Five Differences Between Service and Manufacturing Organizations

Goods
The key difference between service firms and manufacturers is the tangibility of their output. The output of a service firm, such as consultancy, training or maintenance, for example, is intangible. Manufacturers produce physical goods that customers can see and touch.

Inventory
Service firms, unlike manufacturers, do not hold inventory; they create a service when a client requires it. Manufacturers produce goods for stock, with inventory levels aligned to forecasts of market demand. Some manufacturers maintain minimum stock levels, relying on the accuracy of demand forecasts and their production capacity to meet demand on a just-in-time basis. Inventory also represents a cost for a manufacturing organization.

Customers
Service firms do not produce a service unless a customer requires it, although they design and develop the scope and content of services in advance of any orders. Service firms generally produce a service tailored to customers' needs, such as 12 hours of consultancy, plus 14 hours of design and 10 hours of installation. Manufacturers can produce goods without a customer order or forecast of customer demand. However, producing goods that do not meet market needs is a poor strategy.

Labor
A service firm recruits people with specific knowledge and skills in the service disciplines that it offers. Service delivery is labor intensive and cannot be easily automated, although knowledge management systems enable a degree of knowledge capture and sharing. Manufacturers can automate many of their production processes to reduce their labor requirements, although some manufacturing organizations are labor intensive, particularly in countries where labor costs are low.

Location
Service firms do not require a physical production site. The people creating and delivering the service can be located anywhere. For example, global firms such as consultants Deloitte use communication networks to access the most appropriate service skills and knowledge from offices around the world. Manufacturers must have a physical location for their production and stock holding operations. Production does not necessarily take place on the manufacturer's own site; it can take place at any point in the supply chain.

Service Operations vs. Manufacturing Operations

Service and manufacturing operations have differences, but also similarities. For example, both create mission statements and a vision for how the organization will be run and perceived by customers. Each provider or manufacturer wants to lead the market in its specific industry. However, manufacturing and service operations answer different questions and formulate different strategies when it comes to planning and managing the way in which an organization is run.

Characteristics
Manufacturing operations produce tangible goods, which are physical products that can be held and seen. Manufacturing can be broken down into two branches: process and discrete manufacturing. While process manufacturers produce goods that typically use a formula and ingredients, such as soda pop or pharmaceutical drugs, discrete manufacturers produce goods from parts, such as electronics, appliances and automobiles. On the other hand, service operations provide certain intangible services that may not be easily identifiable. Service operations can be classified into many industries, such as banking, hospitality, advertising and consultancy.

Customization vs. Standardization

In general, manufacturers have a standardized way of producing goods. Goods are produced en masse in a factory or warehouse-type environment. One finished product is generally the same as the next. Service operations, by contrast, have more opportunities to customize the services they provide. For example, beauticians and hairdressers must customize the styling and treatments to match the customer's hair, shape of face and other characteristics. Even in service operations where you receive a tangible product, the service you receive from workers may not always be the same.

Production Environment
Manufacturing and service operations both plan the environment in which work takes place, but they focus on different elements. Manufacturing operations, for instance, consider the manufacturing layout. For example, the manufacturing layout can be fixed, process-focused or product-focused, such as in an assembly line factory. These issues affect the manufacturer's workforce performance and total output. Service operations, by contrast, plan the environment according to how it affects customers. For example, service operations are concerned with how the atmosphere appears to customers. Dimensions of the service environment include the layout of furnishings, arrangement of signs and tangible cues, such as colors and sounds designed to enhance the customer experience.

Operations Management
In a manufacturing environment, operations managers oversee the activities required to produce goods from raw materials. Issues managers in this environment face include managing the space to store raw materials, the flow of materials through the manufacturing process, how much product to produce and quality of output. In a service operation, operations managers schedule workers to handle customer demand. They must coach and train employees to provide optimal services to customers. Service operations that also sell physical goods also face inventory control issues, such as how much to stock and when to order.

Similar Issues
Service and manufacturing organizations face many similar issues that affect the end result of the operation. For example, both face issues of cost control. Manufacturing operations must find suppliers of raw materials at the lowest cost -- and highest quality -- possible. Likewise, service operations' indirect cost of providing services must be kept low so that the organization can provide competitive prices to customers and still turn a profit. Other issues both types of operations face include forecasting demand for products and services and staying competitive in the marketplace.

Service Operations Planning vs. Manufacturing Planning

Both service operations and manufacturing operations are in the business of satisfying customers, and that requires organization and planning. While the mechanisms and inputs for creating customer value are very different, the essence of planning is the same: Put the right things together at the right

time to meet customer demand. Planning for manufacturing organizations is typically more complex due to the physical movement and processing of material.
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Customer Demand
Both service and manufacturing companies have goals of satisfying customer demand. Maintaining sufficient capacity to meet demand is one of the great challenges of operations management. Demand planning depends on some type of forecast; in some industries, customers will partner with a company to help create a forecast. In most cases, forecasts are generated by analyzing historical demand, plus marketing and sales forecasts based on current and expected future conditions. The goal of a forecast is to prepare to meet the right amount of customer demand. Over-forecasting results in waste, and under-forecasting creates back orders and customer dissatisfaction.

Resource Planning
Everything a customer pays for is the result of a process. Whether you're building cars for sale or cleaning homes for a fee, there is a process required to go from start to finish. Resource planning is the discipline of making sure all the necessary inputs are present at the right time so the process that makes your company money can be completed. A good start for identifying the resources needed is a SIPOC chart. SIPOC (supplier, input, processing, output, customer) spells out exactly what's needed to complete each step of a process, who must supply it, what processing will occur, and who the customer is -- all the way to the end customer.

Manufacturing Operations
Manufacturing organizations must plan to have materials, personnel, facilities and equipment all ready at the right time to produce finished goods for sale. Many manufacturing companies use a version of Manufacturing Resource Planning (MRP-II) software to help schedule all the required resources at the right time. The key difference that tends to make manufacturing planning more complex than service planning is the addition of materials and physical processing. Many physical processes have fixed time and space requirements that can't be compressed.

Service Operations
While a service organization will also require some equipment and supplies, its key planning decisions surround processing times. The primary input to most service processes is labor. Whether it's an auto mechanic tuning an engine or an insurance agent preparing an application for coverage, the constraint is the amount of time it takes to process each task. The constraining or "bottleneck" process is often a department with limited personnel or resources, as opposed to a mechanical process with a fixed time or capacity constraint. As such, it usually requires less investment to add capacity to a service organization to satisfy more customer demand.

Value Stream Map

Value stream mapping is a method of visually representing the flow of a process from beginning to end, and separating the parts of the process that add value from those which do not. Both service and manufacturing companies have value streams, although they look much different. Completing a value stream map analysis of a business -- especially a new business -- is an excellent tool for understanding and improving the flow of its processes and, therefore, to satisfy more customers, faster and with less cost. Read more about Value Stream Mapping in the Resources section.

The Difference Between Service and Manufacturing Income Statements

Income statements are an important part of most businesses. These statements allow owners, managers and shareholders to see exactly how money is flowing into the company. There is no universal income statement format that covers all businesses; however, businesses in different industries, such as service and manufacturing, have several differences between their statements since the businesses have different types of expenses and different income sources.
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Income Statements
Income statements record the profits and losses experienced by a business over a set period of time. Income statements can cover short periods, such as one month, or longer periods, such as a full year; a common naming syntax is to describe the time period and the ending date, as in "The Six Month Period Ending April 30, 2011." The income statement includes an accounting of all revenue made during the time period as well as any expenses involved with the production of that revenue.

Industry Differences
Businesses adapt their income statements to their needs based upon the industry the business is in; service industry businesses could not use the same income statement template as manufacturing industry businesses because of the significant differences in how the businesses operate and earn money. Since an income statement reflects both the total amount of money earned by a company and the cost of earning that money, those industries that have more expenses or more types of expenses must provide more information in their statements than those who have only general expenses.

Service Industry Income

Service providers typically have low overhead costs as a result of keeping little if any inventory and having a relatively small number of employees on staff. This results in a larger percentage of revenue converting to profit in comparison to other business types, though depending on the service, the total amount of revenue may be low. Income statements generated by a service provider focus on the amount of income brought in and the types of expenses that the business encounters. Expenses that are common to other types of businesses may be left off of the income statement if the service does not require them.

Manufacturing Industry Income

Manufacturing companies typically have higher amounts of revenue than other business types due to the products produced being sold to retailers, other manufacturers, and directly to consumers. Manufacturing equipment, raw materials and the number of employees required to run a manufacturing company increase the amount paid to generate this revenue, however, resulting in a smaller amount of profit in comparison to business income. Income statements for manufacturing companies are typically more robust than those for other industries since manufacturers encounter a wider range of expenses than those companies that do not require extensive equipment, maintenance, shipping services or manpower.