforms it into a value chain, in which the companies contained within it enjoy a number of benefits. There are many definitions of what a supply chain is. Basically, a supply chain is the context in which goods, services and information flow from the earliest supplier to the end user. Today, the supply chain concept is expanded to include the flow in the opposite direction, which is known as reverse logistics. In this context, supply chain management is the effective and efficient management of this structure and the relationships between parties taking place in the chain. Following a widely accepted definition, which was proposed during the Global Supply Chain Forum held in 1998, supply chain management is the integration of the key business processes from end user through original suppliers of products, services, and information that add value for customers and other stake holders [Lambert, Cooper and Pagh, 1998]. As mentioned, the importance of supply chain management is closely tied to the benefits it creates for the firms in the chain. By effectively managing a supply chain, firms can benefit from reduced costs, boosted revenues, increased customer satisfaction, improvements in delivery and product or service quality. These benefits arise from a number of factors achieved by supply chain management. First, in a supply chain understanding, there is enhanced information sharing, coordination and a resulting synergy between firms. Subsequently, lead times are decreased and inventory levels reduced, which in turn decreases the costs significantly. Second, as market data is more efficiently monitored, changing consumer needs and demands are easily accessed and satisfied through appropriate production processes. By providing the right goods and services at the right time and place, customer satisfaction may be increased, which has a positive effect on sales and revenues. Supply chains are also important because in today’s conjuncture it is not possible for a firm to survive isolated from others. Supply chains are needed to achieve competitive advantage in both national and international contexts. Globalisation and its related consequences also boost the importance of and the need for effective supply chain management. The need to improve operations, the existence of empowered and demanding consumers, power shifts in the chains and increasing complexity of relationships, increasing levels of outsourcing, regulatory challenges such as those


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in transportation, economic and financial institutions, changes in communications industry and the advance of technology, and of course increasing costs and compelling competitive pressures are some of these consequences [Coyle et al., 2003]. Despite growing interest in the subject, the supply chain management concept still suffers from a number of flaws. First, the concept is defined from a number of different frames and this leads to ambiguity about what supply chain management actually is. Kathawala and Abdou [2003] point to variability between definitions, ranging from those which are simplistic and applicable to all industries, to others that specifically identify each process that should be included within the concept. Second, the nature of the supply chain network is not the same in all industries. It varies from industry to industry as well as from product to product. However, the supply chain management concept has traditionally been applied to manufacturing industries and the terminology created is thus generally not applicable to services. When the growth of the service sector in the global economy is considered, this latter issue emerges as an important problem and it is necessary to re-conceptualise supply chain management by taking the services industry into account. The advance of technical innovations, worldwide increase in income and accordingly changing customer needs, institutional development and structural changes in the division of labour have led to the rapid development of the service sector in recent decades. As initially firms tended to operate the service functions, such as logistics, distribution, human resources and IT, within the firm, today these functions are commonly being performed by specialised service providers. This is the expected result of focusing on core competencies to achieve greater efficiency and effectiveness, and it is why the service sector is growing rapidly. Today, the service sector is remarkably diverse and is still going through almost revolutionary change. Because of the changing demands of the customers, the service industry is becoming broader [Lovelock and Wirtz, 2004]. The structures of today’s economies mainly depend on the service sector. In developed countries, services constitute nearly two-thirds of total GDP. Even in emerging economies, service businesses contribute to at least half of GDP. Statistical data reveals that in 1995, services accounted for 66 per cent of GDP in developed countries, followed by 32 per cent in manufacturing. In developing and underdeveloped countries, the GDP share of the services sector was 52 per cent and 35 per cent, respectively [World Bank, 1999]. Today, the service sector accounts for 58 per cent of worldwide gross national product. In parallel, the number of employees in the service sector is increasing dramatically. Forces such as government policies, social change, business trends, advances in information technology and internationalisation are shaping and contributing to the growth of the service markets [Lovelock and Wirtz, 2004]. Despite the importance of the service industry mentioned above, scholarly work devoted to services is relatively new and therefore scarce, compared to the manufacturing industries. Earlier focus on service industries began in the 1980s; in many of these studies the definitions of goods and production were adapted to services and service production. However, it was obvious that managers who yearn for successful service enterprises could not continue to rely solely on tools and concepts developed in the manufacturing sector. In time, service management emerged as a distinctive


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field and began to create its own terminology. Today, it is recognised that effective management and marketing of services requires different tools than those of goods, as services are significantly different from goods in their very essence. Because there exists a growing demand for many services, effective management of services is vital for service firms. That is the main reason for the development of concepts such as services marketing and services management. However, in service business, as in other industries, managers should take other aspects into consideration. Supply chains and supply chain management is obviously one of these. Integration with the other firms in the supply chain, such as intermediaries, suppliers, and industrial customers, has a vital importance for service firms. As in the manufacturing industry, effective supply chain management is essential in the services industry. Thus, the supply chain management concept, which is relatively new, should definitely be adapted to the service business, taking into account the distinguishing characteristics of services.

THE NEED FOR A SERVICE SUPPLY CHAIN MODEL

With respect to the limited scholarly work devoted to the subject, it is obvious that there is an unexplored area that lies behind the concept of the service supply chain. The scarcity of resources despite the growing importance of the sector is palpable. Nie and Kellogg [1999] suggest that the traditional focus on the manufacturing sector and the existence of widely accepted models in these areas appear to be an obstacle to the development of service supply chain literature. This is particularly due to the manufacturing orientation of most operations management academics. It may also be suggested that the complexity of service operations acts as a deterrent factor in developing comprehensive models in the field. However, the development of services as a comprehensive field can only be achieved through deeper interest and work in the area. In recent years, a number of attempts at this aim are identifiable. Armistead and Clark [1993], exploring the applicability of the value chain concept in service industries, should be highlighted as a pioneering attempt to integrate services into supply chain phenomena. Similarly, Hellman [1995] revealed that alliances in the service industries are critical to these businesses as cooperative relationships prove to be more important for them compared to manufacturing companies. Youngdahl and Loomba [2000] extended the concept of the service factory to global supply chains and provided remarkable insights for further research in conceptualisation of the role of services in global supply chain management. Focusing on consumer –supplier duality, Sampson [2000] explored the structure of supply chains in service organisations. Cook et al. [2001] applied the concepts of traditional supply chain management to the healthcare industry, concluding that supply chain management is not yet implicit to service sector practitioners due to lack of a systematic integration of supply chain functions. With the aim of developing a framework for extending the supply chain concept into services, Kathawala and Abdou [2003] focused on the trade-off between decreasing the costs and increasing the quality of the services in the supply chain and defined how traditional supply chain management functions – with a focus on inventory



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and production – can be adapted. Finally, Ellram et al. [2004] made the most remarkable contribution to service supply chain literature. The authors proposed a general framework, adapted from manufacturing-oriented supply chain management literature, and identified the key service processes/functions as information flow, capacity and skills management, demand management, supplier relationship management, customer relationship management, service delivery management and cash flow. The purpose of this paper is to develop a comprehensive framework of service supply chain management by highlighting the distinguishing characteristics of services. With our knowledge built on previous research, we are content that new constructs are profoundly needed for service supply chain literature, as adaptation from the traditional supply chain literature forms a valuable base but is no means sufficient. This is due to the structural differences of service supply chains, which will be highlighted in the following section.

STRUCTURAL DIFFERENCES IN SERVICE SUPPLY CHAINS

The structural difference of a service supply chain basically arises from the unique characteristics of services, which distinguish them from goods. These differences also change the nature of service operations in practice. Here we find it useful to briefly summarise how these distinguishing characteristics may change the structure of a service supply chain. The principal distinguishing characteristic of services is intangibility [Lovelock, 1981; Parasuraman et al., 1985]. Services cannot be seen, touched, smelt or tasted, as they are ‘performances’ rather than ‘things’. Intangibility of services is the main reason why a number of logistics activities cannot be applied to service supply chains. Transportation is evidently one of these. In a service supply chain the physical flow of the service from the supplier to the producer and then to the consumer is not possible by nature. Although the service product may be pre-customised and then may be delivered to the consumers via branches or other intermediaries, this does not constitute a transportation activity; as the services are also cited to be simultaneous. Simultaneity reflects the fact that customers must be present for the service to be provided. In a service setting the customer usually contributes to the production process, and once the production is realised it is followed by instant consumption in a simultaneous manner. This fact leads to a major structural distinction in service supply chains: the production process usually takes place only when the service provider and the service customer are both present in the service environment and these parties cannot be separated from each other in the production phase. Therefore, although it may be argued that some services may be customised and standardised beforehand, the final service product is never the same for a particular consumer. In this context, each service providing unit, be it a branch or a service employee, serves as a single service factory. Heterogeneity addresses the fact that services cannot be easily standardised. Every customer experiences a different service each time s/he is delivered it, depending on customer perceptions, mood and service atmosphere. Jones and Hall [1996] indicate that this is one of the major reasons for complexity in planning and


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analysis of production of services and the measurement of output. Services are perishable and if a service is not consumed when available, then there is no chance to stock it for future use. Unused capacity is lost forever. This characteristic makes it impossible to store services in a warehouse, implying a total inapplicability of the warehousing function in service supply chains. Finally, service industries are labour intensive. Hence, the impact of the human aspect in service operations is remarkable accompanying the complexity it creates. Significant human involvement in the process requires a diverse approach in the study of service supply chains. In this context, the role of human resources should be redefined as a core function. In this context, it is obvious that there is a profound need for a unique supply chain model for services highlighting these structural differences. In this attempt, the existing supply chain literature may constitute a valuable base to identify the similarities and discrepancies between the service-oriented and manufacturing-oriented supply chains. In this manner, we will use the widely recognised Supply Chain Operations Reference model (SCOR model), developed and endorsed by the Supply Chain Council as the cross-industry standard diagnostic tool for supply-chain management (Figure 1) to serve as a base standard and then adapt it to service businesses by adding a number of original constructs. The SCOR model describes the business activities associated with all phases of satisfying a customer’s demands.1 This model depicts the manufacturing company as the central unit in the supply chain buying from suppliers and selling to customers, where all these units also operate in a similar manner with the manufacturer. Units in the chain may be basically engaged in five business actives, which are identified as sourcing, making, delivering, returning and planning, corresponding to procurement, production, transportation, returns management and operational and managerial planning, respectively. The two units at the two ends of the continuum are not involved in all activities: the suppliers’ supplier engages only in delivery and returns; and the customers’ customer only sources and returns the product. Throughout the chain, planning emerges as a central business activity. FIGURE 1 THE SCOR MODEL



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One of the important features of the SCOR model as well as other manufacturingoriented supply chain models is that the relevant business and/or logistics activities are generally realised within the particular firm. However, due to the simultaneity characteristic of services, we find this not applicable to service supply chains and an alternative conceptualisation will be discussed in the proposed model. Secondly, although five business activities identified in the SCOR model successfully draw a general framework for supply chains, a specification in these functions and activities is usually needed. Following the Global Supply Chain Forum definitions, these functions are classified as customer relationship management, supplier relationship management, customer service management, demand management, order fulfilment, manufacturing flow management (which includes sourcing, making and delivering), product development and commercialisation, and returns management, with respect to manufacturing industries [Lambert, Cooper and Pagh, 1998]. However, in line with the discussion regarding the structural differences in service supply chains, it is obvious that not all these functions are relevant to the services. In this context, Ellram et al. [2004] translated this latter model to service supply chains and identified key functions as capacity and skills management, demand management, customer relationship management, supplier relationship management, service delivery management and cash flow management (Figure 2). In both models,

FIGURE 2 ELLRAM ET AL.’s [2004] SERVICES SUPPLY CHAIN MODEL


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information flow emerges as a key construct, which is apparent in all phases of supply chain management.


In this paper, we aim to develop a new framework, which is built on the existing knowledge derived from the SCOR and Ellram et al. models, with an application in the healthcare industry. The name of the model (IUE-SSCM) is derived from the initials of the affiliated organisation of the authors and Service Supply Chain Model. Before proceeding with the construction of this new model, we find it necessary to define what service supply chain and service supply chain management are. In the literature, Ellram et al. proposed as the only relevant definition of service supply chain management ‘the management of information, processes, capacity, service performance and funds from the earliest supplier to the ultimate customer’. Yet a definition of service supply chain is still missing. In this context, we primarily propose that: The service supply chain is the network of suppliers, service providers, consumers and other supporting units that performs the functions of transaction of resources required to produce services; transformation of these resources into supporting and core services; and the delivery of these services to customers. Following the original definition acknowledged in the Global Supply Chain Forum [Lambert, Cooper and Pagh, 1998] and our definition of supply chains, we propose that: Service supply chain management is the management of information, processes, resources and service performances from the earliest supplier to the ultimate customer. In these definitions, it should be noted that the ultimate product delivered to the customer is the ‘core service’ that provides benefit to the customer. In other words, opening an investment account in a bank, treatment of an illness in a hospital, or having an enjoyable vacation in a hotel constitute the core benefits that the customer seeks and therefore are referred to as the core services. When delivering a core service, a number of supporting services may be required, such as doctor’s examination, laboratory tests or realisation of a surgical operation when a health care business is considered. The supporting services may be produced by suppliers as well as the service provider itself. In the service supply chain context, the core service and supporting services in combination is the focal subject of transaction. In other words, this combination is the general context that is addressed by a ‘service’. The customer perceives all services s/he receives as one and as aiming to provide her/him the ultimate benefit. It is obvious that the delivery of a service is generally not possible unless many tangible objects are available both to the service provider and the customer. A bank needs computers to process account holder’s information or teller machines so that the customer can withdraw money. A hotel requires furniture, major appliances, fresh foods and many other items to ensure the satisfaction of its guests.



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Although the existence of these objects contributes to successful service performance, in our model we refer to them as resources. These resources make a service performance possible; however, their flow is not the subject of service supply chains but of manufacturing-oriented ones. Besides tangible goods needed to produce services; labour, funds and other services outsourced from other firms are also classified under resources. Processes, as the definition suggests, include all kinds of operations that are needed to transform these resources into core and supporting services. All business units, ranging from marketing to human resources, are responsible for the efficient implementation of these processes. Finally, managing the flow of information between the units of the supply chain is also fundamental to service supply chains. Following these definitions and the structural differences discussed before, we construct our model to cover three basic units in the chain: the supplier, the service provider and the customer (Figure 3). The service provider is the focal company in the supply chain that performs the service and it claims the manufacturer’s role in the traditional supply chain literature. The supplier is the company which supplies additional services to the service provider and/or directly to the service provider’s customer where these additional services contribute directly to the production of the core service in the chain. In other words, the service supplied by the supplier should constitute some part of the core service. In this manner, the supplier is usually involved in the delivery of supporting services. To give an example, the FIGURE 3 THE IUE-SSC MODEL


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catering company, which cooperates with the hotel in the hospitality supply chain, is a supplier. However, the bank that the hotel works with is not the supplier in this chain, because it does not contribute directly to the core benefit. However, it may be argued the bank is the service provider in a finance supply chain where the hotel emerges as a customer. It should also be noted that a supplier may be providing supporting services directly to the service provider’s customer (e.g. animation team in a hotel), however this firm is the provider’s supplier as long as these services are paid for by the service provider. Our model depicts the customer and the end-consumer as being the same. This is due to simultaneity of services. In any service context, the each service performance is unique, and it is only possible when both the service provider and customer are present. A service cannot be transported to an intermediary and then resold to an end consumer. The particular environment where the service is performed is the service factory itself. Therefore, the service provider and customer are both involved in the production process, as depicted in the model. Consequently, a singular illustration of the customer is sufficient. In our model, suppliers’ supplier is also not included for similar reasons. Notably, a number of activities are essential to the service supply chain management. From the service provider’s perspective, some of these activities exist through the whole chain, while some others may only be fulfilled in certain phases of the process. In the model, we identify these activities as: demand management; capacity and resources management; customer relationship management; supplier relationship management; order process management; service performance management; and information and technology management. Demand Management Demand management, which is the preliminary function of supply chain management, can be defined as the ‘focused efforts to estimate and manage customers’ demand, with the intention of using this information to shape operating decisions’ [Blackwell and Blackwell, 1999; cited in Coyle et al., 2003: 77]. It is the operational management of demand information and includes not only forecasting but also generating forecasts, managing them, reconciling new information with the forecasts and keeping them up-to-date [Handfield and Nichols, 1999]. In service industries, the successful management of demand is vital due to a number of difficulties that arise from the unique characteristics of services. First, in service industries there exists a great uncertainty of demand patterns. Accompanying this uncertainty, the inability to inventory services is challenging to service managers [Klassen and Rohleder, 2001]. However, service companies can cope with this situation by managing the demand for their services. In this context, two alternative strategies are present: (a) controlling demand so that it does not exceed a constant level, and (b) influencing demand to reduce the magnitude of peaks and valleys [Crandall and Markland, 1996]. Examples of these can be proposed as using an appointment system or using differential pricing schemes to smooth demand. There is little doubt that the success of all other supply chain activities depends on determining demand and planning the other processes according to determined



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demand. In this context, the importance of demand management is also significant in service supply chains. In a service flow, the functions of demand forecasting, determination and planning are needed prior to actual service delivery. Also, the supporting functions in the service supply chain, which are directly related to the product supply chain, should also be taken into consideration. Capacity and Resources Management Capacity management is the ability to balance demand from customers and the capability of the service delivery system to satisfy the demand [Armistead and Clark, 1994]. Because of the characteristic fluctuations in the demand for services and the fact that services are produced and consumed simultaneously, service businesses continuously face the problem of matching their capacity and demand. Ng et al. [1999] state that managers in service firms face a complex and difficult task with regard to capacity management, and have less than adequate information to assist them. It can be suggested that the perishability characteristic of services usually increases the severity of the problem. Because services cannot be inventoried, in times of low demand unused capacity is lost forever. Contrary to this, during periods of excess demand, the excess business is usually also lost. Service organisations can respond to this situation by choosing either of two strategic alternatives designed for managing capacity. As Crandall and Markland [1996] imply, these strategies are: (a) matching capacity exactly to demand, and (b) maintaining a capacity that serves the maximum demand. Examples of capacity management are scheduling of employees to varying work shifts or using part-time employees. Undoubtedly, a service firm’s capacity is not only dependent on labour, but on other resources that are accessible to the company. As mentioned before, these resources also include all tangible objects, facilities, funds and services outsourced from other firms. A successful capacity and resources management requires that all these resources are organised effectively and efficiently to operate at optimum capacity that meets the fluctuating demand. Customer Relationship Management Customer relationship management (CRM), which includes the processes that focus on the interface between the firm and its customers, seeks to create customer demand and facilitate the placement and managing of orders [Chopra and Meindl, 2004]. Other than determining demand, improved communications with customers and better predictions of customer demand are needed; which leads to customer relationship management. Identifying key customers and customer groups through customer relationship management is a key step in supply chain management. Customer service, which is the nodal point of marketing and logistics, aims to develop a continuous source of customer information. Determining the key customers or classifying customers according to their different characteristics leads to development of partnering programmes and increases interaction between the focal company and its customers.


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In service industries, customer relationship management is a critical function due to extensive human involvement in the delivery phase. In this context, it includes not only external customers, but internal customers (i.e. the employees) as well. Effective management of customer relations requires acquiring adequate information from these customers, appropriately classifying and monitoring them, and accordingly implementing corporate strategies. The importance of this function also highlights the vitality of market research in service industries. Supplier Relationship Management Recent business forces lead to inter-firm relations because the business environment is making it more complex and expensive for one firm to go it alone [Lambert, Stock and Ellram, 1998]. Therefore, the buyer – supplier relationship is becoming more critical for all companies in the supply chain. In this context, supplier relationship management (SRM), which can be defined as an integrated solution that bridges product development, sourcing, supply planning, and procurement across the value chain [Lang et al., 2002], provides the interaction between the focal company and the potential suppliers [Chopra and Meindl, 2004]. Supplier relationship management’s basic aim is to arrange for and manage various supply sources for various goods and services. This function includes many processes such as design improvement through the joint selection (with suppliers) of components, contract management, supplier evaluation, and negotiations with suppliers, procurement and control of supply chain performance. In a service context, a successful SRM system should enable service firms and their suppliers to collaboratively create and deliver services faster and at the lowest total cost. Supplier relationship management is unquestionably critical to service supply chain management. This is basically due to the nature of the service delivery process, in which suppliers have a great dominance in the chain. As mentioned before, in service supply chains suppliers contribute directly to service delivery and usually in direct contact with customers. Hence, a failure in the supply side may simultaneously turn into a failure in performance. To prevent such an occurrence, sustainable relationships built on coordination, collaboration, responsiveness and trust should be maintained with the suppliers, which is the focus of supplier relationship management. Order Process Management Lambert, Stock and Ellram [1998] define order processing as the function that entails the system which an organisation has for getting orders from customers, checking on the status of orders and communicating to customers about them, and actually filling the order and making it available to the customer. The order process management function covers many sub-processes such as order preparation, order transmittal, order entry, order filling, and order status reporting [Ballou, 2004] and has many intersections with other functions of supply chain management. Thus, it has a great impact on customer’s perception of service and customer satisfaction which are decisive and shared aims of the firms in a supply chain.



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Because order processing tends to be based on automated systems, it is strictly dependent on information flows in the chain and technological advancements in logistics. Yet many businesses find that their order processing function is not working properly, despite the advances in technology and information systems. This is generally due to the lack of strong linkages between the order processing function and other logistics functions such as demand management, production and procurement. Order processing has great importance in service businesses and improvements in this function are usually reflected in cost decreases. In the service industry, the orders may take many forms such as reservations or applications. As Lovelock and Wirtz [2004] imply, the process of order taking should be polite, fast and accurate, so that the customers do not waste time and expend unnecessary mental and physical effort. Therefore, the service businesses should ensure that their order processing system is well designed and managed, and operates in cooperation with all the other abovementioned logistics activities. Service Performance Management Service performance management can be regarded as the key function in the service supply chain. Because of the nature of service businesses, the service production process requires both customer and producer to be present. In addition, performance (i.e. service production) and consumption occurs simultaneously. Service performance management in the service supply chain is similar to the production function in manufacturing-oriented supply chains, however because suppliers and buyers are required in the process besides the producer, it has a unique nature. In addition, its similarity with the production activity makes it a core rather than a supporting activity. Human resources should assume a critical role in service performance management. This is due to the extensive involvement of the human factor both as service personnel and customers in the production of services. Therefore the functions of human resources management act as an interface to the achievement of service delivery and performance. Information and Technology Management Supply chain management is to a large extent about the management of information flow. Therefore, successful management of this flow is rapidly is becoming a powerful tool for logistics and supply chain operations. It is obvious that information systems benefit vastly from advances in technology, and today management of technology is also crucial to maintain effective and efficient information systems. The key drivers for information and technology management can be summarised as the efforts to improve customer satisfaction through product availability, delivery accuracy, responsiveness and flexibility, improvement through feedback, and to increase sales revenue and improve efficiency of operations [Korhonen et al., 1998]. Management of information and technology is critical to service supply chains as the success of the key functions in the chain such as demand management, capacity management, CRM, SRM and order process management are dependent on an effective flow of information.


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APPLICATION OF THE MODEL TO THE HEALTHCARE INDUSTRY

The healthcare industry constitutes one of the most significant segments of the service sector in all developed and developing countries. In the US, the healthcare industry accounts for 16 per cent of GDP, whereas the EU average is around 8 per cent [Plunkett Research, 2005; UK Department of Health, 2003]. In developing countries, similarly, there is an increasing trend in healthcare expenditures. The reasons for growth in the healthcare industry are numerous. Decreasing fertility rates and increasing life expectancy is one of the major factors that increase the total spending on healthcare. At the same time, healthcare costs are constantly increasing due to government policies, improvements in the service quality and technological advancements. In the new millennium, healthcare institutions face additional challenges such as increased complexity of processes, the need for efficient utilisation of resources, increased pressure to improve the quality of services and the need to control the workload of healthcare personnel [De Vries et al., 1999]. All these challenges prove that implementation of logistics and supply chain management have now become a hot issue for healthcare organisations. Although there exists extreme political and public pressure on healthcare institutions to control costs while increasing the quality of services offered, healthcare organisations to a large extent are reluctant to implement supply chain management principles in their operations. Jarrett [1998] indicates that the reluctance of healthcare institutions arise as these organisations emphasise the differences in their operations and the vitality of the services they offer compared to manufacturing industries, and conclude that attempts to reduce costs may result in decreases in service quality. However, research has revealed that implementing supply chain management principles may reduce the costs by 50 per cent [Poulin, 2003], while increasing the quality of services as labour productivity is improved and more time is dedicated to core healthcare operations [Philippe and Duhamel, 2004]. Other researchers maintain that supply chain management concepts may be well implemented in the healthcare industry and other service industries [Whitson, 1997; Jarrett, 1998; De Vries et al., 1999] to achieve remarkable performance improvements [Ammenwerth et al., 2002; Li et al., 2002]. Although much of the discussion focuses on supply chain operations in healthcare organisations from a manufacturing framework [e.g. Fineman and Kapadia, 1978; Beier, 1995; Rivard-Royer et al., 2002], i.e. improving materials flow processes and systems, in this paper we propose that applying service supply chain management principles will also be beneficial to these institutions in terms of increasing performance and reducing costs. From a service supply chain perspective, hospitals and other individuals and institutions that provide healthcare services (e.g. physicians, medical and ambulatory surgical centres) are focal units in the chain. In this analysis, the hospital is taken as the basic unit that produces healthcare services, as the key activities discussed in paper are totally applicable to these institutions. The core service of a hospital is healthcare, and the process of realising this service is organised into several departments: the emergency department for acute emergency cases, the outpatients



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departments that provide specialist consultation, the diagnostic centres that deliver diagnostic support services, and the inpatients department that admit patients that require overnight treatment [De Vries et al., 1999]. Additionally, the healthcare service has many other components accompanying the core service. Some examples of these services can be listed as maintenance, catering, cleaning, laundry and patient transportation. The latter forms the operational area of the suppliers in the healthcare service supply chain, whereas many hospitals still produce these services themselves. However, this inclination to vertical integration is usually responsible for ineffectiveness and inefficiency of healthcare institutions. The healthcare industry can benefit considerably from partnerships and the value chain approach [MacStravic, 1999; Steinhart and Alsup, 2001; Pitta and Laric, 2004], which requires the hospitals to focus on their core services, and to outsource others from their suppliers. Ideally, a healthcare service supply chain is composed of suppliers offering the aforementioned support services, the hospital as the core service provider and patients as the consumers. In such a framework, the critical activities of service supply chain management are also applicable to the healthcare industry. To start with, demand management in this chain engages in activities of identifying and forecasting the healthcare demand and matching it to the organisation’s resources. In the healthcare industry, demand management involves the processes for controlling demand and managing the flow of patients through the system [Heineke, 1995]. As Li et al. [2002] indicate, demand for hospital services depends on many unpredictable factors, such as the time that services are needed and the type of professional skill that is required. Yet the demand patterns of many healthcare services can be traced using statistical data, and measures to organise operations effectively can be taken accordingly. For example, poisonings due to several causes such as insect bites or pesticides follow seasonal patterns. Given such a track record, the emergency service may increase its supply of the antidotes to these types of poisonings in accordance with the increase in their incidence. Similarly, during special events that directly affect the healthcare demand (Olympiads, international conferences, etc.), logistics operations in the chain should be organised to meet increased demand. A hospital has to continually carry out retrospective analyses and base its future strategies on the results of these analyses. Consequently, the hospital may develop guidelines to manage patient admissions, operational and personnel scheduling, or use of support services, addressing flexible strategies to suit the dynamic nature of health itself and which will in turn enhance the effectiveness and efficiency of operations. Capacity and resources management is closely connected to demand management. Capacity can be planned using demand forecasts, as well as information flowing from other primary or secondary data sources. By using this data, the enterprises operating in the healthcare supply chain should organise and plan their available capacity and resources to meet the demand, and if there is shortage of resources they should seek outsourcing alternatives. The resources of a hospital include staff (nursing, medical and paramedical), beds, operating rooms and diagnostic facilities [De Vries et al., 1999] and determine the type and level of healthcare service offered. These resources are usually subject to constraints by governmental agencies or private insurance companies. Additionally, it should be noted that


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many of these resources are shared by different processes concurrently and consecutively, while the availability and utilisation level is to a large extent fixed [De Vries et al., 1999]. Consequently, there exists a high level of complexity in capacity planning in healthcare institutions. Therefore, capacity planning should be done at the hospital level as the part of strategic decision making to ensure efficiency in all departments. Customer relationship management practices are relatively new, and thus still insignificant in the healthcare industry. Especially in developing countries where healthcare services to a large extent are provided by public institutions, such practices are literally nonexistent. However, CRM, sometimes referred to as PRM (Patient Relationship Management), constitutes an important area for successful implementation of supply chain management principles and is an important tool for understanding, managing and measuring patient profitability. CRM in healthcare includes obtaining information about the patients and prospects, communicating relevant and timely information to them, and tracking results to make message and programme adjustments as necessary. The CRM approach is also an effective tool to improve patient health, relationships and loyalty [Benz and Paddison, 2004]. In the healthcare industry, an effective CRM programme can only be achieved by information systems that enhance data quality and data integration [Alshawi et al., 2003]. Therefore, medical informatics systems are of critical importance for CRM applications in healthcare servicescapes. Supplier relationship management is also vital to healthcare service supply chains. This is basically due to the nature of the service delivery process, in which suppliers may contribute directly to service delivery (such as outsourced ambulatory services) and usually come into contact with patients (customers). Additionally, any flaws or failures in supplier services can create health-threatening risks. Therefore, maintaining ‘healthy’ relationships with service suppliers emerges as one of the critical tasks for healthcare industry. Given the complex and interdependent structure of supplier– buyer relationships in the chain, supplier relationship management, which is responsible for the selection of suppliers, collaborative service design processes, definition of optimal sourcing strategies and the actual procurement processes, directly contributes to actual service performances and plays a key role in the effective management and maintenance of the system. Order process management in the healthcare industry is responsible for translating patient requirements into actual orders that are put into the system. In the healthcare sector, order process management begins with the initiation of the healthcare service purchase, which can be in the form of appointment or admission to the institution and continues as long as the relationship with the patient is maintained. The order process management function in the healthcare industry covers many sub-processes such as order preparation, order transmittal, order entry, order filling, and order status reporting [Ballou, 2004] and is of critical importance to delivery of the service, as many healthcare services require urgent and simultaneous order information. For example, the consequential flow of operations including the admission of the patient, preparation of the initial diagnostics and consultation report, and submission to the Emergency Room (ER) department, documents required for the transfer of the



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patient and preparation of the operating room accordingly are the responsibility of order process management. Consequently, this activity has a great impact on customer’s perception of healthcare service delivery and satisfaction. Failures in order process management may have a direct negative impact on the overall effectiveness of the service performance. Finally, service performance management in the healthcare industry is about the core service delivery to the patient. It therefore includes the design of the healthcare service and management of operations during service delivery. All other activities mentioned before are strongly linked to service performance management and form the basis for success in this activity. Service performance management is the production function in the chain, and the actual service product such as physician’s examination and consultation, diagnostics, treatment and nursing services offered to patients, with all the aspects surrounding the core service product, is under direct responsibility of service performance management. In healthcare service settings, the healthcare staff is of great importance, as these services require constant interaction with patients. Therefore, it should be noted that human resources management contributes extensively to the success of service performance management. The complicated and decentralised nature of healthcare operations requires effective information and technology management in the supply chain and all activities contained within it. Ammenwerth et al. [2002] state that innovative information technology, such as electronic patient record systems or bar coding in the medication administration process [Abrahamsen, 2005] have potential to support all logistics operations and service quality improvements in the healthcare institutions. Similar to the mission of logistics management, the mission of information and technology management is providing the right patient data and medical knowledge at the right time, in the right place, to the right person and in the right form [Ammenwerth et al., 2002]. Information and technology management also connects key supply chain activities of demand management, capacity and resources management, order process management, SRM and CRM. Effective management of the healthcare supply chain is only possible via the implementation of effective information and technology management systems.

CONCLUSION AND RECOMMENDATIONS

The importance of effective supply chain management is becoming more critical for all manufacturing companies as well as service companies. In order to gain competitive advantage through effectively applied supply chain management, all service industries seek for new approaches to achieve effective reorganisation, restructuring, reengineering and redesigning applications for the overall industry system processes. The effects of globalisation, such as borderless markets, increasing competition, and rapidly improving technology, have changed the nature of service industries. All service industries are transforming into more complex and diversified organisational structures. Therefore, the requirements for service firm management are increasing dramatically. The successful management of service businesses basically


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requires an integrated supply chain management approach, including high involvement in the supply chain and close relations with both suppliers and customers, to gain the synergy advantage of cooperation in the chain. The adaptation of the supply chain approach to different service sectors is therefore essential. Industry-based new models and frameworks for service supply chains are required for future research. In this study, a general supply chain model for the services industry is proposed. The model includes all elements of the supply chain and defines the managerial activities to be fulfilled for effective management of service supply chains. These activities are identified as demand management, capacity and resources management, customer relationship management, supplier relationship management, order process management and service performance management. Additionally, information and technology management is accepted as a supra-structural construct in the model. The proposed model, which is called the IUE-SSC Model, is also implemented for the healthcare industry. The healthcare industry today is characterised by tremendous growth accompanying escalating costs due to government policies, improvements in service quality and technological advancements. Therefore, implementation of effective supply chain management in the healthcare industry emerges as a powerful tool to cope with these challenges. In this context, service supply chain management is undoubtedly vital for the industry. Future research should be directed to examining the validity of the model in different service industries. Moreover, implementation of the model in different countries addressing different healthcare systems is necessary to verify the applicability of the model. Additional data obtained from these studies should be used to substantiate the generalisability of the model and enrich it with new constructs. Finally, a new body of managerial literature can be developed which addresses the service industry-based supply chain management strategies.

NOTE 1. http://www.supply-chain.org.

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