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

1.1.2 Service Orientation in the Classical Industry, Product Orientation in the Service Industry, and the Industrial Product-Service System (IPSS)

Intended learning outcomes: Differentiate between a (primary, ore core) product, a product in a broad sense, and a product in the most comprehensive sense. Produce an overview on industrialization of service. Present the industrial product-service system. Explain product-oriented, use-oriented, and result-oriented services as well as their degree of intangibility.

As [Levi81] states, “tangible products differ in that they can usually, or to some degree, be directly experienced — seen, touched, smelled, or tasted, as well as tested”. However, for capital goods in particular, tangibility is not enough. As Figure shows, the decisive factor influencing the purchase is rather the holistic experience.

Fig.         The product in its holistic experience.

A product, in a broad sense, is a (primary, or core) product along with the services provided, where the consumer sees the two as a unit. 

For investment goods, additional services increasingly constitute the key sales argument. Here, “services provided” could mean installation instructions or a user manual, training information, or the promise of future (after-sales) services such as maintenance and repairs.

In buyer's markets, individualization of products to customers' requirements and personali­zed production become more and more important. In particular, an ETO (“engineer-to-order”) production environment leads to a service focus and to value co-creation. See here Section 7.4. With a product variety subject to (changing) customer specification (e.g. for the “haute couture” sector of the fashion industry), repeated input from the customer is a key characteristic of the production process. Trying on a half-finished dress is actually a service process in the original sense, i.e. it needs ongoing intensive contact with the beneficiary of the service. It even offers an opportunity for the specification of the product (the dress) to be changed. Then, the quality of such services, or the processes “around the product,” can become as much or even more important than the quality of the core product.

A product, in the most comprehensive sense, comprises the (primary, or core) product, the services provided, and the company itself, with its image and reputation. 

Here, the consumer sees all three as a unit. An example is the concept of Total Care in the insurance branch. The aim is to give the customer the idea that the quality of the company, that is of the organization as a whole will provide all-encompassing care. This "all about the customer" process builds trust. Image and reputation of a company are a consequence of stakeholder opinions which, according to Figure 1 in the introduction, include business partners, employees, shareholders, society, environment and nature.

Small exercise: To get more informations on the holistic experience of a product, and the degree of its compehensiveness roll over the terms.

Beside the need for service orientation in the classical industry, there also is a need for product orientation in the service industry. According to the hospitality sector example quoted in Section 1.1.1 from [Levi81], “tangibilization of an intangible should ideally be done as a matter of routine on a systematic basis.” Such hotels have “industrialized the delivery (of their promise of service).”

Industrialization of service means, like in classical industries, standardization and automa­tion of its performance. Section 7.3 describes an example from the insurance industry. The use of a product configurator allows (intangible) elementary insurance services (called elementary products — as the insurance specialists took the idea from classical industry) to be modularly assembled to form a variety of combined products, and these combined products to be put together to form contracts. Catering is another example: there is a lot of similarity between standardized recipes in the catering sector and recipes used in industrialized food or chemical-pharmaceutical production.

Industrialization also means some standardized service components can be developed and prepared in advance. This applies for hotel and catering services every bit as much as for spare parts. Also, the costs for these components that form part of a more comprehensive service can be calculated in advance. In this context, it becomes clear why an industrialized service, although intangible, is often perceived as a product (and is referred to as one), for example in the above-mentioned hospitality or insurance sector. Industrialization of services offers efficiency gains, without any loss of effectiveness. This is an area where the service sector is learning from classical production used for tangible goods. Then, the performance of the (part) service can be perceived as a “production” of intangibles (sometimes, called service production), and the result can be perceived as an (intangible) product or commodity.

The service industry can also provide entire services that are similar to the supply of tangible products. Simple spare parts delivery is often perceived as a service, but is actually no dif­ferent to producing standard products, where these are kept in stock to ensure fast delivery. And although delivery of a passport is considered to be a service, these days it is actually no different (even in the degree of industrialization) to the supply of a make-to-order product, for which the beneficiary has to enter their personal data (including a facial photograph). Thus, the customer focus will be on acquiring a product rather than receiving a service.

This means that although the so-called IHIP characteristics of services (Intangibility; Heterogeneity, i.e. uniqueness of service processes; Inseparability (or simultaneity) of provision and consumption; and Perishability (e.g. exclusion from inventory)) are popular for practical applications in service-oriented companies, their suitability is limited. According to [Hert13], IHIPs are “not defining characteristics, but simply symptoms.”

According to [MeRo10], an industrial product-service system IPSS (or IPS2) is characteri­zed by the integrated and mutually determined planning, development, provision and use of product and service shares including its immanent software components in Business-to-Business applications and represents a knowledge-intensive socio-technical system.

An IPSS is thus focused on capital goods such as machinery and equipment which are produced and sold by classical industry, and which are used over a long time period. In that model, customers are businesses, rather than individuals. In addition, although the service recipient is a tangible (core or primary) product, this definition shows that in an IPSS there are no “add-on” services to this product. To create value for the customer and to sell well, the original equipment manufacturer (OEM) network and their suppliers must design the services with the customer (beneficiary) right from the start, as shown in Figure That is the thinking behind the term value co-creation (see also [KaNi18]).

Fig.         Industrial product-service system stakeholders (copied from [MeRo10])

Industrial product-service systems have become more important particularly in classical industries, since quality and costs of the core product from many OEM have become almost indistinguishable from the customer's perspective. Offering something different in terms of additional services can be the distinguishing feature that makes what a company is offering stand out, especially in competitive markets.

Product-service systems can be categorized into product-oriented, use-oriented, and result-oriented product-service systems. Across these three categories, the degree of integration in the customer’s process is increasing. Figure assigns possible services in an industrial product-service system for packaging machines to these categories.

Fig.         Categories of possible industrial services (cf. [Lang09])

Some product-oriented services are of a material nature. As an example, there is no real distinction between the simply supply of spare parts without any additional services and supplying and charging for some form of material goods. Other product-oriented services tend to be of an intangible nature and are usually charged for in time units, whereby (material) consumable materials or components can also be charged for. Examples of this would include commissioning the machine, maintenance and repair, retrofit, or upgrading.

Use-oriented services are generally intangible. Examples include process consulting, train­ing, audits, monitoring, and usability of the machine. Such processes are normally charged for in time units or on the basis of a performance indicator that is measured as a percentage.

The degree of intangibility for result-oriented services can be high or low, depending on the agreed result. As an example, for cleaning services, the result could be an agreed upon level of cleanliness, which is an intangible result. Photocopier manufacturers supply the machine, paper and consumables. As a result, they can determine the number of copies produced. Whether the result counts as a tangible or intangible will depend on whether attention is focused on the photocopy that is produced, or whether the significant fact is simply that a copy has been taken. For industrial services, the focus for contract work (an external manufacturer executes just one or more operations for making a product) or the operator model (the manufacturer not only supplies but also operates the machine under contract to the customer) is on the items that are produced, which the customer assesses the quality of and pays for accordingly. Those are tangibles. In the case of the packing machines, the manufacturer of the packing machines as well produces packaging.

Conclusion: The oft-formulated distinction between “product = tangible” and “service = intangible” is becoming ever more blurred. What the customer actually perceives as value-added depends on a number of tangible and intangible elements that work together as a system and offer the customer the desired benefits. The elements and the system as a whole may be perceived to be a product or a service, depending on the customer's focus.

Course section 1.1: Subsections and their intended learning outcomes

  • 1.1 Basic Definitions, Issues, and Challenges

    Intended learning outcomes: Produce an overview on terms of the working environment and of business life. Explain service orientation in the classical industry, product orientation in the service industry, and the industrial product-service system. Disclose the product life cycle, the synchronization of supply and demand, and the role of inventories. Produce an overview on supply chain management, the role of planning and control as well as the SCOR model.

  • 1.1.1 Important Terms of the Working Environment and of Business Life

    Intended learning outcomes: Produce an overview on terms of the working environment, such as work, task, process, method, object, etc. Explain terms of business life, such as value-added, business process, material, product, service, classical (or conventional) industry, etc. Present terms of the service domain such as customer service, service in the originary sense, service industry, etc.

  • 1.1.2 Service Orientation in the Classical Industry, Product Orientation in the Service Industry, and the Industrial Product-Service System (IPSS)

    Intended learning outcomes: Differentiate between a (primary, ore core) product, a product in a broad sense, and a product in the most comprehensive sense. Produce an overview on industrialization of service. Present the industrial product-service system. Explain product-oriented, use-oriented, and result-oriented services as well as their degree of intangibility.

  • 1.1.3 The Product Life Cycle, Logistics and Operations Management, the Synchronization of Supply and Demand, and the Role of Inventories

    Intended learning outcomes: Produce an overview on the product life-cycle. Differentiate between terms such as logistics, operations, logistic management, operations management, and value-added management. Describe supply, demand, lead time, and costomer tolerance time. Explain the problem of temporal synchronization between supply and demand as well as the role of various kinds of inventories in solving this problem.

  • 1.1.4 The Supply Chain, Supply Chain Management, and Integral Logistics Management

    Intended learning outcomes: Differentiate between a logistics network, a production network, a procurement network, a distribution network, and a service network. Describe the concept of the supply chain. Produce an overview on supply chain management and on integral logistics management.

  • 1.1.5 The Role of Planning and Control and the SCOR Model

    Intended learning outcomes: Produce an overview on planning, in partcular on supply chain planning. Differentiate between production planning and control (PPC) and a PPC system. Present the Supply Chain Operations Reference (SCOR) model. Describe levels 1 and 2 of the actual SCOR model.