Adapting Manufacturing Strategy to Industrial After-Sales Service Operations

Postgraduate

 Introduction

For basically any company the goal is to maintain long term profitability, in order to secure shareholder value. By integrating the fields of engineering and economics in an interdisciplinary way, Production Economics provides tools and methods that are applicable to managerial problems, with an aim to ensure the economic needs of companies. For many manufacturing companies after-sales services are a natural part of the performed activities, and as such should contribute to the overall goal of profitability. The needs and characteristics of these after-sales services are here connected to the framework of manufacturing strategy, in order to find production economic solutions to problems raised in manufacturing companies with a significant share of their operations being involved in the supply of after-sales activities.

The original reason for starting this research was the background of the author. Having come in contact with various after-sales service activities within the companies Kvaerner, ABB and SKF during my time studying for a master of science, I was intrigued by basically two things. The first was the usually very good profitability of these business areas of the companies, even at times when industry in general was struggling. This was a very appealing characteristic of the after-sales services, as it is almost always funny to be part of a winning – or in this case profitable – team. The second thing though was something that gave a more mixed feeling, and this was the lack of refinement in the business models, and also the lack of both theoretical and empirical guidelines for managing the after-sales service part of operations. So while working at what was then named ABB-ALSTOM Power, today divided into ALSTOM and Siemens, the opportunity to enter a doctoral program at the Department of Production Economics emerged. To achieve a counterweight to this starting point as a practitioner, the thesis has a theoretical aim and its results are found through deductive reasoning using existing theories. This reasoning may however unintentionally be coloured by the background of the author, as stated above.

Although questions concerning the management of industrial aftersales services was the main reason for initiating this research, it should be noted that services in general are becoming of increasing importance to companies and society. The continuous change in the world has led to a situation where traditional industry no longer is the major contributor to employment and economy in the western countries. Instead, service activities are at an all time high, contributing to more than 70 % of both gross domestic product and share of employment (see e.g. Fitzsimmons and Fitzsimmons, 1998, Hope and Mühlemann, 1997, and Schmenner, 1995). Considering employment, services are in the lead while agricultural activities are at an all time low, only occupying a few percent of the workforce, and manufacturing is still making a fairly large contribution with commonly around 20 %. Figure 1 shows how employment has shifted in the U.S. economy over the past 150 years, highlighting the importance of services. 


Frame of reference

The purpose of this chapter is to give the reader an introduction to the research foundation which the individual papers of the thesis rests upon. The theoretical frame of reference presented here is divided into three parts. First is a part discussing the differences and similarities between goods and service, and the use of the term product. The second part is devoted to the basic concepts of manufacturing strategy, and the third to service operations management, with a specific focus research related to after-sales services. 

The goods to service continuum

A common denominator within service operations and service management literature is a clarification and motivation why service is an area that needs to be treated separately from traditional goods manufacturing. Based upon Sasser et al. (1978), Haksever et al. (2000) claim that the four primary characteristics of a service are intangibility, inseparability, perishability and variability. A similar view is held by Metters et al. (2003), who claim that what separate services from goods is intangibility, simultaneous production and consumption, proximity to customer, and that inventory cannot be held. Slight differences can be found between different works, but a summary of characterising differences is presented in Table 1. These differencing characteristics are adapted from Grönroos (2001), Fitzsimmons and Fitzsimmons (1998), Schmenner (1995), Johnston and Clark (2001), and Finch and Luebbe (1995). 

A pure service product can thereby be seen as something untouchable, which only exists while it is being supplied, and that is an exchange between two actors. Operations management deals with the transformation process of turning inputs into outputs, traditionally considering the output to be a good (Hope and Mühlemann, 1997). In a similar way service operations management also deals with the transformation process, but with consideration taken to the specifics of services, compared to operations’ original manufacturing focus. (See e.g. Hope and Mühlemann, 1997).


Manufacturing strategy

In order to succeed with the goal of creating value trough long-term survival and profitability, manufacturing companies continuously make decisions regarding future events, consciously or not. Under the premise that these decisions are deliberate and thought through, they constitute the company’s strategy. Thus a company’s strategy is the path it takes to reach its goals.  Since the start by Skinner (1969), manufacturing strategy has evolved into a well-defined research area, with generally accepted theories and numerous textbooks for teaching the subject (e.g. Hayes and Wheelwright, 1984; Stonebraker and Leong, 1994; Hill, 1995, 2000; Slack and Lewis, 2002; and Hayes et al., 2005). Common content in these books are chapters regarding capacity, facilities, planning and control, and quality strategies. As the research field has evolved, the word operations is increasingly being used instead of manufacturing; in the following subchapters both words are used, in order to try to stay true to the references which are being used. However, given the evolution of the manufacturing strategy framework, the term operations strategy is the most appropriate in the view of the author. This is based on an increasing attention to service specific questions being handled in the books listed above, especially so in Slack and Lewis (2002) and Hayes et al.  (2005), in which the word operations is used instead of manufacturing.  Slack and Lewis (2002) explicitly state that they make a step from manufacturing only to a more generalised operating environment, covering both goods and service operations. As such, Slack and Lewis (2002, p.14) define operations strategy as: “the total pattern of decisions which shape the long-term capabilities of any type of operation and their contribution to overall strategy”. This indicates that a manufacturing strategy would be defined by substitute the words “of any type” to “a manufacturing” in the definition. In a similar fashion, Hayes et al. (2005, p.33) define operations strategy as “a set of goals, policies, and self-imposed restrictions that together describe how the organization proposes to direct and develop all the resources invested in operations so as to best fulfil (and possibly redefine) its mission”.