Managers' perceptions of the importance of supply, overhead and operating costs.

Introduction

Management researchers and managers might have an intuitive view of the relative importance of costs of supply, operating costs and overhead costs. However in changing environments for businesses things might not be so simple. This article takes a fresh look at the way in which managers from different types of firms perceive the relative importance of the three costs. The firms are representative of professional services, financial services, retail distribution and manufacturing. The perception by managers of the relative importance of costs may be determined by the nature of the business, the operational focus (which will be influenced by competitive strategy) and the opportunities for their control. This article examines the existing literature for indications of the importance which is attached to the three types of costs in the four business sectors. The hypotheses which are developed are tested using a research instrument for assessing the perception of managers of the current competitive strategic posture of their business. The results show that managers have more discretion over the control of operational costs, without challenging the recipe for the industry, where they represent a high proportion of the three types. Where supply and overhead costs form a high proportion of the total costs managers can exercise discretion by challenging the existing industry recipes through restructuring their operations.

An operational taxonomy for service and manufacturing firms

The operations management and service management literature contains a number of paradigms which are relevant to the examination of costs. The divergence between service and manufacturing is at the simplest level expressed on a service to manufacturing continuum[1] with firms identified according to their productive output being either goods alone, or pure service or a mix of goods and services.

Service is defined for these purposes as an intangible output with no physical aspect. While this is a somewhat simplistic view of either manufacturing or service production it does allow a separation of firms into different categories. Chase[2] and Chase et al.[3] developed the basic model with particular regard to services by introducing the concept of the degree of customer contact in the production process. Pure services are defined as high contact and manufacturing as low contact, with mixed services and quasi-manufacturing positioned in between as in Figure 1. The model assumes the paradigm of services as consisting of a front office where there is contact with customers and a back room where there is no contact with customers and where operational processes may be controlled as in manufacturing environments[4]. Hence manufacturing is positioned on the model as low contact.

Service operations

Chase[5], Chase and Tansik[6] and Chase et al.[3] link the contact model to the design of service delivery systems in terms of labour and technology and effectiveness and efficiency. Effectiveness and efficiency are defined respectively as customer-focused and emphasizing sales and revenues from a product line and its marketing and production focused and concerning the costs of service production and delivery[7]. The proposition derived from the model is that low contact systems offer the greater opportunity for efficiency (which is in line with Thompson's concept[8] of a technical core). High contact systems, conversely, present potential gains from effectiveness and are limited in the potential for efficiencies because of uncertainties caused by variations in work flow, tasks and demand[9].

The contact model has been extended to take into account the extent of customization of the product by Maister and Lovelock[10] who also emphasized the value added contribution of back room (low contact) and front room (high contact) operations. Schmenner[11] developed the contact and customization model to include the degree of labour intensity in the service production.

A refinement of the contact model has been proposed by Wemmerlov[12] who introduced the concept of rigid and fluid processes where rigid processes are characterized by relatively low levels of task variety, low technical skills, little information exchange with the customer, constant resource absorption per service encounter, low variety of services, and low encounter time. Fluid processes display high levels in each of these dimensions and are associated with professional people based …