SBP 3a: Customers in Inventory

This principle occurs because of simultaneous production and consumption–production occurs after customer has indicated demand and presented inputs. The customer may be impatient if work-in-progress inventory is kept for a period of time. Also, there is usually no practical need to keep finished goods inventory, since the customer has already expressed willingness to take delivery prior to the time production is complete.

Inventory is stored items. Why do inventories occur? There are a number of reasons. However, the most fundamental reason inventories occur is because there is an intentional or unintentional mismatch between production timing and demand timing.

Manufacturers intentionally keep inventories for various reasons, some of which are listed below. However, most of these reasons are not directly applicable to services:

(1) Production Smoothing.

Product demand rates are rarely level and stable-customers purchase whenever they want to. Manufacturers, however, desire to produce at stable rates. Demand for lawn mowers may go up and down with the seasons, but the factory may want to produce the same number each month, putting them in inventory in the winter for sale in the summer.

Service business generally cannot implement production smoothing through inventories. It is not practical for lawn mowing services to “inventory” mowed lawns in the winter so that they will have fewer to mow in the summer.

(2) Buffer Stock

Sometimes the big concern about forecasted demand is not foreseeable swings in demand, but unforeseeable demand. Manufacturers may inventory some extra product just in case demand is greater than expected. They may scale back future production to use up excess buffer stock, or produce extra when the buffer stock is running low.

Due to customer inputs, services typically have a one-to-one correspondence between demand and production. This means that the service only produces for demand, not extra just-in-case. The service may have buffer capacity, but cannot generally complete the service in anticipation of unforseen future demand.

(3) Material Handling

It can be impractical to handle or move one item of manufactured production. Imagine the shipping cost if a paper manufacturer shipped one roll of toilet tissue at a time. Instead, paper manufacturers produce a large inventory of toilet tissue, put it in huge creates, and ship it is bulk to the customers (i.e. distributors and retailers).

Every service customer represents a unique unit of production. Most of the time it is not possible to inventory large numbers of customer inputs to simplify “material” handling.

(4) Economies of Scale

Manufacturers often find it is less expensive to produce large production runs of an item than to produce individual items. For example, microchip fabricators will produce tens or hundreds of microchips on a single silicon wafer-it would be very expensive to etch each tiny microchip on its own wafer. The manufacturer will sell what has been ordered, and inventory the unsold portion of a batch for future sale.

Since service customers are individual and provide unique inputs, economies of scale are extremely difficult to realize. (This issue will be discussed further in the Lowered Entry Barriers Service Business Principle.)

We see that the reasons manufacturing companies keep inventories are not too relevant for service businesses. One might assume that service companies would thus not keep inventories. The reason service companies keep inventories is also a reason manufacturers often have excess inventories:

(5) Imprecise Planning

Manufacturers may just have poor planning which results in a excess inventories. The poor planning may be avoidable, such as planning production without seriously considering the implications of forecasted demand. (As ludicrous as that sounds, it is quite common.) Manufacturers can and often do use inventory to hide the effects of poor management practice. When production managers do not have a clue what they are doing, the just produce so much excess inventory that the customers are not aware of the problem. The company is aware, though, because of the high costs of unnecessary inventories.

With services companies, poor management practice is not so easily hidden. (This Service Business Principle states: “Therefore, with services, managers do not have the luxury of hiding poor management practice under inventory, as manufacturing managers do.”) If the service providers do not have a clue what they are doing, the customer generally suffers. For example, have you ever had an experience trying to check in at an airport when they are clearly understaffed? The result is angry customers who have to wait an unacceptable amount of time!

This is the key to understanding the most significant inventories in services: the inventories of customer inputs. (Inventories of non-customer inputs will be discussed in the next Service Business Principle.) Post office customers are inventoried behind the ropes waiting for the next available service employee. Patients are inventoried in waiting rooms waiting for the production process of the doctor or dentist to catch up. Shoes are inventoried at the shoe repair shop waiting for the repair person to get to them. Loan applications are inventoried on the loan officer's desk waiting for the approval process to catch up to it. And, we even inventory our garbage in trash cans until the garbage collection process makes the weekly visit.

Such customer inventories are generally called a queue, which is a waiting line. Queues exist in many forms. The postal customers form a single-file, first-in-first-out queue called a “snake” (it often forms a path back and forth like a snake). The patients in the waiting room form a queue, even though they are not sitting in a straight line and are not always served by the first-in-first-out rule. People calling in to a busy doctor's office may be placed on hold, which is also a queue. People can be placed in a queue, as can their belongings or their information.

Customers do not like to be inventoried, or left in a queue, due to poor planning, and they do not like their belongings or information to be inventoried for more than a brief time. Think of how you react when you call the shop who is fixing your car and they say, “Sorry, we have not gotten to your car yet but should by the end of the week.” That is to say, “our demand for auto repair has exceeded our production rate; therefore we are keeping your car in inventory until production can catch up with it.” (Or, think how upset you are when the garbage collection people get behind and force you to inventory two weeks worth of garbage in a bin only big enough for one week.)

In fact, imprecise planning of service production is usually unavoidable, since production is so directly tied to actual demand. (recall the Simultaneous Production and Consumption Service Business Principle) The results is that some amount of production inventory is generally inevitable. Since it is impractical to keep service production inventories for an extended period of time, it is essential to carefully plan and manage the service production process

Service providers must carefully consider the costs of customer provided inventories and plan service production capacity to control those costs. When inventories are inevitable, the service provider may implement strategies for reducing the cost of inventories to the customer.

Information about how to manage customer-inventory costs will be discussed later in the Inadvertent JIT and Customer Inventory Costs Service Business Principles.

With dental care, many facilitating goods such as cleaners and x-ray film are kept in inventory. However, once the production process starts, meaning that a patient has provided his teeth to the dentist for care, it is impractical to keep that production (the patient's teeth) in inventory for any extended period of time. It would be absurd for a dentist to inventory a work-in-progress patient in a dental chair for a few hours while the dentist catches a game of golf. It would be even more absurd for patients to be inventoried in the dental office for an extended period of time after their dental care is finished. (Which is why the patient inventory in the dentist's waiting room tends to be incoming, not outgoing, patients.)

Airlines do in fact keep a form of in-progress inventory in the form of layovers, or stops at a different airport on the way to the final destination. Layovers exist because part of the production process, the flight into the layover city, is not in perfect sync with the production process out of that city (the outbound flight). It is certainly possible for airlines to deal with poor flight scheduling by keeping huge inventories of passengers at layover cities. However, it is not practical to do so, since many customers would be angered by such inconvenience.

Another situation involving work-in-progress inventories in airlines is what occurs at the time a supporting facility (airplane) breaks down. If a factory breaks down for a couple of hours, we use inventories to buffer the production needs of dependent processes. However, if an airplane brakes down for a couple of hours, the impact on the customer can be quite dramatic. The typical response is to inventory passengers in the airport terminal for a period of time and often attempt to clear that inventory by channeling people on other flights. Even though an airline may attempt to inventory passengers in the airport for extended periods of time, it is not practical to do so.

The finished product of airline production is passengers and their baggage at the destination airport. Airlines have no desire to keep passenger and baggage inventories in planes that have landed at their destination. Usually, passengers are even more eager to be out of the airline supporting facility.

With manufacturing, since production usually occurs well before consumption, the product can easily be kept in inventory.

1. It is common to keep inventories of facilitating goods provided by non-customers. What are some examples? How long are they kept in inventory before they are used in production?
2. Are customers kept in “inventory” (i.e. stored somewhere)? Where? How long are they kept in inventory?
3. What customer belongings are kept in inventory? Where? For how long?
4. What customer information is kept in inventory? Where? For how long?
5. After service production is complete, could the finished result be kept by the company for a period of time? If it could be kept by the company, would it be practical to do so? Why or why not?

Redraw your service business process flowchart. Indicate where customer-inputs are stored, or kept waiting in inventory (the standard symbol is a small triangle pointing down). Write the reasons the company allows these inventories. Indicate the typical amount of time an item is kept in these inventories. What limits the amount of time customer inputs are kept in inventories?