The current issue and full text archive of this journal is available at                                         www.emeral...
IJOPM   Manufacturers now tend to include more services in their total offering to facilitate the31,5    sale of their goo...
This paper focuses on performance-oriented industrial services operations strategy.                              Industria...
IJOPM   A PSS is considered to be a special case of servitisation, which provides value by31,5    integrating products and...
looked at the different drivers for competitive industrial product service offerings                   Industrialdevelopme...
IJOPM   four of these performance requirements, but in any performance-based service contract,31,5    this is very hard to...
collection (Meredith, 1998). The resultant interview questions were decided by the                      Industrialresearch...
IJOPM                 type service contracts are totally new business to them. For confidentiality reasons, the31,5        ...
Key operations strategy constructs                             Co-production             Organisational readiness Incentiv...
IJOPM   operations carried out by the provider (Kumar and Kumar, 2004). The service delivery31,5    strategy involves the ...
4.4 Organisational readiness                                                                         IndustrialDeveloping ...
IJOPM                       where the service provider’s capacity and the demand rate are not equal. This influences31,5   ...
need more frequent repairs) or new parts (cost more to the contractor but would require                     Industrialless...
31,5                                                                                                                      ...
Operationsstrategydimensions            Contract X                                                                        ...
IJOPM                      With respect to pain/gain sharing arrangements, there is pain or gain sharing set at31,5       ...
Industry                                                                                                    Industrial    ...
IJOPM   There are serious cultural challenges of a partnered solution. The military and31,5    commercial teams have diffe...
[. . .] the teams that accompany our main interface with the supply chain are from our own                                ...
IJOPM   the different individual traditional contracts under the aegis of contract Y. One of the31,5    key difference in ...
Key framework                                                                 Benefitelements                     Contract ...
IJOPM   service provider and most importantly it helps in delivering the target performance level31,5    and hence the pay...
offering. One limitation of the study is the lack of consideration of the service network,                  Industrialwhic...
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  1. 1. The current issue and full text archive of this journal is available at Industrial Operations strategy for the product-service effective delivery of integrated offerings industrial product-service 579 offerings Received October 2009Two exploratory defence industry case studies Revised March 2010 June 2010 Partha Priya Datta October 2010 Accepted November 2010 Operations Management Group, Indian Institute of Management, Calcutta, India, and Rajkumar Roy Department of Manufacturing, Cranfield University, Cranfield, UKAbstractPurpose – As enterprises focus on offering integrated product/service bundles, performance-basedcontracts become ever so important in ensuring effective delivery. Performance-based contracts fallunder the result-oriented category of industrial product service systems (PSSs). The paper aims topresent a conceptual framework for operations strategy in performance-based industrial PSSs that willhelp manufacturing companies configure their operations to support effective delivery of integratedproduct/service offering.Design/methodology/approach – This paper first develops a conceptual framework for operationsstrategy in performance-based contracts by identifying the key elements after a detailed systematicreview of literature. A major shift in support and maintenance logistics for complex engineeringsystems over the past few years has been observed in the defence and aerospace industries.Availability contracting, a special type of performance-based contracts, is replacing traditional serviceprocurement practices. Two exploratory case studies involving defence availability contracts areconducted for making inferences regarding the operations strategy.Findings – The important findings of this research are a set of elements of operations strategyguiding the development of a conceptual framework, a set of operating principles and processessupporting effective delivery of performance-based service contracts.Originality/value – The true value of this research is to open up the novel area of result-orientedindustrial PSSs operations strategy by capturing the key characteristics of operations using bothliterature and empirical evidence.Keywords Operations management, Contracts, Defence sectorPaper type Case study1. IntroductionUpon entering into twenty-first century, the business environment for the manufacturingindustry has changed significantly. Well-designed products are no longer found tobe criteria for distinct competitive advantage in manufacturing industries. International Journal of Operations & Production Management Vol. 31 No. 5, 2011This research reported here is jointly funded by British Aerospace Systems PLC and Engineering pp. 579-603 q Emerald Group Publishing Limitedand Physical Science Research Council (EPSRC) and conducted as part of the Support Service 0144-3577Solutions: Strategy and Transition (S4T) project consortium led by the University of Cambridge. DOI 10.1108/01443571111126337
  2. 2. IJOPM Manufacturers now tend to include more services in their total offering to facilitate the31,5 sale of their goods (Brax, 2005). Unlike the normal product offering with defined functionality the product-service mixed offering includes a greater variety of functions and therefore a higher value (Johansson et al., 2003). Baines et al. (2007) have identified several key challenges of integrated product/service offerings. The transformation towards including a higher degree of services in the “product580 solution” has in some cases produced some managerial difficulties for the companies (Oliva and Kallenberg, 2003). Companies need to be able to configure their operations strategy to support their offering and there is little guidance in existing literature on how to achieve this. This paper aims at understanding the operations strategy for successfully delivering integrated product/service offerings. This paper particularly focuses on industrial product service offerings, which is defined as supply of services in the form of tangibles such as spares, manpower and consumables related to maintenance of industrial goods and intangibles as training, knowledge, technical support and customer support for effective operations (Johansson and Olhager, 2004). The contracts between the customer and provider are of prime importance in industrial product service systems (PSSs). Especially, for high-cost, high-technology and long-life products/equipment, the service contracts are extremely crucial. Performance-based contracting is replacing traditional spare purchase type contracts. Customers are now focusing on “what” is required in terms of equipment operations rather than “how” a facility (a spare/repair action) is to be delivered according to set technical specifications (Gruneberg et al., 2007). A major shift in support and maintenance operations for complex defence equipment (aircrafts, ships and missiles) has been observed in defence and aerospace industry over the past few years. Availability-based contracting, a variant of performance-based contracting, is increasingly being used in UK defence equipment service procurement. An availability-based contract is a type of contract in which the end customer contracts out through-life support of equipment based on availability levels, as opposed to the traditional model where assets and services are purchased on demand (www.defenseindustrydaily. com/). Such contracts are beneficial for both customers and providers. The customer eliminates maintenance infrastructure and inventory costs. On the other hand, the provider assures a long-term revenue stream through long-term contracts. However, such contracts can only deliver benefits if the operations strategies are properly and effectively implemented. The academic literature provides very little guidance with respect to how the operations strategies for such contracts should be implemented. This paper aims at filling this gap by reporting the key elements of operations strategy for performance-based industrial service contracts in the context of UK defence industry. This paper first reviews the relevant literature in the field of operations strategy in the context of industrial service offerings. Next, the paper discusses the concept of performance-based service contracts and the delivery strategies. The paper provides a conceptual framework for operational strategy for performance-based service contracts. Next, the paper describes the case study based research methodology adopted and shows how the different elements of operations strategy identified in the framework contribute to effective delivery of services in two defence service contracts. 2. Literature review The changes in the type of offering (a combination of product and services) and the associated performance outcomes warrant a reformulation of a firm’s operations strategy.
  3. 3. This paper focuses on performance-oriented industrial services operations strategy. IndustrialThe next two sub-sections review literature in industrial services operations strategy product-serviceand performance-based industrial service contracts. offerings2.1 Industrial serviceIn industrial services, firms move from manufacturing physical goods to deliveringservices by adding services as a key component of their business strategy. 581 One of the first to discuss the change in operations under industrial service settings wasLevitt (1972) who described how manufacturing firms should integrate services into theirofferings and focus on nurturing their customer relationships, recommending aproduction-line approach to services. Sundbo (1994) presents the idea of modularisedservice as a category between pure manufacturing and pure services (Table I). This enablesservice operations to utilise the efficiency characteristics of manufacturing processes. Thischange has later been designated as “servitisation” (Vandermerwe and Rada, 1988).Manufacturing Modulised service Classic serviceThe product it generally concrete The service is semi-material (it is The service is intangible(it is technology) not technology, but is embedded (it is not technology) in a technological form)Ownership is transferred when a Ownership is partly transferred Ownership is not generallypurchase is made (the right of using the service transferred facility in an appointed period and form)The product can be resold The product can be passed on The product cannot be resold and sometimes resoldThe product can be The product can be The product cannot usually bedemonstrated demonstrated by reference to effectively demonstrated (it does previous examples not exist before purchase)The product can be stored by The product can sometimes be The product cannot be storedsellers and buyers stored (e.g. self-service, discs)Consumption is preceded by Production and consumption are Production and consumptionproduction separated in many cases (but not generally coincide in all)Production, selling and Production, selling and Production, consumption andconsumption are locally consumption are locally often even selling are spatiallydifferentiated separated in many cases united (but not in all)The product can be transported The product can often be The product cannot be transported (if it is an transported information service)The seller produces The buyer takes part in the The buyer/client takes part composition of the finished directly in the production product, but not in the productionIndirect contact is possible Direct contact is not necessary In most cases, direct contact isbetween company and client fur the production, but necessary sometimes for deliveryCan be exported The service can sometimes be The service cannot normally be exported (particularly if it is an exported, but the service information service) delivery system can Table I.
  4. 4. IJOPM A PSS is considered to be a special case of servitisation, which provides value by31,5 integrating products and services (Baines et al., 2007). Case study research (Roy, 2000) has revealed a spectrum of PSS types. First is the product-oriented service (where the prime focus of the offering is the product and service is offered as an addition), second is the use-oriented system (where the provider sells the use providing all additional actions to support life cycle of maintenance and upgrade) and final category is result-oriented system582 (where the seller is paid for the units of service delivered to the customer). Baines et al. (2009) studied a manufacturer providing a portfolio of product/service offerings and outlined a framework for operations strategies in the context of product-based servitised organisations. The researchers identified 12 different types of operational characteristics under two key operations strategy elements – structural and infra-structural characteristics. Although this study throws some light into the operations strategy in a real-world industrial services offering yet the study focuses more into standardised product assembly type services with strong product-oriented service focus. Oliva and Kallenberg (2003) demonstrated a manufacturing to services continuum for machine manufacturing industry. They showed how products become part of the offering in industrial services in contrast to being the focal point of value proposition. Jackson and Cooper (1988) found that industrial services need to be customised to meet an organisation’s needs and that they are also more complex. Jackson et al. (1995) divide business services into two categories: maintenance, repair and operation services and production service while Boyt and Harvey (1997) classify industrial services into elementary, intermediate and intricate services. Hence, industrial services are viewed as a series of activities connected to customer’s value creating processes in a business-to-business context. Thus, industrial service offerings are increasingly of a more customer oriented, comprehensive and tailored nature. According to Wise and Baumgarter (1999), “integrated solutions” entail products and services being combined into seamless offerings. A “customer solution” is an integrated offering characterised by customisation (i.e. based on the unique requirements of each customer) and typically, but not necessarily, co-creation (i.e. co-developed with the customer) (Vandermerwe, 1996). According to Frambach et al. (1997), industrial customers increasingly want turnkey solutions instead of products that partially solve their needs. This means suppliers having to offer tangible products augmented with product services. Finally, “full/advanced service” is defined as “comprehensive bundles of products and/or services that fully satisfy the needs and wants of a customer related to a specific event or problem” (Oliva and Kallenberg, 2003). In order to adopt service orientation in industrial firms, perspective transitions have been pointed out by several researchers. A transition is needed when firms change from a service supporting the customer’s product to a service supporting his actions (Mathieu, 2001). Adopting a full service or solutions strategy in industrial services is typically interrelated with a number of strategic changes on the supply side of firms (Gadde and Snehota, 2000). Spring and Araujo (2009) examined the implications of offering different combinations of products and services on the operations strategy. A general discussion of product/service offerings is carried out in different examples ranging from business-to-business to business-to-customer personalised offerings. The study is limited to intra-firm capabilities in conceptual discussion of operations strategy thus lacking a holistic perspective. The study lacked practical significance in absence of detailed empirical study of real-world cases. One study by Roy and Cheruvu (2009)
  5. 5. looked at the different drivers for competitive industrial product service offerings Industrialdevelopment. They looked at the infrastructural factors as well for delivering product-servicesustainable customer value. However, the framework is the conceptual nature with novalidation from real world. Frohlich and Westbrook (2001) investigate the differing offeringssupply-chain integration strategies implemented by a firm with upstream suppliers inaccordance with its integration strategies with downstream customers. These authorsconclude that tighter integration (i.e. longer “arcs”) resulted in better performance. In the 583service operations literature, a distinction has been made between “back office”(supplier-facing) and “front office” (customer-facing) activities (Chase and Tansik, 1983).Most of the literature in industrial services focuses mainly on conceptual frameworkderivation (Boyt and Harvey, 1997; Johansson and Olhager, 2004). Very few studies havelooked into the operations strategy of industrial organisations adopting a service focus.Also, empirical evidence on implementation and challenges of implementing theoperations strategies to effect successful delivery of full services is sparse in literature.2.2 Performance-based industrial service contracts – why and howPrincipal-agent model provides a good theoretical basis for understanding thebuyer-supplier relationships, information and need for performance monitoring(Robinson and Scott, 2009) in industrial service contracts. The principal (customer)cannot observe and evaluate the time and effort put in by the supplier in a particulartask. Under such situations, the agent (supplier) can attempt to maximise his utility byinappropriately representing his efforts (Kunz and Pfaff, 2002). It is, therefore, importantto have an output or performance-based contract designed. The performance-basedcontracting tends to focus on achieving a required outcome rather than a contract for thesupply of a set of prescribed specifications (Gruneberg et al., 2007). Thus, the buyerpurchases the result of product use not ownership of the product. Underperformance-based contracts suppliers have full responsibilities for performance(Glas and Essig, 2008). There are equitably aligned risks and incentives betweensuppliers and customers in performance-based contracting (Kim et al., 2007). Since suchtype of contracts involve the entire performance periods of the assets, relationshipbetween actors play a key role in the operations strategy formulation. Performance-based contracts are an example of result-oriented industrial PSS.This has affected the way in which the supply network interacts as responsibilities getredistributed based on a target outcome (Alonso-Resgado and Thompson, 2006).This means that all associated parties need to understand the process, competencies andassets required to deliver the customer’s required performance level. Through incentivesor penalties, involved parties need to improve performance over contract period.In performance-based contracts, customers may have significant tasks to perform(Ferrer et al., 2010). Parasuraman et al. (1985) state that evaluating the quality of a serviceis a difficult matter, because customer’s involvement makes it difficult to standardise theoutput. They also state, in many cases, there are no clear performance measures forevaluating service quality as it is based on the outcome as well as the process of servicedelivery. This paper highlights performance assessment as one of the key elements ofoperations strategy in performance-based service contracts. A successful service delivery as per the pre-set performance requirements (quality,speed, flexibility or cost leadership) requires understanding the operations capabilitiesof the provider firm. Most world-class operations strive to deliver high performance in all
  6. 6. IJOPM four of these performance requirements, but in any performance-based service contract,31,5 this is very hard to quantify and maintain as there are many uncertainties involved. A match between demand and resources enables desired service quality standards to be achieved while also maintaining resource productivity rates (Armistead and Clark, 1992). In order to achieve this match, it is necessary to identify and study processes involved in service delivery (Aurich et al., 2006). As the service offering constitutes a584 range of different activities, there is value in breaking down the different elements configuring the industrial service operations strategy and analysing the interactions and distinctions between them. Operations strategy needs to account for service delivery uncertainty driven by the quality of information and type of contract (Armistead and Clark, 1992). These need to be studied in detail to guide operations strategy development in performance-based industrial and performance-based service contracts. 3. Research design 3.1 Research question and programme The literature review shows that few research work have been directed to understand the operations strategy in a result-oriented industrial services offering. A number of typologies, models have been developed to provide some guidance on how to configure an operations strategy. However, empirical validation is required to provide a complete and detailed picture of the challenges and effective operations in performance-based industrial PSSs. Performance focus is lacking in most of the studies in industrial service operations strategy literature. Thus, the research question arises for this study as to how to provide an effective and efficient service delivery system that is capable of meeting target outcomes desired by the customer and the service provider? As previous work in this area is largely conceptual and the area of performance-based service contracts is relatively new, we first build a theoretical framework that synthesises the different operations strategy elements mentioned in extant literature. Next, we carry out in-depth case study of two such performance-based service contracts. The results of this study are used to identify operations strategy elements for effective delivery of performance-based contracts. The case study method is summarised in following sections. 3.2 Case study based research approach Case study based research is appropriate in this context since we are addressing a “how” type of research question (Baines et al., 2009). This methodology is suitable for a relatively new, exploratory investigation where the variables are still unknown and the phenomenon being studied (operations strategy in performance-based industrial PSS) is not well understood (Ferrer et al., 2010). The unit of analysis for this research programme is an organisation, which enters into performance-based service contracts with customers in order to deliver services as per pre-agreed performance measures. We reviewed two cases in depth. The analysis and review of the cases were based on semi-structured interviews with personnel within the customer organisation and the firm. All the interviewees are managers involved in the operation and design of the contracts. In all, 15 semi-structured interviews were conducted with stakeholders from the firm and customer organisation. Many of the interviews were conducted by a large multi-disciplinary research team (involving researchers from manufacturing, marketing and operations management disciplines). This allowed an all-rounded coverage of the research topic and facilitated exploration from different perspectives for effective data
  7. 7. collection (Meredith, 1998). The resultant interview questions were decided by the Industrialresearch team in an integrated manner after carrying out several initial familiarisation product-serviceworkshops with the organisations. The interview questions primarily focus ondetermining how and why the case companies had begun to deliver advanced/full service offeringsofferings and the issues, this was posing for their earlier product-oriented operations.A series of guiding interview questions were identified. These were organised around theframework that is presented in Section 5. A selection of key questions included: 585 . How is the service designed? How is service performance measured? . How is the service delivered? What constitutes the offering? What are the key resources? . What is the outcome of the service delivered? What is the benefit to the customer? . How do you perceive the service level delivered? What is the benefit to you? (customer questions) . How do you manage operations to deliver target performance? . What are the implications of shifting away from a manufacturing-oriented operating model in these contracts?3.3 Case selectionChoice of case companies is critical to this research as we needed to explore a companywith experience of executing performance-based service contracts. Since the area isrelatively new and services are diverse, it was very difficult to find contracts offeringsimilar types of product/service combinations. We were of the opinion that the casecompany should have prior experience of configuring operations strategy inproduct-based offerings. This would help bring out the challenges and new elementsof operations strategy in an advanced services offering under performance-basedcontracts. The UK defence industry was the ideal choice for our research. Availability-based contracting is increasingly being used in UK defence equipmentservice. The premise behind availability contracting is summarised in the official UKMinistry of Defence (MoD) Guidelines (2007, Contracting for Availability (CfA) is a commercial process which seeks to sustain a system or capability at an agreed level of readiness, over a period of time, by building a partnering arrangement between the MoD and Industry.Under CfA, the supply of spares takes second place to the overall goal of providing theavailability and upgrades to mechanical and electrical equipment. Consequently,industry is incentivised to deliver reliable and capable equipment (e.g. an aircraftshould be capable of flying day or night with the weaponry to defend and attack),reduce maintenance downtimes and minimise the number of required spares as part ofa total package of maintenance, repair, overhaul, logistics support as well as equipmentavailability. In such cases, both the delivery and the availability performance becomepart of the service offering. While organisations may be aware of the former and couldprice/contract accordingly, it is often a challenge to contract/price on the latter asavailability is of value to the customer even if the actual service does not get consumed. Two defence contracts are used as two case studies to be able to understand newprocesses and behaviours and overcome single case study limitations. Both thecontractors are predominantly manufacturing-oriented organisations and availability
  8. 8. IJOPM type service contracts are totally new business to them. For confidentiality reasons, the31,5 two contracts are termed X and Y and the companies are termed 1 and 2, respectively. Contract X is for weapons systems service in the army and Y is for fighter aircraft service within the air force. 3.4 Results and data analysis586 Data were collected between June and November in 2008. Interviews were conducted with key personnel from the two organisations and the MoD. Each of the 15 interviews lasted between 1.5 and two hours and was recorded and subsequently transcribed. We coded the interview data on a number of dimensions underpinning the conceptual framework to gain insights into the key variables that govern the service delivery performance. In the next few sections, we describe our framework along with the interplay of different key variables and illustrate them with exploratory investigation of case material. 4. An operations strategy framework for performance-based industrial PSS This section summarises the principal constructs underlying the theoretical framework shown in Figure 1. Table II summarises the key elements of operations strategy (extracted from literature). These are categorised under prime dimensions of the framework. Four key dimensions of operations strategy in performance-based contracts are identified. The first is contract definition that covers price, payment plan, technical and functional aspects of the industrial assets, key performance indicators (KPIs), operations constraints, contract duration, contingencies and liabilities of both parties (Gupta et al., 2008). The second dimension operations strategy of the service provider includes end-to-end service Contract definition a) Incentives b) Performance measures Service provider operations strategy Organisational readiness Customer Service delivery operations strategy Performance measures Co-productionFigure 1.Performance-basedcontract operationsstrategy conceptualframework External environmental factors
  9. 9. Key operations strategy constructs Co-production Organisational readiness Incentives Information PerformanceOperations Customer Operating conditions Understanding customer Incentive design for Information about The customer assessesstrategy operations (Kumar and Kumar, organisational culture responsible usage of customer operations, effectiveness (quality,dimensions 2004); Customer inputs, and values (Kumar and equipment by customer installed equipment; satisfaction and utility) knowledge, skills, Kumar, 2004); building to improve performance service performed to his own inputs motivation, operational customer relationships, (Ng et al., 2009) (Sampson and Forehle, (Parasuraman, 2002) and processes knowledge efficient management of 2006); devises operations capture (Kellogg and customer resources strategy Chase, 1995) (Lee, 2002) Service Customer participation Developing a service New arrangements for Effective information Performance measures provider accommodated, planned culture (Neely, 2008); sharing gains, costs and flow is essential for guide operations, help operations and designed into the improving product risks induce more effective service supply monitoring past, present process (Lovelock and reliability and responsible operations chain management and future customer young, 1979) maintainability through (Johnsen et al., 2009) (Lee, 2002), provide expectations (Robinson training, collaborative such as efficient supply continuous Improvement and Scott, 2009) design with suppliers chain information opportunities by (Kumar and Kumar, architecture, aligned providing integration 2004); agile service suppliers, workforce, between front and back network (Roy et al., innovation (Fuhr, 2007) offices (Price et al., 1995) 2009); efficient resource management (Lee, 2002) Contract Ease in capturing Ability to react to Different payment Through effective Key performance definition variability in inputs, changes in customer models (Kim et al., 2007; Information sharing Indicators can be defined (Lovelock and young, demands (Roy et al., Ng et al., 2009) multiple customer through contracts 1979); ease in capturing 2009); efficient resource expectations and (Ng et al., 2009) and enhancing perceived management (Lee, 2002) requirements can be value of service offerings Included In designing (Bitner et al., 1997) KPIs (Collier, 1994) Service Active customer Flexibility in service Deliver value-for-money Performance critical A well-drafted output delivery participation, usage delivery and solution that will benefit information is essential specification ensures (Ng et al., 2009) maintaining availability both parties (Kim et al., for effective delivery successful delivery level (Kumar and 2007; Robinson and (Sampson and Forehle, (Gupta et al., 2008) Kumar, 2004); Scott, 2009) 2006) Performance-based product-service offerings Industrial strategy map contract operations industrial service 587 Table II.
  10. 10. IJOPM operations carried out by the provider (Kumar and Kumar, 2004). The service delivery31,5 strategy involves the process of providing the service for sustaining customer specified performance (Gupta et al., 2008). Such type of contracts depends heavily on customer’s operations strategy. Table II shows the interrelationships between the different dimensions through identifying the key elements described below.588 4.1 Co-production The performance-based contracts imply active customer participation. Ng et al. (2009) state that, usage of the equipment by the customer under such long-term contracts for the whole operational life of the equipment will have impact on the way the contractor delivers service. Kumar and Kumar (2004) support this by stating that climatic and operating conditions have considerable influence on service delivery. Customers’ motivation, knowledge, expectations and skills can be diverse and difficult to capture causing inefficiencies in the output process (Kellogg and Chase, 1995). Therefore, the service delivery system has to be flexible enough to cope with the variability in (customer) inputs. However, some researchers are of the opinion that, service output improves through customer participation by enhancing two-way communication (Lovelock and Young, 1979) and enhancing the perceived value of service offerings (Bitner et al., 1997). Hence, customer’s operational processes form a very important part in forming operational strategies for performance-based service contracts. 4.2 Information Services are information rich and require information processing capability from the service personnel and service technology. Customer is a key supplier of performance critical information in delivery of performance critical information (Sampson and Forehle, 2006). Customers exchange information with service delivery performers to assure that customer expectations fit his/her perceptions at least for those activities (Collier, 1994). Information on the installed equipment or service performed is required as an input for delivery of industrial services, performance measurement and continuous improvement (Oliva and Kallenberg, 2003). Information sharing integrates front and back office activities (Price et al., 1995) and reduces customer effort to acquire information about back-office activities. 4.3 Incentives Powerful incentives are used in such contracts to transfer risks and ensure compliance with performance measures (Robinson and Scott, 2009). Consequently, as suppliers take on more responsibility, they seek new arrangements for sharing of profits, costs and risks (Johnsen et al., 2009). In defence contracting, “incentives to produce good performance” and “incentives to induce innovation” were subjects of discussions (Fuhr, 2007) to ensure that the goals of the parties concerned are aligned. Robinson and Scott (2009) showed an incentive system that measures level of service against a percentage scale with a minimum standard and a scale for applying penalties if performance falls below threshold. Kim et al. (2007) used analytical models to examine the optimal incentive mechanism for delivering the best product availability requirements in aerospace and defence organisations. According to Ng et al. (2009), unless severe conditions arise service providers’ inability to meet targets may result in payments being withheld or reduced. If service performance is tied with customer’s operations, uncertainty due to varying level of equipment usage will be reduced.
  11. 11. 4.4 Organisational readiness IndustrialDeveloping a service culture inside a traditional manufacturing business is needed for product-servicecomplex engineering service design and delivery (Neely, 2008). In industrial services,solution provider will get competitive advantage by understanding customer offeringsorganisational cultures and values (Kumar and Kumar, 2004). In industrial servicedelivery, it is necessary to involve the entire supply chain. In industrial service supplychains, the efficient management of demand, capacity and resource, customer and supplier 589relationship is important (Lee, 2002). An agile service network has to be developed that canbe changed dynamically with varying customer demands (Roy et al., 2009).4.5 Performance assessmentThe selection of the KPIs is a key step to define the processes in service delivery.A well-drafted output specification is fundamental to the successful delivery of long-termperformance-based service contracts (Robinson and Scott, 2009). Co-production ishowever, a source of two measurement problems. First, input calculus should embrace allthe productive resources provided by supplier and customer in the transformationprocess. Typically, the contributions of the client are not accounted or compensated but ¨they affect as sacrifice for the client (Ravald and Gronroos, 1996). Second, the total serviceoutput consists of the benefits gained by both parties. To bring the reasoning a stepfurther, service processes may link several contributors and beneficiaries, which are notcompensated for their inputs or charged for the gained benefits and spillages (businesscycles or competitors or numerous works done as a gesture of goodwill). There exist anumber of factors that affect the service outcome beyond the official book keeping of theparticipating companies. As illustrated by Parasuraman (2002), service operationalproductivity is sum of seller and buyer productivity. The buyer assesses his productivityby relating the effectiveness (quality, satisfaction and utility) to his own inputs, whilesupplier’s productivity links revenues to the inputs in use.4.6 The frameworkAll these elements, dimensions of operations strategy and their linkages are shown inthe form of a framework in Figure 1. The arrows show the information element ofoperations strategy that contributes to the service delivery. The contract definitionshapes the supplier’s operations strategy which in turn affects the service delivery.Performance critical information from customer’s operations strategy is essential forsuccessful service delivery. Similarly, the service performance information from servicedelivery will help customer develop operations strategy in terms of resource and facilityplanning. Customer’s operations strategy shapes the performance measures drafted incontract definition, whilst incentives reshape customer’s operations strategy in terms ofresponsible equipment usage. The entire framework is shaped by environmental driverslike world and state economy, business scenario and technology development. Theexternal political and economic environment can impact the customer’s ability toprocure a system as the need arises. Accordingly, this will shape the contract definitionand operations strategy of customers. Rapid technological development can increase thecapabilities of the companies and this might positively influence the supplier’soperations strategy. The members in the performance-based contracts need to agree onpayments, rewards and performance measures after assessing the gap between requiredand delivered services. The service delivery process is often at an unbalanced state,
  12. 12. IJOPM where the service provider’s capacity and the demand rate are not equal. This influences31,5 the sustainability of a contract as the perceived customer value or satisfaction gets affected. The suggested conceptual framework serves as the foundation for illustrating operations strategy of performance-based service contracts in the case studies discussed in the next section.590 5. Findings from the case studies In the following sub-sections, we first discuss the key findings from the two case studies and categorise them under the key operations strategy dimensions. Next, we will carry out a comparative analysis of the two cases to show how the interrelationships between the different operations strategy constructs and dimensions affect the service delivery performance. 5.1 Customer operations strategy 5.1.1 Multiple customers. Projects X and Y are launched to provide support to defence equipment on an availability basis. The companies have to satisfy two different customers, one is the defence logistics organisation (DLO) or the “commercial customer” who drafts the contract jointly with the companies and the other is the “operational customer” or the MoD personnel in regiment, navy or air force who actually use the equipment (Figure 2). The operational customers provide necessary resources called government furnished assets (GFA) for service delivery. The service level agreements between DLO and operational customer are about setting the key performance measures for availability. The DLO expects the contractor to offer means to save operating costs. The selected case studies involve similar equipment in operation for a long time and the MoD has detailed service and cost information for X and Y. Both the DLO and the operational customers demand reduction of operational faults in battlefield. To add to the complexity, all military equipment spares inventory is owned by the MoD and contractors are tasked to either use existing inventory of spares to ensure availability or purchase new ones at their own costs. This creates a choice of delivering availability through existing spares (lower costs to the contractor but may Commercial customer Savings A Co SL nt ra ct 1st line arisings reducedFigure 2. Manpower savingsThe different aircraft availability Increased profitrequirements of customersin availability contracts Operational GFA Contractor customer
  13. 13. need more frequent repairs) or new parts (cost more to the contractor but would require Industrialless frequent repairs). Under a CfA type of contract the contractor will endeavour to product-servicemanage the trade offs in the most efficient way possible. One representative fromcompany 1 mentioned about the dilemma as: offerings If you rely on the kit being to a certain standard or reliability, there will be a problem. Since the kit may not have been looked after properly in the past, has not been maintained properly [. . .] we might suddenly find ourselves spending a lot more money than first 591 anticipated.5.1.2 External environment. The problem of having multiple customers is pointed outby one MoD respondent as the separation of point of service delivery and usage. Thisactually impacts the contract definition: There’s quite a big gap between the commercial staff who negotiated the contract [. . .] and those who employ the output of the contract.An important element of the operations strategy is the external environment. As theneed to mount military operations from different geographical regions develop,current CfA does not take that into account sufficiently as for where the real availabilityneeds to be delivered. 5.1.3 Co-production. One of the respondents from the customer side commented: The service is delivered through a network which is not owned by the contractor renders it unstable [. . .] because the military customer acts as a supplier to the industrial contractor in terms of returning the unserviceable components in a timely fashion.This is true for both the cases and actually harms the service delivery by adverselyinfluencing the performance. The typical challenges of co-production in the two casesare discussed in Table III. First problem is the timely availability of customer supplied resources in suchcontracts. In view of the companies, customer does not necessarily regard or see impactof their roles in delivering the service. Customer always believes their “first role is to bea fighting force”. Though customer commits fixed annual man-hours to the contract,but only a fraction is available, rest is spent in guard duty, sports day. Thisnon-availability adversely impacts the performance of the contracts. Second problem is culture compatibility. One MoD respondent believes the earlieranimosity on air-force side to apparent invasion of company 2 has died down slowly.However, such operation in partnership is effective only with contractors’ little bit thatis close to the air-force bases where a small team of company 2 is co-located. Thecompany 2 and MoD organisations which are far away from the service delivery sitestill inherit the age-old adversarial buyer supplier relationships. Some examplesare depicted in Table III.5.2 Contract definition5.2.1 Incentives. In contract Y, company 2 and MoD are incentivised through again-share pain-share mechanism. The incentive scheme is based on a banded firm price(i.e. price varies with different flying usage band) and a built-in mechanism for sharingsavings throughout the contract. Price is reviewed every five years. The monthlypayment is linked to contractor’s availability performance. Also, there is an annualreconciliation against where company 2 said they are going to be in terms of spending.
  14. 14. 31,5 592 X and Y IJOPM Table III. Operations strategy dimensions for contractsOperationsstrategydimensions Contract X Contract YA. Customer operations strategyAl. Co-production 1. Implementatioon of co-production. Company 1 employs personnel who join 1. Implementation of co-production. Company 2 has to use people and the territorial army to ensure front-line availability and they work side-by- assets that “belong” to the MoD in delivering the service and also be side the Royal Electrical and Mechanical Engineers (REME). They are called co-located physically at the customer’s site. For example, both sponsored reserves company 2 and MoD personnel work in the bays side-by-side on maintenance and repair activities 2. Culture clash. Initial adversarial relationship between REME and company 1 2. Culture clash. Joint behaviour/culture emerging after initial period of personnel is still existing. The MoD people are sceptical about fellow civilian animosity. Culture of blame is existent. Suppliers blame GFA in case workmen. Culture of trust is still not there. Years of negligence to of any performance failure. Air force blames suppliers if there is any obsolescence risk management or process improvement resulted in large problem even if not related to them. Culture of “if in doubt send back spares storage to repair” results in huge costs of repair or testing of no faults are foundB. Contract designBl. KPIs Only one single composite success factor is used to assess contract performance Multiple performance indicators are used to assess contract performanceB2. Incentives 1. Service provider incentives. Full risk is on company 1 as there is no pain-share 1. Service provider incentives. Very difficult to comprehend and complex arrangement and any escalation in costs due to inefficient management has to to operate. For example, the contract Y incentive scheme has a fixed be company 1’s responsibility. The gain-share arrangement is also variable cost element (a certain number of employees who will be on the platform for the life of the platform, IT/IS development and training). This means that costs have to be recorded and allocated according to whether fixed and part of the incentive, or fixed but not part of the incentive scheme, and variable costs. Even then there is additional complexity; the “fixed” number of employees is not actually fixed and will flex downwards somewhat over time. Variable costs are linked directly to repair rates 2. Customer incentives. To protect the service provider from unexpected costs 2. Customer incentives. The contracts are designed to cover GFA- due to misuse related damages, contracts are designed to cover these clauses related issues. If there is a loss of availability due to GFA non- availability, the service provider can reconcile the short-fall (continued)
  15. 15. Operationsstrategydimensions Contract X Contract YC. Service delivery 1. Maintenance. Forward and depth maintenance policy – traditional four lines 1. Maintenance. Company 2 has responsibility for supply chain, fleet of maintenance support condensed into a simplified, two-level construct: management, optimising capability required in aircraft, managing forward and depth. Forward support contains only better trained front line obsolescence, improving maintenance throughput, reducing levels of people and has a greater need for resilience as equipment in frontline has very risings/faults, reducing no-faults-found, improved testing facilities of little downtime. Depth support collapses the second line of maintenance by aircrafts, reducing spares in supply chain repair loop. Company 2 reducing the number of maintenance locations. Company 1 is accountable to also investing largely in diagnostics, testing to avoid sending operate the base maintenance saving manpower and reducing repair time. – not-faulty parts to repair loop Introducing fleet management and controlled humidity storage to avoid deterioration of spares and sustain equipment readiness/availability. – Providing spares warehouse at regiment which is replenished as and when required 2. Flexibility. Company 1 also introduces flexibility by going extra, finding every 2. Flexibility. Contractor for their own benefit has modernised the air way to reduce costs and improve service, neglect minor user-related damages, force workshops, created quality management systems and reduced use of all the operational knowledge of the system to make the operations costs by doing things differently. Design teams look at how things flexible to changes in customer requirements are done at base, how they service and how to reduce servicing cycles, can they bring modifications to service as they know other users of same aircraft doing things differently than the way the UK does. Any changes or modification is endorsed through contract change protocol by jointly developing with customerD. Service provider operations strategyDl. Organisational 1. Culture change. Traditionally, company 1 will have contract for tech support, 1. Culture. Previously, it was only customer asking for spares andreadiness supply support separately. In basic manner, customer kit breaks down and company 2 has to supply it. Air force got what they asked for. they come to company 1 to make it more reliable. In no way there is incentive No dialogue was there, why they needed that particular spare. to reduce costs from company side except goodwill. Also, there was no Thus, traditional contracts in resulted in lots of assets on the shelf. compulsion from both sides to deliver by a certain date. But now company 1 However, in contract Y, company 2 is more interested in solutions, has to bear the cost to look at safety, obsolescence, reliability, etc. through out data, stakeholder management and risk and uncertainty analysis to the duration of contracts though they might not directly affect the availability reduce the costs of service 2. Supply chain. There is a limited gain share agreement with one supplier, but 2. Supply chain. Suppliers account for around 7,096 of supply chain cost such negotiations were extremely difficult, there was little enthusiasm in the but company 2 does not appear to adopt a joint structural/proactive supply chain for availability contracting. Also as reported above, wider approach in working with major subcontractors. The suppliers feel supply chain involvement was limited by the spares and cannibalisation left out of the availability concept and thus are not locked into the possible in this contract risk sharing arrangements. Difficulties in extending the dialogue in supply chains as there is very poor level of support data available product-service offerings Industrial Table III. 593
  16. 16. IJOPM With respect to pain/gain sharing arrangements, there is pain or gain sharing set at31,5 50/50 if company 2 over-spends or under-spends, respectively. So, there are strong financial motivations for both parties to work together and continually reduce aircraft operation costs. In contract X, company 1 effectively signs up for all of the risk in terms of agreeing to a firm price. There is no pain share in the contract. In the first few years, MoD gets a much higher percentage of the savings, after that majority of gain share goes594 to company 1. The target price performance incentive (TPPI) type of arrangement between MoD and company 2 is shown in Figure 3. The key features of this incentive mechanism are: . it gives a price sufficiently stable at contract signature to allow internal; . the price easily changes with varying flying levels; . fixed unit prices with supply chain providers; and . provides a financial motivation (and simple share-out mechanism) for both sides to work together to reduce “overall” programme costs. The variable costs are subject to 50:50 gain and pain share keeping aside a certain percentage for profit. The fixed costs savings are retained by the service provider while additional costs are funded by the provider. The incentive arrangement is self-funded by savings under contract X. The share of savings is skewed based on involvement in the project. In early years, since MoD is more involved (Figure 4), it enjoys larger share of savings. While towards the end of the contract, the share of company 1 (industry in Figure 4) grows. Again the shares of Variable costs Fixed costs • Spares-inclusive repairs • Fixed management team • Manpower sensitive to flying levels • L&IS and CIS • Training Cost increase Cost 100% funded increase Profit @ 3% by customer (inc 3%) Painshare at 50:50 Cost increase funded by company 2 Baseline cost Risk allowance in price and profit Company 2 retain 100% savings Company 2 retain 100% savings Profit @ 10% Gainshare at 50:50 Gainshare at 50:50 Cost decrease • Contract price initially based on mutually • Annual adjustment compares baseline agreed flying hours costs/risks against actual costs/risk spend to • Price and payment for variable costs is calculate gainshare adjusted annually from baseline if projected flying hours differ to contract assmuptions • Annual adjustment also compares baselineFigure 3. costs/risks against actual cost/risk spend toTarget price performance calculate either painshare or gainshareincentive mechanism Source: Contract Y, Company 2
  17. 17. Industry Industrial shareline (%) product-service MoD offerings shareline (%) Contract Contract start end 595 Contract Industry performance + SFyy shareline (%) Contract performance + SFxx MoD shareline Contract (%) performance Figure 4. Incentive mechanism Source: Contract X, Company 1industry go down if the availability performance is below the set success factor (SF).On the other hand, if performance . SF, no additional price is paid to the industry byMoD but that additional savings is retained by the industry. 5.2.2 Performance assessment. The performance indicators in contract Y are set aftermuch careful considerations. The KPIs were designed to measure number of aircraftsavailable (flying hours to make them usable for training or battlefront) and sparesavailable (number of non-functional days). There is a non-contractual KPI that measuresthe the MoD’s performance in delivering GFA. In contract X, a single SF is based on a set ofweighted contract performance indicators (CPIs) (Figure 5). Performance indicators (PI)are measured to indicate the cause or mitigation of future problems. All CPIs are calculatedbased on analysis of quantifiable PIs. For example, in-barracks-availability (target100 per cent) is measurable based on threshold of two hours. If company 1 cannot get theequipment functioning in two hours, it starts losing money. The flexibility in design ofPIs and KPIs and how to achieve that are down to companies 1 and 2, respectively.5.3 Organisational readinessExternal business environment and temporal demographics need to be considered inservice provider operations strategy. For example, in winter due to chartered airlinesmaintenance work sufficient number of maintainers may not be available. P sis P Equipement ly na readiness A P g P In Barracks tin gh P availability ei SF W P Availability P on excercise/Ops Figure 5. Performance indicatorsSource: Contract X, Company 1
  18. 18. IJOPM There are serious cultural challenges of a partnered solution. The military and31,5 commercial teams have different ways of thinking about maintenance. For example, in order to plan operations it is essential to record the timing of each activity in maintenance but MoD personnel does not have the “swipe in culture”. So, it costs companies extra manpower to find out MoD labour hours. Both companies are design authorities in the equipment. Managing MoD run596 workshops, managing military workforce are all new to them. The biggest challenge for company 2 is to gauge the fleet capability, maintenance schedules and stages of operational service upgrade. Attempts to simultaneously optimise the capability and upgrade are totally unexplored areas for it. Another cultural barrier for both the companies was shedding off the pride of being a design authority. One respondent clearly mentioned this challenge as: [. . .] it’s engineering, it’s design, it’s manufacture, it’s drawings it’s configuration control it’s obsolescence whereas contracting is what else can I do for you sir and a courtesy and scope creep again [. . .] In view of one company 1 respondent: [. . .] in traditional spare repair type contracts, contractors could have turned round and said “We can’t deliver” but now, if they do they are the ones who are going to suffer. So, now both companies calculate over the period of contract the number of spares based on consumption profile data and price accordingly. Suppliers account for the majority of supply chain cost and play key roles in subsystems, technical upgrades, repairs and obsolescence management. Since availability contracting incentivises lower number of faults, it is very difficult to incentivise the suppliers in such long-term contracts. In the cases, the service providers set up traditional contracts with their suppliers, where the suppliers have no visibility of the customer demand. 5.4 Service delivery 5.4.1 Information. Both companies and the MoD respondents mentioned visibility of frontline usage is an issue in successful operation of such contracts. One MoD respondent quoted: [. . .] if the weapon system for which you are providing availability leaves your hands and you are not informed of any changes that would be germane to that engineering climate you start to see a risk developing that by the time it comes back into your hands you will have lost the opportunity to plan. The data quality for spares, maintenance logs were very poor for both the contracts. Company 2 respondent commented that: We manage the flow of assets from the suppliers but we also manage the demand of assets from the suppliers. The subtlety here is that the transportation system is what we call the GFA [. . .] there is very little point in us by better demand forecasting having an asset available at a supplier if the customer’s system takes four weeks to get that asset from the supplier to the aircraft. Issues regarding information integration within company 2 are evident in one response:
  19. 19. [. . .] the teams that accompany our main interface with the supply chain are from our own Industrial organisation team which is in the North West. I don’t believe that they are being engaged as much as we at base probably should do. product-service5.4.2 Service delivery effectiveness. Company 1 created an integrated service delivery offeringsframework (Figure 6). In “As-was” solution, company 1 used to deliver stand-alone servicesto the customer as and when requested. In contract X, the whole programme is delivered bya joint team formed across customer and service provider organisation. This team has full 597information of all levels of maintenance activities. Company 1 now has full ownership of allrepairs and spares workshop, recruits military man power (sponsored reserve or SR inFigure 6) for carrying out service at battlefront and the regimental base. Royal Electricaland Mechanical Engineers (REME) reduction saves customer manpower. Apart fromabove changes in service delivery configuration, company 1 introduced innovativemeasures as use of parts from drawn down equipment to help reduce procurement costs. Another key aspect of contract X is a two-tier integrated project team where thecompany 1 team is integrated with MoD at operational and strategic levels. The seniorcustomer executive roles are more useful in expediting solutions. Company 1 spends a lot of time in building relationships and trust with customer.Company 1 tries to be as flexible as possible in ignoring minor customer errors, butafter certain level, they bind them to CPIs. So, for equipment which is damaged due tocustomer misuse and losses are huge (up to £5 million) MoD will be charged. Contract Y is a combination of several contracts which were already running withthe customer for several years. However, there were major issues in terms ofmisalignment of previous supply chain contractual terms with what company 2 signedup in contract Y (performance based). One of the key challenges thus was to integrate HQ land Customer programme executive IPTL Project manager Joint delivery team 4th line/industry Regiment base Regiment Engineering support Training and training Configuration/upgrades equipment support OJT training In battlefronts Obsolescence Missile management and Fleet management Unit holdings 1stLine levels 1 and 2 surveillance storage TA holdings battery fitter section Safety Reliability assessment REME and company1 Help desk Centralised repair 1st line SR operators (SR) Technical queries workshop support Technical support Company 1 operated Level 3 repair capability Primary Eqpt. Spares Missiles Spares and distribution Factory SRU/LRU Repairs Reprovisioning Reprovisioning MoD logistics Operations Supply management traders Figure 6. Information: Service delivery Company 1 accountability in Company 1 accountability Equipment: framework for company 1 “as was”solution in contract X
  20. 20. IJOPM the different individual traditional contracts under the aegis of contract Y. One of the31,5 key difference in operations of contract Y and previous contracts is summed up as: One of the things that we found in contract Y is the customer has bought a whole load of capability upgrade kits through earlier supply contracts with us. These are still sitting in the boxes that we supplied them in because they haven’t had the capacity, the time, the will and/or whatever to actually embody those onto the aircraft. Our challenge going forward is to598 batch the upgrades in an effective manner and integrate them and not only integrate them onto the platform but integrate them from a commercial and project delivery perspective into contract Y because at the minute this has been done by a separate project team based in a separate location. Company 2 relies on air force engineers to help them deliver the service. The downsizing of air force maintenance manpower has made it difficult to provide sufficient number of working hours. In addition, non-availability of other GFA results in additional costs in the form of subcontracts. In spite of so many challenges, contract Y is still delivering service to the required performance levels because of “actual physical proximity of the teams and aligning as well as to customer’s environment and expectations.” Company 2 has implemented integrated information systems to time the activities for better planning, implemented continuous improvement measures, such as better housekeeping and safety standards, total quality control initiatives at service bases. The most important element of operations strategy for service delivery is the customer’s operations strategy. The drafting of the contract, setting the KPIs and relating them to meaningful payment mechanisms constitute important part of operations strategy. While considering the contractors operations strategy, organisational readiness factors need to be considered. All these shape the service delivery, which includes maintenance policies, facility layout, obsolescence management and process improvement. Since the level of operational risk and complexity is so much in these types of contracts, the contract never attains stability. Uncertainty in supply is influenced by availability of right resources. Uncertainty in demand included information on usage. Other sources of uncertainty in service delivery derive from the supplier-customer interaction and the adoption of service culture. 6. Discussion Through comparing the findings from two case studies, we identify the key factors contributing to the successful delivery of performance-based industrial service contracts. In this paper, we have researched engineering service contracts where the key objective was to maximise the availability of the equipment under long-term service contract. Both organisations 1 and 2 are new to industrial service provision and are undergoing a massive culture change. Table IV shows the different important elements of operations strategy and how they can benefit the customer and the supplier. We use different factors to tabulate the benefits, for example to the customer the prime benefits are availability improvement and cost reduction. While for the service provider, there can be many benefits, for example, increasing the resource pool for future business sustainability, responsiveness to customer demand, information flow and improved customer and supplier relationships. Information is of prime importance for success of performance-based service contract as it helps in defining the contract terms, setting pre-bid costs for the contracts for the
  21. 21. Key framework Benefitelements Contract X and Y delivery success contribution Customer Service providerInformation Detailed service information, process data, cost data, Better availability Reduced cost equipment usage pattern and network wide performance informationService provider (a) Maintenance: “Spend-to-Save” type culture: invest Better availability Reduced costoperations in newer equipment, safety and obsolescence performancestrategy management to reduce dependence on faulty parts (b) Flexibility: accommodating and flexible to Reduced cost Good customer relationship and trust, good varying customer demand, over-looking minor information flow damages by the customer and building joint delivery team (c) External business environment or temporal Better availability Improved responsiveness demographics consideration – use multi-skilling performance and maintain good strength of trained workforce to hedge (d) Developing service oriented culture – managing Better availability Improved responsiveness, improved delivery logistics, scheduling capability upgrades, performance performance and increased future business manpower resource management, customer and supplier relation management, change of internal mindset, removing behavioural silos, fostering partnershipCustomer Partnership: need to partner with whole service Better availability Improved communication, responsiveness,operations provider organisation rather than only a “little-bit” at performance at reduced cost delivery performance and reduced costs, risksstrategy the base, building joint delivery team and risksContract definition Incentives: need to be designed to result into win-win Better availability Reduced risk and better performance situation for both parties, cost and risks should be performance shared equitably (as shown in TPPI type arrangement) KPIs: should be designed after considering factors as Better availability Better performance capability, customer affordability, environments, performance severe conditions of usage and uncertainty; the flexibility in deciding the range is also important product-service Attributes for effective offerings Industrial the two contracts service delivery across 599 Table IV.
  22. 22. IJOPM service provider and most importantly it helps in delivering the target performance level31,5 and hence the payments received. All respondents feel the need to build a congenial customer-service provider-supplier relationship is essential for successful operations of such contracts. Use of integrated customer-service provider team, understanding customer’s processes and inventory ordering patterns are essential factors for successful delivery of contract. Effective contract design including linking customer’s600 responsibility to the contract KPIs is an important element of operations strategy. The service delivery process for such contracts is not studied in contemporary literature. This paper presents empirical evidence from case study findings on the operations strategy for successful service delivery. The study on customer operations strategy, contract definition, performance assessment and organisational readiness helps in understanding the operations strategy elements for effective delivery of performance-based contracts. This is one of the most important contributions of this paper. The findings for both the contracts show the challenges of such contracts as multiple customers, external environment risks, co-production risks, incentive risks, KPI measurability problems and information integration. 7. Conclusion This research develops an operations strategy conceptual framework after conducting a detailed literature review. The research uses defence industry example to show the added complexity of the service offerings, the constraints of operations as using GFA and intricate contractual settings governing the delivery performance. Since the point of use is separated in time and space from the point of delivery, neither the commercial customer nor the supplier has any knowledge of the actual operating environment of the equipment. As there is no way to judge and incentivise the contractors, some innovative way of measuring their performance is developed as cost saving and sharing. This entails a whole new set of operations strategy dimensions. This paper reports these sets of strategic dimensions and elements. This paper has set out a series of indicative characteristics for servitised manufacture. First, in CfA, the service provider needs to be proactive and flexible. The service provider has to be ever-ready to make extra investment in additional resources and process improvement to ensure better performance. The capacity planning has to be flexible as the contractor has no visibility of frontline usage. Second, the contractor has to adopt joint operations strategy with supplier and customer. There should be end-to-end full visibility of the entire contract. Third, both parties in the contract have to make some sacrifices, which cannot be accounted in financial terms. For example, the contractor carries out much work beyond contract scope to facilitate smooth delivery of availability. The final element of success is the configuration of the contract incentives and performance indicators. The contribution of this paper is twofold. First, it proposes a set of theoretical operations strategy constructs for effective and efficient delivery of performance-based industrial service contracts. The framework is a contribution to PSS literature where operations strategy area is quite under-researched. Second, this paper provides a basis to construct a set of guidelines for devising operations strategy for effective delivery of performance-based service contracts. Although this study is based on two case studies in defence sector, we believe our results can be of use to a wider set of organisations offering outcome-based service
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