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.

Services as Attributes and Processes

Service inventory needs to be viewed in the context of how firms compete and create value for customers. Every service represents a bundle of attributes--quality, speed, customization and price--produced through a set of processes. Customers elect to buy from a service provider only if the attributes of its offering are more attractive than the available alternatives.

How well a service firm delivers its bundle of attributes depends on its process choices. Thus, process design is one of the most fundamental managerial decisions. We emphasize three drivers of performance: the placement of the push-pull boundary, the level and composition of resources and access policies. (See "A Framework for Service Process Design," p. 59.) The push-pull boundary determines how much work is done and stored as service inventory in anticipation of demand. Resources--that is, the people and the equipment that the provider employs--are used to perform the actual work of delivering a service. And access policies are used to govern how customers are able to make use of service inventory and resources (for example, when does an airline traveler complete check-in at a kiosk instead of going through an agent at the counter?). Most studies of service processes have focused on resources as the key lever in service design and performance. However, decisions about the push-pull boundary, resources and access policies are interrelated. A firm's ability to deliver targeted levels of quality, speed, customization and cost for given resource levels depends on both how much work is done ahead of demand (and thus how much work must be done in reaction to demand) and how the firm allows customers to tap into its resources. Where to locate the push-pull boundary is thus a significant decision in service-process design.

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The Role of Service Inventory

There are many different types of service inventory, and the choices a service provider makes depends on its industry and desired position in the market. A rheumatologist, for example, needs to produce letters for insurers on the status of patients. A system that automatically helps generate these letters represents a type of service inventory. The tools that help customers set up and run online auctions on eBay Inc. constitute another type of service inventory. Credit rating agencies, which sell consumer data and credit scores to financial institutions, have built their entire industry around service inventory. Financial institutions, in turn, have their own form of service inventory in the predetermined rules they apply to different customers on the basis of their financial profiles and credit scores. In all these examples, the service providers have shifted the push-pull boundary by performing some part of a service before the service request has arrived.

The title insurance industry illustrates some of the potential gains of moving the push-pull boundary closer to the customer. Title insurance …