Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

3.1.4 Centralized Service Versus Decentralized Service

Intended learning outcomes: Differentiate between centralized service and decentralized service. Present features such as the mobility cost ratio of the service, the degree of customer involvement in bringing and picking up the service object, as well as the need for repeated transfer of the service object.

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A service in the originary sense can also be described as a process with direct contact with the service object (see the definitions in Section 1.1.2). Due to technological development and industrialization, the following two kind of (sub)processes have developed for which contact with the object in the same location is no longer necessary to the same extent.

  • Process with indirect contact with the object ranks services that take reservations or orders, such as travel agencies, car rental, or mail order companies; also services that deliver information and thus support the actual products or services, both before and after sales, e.g., call centers or hot lines. As the deli­very costs of information do not differ greatly for different locations, the locations can in principle be anywhere in the world where the production costs — for the required quality — are minimal.
  • Process with no object contact often ranks sub-processes of the service as a whole that bear similarities to classical production and that — for example, due to efficiencies (econo­mies of scale or economies of scope) or difficulty — must be carried out at a centralized location. Some examples of these processes are the “back offices” of banks (for example, in the mortgage or loan busi­ness), insurance compa­nies (for example, for policies that cover special risks), or credit card billing companies. Delivery costs do not play a role as soon as goods can be transmitted digitally; these
    centers can in principle be located anywhere in the world, as long as quality is assured. Other processes that also belong here are the mere delivery of spare parts, or activities in centralized picking locations, e.g., for catering busines­ses, or processes along the distribution network structure for tangible goods; in these cases there are delivery costs in addition to production costs, so that the facilities cannot be sited at just any locations. With this, under certain conditions multi-level
    service networks will form, in which the individual locations are linked together.

For networks of services in the originary sense, it is possible to distinguish, in a first approach and in analogy to production and distribution networks, two fundamental types:

In centralized service a specific service is provided directly at one or a few central service centers.
In decentralized service, the service is provided at or from several service centers, located, as close to customers as possible.

The advantages and disadvantages of centralized service as compared to decentralized service arise in a similar manner to the advantages and disadvantages of centralized distribution versus decentralized distribution. It is simply necessary to assume that the object will be transferred to the service provider, potentially also at the place at which the object is located; this must be the first sub-process of the service and is critical to the effectiveness of service delivery. The important features for designing service networks are in principle the same as those for the distri­bution networks. However, the meaning of the following features changes:

  • The value density of the product becomes the mobility cost ratio of the service, i.e., the mobility costs for the service provider (to bring people, equipment, and materials such as spare parts to the object), in comparison with the mobility costs of the object. The latter include costs of transporting the object (generally dependent on size and weight) and for preparing the object for transportation at its base location. In the event of a complete overhaul or retrofitting of a machine or piece of equipment, preparations also include the dismounting and subsequent re-mounting. When the object is actually a person, the cost is measured in terms of the subjective value placed on loss of comfort, for example, due to a stay away from home in a hospital.
  • The degree of customer involvement in picking up becomes the degree of customer involvement in bringing and picking up: To what extent are customers willing and able to bring and pick up the object?
  • The need for efficient returns becomes the need for repeated transfer of the service object. Some objects must be treated repeatedly by the same service provider, e.g., vehicles at a garage or patients by a general practitioner.

As with production or distribution networks, the two groups of features often stand in opposition to one another. There are examples of this:

  • The classical maintenance and repair or operator models on site, insurance services, simple home care, medical services provided by general practitioners in the home, home tutoring: low mobility cost ratio of the service (in favor of decentralized service), however, a rather low degree of customer involvement in bringing and picking up (in favor of centralized service)
  • Major repairs to tools and equipment, the operation of traditional schools with collective transportation of schoolchildren, group trips: high mobility cost ratio of the service (in favor of centralized service), however, a high degree of customer involvement in bringing and picking up, as long as the pickup site is close enough (in favor of decentralized service)

Again, a company must make a strategic decision, which some­times differs for each product family.

Continuation in next subsection (3.3.4b).

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Course section 3.1: Subsections and their intended learning outcomes

  • 3.1.2b Design Options for Global Distribution Networks
    3.1.2b Design Options for Global Distribution Networks

    Intended learning outcomes: Explain design options for global distribution networks. Describe some company cases.

  • 3.1.3 Network Structure for Decentralized Distribution
    3.1.3 Network Structure for Decentralized Distribution

    Intended learning outcomes: Disclose the distribution network structure and describe decision variables in its design. Present features such as available time for shopping, and simultaneously, capacity of an available means of transport of the customer, as well as the required geographical catchment area.

  • 3.1.3b Design Options for Retail Networks
    3.1.3b Design Options for Retail Networks

    Intended learning outcomes: For decentralized distribution, explain the portfolio for designing retail networks retail networks.

  • 3.1.4 Centralized Service Versus Decentralized Service
    3.1.4 Centralized Service Versus Decentralized Service

    Intended learning outcomes: Differentiate between centralized service and decentralized service. Present features such as the mobility cost ratio of the service, the degree of customer involvement in bringing and picking up the service object, as well as the need for repeated transfer of the service object.

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