Managing Service Inventory to Improve Performance

In service businesses as in others, work can be performed and stored in anticipation of demand. By wisely choosing what kind of inventory to hold, companies can improve quality, response times, customization and pricing.

In recent years, the practice of pushing product by building inventory in anticipation of demand has fallen out of favor. Many companies have shifted to a“pull” environment, in which they build product only in response to actual demand. These firms have moved the “push-pull boundary” — the point at which a supply chain switches from building to forecast to reacting to demand — away from their end customers. By decreasing the amount of work completed before actual demand is known, firms avoid costly mismatches in supply and demand. For example, Dell Inc. has assumed and maintained a leadership position in the personal computer industry in no small part by setting its push-pull boundary to offer customers greater customization.

Given that repositioning the push-pull boundary has paid huge dividends for many product-based firms, it is only natural to wonder what kind of promise this approach holds for service firms. On the surface, the answer seems to be very little. A basic tenet of service management is that services cannot be inventoried; without inventory, the location of the push-pull boundary seems to have little relevance. Yet this view relies on an extremely narrow definition of inventory as finished product waiting for customers. In practice, inventory also serves as a way to store work; because the work has been stored, customers don’t have to wait for it to be performed. In a service setting, then, the placement of the push-pull boundary defines the portion of the work that has been performed and stored before the customer arrives. We call this work “service inventory.”

Service inventory includes all process steps that are completed prior to the customer’s arrival. As with physical inventories, service inventories allow firms to buffer their resources from the variability of demand and reap benefits from economies of scale while also providing customers with faster response times. Having service inventory also facilitates using the customer as a resource and offers the potential for automating the process. By using the correct form of service inventory, companies can offer better quality, faster response times and more competitive pricing. In this article, we will discuss how moving the push-pull boundary in service firms can be a strategic lever in designing and managing service offerings.(See “About the Research.”)

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