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

1.1.3 The Service Industry and Industrialization of Service — Product Orientation in the Service Industry

Intended learning outcomes: Differentiate between service industry and classical (or conventional) industry. Produce an overview on industrialization of service.

The service industry is, according to [APIC16], in the narrowest sense, an organization  that provides intangibles (e.g. medical or legal advice). In the broad­est sense, all organizations except farming, mining, and manufacturing. It includes retail trade, wholesale trade, transportation and utilities, finance, insurance and real estate; construction; professional, personal, and social services; and local, state, and federal governments and also provides intangible goods such as information.
Using this definition, examples of a classical (or conventional) industry would include organi­zations like farming, mining, and manufacturing. Companies working in this sector mainly produce tangible goods, or tangibles.

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 7.3.3 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.”

Course section 1.1: Subsections and their intended learning outcomes