Purchasing Services

Concepts from theory and practice

Seminar Paper 2006 43 Pages

Business economics - Supply, Production, Logistics


Table of Contents

List of Abbreviations

1 Introduction
1.1 Research Objective
1.2 Procedure of Analysis

2 The Challenge of Managing the Services´ Spend
2.1 The Service Portfolio from a Supply Management Perspective
2.2 Differences and Similarities between Purchasing Goods and Services
2.3 Particular Difficulties in Purchasing Services

3 Concepts in Theory
3.1 Manufacturing-Based Models
3.2 The Application of Manufacturing-Based Models to Services
3.2.1 The Services Supply Chain Model
3.2.2 The Activities-Resources-Actors Model

4 The Status Quo in Practice
4.1 Purchasing Services in Chosen Companies
4.2 Case Study

5 Analysis and Comparison of Theory and Status Quo - A Benchmark
5.1 Theoretical Approaches versus Current Processes
5.2 Identification of Best Practices

6 Conclusion and Recommendations

7 Appendix


List of Figures

Figure 1: Different Service Dimensions and Resulting Problems

Figure 2: Hewlett-Packard Supply Chain Model

Figure 3: The SCOR Model

Figure 4: The GSCF Model

Figure 5: The Services Supply Chain Model

Figure 6: The Activities-Resources-Actors Model

Figure 7: Importance of the Four Dimensions in Theory and Practice

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1 Introduction

1.1 Research Objective

“Unfortunately, the tried and true rules for buying goods do not work when applied to the buying of professional services.“[1] Thirty years ago, Wittreich already recognized the importance and the lack of an individual approach for buying professional services compared to the sourcing of goods. At this time, the intention behind buying was merely a reactive approach to overcome companies’ lack of capabilites to provide services on their own. This represents a rather operative procurement in a reactive sense.[2]

Today, this reactive behavior has developed into a more anticipating proactive approach. Lately, sourcing services has been moving in the direction of strategic purchasing. Up to 86 % of the total purchase spend are assigned to services. This service spend does not allow companies to neglect the importance of sourcing services in all sectors of today’s economy.[3] To ensure a longterm competitive advantage, companies need to analyze and evaluate their value added by optimizing the amount of buying services.[4] The remaining problem is that companies often struggle to break down their spend category, especially the amount belonging to services. Furthermore, what aggravates buying services is the fact that the purchasing departments are not integrated enough[5] to ensure predominant procurement methodologies for further efficient cost-savings.[6]

Still, “the procurement department is often seen as the little brother of other company departments, who is on his way to grow up”. Even more rudimentary is the companies’ procurement of services – it is still regarded as “a real stepchild”[7]. In addition to this grievance in practice, a shortcoming seems to be the rare dispersion in theory and literature.

This leads to the objectives the authors of this paper seek to throw light on. Namely, to what extent can the procurement of services in theory and its implementation in practice be viewed critically, and to what extent theory and practice are interlocked.

1.2 Procedure of Analysis

To develop the stated research objective, the second section of this paper will provide the foundation for the following chapters by offering an overview about the services’ spend and its procurement in general. This chapter sets focuses on the service portfolio (2.1), the differences and similarities between purchasing goods and services (2.2) and the difficulties in purchasing services (2.3).

The foundation set above leads to the third part, in which processes in theory from a supply management perspective are applied. Therefore, manufacturing-based models will be introduced (3.1) in order to project former concepts on a services’ level (3.2). In this context, the Services Supply Chain Model (3.2.1) and the Activities-Resources-Actors Model (3.2.2) are derived.

The resulting “differences”, “difficulties”, and “processes” will continue to form the inner framework of this paper.

Within the fourth chapter, the relevance of practice is elaborated with selected companies (4.1), thus supporting the outlined foundations of the preceding two chapters. More profound, in the following section (4.2), is a practical case in cooperation with XXXXX, which reveals a company’s processes handling of the procurement of services.

The second to last section of this paper is designated to combine both theory and practice in terms of a benchmark. Comparisons between theory and practice are revealed in order to prove their interaction (5.1), which is followed by a formulation of best practices (5.2).

Finally, supplementary viewpoints and a continuance of before derived aspects and their solutions are presented in order to evaluate the objective, to which extent the theoretical procurement of services fit with the practical applications.

2 The Challenge of Managing the Services´ Spend

By means of a general overview about the service portfolio, within the following chapter differences as well as similarities and resulting difficulties of purchasing goods compraed to services are elaborated. Differences and difficulties form the first two out of three decisive elements of the inner framework in this paper.

2.1 The Service Portfolio from a Supply Management Perspective

Initial research on the purchasing of services defined the process as a contract between a company and a third party provider to deliver a certain intangible good.[8] Correlated to the increasing importance of this topic, this basic definition is nowadays outstripped and various perspectives, which go beyond the earlier narrow view, are provided today.[9] To strengthen this point of view, Jahns’ general definition regards Supply Management as a relation-oriented, holistic planning and coordination process, which merges the earlier operative aim of efficiency with the strategic aim of effectiveness.[10] Thus, it can be viewed as the development of an instrumental concept towards a management function with the focus on an integrative relationship-based approach.[11] Since the procurement of services is one part of the supply management approach, the described development via a strategic perspective can, as in the following, be transferred to the purchasing of services. This is the outcome, based upon various attempts, to define services.

A relation-oriented definition treats a service as a “process consisting of a series of more or less intangible activities that normally [...] take place in interactions between the customer and service employees [...] or systems of the service provider, which are provided as solutions to customer problems.”[12] A further definition, which strengthens the relation-oriented understanding of services puts the focus on the high content of personal input which is offered by a service.[13] Out of a more process-oriented point of view, internal and external factors are combined in various steps to achieve a certain value added for the customer.[14] Another spectrum of types of business services differentiates services into an equipment-based dimension, for example grouping automated services, and a people-based dimension, for example grouping services exercised by professionals.[15]

A sample of the potentially purchased services which are most commonly named in literature are services handling information technology, marketing, logistics and warehousing, real estate and security, banking and insurance, telecommunication, consultancy, legal services, engineering, training and recruitment or sales and advertisements. To offer a structured scheme, the mentioned examples can be clustered into the following eight categories. Facility services include cleaning, real estate and security, financial services include banking, finance, and insurance, information and communication technology services include telecommunication, customization, and maintenance, business organization services include management consultancy, accounting, auditing, and legal services, research, development and technical services include technical maintenance and assistance, development, and engineering, transportation and distribution services contain warehousing, value added logistics, and transport, human resource development services consist of training and recruitment and finally, marketing services contain sales, advertisements, and agents.[16]

Furthermore, it has to be taken into account that services are to be distinguished because they all differ in various criteria. One approach includes five different schemes for classifying services, therefore offering another tool in order to structure the wide array of services. These determine services concerning their nature, relationships with customers, potential of customization, nature of supply and demand, as well as the delivery of the service.[17]

The most essentiel task in the buying decision is to differentiate goods and services and to confirm the different requirements for both spend categories.

2.2 Differences and Similarities between Purchasing Goods and Services

Despite various differences in the procurement of buying goods and services, there are also a few similarities such as the least common denominator that as products, both are “offered to a market to satisfy a want or need”[18] of a customer. In detail, besides fulfilling demands, goods as well as services require competitiveness and the provision of a certain value added. Furthermore, both goods and services enjoy the same levels of benefits.[19] Referring to the differences between goods and services, a further distinction can be drawn to subdivide goods into direct spend, which can be identified with a single unit of the final product, and indirect spend, where no real connection with a specific product exists.[20] The literature cites four main factors that differentiates services from goods: intangibility, inseparability of production and consumption, heterogeneity, and perishability.[21]

According to the first dimension intangibility, services have to be seen as performances and not as a tangible output. This is the inherent immaterial status attributed to services.[22] Intangibility is the most critical goods-services distinction and as a basis, it attributes to the three further dimensions. It also makes services the most difficult to evaluate because a service exists only when it is performed. Thus, prices are difficult to set and the limited physical evidence of services increases the risk perception when purchasing. Finally, the multi-facetted nature of a service aggravates customer satisfaction in comparison to a good.[23] A useful management strategy to solve the described problem requires the creation of an organizational image with strong communication and the use of personal sources.[24]

The second variable inseparability, also called simultaneity, refers to the fact that services are produced and consumed at the same time. In contrast, goods are first produced, then sold and finally consumed, whereas services are first sold, then produced and consumed simultaneously. With service processes, the customer passively participates in the services’ production and only with his presence a service contract is elaborated. Further, this variable forces the customer into having immediate contact with the process of production. As the producer and the seller build one entity, a direct distribution, a high interaction of production and the following marketing processes are built.[25] This offers the opportunity to manage consumers by emphasizing an adequate training of the personnel’s contact with the public and the use of multi-site locations.[26]

The third dimension heterogeneity means that a service is always subject to variation in performance, and developing common standards is extremely difficult. Thus, units of a service production can be regarded as unique, especially, when a service is compared to a non-service like mass production. The quality of a service varies “from producer to producer, from customer to customer, and from day to day”[27] and even the overall performance strongly depends on the individual producer’s performance, which can significantly differ. Variability is a big challenge in service operations and increases the perceived risk.[28] A strategic advice is to customize services.[29]

Perishability as the fourth factor, describes the inability to store services compared to goods. As a result, it is not possible to fully determine production factors and to synchronize supply and demand. This may cause dissatisfaction concerning the service due to a lack of manpower or an excess of demand on the market et vice versa. This factor also increases the consumers’ risk perception because the offering may occur lower than expected. The only transmission possible lies in the fact that at some time a possible excess of demand results in customer inventory, expressed by a queue or waiting line.[30] To achieve a closer fit between supply and demand, simultaneous adjustments in capacity and aligned strategies should become a managerial focus.[31]

A fine distinction has to be drawn between the last two mentioned dimensions, since perishability accounts for the variation caused by the time of the transaction process, whereas heterogeneity’s variation lies within the transaction process.[32]

The four different service dimensions and directly resulting problems are summarized within Figure 1.

illustration not visible in this excerpt

Figure 1 “Different Service Dimensions and Resulting Problems”, Source: Own Illustration

As illustrated above, literature stresses the major importance of the intangibility of services and their insepaparability of production and consumption. The difference with manufactured goods is based upon these two unique descriptions of a service. On the one hand, the buyer stays in direct contact with the production process and on the other hand, the seller owns a high responsibility in performance by offering and delivering the service to the customer.[33] The emphasis only on the two important dimensions is a common viewpoint. Intangibility and inseparability can presuppose perishability, and in terms of comparable quality, heterogeneity as well.[34]


[1] Wittreich (1966), p. 127.

[2] Cf. Dörsch (1976), pp. 8f.

[3] Cf. CAPS Research (2002), p. 1.

[4] Cf. Barth (2003), p. 5.

[5] Cf. Bals/ Hartmann/ Jahns (2006), p. 10.

[6] Cf. CAPS Research (2003), pp. 9f.

[7] Kaufmann (2006), p. 61.

[8] Cf. Dörsch (1976), p. 8.

[9] Cf. Barth (2003), p. 47.

[10] Cf. Jahns (2005): Supply Controlling, p. 350.

[11] Cf. Jahns (2005): Supply Management, pp. 53f.

[12] Grönroos (2000), p. 46.

[13] Cf. Bales/ Fearon (1995).

[14] Cf. Barth (2003), p. 55.

[15] Cf. Thomas (1978), p. 161.

[16] Cf. Axelsson/ Wynstra (2002), pp. 30f.

[17] Cf. Lovelock (1983), p. 10.

[18] Kotler (2000), p. 394.

[19] Cf. Axelsson/ Wynstra (2002), pp. 11f.

[20] Cf. CAPS Research (2003), p. 11.

[21] Cf. O’Reilly/ Garrision/ Khalil (2001); Carman/ Langeard (1980), pp. 7-10; Mitchell/ Greatorix (1993), pp. 180f; Sampson/ Froehle (2005), pp. 8-10; Barth (2003), pp. 47-58; Zeithaml/ Parasuraman/ Berry (1985), pp. 33f; Levy/ Weitz (2004), pp. 64-66.

[22] Cf. Barth (2003), p. 55.

[23] Cf. Sampson/ Froehle (2005), p. 9.

[24] Cf. Zeithaml/ Parasuraman/ Berry (1985): Problems and Strategies in Services Marketing, p. 35.

[25] Cf. Mitchell/ Greatorix (1993), p. 180.

[26] Cf. Zeithaml/ Parasuraman/ Berry (1985): Problems and Strategies in Services Marketing , p. 35.

[27] Zeithaml/ Parasuraman/ Berry (1985): Problems and Strategies in Services Marketing, p. 34.

[28] Cf. Mitchell/ Greatorix (1993), p. 180.

[29] Cf. Zeithaml/ Parasuraman/ Berry (1985): Problems and Strategies in Services Marketing, p. 35.

[30] Cf. Sampson/ Froehle (2005), p. 9.

[31] Cf. Zeithaml/ Parasuraman/ Berry (1985): Problems and Strategies in Services Marketing, p. 35.

[32] Cf. Mitchell/ Greatorix (1993), p. 181.

[33] Cf. Carman/ Langeard (1980), p. 8.

[34] Cf. Barth (2003), p. 55.


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European Business School - International University Schloß Reichartshausen Oestrich-Winkel
Purchasing Services




Title: Purchasing Services