Determination of the Best Ordering Policy in Service Organisations

In service organisations, the role of procurement is less developed than in manufacturing. This has been due to the intangible nature of the service product and the significance of the costs involved. Recently Barclay's bank has estimated that it spends in excess of £40m per annum on basic supplies of stationery materials, less than 10 per cent of this total is managed through a single centralised budget. The rest is controlled by individual branches who have freedom to buy from any supplier.

The scope for centralised purchasing through a single vendor prompted Barclays to work with the Oracle Corporation to produce an internet store that will link all branches to a limited range of suppliers. Branches simply order what they want from an internet store while behind the scenes orders are grouped to ensure efficient batch ordering costs are managed. For hospitals, airlines and restaurants, the procurement function is critical. Boeing must order 1.5 million different part numbers for a 737 sourced from 16 different countries. Procurement in non-manufacturing organisations may be less controlled and have fewer quality standards to support it than in manufacturing companies. In procuring service products such as food preparation, cleaning, building maintenance, deliveries, waste disposal, security or education there is usually reliance on the setting of service level agreements (SLAs). These agreements establish the minimum acceptable standards and usually the means by which these standards will be measured.

The setting and measurement of service standards is a major challenge for procurement management as is the management of capacity and the matching of supply and demand in a service situation. In manufacturing environments, raw material, parts or finished goods inventory can provide a buffer to absorb fluctuations between demand and the manufacturing process. This option is not available for service products, which are usually consumed and produced simultaneously. There are exceptions - for instance, in the production of meals, which can be inventoried, or education, or even entertainment which could be videoed but not usually so in health care, retail management, distribution or financial services.