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

3.1.4 Design Options for Global Service Networks

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. Explain design options for global service networks for services in direct contact with the object. Describe some company cases.


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 1.1.1). 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. The portfolio in Figure 3.1.4.1 shows, in addition to the two classical designs (centralized or decentralized service), two possible mixed designs. The four possible designs lie in four sectors in a two-dimensional space, spanned by the dimensions that correspond to the two (conflicting) groups of features.

The sector S1 describes the option of a centralized service at the manu­facturer’s or speci­fic service provider’s location, with the object being picked up, and later (that is, after the service provision), brought from or to the location by the service provider. It is advantageous where the mobility cost ratio and demand volatility are high. In such cases, customers are usually also prepared to tolerate generally longer transport routes and longer lead times until delivery or execution of the service. This option permits a wide selection of services and a high fill rate as well as relatively low facility and handling costs. Neverthe­less, these are countered by high transport costs, often associated with complex preparation and special modes of transport. In addition, there is a rather higher level of complexity for information systems, in relation to both the transmission of orders from the service point of sale and to order tracking during the service provision. The location of the object before and after the service need not necessarily be the same, and need not necessarily be that of the ordering party (e.g., dealer in second-hand machinery). However, in such cases, even greater complexity must be taken into account for the information systems described above. This is the classical design option for comprehensive refurbishment and modernization of capital goods (normally by the manufacturer, e.g., machinery, aircraft, and vehicles), for contract work, and for major operations at specialized hospitals in the health sector.

Fig. 3.1.4.1        Features of and design options for service networks for services in direct contact with the object.

The opposite sector S4 describes the decentralized service in the service center. The object is brought and later (that is, after the service provision) picked up by the customer. This design option is suitable where the customer is prepared and able to bring the object to the service center and pick it up again. First, the customer may or must schedule the execution of the service — potentially involving several visits. This design option is transparent, requires much simpler information systems for ordering and order tracking of the service, and allows repeated transfer of the same service object. Examples here are simple repairs to items of everyday use, such as vehicles, shoes, devices, and simple services delivered to people, such as in the hairdresser’s, at the bank, at the doctor’s surgery, or at a kindergarten.

The intermediate sector S2 describes the service provided by the manu­facturer / specific service provider or from a local service center, with provision of the service at the location of the object: this is the easiest option for the customer. However, it requires rather low demand volatility and accessibility to the object at the agreed time. If this is not the case, the consequences will be high stand-by costs and transport costs that are even higher than their currently high levels owing to futile journeys. Often, the challenge of optimum routing and scheduling also presents itself. The service is provided from a local center. For rarely executed or difficult services it may be better if a specialist service provider or even the manufacturer is deployed. Examples here are the classical maintenance and repair or operator models on site, as well as insurance services, simple home care, medical services provided by general practitioners in the home, and home tutoring.

The intermediate sector S3 describes the centralized service at the manu­facturer’s location or servicing in a major service center. The customer brings to and later (that is, after the service provision) picks up the object from a collection point. This design option can be selected if the customer is prepared and able to bring and pick up the object and can thereby benefit from significantly lower transport costs. Examples here are major repairs to tools and equipment or the operation of traditional school (collective transportation of schoolchildren) or group trips. The requirement in terms of accompanying information systems for this is even higher than for option S1. If the collection point incurs significant costs, this solution becomes economically unviable. Thus, collection points should be combinable with existing service centers or product distribution centers (e.g., in-store). Such collection points permit repeated transfer of the same service object. Collection points in relation to schools or tourism can be combined with a stop on the public transport network, for example. Provision of the service in service centers instead of the producer reduces the transport times. In turn, either the selection of services and their availability is reduced, or stand-by costs rise. The costs for plant and handling rise further anyway, due to the costs of the service center. This solution is suitable if the objects accumulate in specific regions. Larger service centers and the specific service provider may also act as collection centers. An example of this would be accident and emergency departments in a hospital.

Similarly to the network structure for decentralized distribution and the design options for retail networks, decentralized service concepts (sectors S2, S3, S4) require a suitable “multi-echelon” structure and a network of service providers, service centers, and collection points. The degree of similarity to the shapes of retail networks shown in Figure 3.1.3.2 is high.

Company cases: In the prior example, Hilti owns local service and repair centers as part of the different sales organizations. The customer tolerance time is very low, as is the degree of customer involvement in bringing and picking up. Due to the direct delivery concept, the sales representatives are close to the customer. In case of a defect, e.g., of a drilling machine, Hilti’s fleet management quickly delivers replacement, taking back the defective equipment at the same time. Thus S2 is the preferred design option.

For the equipment they previously sold, the aforementioned big retail chains like Walmart or Migros offer collection points right at their larger points of sale. Sometimes, there is also an on-site service shop (option S4). More commonly, they use the transportation network that delivers products via the different echelons of their distribution network structure for transporting the defective part to a larger service center or to the manufacturer (option S3).

Further Correlations That Should Be Considered for an Integrated Determination of the Design Options: Through skillful redesign of a complex service, parts of the service can possibly take on a more decentralized character. For example, extensive revision of a machine at the manufacturer’s site can be carried out more as a sequence of simplified service variants at the operator’s site, without missing the de­sired goal of the revision. Prior to the performing of these simpler services, the necessary repair parts can be delivered via the distribution network. Furthermore, the degree of decentralization of services is, in general, at least as high as the degree of decentralization of the distribution. Actually, it would not make sense to the customer, why she or he should accept a longer way for maintenance and repair than for delivery. So a point of sale can often be used as a collection point, sometimes even as a local service center.

For a service that is related to a previously manufactured product (e.g., the classi­cal mainte­nance and repair of installed appliances), then these four design options cannot be selected without giving consideration to the design of the production network. For production destined for the global market (sectors P1 and P3 in Figure 3.1.1.2), all four design options for the global service network come into question. For production destined for the local market (sectors P2 and P4 in Figure 3.1.1.2) only the design options in the sectors S2 and S4 in Figure 3.1.4.1 come into question from a global perspective. From a local perspective, it is naturally possible to view ser­vice by the (local) manu­facturer as “central.” In such a case, all four design options can come into question, albeit only for the local service network.



Course section 3.1: Subsections and their intended learning outcomes

  • 3.1 Design Options for Integrated Production, Distribution, Service, and Transportation Networks

    Intended learning outcomes: Explain design options for global production networks, distribution networks, service networks, and transportation networks. Describe the network structure for decentralized distribution, and design options for retail networks. Disclose the integration of the portfolios.

  • 3.1.1 Design Options for Global Production Networks

    Intended learning outcomes: Differentiate between centralized production and decentralized production. Present features such as demand volatility, supply chain vulnerability, economies of scale, demand for consistent process quality, customer proximity, market specificity of products, value density. Explain design options for global production networks. Describe some company cases.

  • 3.1.2 Design Options for Global Distribution Networks

    Intended learning outcomes: Differentiate between centralized distribution and decentralized distribution. Present features such as demand variety, need for efficient returns, degree of customer involvement in picking up. Explain design options for global distribution networks. Describe some company cases.

  • 3.1.3 Network Structure for Decentralized Distribution, and Design Options for Retail Networks

    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. For decentralized distribution, explain: portfolio for designing retail networks retail networks.

  • 3.1.4 Design Options for Global Service Networks

    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. Explain design options for global service networks for services in direct contact with the object. Describe some company cases.

  • 3.1.5 Design Options for Global Transportation Networks

    Intended learning outcomes: Differentiate between direct transport and indirect transport. Present features such as size or weight of the delivery, possibility of using an existing transport network, and need for merged transport. Explain design options for global transportation networks. Describe some company cases.

  • 3.1.6 Integration of the Portfolios of Design Options

    Intended learning outcomes: Describe the interrelation between and integration of the production, transport, distribution and retail network.

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