Product Strategy

1
 What is a Product?
A Product is anything that can be offered to a
market for attention, acquisition, use, or
consumption and that might satisfy a want or need.
Includes:
n Physical Objects
n Services
n Events
n Persons
n Places
n Organizations
n Ideas
n Combinations of the above 2
 What is a Service?
A Service is a form of product that consist of
activities, benefits, or satisfactions offered for sale
that are essentially intangible and do not result in
the ownership of anything.
Examples include:
n Banking
n Hotels
n Tax Preparation
n Home Repair Services

3
 Products, Services, and
Experiences
Tangible Good Service
Pure With Hybrid With Pure
Tangible Accompanying Offer Accompanying Service
Good Services Minor Goods

Auto With Airline Trip

Soap Accompanying Restaurant With Doctor’s
Repair Accompanying Exam
Services Snacks

4
 Levels of Product
Augmented Product

Installation

Packaging
Brand Features
Name Core After-
Delivery
Benefit or Sale
& Credit
Quality Service Design
Service
Level

Warranty

Actual Product Core Product

5
 Product Classifications
Consumer Products
Convenience Products Shopping Products

Ø Buy frequently & immediately Ø Buy less frequently

Ø Low priced Ø Higher price
Ø Mass advertising Ø Fewer purchase locations
Ø Many purchase locations Ø Comparison shop
i.e Candy, newspapers i.e Clothing, cars, appliances

Specialty Products Unsought Products

Ø Special purchase efforts Ø New innovations

Ø High price Ø Products consumers don’t
Ø Unique characteristics want to think about these products
Ø Brand identification Ø Require much advertising &
Ø Few purchase locations personal selling
i.e Lamborghini, Rolex i.e Life insurance, blood donation
6
Product Classifications
Industrial Products
Materials
and
Parts

Capital
Items

Supplies
and
Services
7
 Product Classifications
Other Marketable Entities
Activities undertaken to create, maintain, or
change the attitudes and behavior toward the
following:
n Organizations - Profit (businesses) and nonprofit
(schools and churches).
n Persons – Politicians, entertainers, sports figures,
doctors and lawyers. Place
Marketing:
Vacation spots

Places - Business sites and tourism.

are the subject of
most place marketing

Ideas (social ideas marketing) – public health

Click orp ress space bar to re tu rn.

n
campaigns, environmental campaigns, and others
such as family planning, or human rights. 8
 Individual Product Decisions

Product Attributes
Branding
Labeling
Packaging
Product Support Services
9
 Product Attributes
Developing a Product or Service Involves Defining
the Benefits that it Will Offer Such as:
Ability of a Product to Perform
Product Quality Its Functions; Includes Level &
Consistency
Help to Differentiate the Product
Product Features
from Those of the Competition

Product Style Process of Designing a Product’s

& Design Style & Function

10
 This Land-O-Lakes ad shows the depth of the brand.

Branding
Consistency Quality & Value

Attributes Advantages Identification

of
Brand Names
High Brand Brand Strong Brand
Loyalty Equity Association

Name Awareness Perceived Quality

11
Major Branding Decisions

Brand Name Selection

Selection
Protection

Brand Sponsor
Manufacturer’s Brand
Private Brand
Licensed Brand
Co-branding

Brand Strategy
Line Extensions
Brand Extensions
Multibrands
New Brands
12
 Four Brand Strategies

Product Category
Existing New

Existing Line Extension Brand Extension

Dannon Yogurt Flavors Barbie Electronics
Brand Name

New Multibrands New Brands

Seiko Lasalle & Pulsar Windex (by acquisition)

13
 Brand Strategy
Line Extension
n Existing brand names extended to new forms, sizes,
and flavors of an existing product category.
Brand Extension
n Existing brand names extended to new or modified
product categories.
Multibrands
n New brand names introduced in the same product
category.
New Brands
n New brand names in new product categories.
14
 Discussion Connections
List as many specific examples as you can find of
each of the following:
n brand licensing,
n co-branding,
n line extensions, and
n brand extensions.
Can you find a single brand that has done all of
these?
Pick and describe a familiar brand that has been
widely extended. What are the benefits and
dangers for this specific brand?
15
 This business-to-business ad offers to provide
ecologically sound packaging.

Besides its impact on the

environment, what aspects
of packaging can
help/hinder product sales?

How have these products

Packaging
become known by their
packaging:
•Cracker Jacks?
•Capri Sun?

Activity of designing and

producing the container or
wrapper for a product.
Packaging used to just contain
and protect the product.
Packing now has promotional
value and marketers should:
n Establish a packaging concept,
n Develop specific elements of the
package,
n Tie together elements to support
the positioning and marketing
strategy.
16
 A classic labeling example .

Labeling What about thi s l abe l he lps to se ll the pr oduc t?

Click or pres s s pacebar to r et urn.

Printed information
appearing on or with the
package.
Performs several functions:
n Identifies product or brand
n Describes several things
about the product
n Promotes the product
through attractive graphics.

17
 Product - Support Services
Companies should design its support services to
profitably meet the needs of target customers and
gain competitive advantage.
How?
Step 1. Survey customers to assess the value of
current services and to obtain ideas for new
services.
Step 2. Assess costs of providing desired services.
Step 3. Develop a package of services to delight
customers and yield profits to the company.
18
Product Line Decisions
Product Line Length
Number of Items in the Product Line

Stretching Filling
Lengthen beyond Lengthen within
current range current range

Downward
Two-Way

Upward
19
 Product Mix Decisions
Width - number of
different product
lines
Consistency

Length - total Product Mix -

number of items all the product
in product lines lines & items
offered
Depth - number of
versions of each
product
20
 Discussion Connections
Using P&G’s Web site (www.pg.com) , its
annual report, or other sources, develop a
list of all the company’s product lines and
individual products. What surprises you
about this list of products?
Is P&G’s product mix consistent?
What overall strategy or logic appears to
have guided the development of this
product mix?
21
 International Product and
Services Marketing
Decide Which Products & Services to Introduce

Decide How Much to Standardize or Adapt

Packaging Presents New Challenges

Service Marketers Face Special Challenges

Trend Toward Global Service Companies Will Continue

22
 Review of Concept
Connections
Define product and the major classifications of
products and services.
Describe the roles of product and service
branding, packaging, labeling, and product
support services.
Explain the decisions companies make when
developing product lines and mixes.
Identify the four characteristics that affect the
marketing of a service.
Discuss the additional marketing considerations
for services. 23
 Service Management

Role of Services in an Economy

Reference Book :
Service Management for Competitive Advantage
James &Mona Fitzsimmons
www.howbankswork.com/1.1.html
www.customerservicezone.com
Learning Objectives

! Describe the central role of services in an

economy.
! Discuss the evolution of an economy from an
agrarian society to a service society.
! Describe and contrast the features of the new
experience economy with that of previous
economies.
! Describe the features of the new service economy
! Discuss the role of service managers with respect
to innovation, social trends, and management
challenges.
 Evolution of an Economy
Health
Education Refining & extending Human Capacities
Research
Arts
Transportation
Retailing
Finance & Insurance
Real Estate
Government Trade & Commerce

Manufacturing Domestic Services

Processing

Goods Producing
Hospitality
Beauty Treatment
Laundry
Agriculture
Extractive Repair & Maintenance
Mining
Child – Day Care
Fishing
Forestry
11/7/21 oisi_N1 3
Stages of Economic Development
Features
Pre- Use of Standard
dominant human Unit of of living
Society Game activity labor social life measure Structure Technology
Pre- Against Agriculture Raw Extended Sub- Routine Simple hand
Industrial Nature Mining muscle household sistence Traditional tools
Fishery power Authoritative

Industrial Against Goods Machine Individual Quantity Bureaucratic Machines

fabricated production tending of goods Hierarchical
nature

Post- Among Services Artistic Community Quality of Inter- Information

industrial Persons Creative life in terms dependent
Intellectual of health, Global
education,
recreation
Evolution of Services
Day-to-Day Service Requirements of Humans
(Extractive)
, fishery

industrial, consumer
durables, FMCG, military
 Sectors of Economy : Manufacturing

• Consumer Durables • Industrial (B2B)

Ø Electronics Ø Cement
Ø IT products Ø Ship Building
Ø Automotive

• Consumer Consumables (FMCG) • Military

Ø Beauty Aids Ø Vehicles
Ø Toiletries Ø Weapons & Arms
Ø Medicines Ø Ammunition
Ø Foods & Beverages Ø Clothing
Ø Fertilisers
 Sectors of Economy : Services

• Business Services • Social / Personal

Ø Consulting Ø Restaurants
Ø Finance Ø Hotels
Ø Banking (Personal / B2B) Ø Service Apartments
Ø Insurance Ø Day care for children
Ø Hospitals, clinics

• Trade Services
Ø Retailing • Public Administration
Ø Maintenance Ø Education
Ø Repairs Ø Government
– Water
– Electricity
• Infrastructure Services
Ø Communication
Ø Transportation
Ø Rail/Road Network
Ø Airline Services
Services Required by Manufacturing Sector
Significance & Role of Sectors in Nations Economy
 Significance & Role of Sectors in Nations Economy

52

30

18
% Contribution of Various Sectors to Indian Economy

Contribution to Market Cap by Service Sector

• Banking & Financial Services : 21.7%
• Information Technology : 10.6%
• Utilities : 2.6%
• Telecommunications : 2.1%

6 Companies from Service Sector figure in Top 10 by Market Cap

• TCS(1), HDFC Bank(3), HDFC(6), Infosys(7), Kotak Mahindra(9),
SBI(10)

4 Companies from Service Sector figure in Top 10 by Net Profit

• TCS(2), HDFC Bank(4), Infosys(5), ICICI Bank(10)
The New Experience Economy

Economy Agrarian Industrial Service Experience

Function Extract Make Deliver Stage
Nature Fungible Tangible Intangible Memorable
Attribute Natural Standardized Customized Personal
Method of Stored in Inventoried Delivered Revealed
supply bulk on demand over time

Seller Trader Manufacturer Provider Stager

Buyer Market User Client Guest

Role Of Service Sector in the Economy
• Essential Links between all sectors of economy
• Channels of distribution to end consumer
• Prerequisite to an Industrialised economy
• Enhance the quality of life
• NOT peripheral but Integral part of Society
• Crucial force for change towards Global Economy
• Source of Economic leadership
Interactive Role of Services
Service Definitions

! Any act or performance that one party can offer to

another that is essentially intangible and does not
result in ownership of anything. Its production
may or may not be tied to physical product.
Kotler
! A Service is a Time-perishable, Intangible
Experience Performed for a Customer Acting in
the Role of a Co-producer.
James Fitzsimmons
! Services are deeds, processes, and performances.
Valarie Zeithaml & Mary Jo Bitner
Definition of Service Firms

Service Enterprises are Organizations that

Facilitate the Production and Distribution of
Goods, Support Other Firms in Meeting
Their Goals, and Add Value to Our Personal
Lives.
James Fitzsimmons
 The Four Realms of an Experience

Customer Participation

Passive Active

Absorption Entertainment Education

Environmental (Movie) (Language)
Relationship Immersion Esthetic Escapist
(Tourist) (Skydiving)
Experience Design Principles

! Theme the Experience (Forum shops)

! Harmonize Impressions with Positive Cues
(O’Hare airport parking garage)
! Eliminate Negative Cues
(Cinemark talking trash containers)
! Mix in Memorabilia (Hard Rock T-shirts)
! Engage all Five Senses (Mist in Rainforest)
Role of the Service Manager

! Entrepreneurial Innovation
! Capitalizing on Social Trends
! Management Challenges
Economies of Scale (MRI scanner)
Economies of Scope(Convenience store)
Complexity (Yield Management)
Boundary Crossing (Bank vs Brokerage)
International Competitiveness(Diversity)
Discussion Topics

! Illustrate how the type of work he or she does

influences a person’s lifestyle.
! Is it possible for an economy to be based entirely
on services?
! Speculate on the effect that the Internet will have
on the delivery of services.
! What is the value of self-service in an economy?
! Comment on the role that marketing plays in the
service innovation process.
Interactive Class Exercise

! The class breaks into small groups. Each

group identifies service firms that should be
listed in the Forbes Top 100 and places
them in rank order of annual revenue.
The Nature of Services
Learning Objectives
! Classify a service into one of four categories
using the service process matrix.
! Describe a service using the four dimensions
of the service package.
! Discuss the managerial implications of the
distinctive characteristics of a service
operation.
! Discuss the insights obtained from a strategic
classification of services.
! Discuss the role of a service manager from
an open-systems view of service.
 What is a Product?
A Product is anything that can be offered to a
market for attention, acquisition, use, or
consumption and that might satisfy a want or need.
Includes:
n Physical Objects
n Services
n Events
n Persons
n Places
n Organizations
n Ideas
n Combinations of the above 3
 What is a Service?
A Service is a form of product that consist of
activities, benefits, or satisfactions offered for sale
that are essentially intangible and do not result in
the ownership of anything.
Examples include:
n Banking
n Hotels
n Tax Preparation
n Home Repair Services

4
Service Process

5
 Products, Services, and Experiences
Tangible Good Service
Pure With Hybrid With Pure
Tangible Accompanying Offer Accompanying Service
Good Services Minor Goods

Auto With Airline Trip

Soap Accompanying Restaurant With Doctor’s
Repair Accompanying Exam
Services Snacks

6
Bundle of Goods & Services

7
Bundle of Goods & Services

8
Nature and Characteristic of a
Service
Can’t be seen, tasted, felt, heard,
Intangibility or smelled before purchase.
Can’t be separated from service
Inseparability providers. Customer participation
in service process

Variability Quality depends on who provides

them and when, where and how.
Can’t be stored/inventoried for
Perishability later sale or use. Opportunity loss
of idle capacity. Need to match
demand and supply
Simultaneity Produced & consumed at the same
time
 Nature and Characteristic of a
Service
SERVICE CHARACTERISTICS, EFFECTS & CHALLENGES
Characteristics Effects Challenges
1. Intangibility Service products tend to be invisible and To tangibilize the product with the aid of
impalpable a marketing mix so that customer search
and evaluation is facilitated
2. Inseparability For the simultaneity of production and The service factory must combine retail
consumption, the buyer and the service outlets, limit scale of distribution, &
provider are brought together ensure that service personnel are not only
dexterous in technical skills but also in
interpersonal skills
3. Perishability Services cannot stocked To tackle difficulty in matching the supply
with demand; let the marketing emphasis
be on demand management
4. Customer The customer actively participates in To solicit cooperation from the customers
Participation service production, either by extending
physical cooperation or informational
inputs
5. Variability Labour intesiveness, intangibility and To bring consistency in service output
customer participation together make (standardization) by determining,
service output subject to variations implementation and control of
specifications, and mechanization
Nature and Characteristic of a
Service
Intangibility: Experiential in Value
n Services cannot be inventoried
n Services cannot be patented
n Services do not have features that appeal to the customer’s
senses
n Unlike goods, services cannot be smelt, seen, tasted,
touched or felt in advance
n Evaluation of services is not possible before actual purchase
and consumption
n It is difficult to achieve standardization in services
n Services do not involve transfer of ownership
n Production and consumption of services is simultaneous
11
Nature and Characteristic of a
Service
Inseparability of Production & Consumption
n Services are produced and consumed at the same time
n Services cannot be produced for their consumption at a later
stage/time
n Mass production is difficult
n Decentralization may be essential
n Employees affect the service outcome
n Customers participate in and affect the transaction

12
Nature and Characteristic of a
Service
Perishability: Not Inventoriable
n Since services are deeds, performances or acts whose
production and consumption takes place simultaneously,
they tend to perish in the absence of consumption.
n Services go waste if they are not consumed, they cannot be
returned or resold
n Matching the demand side with supply is a major challenge
in services

13
Nature and Characteristic of a
Service
Customer Participation: A Part of Production
n Customer participation is the key to production of service
and is in the form of cooperation
Variability: Lack of Standardization
n Service experience tends to vary with customer, time and
firm
n Service delivery and customer satisfaction depend on
employee actions
n Service quality depends on many uncontrollable factors

14
 Nature Of The Service Activity

More “White” collar jobs

New Avenues keep propping up
n Day Care for children of dual income family
n “Food” Services for “DINKS”
n “Moving” Services
n Service Apartments
n Malls,Hyper markets
Less “Cyclical”, stable demand
Recession Resistant
Service/Product Bundle
Element Core Product Core Service
Example Example
Business Custom clothier Business hotel

Core Business suits Room for the

night
Peripheral Garment bag Bath robe
Goods
Peripheral Deferred In house
Service payment plans restaurant
Variant Coffee lounge Airport shuttle
How is a Service Different
from a Product?

17
Distinctive Features of Service Operations

Element Product Service

Output Tangible Intangible

Demand Per Uniform Variable

Product
Ownership Possible Not Possible

Customer No or Low High

Involvement
 Distinctive Features of Service Operations
Parameter Service Goods
Customer Participation in production process Yes No
Simaltaneous production & Consumption Yes No
Can be stocked (Inventoried) No Yes
Full Impact of Demand Transferred to System Yes No
Selection of Location dectated by Customers Yes No
Economies of Scale Difficult Possible
Standardisation Difficult Possible
Performed in Controlled Environment ? Yes
Control on Decentralised Facilities ? Yes
Employee Attitude & Performance Important ?
See , Touch, Feel , Test Possible Yes No
What is the Product? Process Goods
Can the Output be Measured Easily? ? Yes
"In Service Business,you cannot make happy guests with unhappy employees."J.Willard Marriott.
Classification of Services

Why Classify Services?

Classification of Services: Objective

! Better understanding of needs and

behaviors of customers
! Various services often have similar
challenges & common problems to address
• Service evaluation
• Analyze customer and usage behavior
• Formulate purchasing, operations and
marketing strategies
Similar Behavior of Different
Services

! Telecom industry and call center

• Similar demand patterns
! Doctors, consultants and lawyers
• Frequent meetings with more personalization
! Airlines and Hotels
• High infrastructure costs
! Haircutting, boutique and spa
• More personalized services
! Education, health and other utilities provided by
government
• Maximum reach to each individual of nation
 The Service Package
! Supporting Facility: The physical resources that
must be in place before a service can be sold.
Examples are golf course, ski lift, hospital, airplane.
! Facilitating Goods: The material consumed by the
buyer or items provided by the consumer. Examples
are food items, legal documents, golf clubs, medical
history.
! Information: Operations data or information that is
provided by the customer to enable efficient and
customized service. Examples are patient medical
records, seats available on a flight, customer
preferences, location of customer to dispatch a taxi.
 The Service Package (cont.)
! Explicit Services: Benefits readily observable by
the senses. The essential or intrinsic features.
Examples are quality of meal, attitude of the waiter,
on-time departure.
! Implicit Services: Psychological benefits or
extrinsic features which the consumer may sense
only vaguely. Examples are privacy of loan office,
security of a well lighted parking lot.
 The Service Package
Facilities Facilitating Goods used in Service
• Layout,Decor • Quality (original spares)
• Tools • Ease of availability
• Waiting areas • Standby products
• Ease of access • Appearance (packaging)

Tangibility (explicit, hard) Intangibility (implicit, soft)

• Trained people • Behaviour of people
• “On time” performance • Confidentiality
• ISO/QS , awards etc. • Comfort while one waits
• Comprehensiveness • Status ( association with brand)
• Authorisation certificate • Safety (customer / product)
 Schmenner Service Process Matrix (Service Classification)
Degree
Degreeof of
Labour Intensity&and
Interaction Customisation
Customization
Level in the Service Activity
of Laborand

Low High
of Interaction

Industrialised Service Personalised Service

customisation

Airlines Healthcare in Hospitals

Intensity

Low Goods Transport Automobile repairs

Hotels, Resorts, Recreation
Hospitality TV/Audio Service
Packaged Tours More …
Degree

Service Factory Service Shop

Service for Masses Professional Service

Degree

Retailing Doctors
Wholeselling/ Distribution Lawyers
High
Education in schools Chartered Accountants
Retail Banking Security
More … Architects
Schmenner Service
Process Matrix
(Service
Classification)
Strategic Service Classification
(Nature of the Service Act & Recipient of Service)

Customer (Recipient of the Service)

Nature of
the Service Act People Things / Goods
People’s bodies: Physical possessions:

Health care Freight transportation

Passenger transportation Equipment repair and maintenance
Tangible actions Beauty salons Veterinary care
Exercise clinics Janitorial services
Restaurants Laundry and dry cleaning

People’s minds: Intangible assets:

Education Banking
Intangible actions Broadcasting Legal services
Information services Accounting
Theaters Securities
Museums Insurance
Strategic Service Classification
(Nature of the Service Act & Recipient of Service)

In which case is facility location and design important?

In which case can service be automated using IT?
Strategic Service Classification
(Relationship with Customers)

Type of Relationship between Service Organization and Its Customers

Nature of
Service Delivery “Membership” relationship No formal relationship

Insurance / Banking Radio / TV channel

Telephone subscription Police protection
Continuous delivery Electric Utility Lighthouse
of service Clubs / Gyms Public Highway
School / College Hospitalization

Post-paid Mobile Services Restaurant

Mall Membership PCO
Discrete transactions Travel pass Toll highway
Music / Movie Club Movie theater
Airline frequent flyer Public transportation

In which case is facility location and design important?

In which case can service be automated using IT?
 Strategic Service Classification
(Customization and Judgment)

Extent to Which Service Characteristics Are Customized

Extent to Which Personnel
Exercise Judgment in Meeting
Customer Needs High Low

Professional services Mass Education

Extent of discretion available

Surgery Preventive health programs

“personalizing” the service

Taxi services Immunization services

High House painting Family restaurant
Beauty treatment
with employees for

Personal loans

Telephone service Public transportation

Hotel services Spectator sport
Low Retail banking (excl. major loans) Movie theater
Cafeteria Institutional food service
Normal appliance repairs

In which case does knowledge, training and expertise or

specialization in the service domain become very important?
Strategic Service Classification
(Nature of Demand and Supply)

Extent of Demand Fluctuation over Time

Extent to which Supply
Is Constrained Wide Narrow

Electricity Insurance
Peak demand can Telephone Legal services
usually be met Police emergency Banking
without a major delay Hospital maternity unit Laundry and dry cleaning
Internet

Tax preparation / It Returns Fast food restaurant

Peak demand regularly Passenger transportation Movie theater
exceeds capacity Hotels and holiday resorts Gas station
IT Returns Car insurance renewal

What strategies will you devise to smoothen the demand?

Strategic Service Classification
(Method of Service Delivery)

Availability of Service Outlets

Nature of Interaction (Place where service is provided)
between Customer and
Service Organization Single site Multiple site

Customer travels to Theater Bus service

service organization Barber / Doctor Fast-food chain
(Carry in service) Product repairs
Service provider House painting Courier delivery
travels to customer Pest control service Emergency vehicle repairs
(On site service) Cabs
Newspaper / milk
Transaction is at Credit card Broadcast network
arm’s length Telephone company
(Remote interaction) Radio / TV network
Service Factors
! Service features
! process features
! customer orientated features
! labour related features
! management features
Service Process Orientation
! Customer as Coproducer
! Front and Back Office Perspectives
! Service Profit Chain Focus on Internal
and External Customers
! Quality (perceptions vs expectations)
! Focus on Productivity, Efficiency and
Effectiveness
! Use IT as Productivity Enabler for Both
Internal and External Customers
 The Service-Profit Chain
Healthy
Internal
Service Profits
Service Quality
and Growth

Satisfied and Satisfied and

Loyal Productive Service
Customers Employees

Greater Service
Value

36
Open Systems View of Service
Operations
Service Process Consumer Evaluation
Consumer arrivals Consumer participant departures Criteria
(input) Consumer-Provider ( output) Measurement
interface

Control Monitor

Customer demand Service operations manager Service personnel

Production function:
Perceived needs Alter Monitor and control process Schedule Empowerment
Location demand Marketing function: supply Training
Interact with consumers Attitudes
Control demand
Modify as necessary
Define standard

Service package
Supporting facility
Communicate Facilitating goods Basis of
by advertising Explicit services selection
Implicit services
 Challenges in Operations
• Innovation (lack of simulation for pre testing concept)
• Using available information to generate revenue
• Demographic changes
– “DINKS”
– Nuclear, 2 income families
• Deregulation
– “Open” skies
– Private life Insurance companies
– External / International Competition
• Disappearing boundaries between products & services
• “Marketing” Service
• “Industrialising” a Service Operation without losing
element of personal touch
 The Operational Challenges :1
Industrialised Service Personalised Service
• Introducing “personal” element • Managing QCD
• Conducive environment • Skill Upgradation of people
• Differentiation • Labors relations
• Staying within SOPs • Employee Loyalty

Services for Masses Professional Service

• Hiring & training • “Ethics”
• Scheduling • “personal” element in Service
• “Remote” control • Knowledge upgradation
• Starting new units • Managing Customer involvement
• Employee welfare in the process
 The Operational Challenges :2

1. Customer participation is Service process

2. Managing peaks & troughs in the load
( Service cannot be “stocked”)
3. Resultant capacity planning
4. Selection of location
5. Human Relations Management
6. Balance between Quality, Quantity and Profit
World Class Service Operation : Basics
•Develop strategies based on a deep understanding of the value of
customer service.

•Operationalize their service strategy by defining the processes that

drive service excellence. They manage those processes as virtual
production lines, in effect creating a service factory.

•Manage frontline performance to ensure superior and consistent

service execution.
www.Mckinsey.com
 Factors affecting Customer Satisfaction
Your Ideas Your Ideas
• •
 Factors affecting Customer Satisfaction
Resulting top 5 factors out of your ideas
1.
2.
3.
4.
5.
 Factors affecting Customer Satisfaction
Customers’ View (Not necessarily in the order shown)
1. Price
2. Quality
3. Relations
4. Speed
5. Tact / Technique / Technology / Technician
 Marketing Strategies for
Service Firms
Managing Service Differentiation
n Develop differentiated offer, delivery and image.
Managing Service Quality
n Empower front-line employees,
n Become “Customer obsessed”,
n Develop high service quality standards,
n Watch service performance closely.
Managing Service Productivity
n Train current or new employees better,
n Work on quality as well as quantity,
n Utilize technology.
45
 Assignment 1
• The class selects a “service” product
• Each student meets atleast two students (from either senior
batch or other institutes)
• For the given product asks the respondent to rank the five
parameters listed in slide 18. Why that ranking?
• Compile the results in one table
• Present & discuss the findings in the class on …..
Refer to slide number 1 in “Assignments_oisi.ppt”.
Village Volvo’s Service Package
! Supporting Facility

! Facilitating Goods

! Information

! Explicit Services

! Implicit Services
Village Volvo’s Distinctive
Service Characteristics
! Intangibility

! Perishability

! Heterogeneity

! Simultaneity

! Customer Participation in the Service Process

Village Volvo’s Service
Classification
! Nature of the service act

! Relationship with customers

! Customization and judgement

! Nature of demand and supply

! Method of service delivery

Managing Village Volvo
! How could Village Volvo manage its
back office (repair operations) like a
factory?

! How can Village Volvo differentiate itself

from Volvo dealers?
Xpresso Lube’s Service Package
! Supporting Facility

! Facilitating Goods

! Information

! Explicit Services

! Implicit Services
Xpresso Lube’s Distinctive
Service Characteristics
! Intangibility

! Perishability

! Heterogeneity

! Simultaneity

! Customer Participation in the Service Process

Xpresso Lube’s Service
Classifiction
! Nature of the service act

! Relationship with customers

! Customization and judgement

! Nature of demand and supply

! Method of service delivery

Xpresso Lube Questions
! What elements of Xpresso Lube’s
location contribute to its success?

! Given the example of Xpresso Lube,

what other services could be combined
to “add value” for the customer?
 Topics for Discussion
! What are the characteristics of services that will be
most appropriate for Internet delivery?
! When does collecting information through service
membership become an invasion of privacy?
! What are some management problems associated
with allowing service employees to exercise
judgement in meeting customer needs?
! What factors are important for a manager to consider
when attempting to enhance a service firm’s image?
Interactive Class Exercise
The class breaks into five groups and each
group is assigned one of the service
classifications (e.g., nature of act, relationship
with customer, customization, nature of
demand, or method of delivery) to come up
with an example for each of the four
quadrants in the matrix.
Service Strategy
 Learning Objectives
! Formulate a strategic service vision.
! Describe how a service has addressed each
element in the strategic service concept.
! Discuss the competitive environment of services.
! Describe how a service competes using the three
generic service strategies.
! Discuss the service purchase decision.
! Discuss the competitive role of information
! Explain the role of the virtual value chain in
service innovation.
! Discuss the limits in the use of information
 Why Strategy is Important?

! It provides a path or direction and a destination to aim

for by defending and sustaining competition.
! It helps the organizations to focus on core
competencies
! It provides meaning for the members of an
organization as well as outsiders
! It reduces uncertainty and provides consistency in
organizing and dealing with experiences.
! It helps manager perceive the relationships among
actions, context and performance
Strategy as Guide to Business Decisions
 Need for Service Strategy

! Who will be the customers?

! What can be offered to the potential customers which
competitors do not?
! On which customer desires will a service organization
compete?
! How will the business grow?
! Why a service organization should be the first choice of
customer?
! Are customer’s expectations aligned with the service concept?
Or Do customers see value in service product? How to create
value?
Strategic Service Imperative
Steps: Formulating Service Strategy
 Steps: Formulating Service Strategy

1. Create value to achieve competitive edge.

2. Understand the competitive environment
of services.
3. Formulate a strategic service vision.
4. Formulate competitive strategies.
5. Role of information in formulating strategy
to achieve competitive advantage.
Steps: Formulating Service Strategy

1. Create value to achieve

competitive edge.
Service Value Perceived by Customer
Service Value Model
Service Value Model: Airline Industry
Steps: Formulating Service Strategy

2. Competitive Environment of
Services
 2. Competitive Environment of Services

Porter’s 5
Forces Model
Porter’s 5
Forces Model:
ITeS
 2. Competitive Environment of Services

! Relatively Low Overall Entry Barriers

! Economies of Scale Limited
! High Transportation Costs
! Erratic Sales Fluctuations
! No Power Dealing with Buyers or Suppliers
! Product Substitutions for Service
! High Customer Loyalty
! Exit Barriers
Steps: Formulating Service
Strategy

3. Strategic Service Vision

 3. Strategic Service Vision

1. Target Market Segments

2. Service Concepts
3. Operating Strategy
4. Service Delivery System
 3. Strategic Service Vision
3.1 Target Market Segments

! What are common characteristics of important market

segments?
! What dimensions can be used to segment the market,
demographic, psychographic?
! How important are various segments?
! What needs does each have?
! How well are these needs being served, in what manner, by
whom?
 3. Strategic Service Vision
3.2 Service Concepts

! What are important elements of the service to be provided,

stated in terms of results produced for customers?
! How are these elements supposed to be perceived by the
target market segment, by the market in general, by
employees, by others?
! How do customers perceive the service concept?
! What efforts does this suggest in terms of the manner in
which the service is designed, delivered, marketed?
 3. Strategic Service Vision
3.3 Operating Strategy

! What are important elements of the strategy: operations,

financing, marketing, organization, human resources,
control?
! On which will the most effort be concentrated?
! Where will investments be made?
! How will quality and cost be controlled: measures,
incentives, rewards?
! What results will be expected versus competition in terms
of, quality of service, cost profile, productivity,
morale/loyalty of servers?
 3. Strategic Service Vision
3.4 Service Delivery System

! What are important features of the service delivery system

including: role of people, technology, equipment, layout,
procedures?
! What capacity does it provide, normally, at peak levels?
! To what extent does it, help insure quality standards,
differentiate the service from competition, provide barriers
to entry by competitors?
Basic & Integrative Elements of Strategic Service Vision
 Customer Criteria for Selecting
a Service Provider
! Availability (24 hour ATM)
! Convenience (Site location)
! Dependability (On-time performance)
! Personalization (Know customer’s name)
! Price (Quality surrogate)
! Quality (Perceptions important)
! Reputation (Word-of-mouth)
! Safety (Customer well-being)
! Speed (Avoid excessive waiting)
Levels of Service Competitive Dimension
 Levels of Service Competitive Dimension

! Service Qualifier (Satisfier):

! Customers say, they want
! To be taken seriously a certain level must be
attained on the competitive dimension, as
defined by other market players.
! Examples are cleanliness for a fast food
restaurant or safe aircraft for an airline.
 Levels of Service Competitive Dimension

! Service Winner (Exciters / Delighters):

! Unexpected and Innovative Features,
! The competitive dimension used to make the
final choice among competitors.
! Example is price.
 Levels of Service Competitive Dimension

! Service Loser (Dis-satisfiers):

! Failure to deliver at or above the expected level
for a competitive dimension.
! Essentials, assumed to be available, not stated
explicitly
! Examples are failure to repair auto
(dependability), rude treatment
(personalization) or late delivery of package
(speed).
Steps: Formulating Service Strategy

4. Formulate Competitive Strategies

 Competitive / Generic Strategy Options

• Cost Leadership
* “You can differentiate Anything.” Read Chapter on
• Differentiation* Differentiation in “Marketing Imagination”by
Theodore Levitt
• Market Focus
And/ Or •Q
•C
•D

“Purpose of a Business is to create & keep Customers” Theodore Levitt

 4. Competitive Service Strategies
(Overall Cost Leadership)
! Run service operations like factory (Fast Food)
! Seeking out Low-cost Customers (D-Mart, Indigo)
! Standardizing a Custom Service (Practo)
! Reducing the Personal Element in Service Delivery
(promote self-service, retail malls)
! Reducing Network Costs (hub and spoke)
! Taking Service Operations Off-line
! Reduce transaction costs (ATMs)
! Fixed charges (Every day low pricing, fixed charges)
 4. Competitive Service Strategies
(Differentiation)
! Making the Intangible Tangible (Memorable) (Kesari,
Cox & Kings, Veena World)
! Customizing the Standard Product (Sub Way)
! Reducing Perceived Risk
! Giving Attention to Personnel Training (Gold Gym,
Talwalkars, )
! Visibile Emphasis & Controlling Quality (Symbiosis,
McDonalds, KFC)
 4. Competitive Service Strategies
(Differentiation)
! Accessibility, Working hours (Sunday), Happy hours
! Provide platform for complaints (Feedback forms,
exclusive help desk facility) (Cabs, Transport
Operators)
Note: Differentiation in service means being unique in brand
image, technology use, features, or reputation for customer
service.
 “Differentiation” Strategy

• A “readymade” formula for a winning strategy never

exists.
• The strategy is determined by the parameters on
which Customers judge a Service
– P
– Q
– R
– S
– T
 4. Competitive Service Strategies
(Focus)
! Buyer Group: (e.g. USAA insurance and
military officers)

! ServiceOffered: (e.g. Shouldice Hospital

and hernia patients)

! Geographic Region: (e.g. Austin Cable

Vision and TV watchers)
 Factors Influencing Service Strategy

• Nature of Service performed (Who is the Customer)

• Expected relationship with Customers
• Extent of Customization planned / needed
• Extent of Demand Fluctuation
• Place of providing Service
External factors affecting Service Strategy

• Innovations are easily “copied”

• Difficulties in reaching high volumes
• Transportation costs (location)
• High level of seasonality, erratic demand
• Building up Customer loyalty
• Entry & Exit (Govt.) barriers

Michael Porter’s 5 Forces Model

Steps: Formulating Service Strategy

5. Competitive Role of Information &

IT in Services
 5. Competitive Role of Information & IT in Services

! Information in any Service Organization

! Represents large percentage of cost structure to
manage and store
! Determine the relative bargaining power of
players.
! Act as a glue that holds the whole value chain.
 5. Competitive Role of Information & IT in Services

! IT as a Source of Competitive Advantage

! IT based entry barrier.
! IT helps in eliminating cost and time utilized
for manually undertaking repetitive tasks of
information processing.
! IT can be utilized to merge various services
! IT helps in achieving lower overall costs by
avoiding traditional distribution channels and
by avoiding physical search of suppliers and
buyers.
 Competitive Role of Information
in Services
Strategic Focus Competitive Use of Information
On-line Off-line
(Real time) (Analysis)
Creation of barriers to entry: Data base asset:
External Reservation system Selling information
(Customer) Frequent user club Development of services
Switching costs Micro-marketing
Revenue generation: Productivity enhancement:
Internal Yield management Inventory status
(Operations) Point of sale Data envelopment
Expert systems analysis (DEA)
 The Virtual Value Chain
! Marketplace vs Marketspace
! Creating New Markets Using Information (Gather,
Organize, Select, Synthesize, and Distribute)
! Three Stage Evolution
• 1st Stage (Visibility): See physical operations more
effectively with information – Ex. USAA “paperless
operation”
• 2nd Stage (Mirroring Capability): Substitute virtual
activities for physical – Ex. USAA “automate
underwriting”
• 3rd Stage (New Customer Relationships): Draw on
information to deliver value to customer in new ways – Ex.
USAA “event oriented service”
 Limits in the Use of Information

! Anti-competitive (Barrier to entry)

! Fairness (Yield management)

! Invasion of Privacy (Micro-marketing)

! Data Security (Medical records)

! Reliability (Credit report)

 Industry Analysis : By Assignment
• Read “Jumbo service Plan” document
• Divide yourselves into Six groups
• Analyse the following Industries in Pune:
– 4 wheeler repairs
– 2 wheeler repairs
– Colour TV repairs
– Home loan Services
– Life Insurance Services
– Auto Insurance Services

Present your findings in 4 weeks from today

 Assignment 2
“Sai-Inn” is the only decent place available in this area for eating out.
Prepare a plan for starting a new place. Use the steps given in slide 13 of
“oisi_2.ppt”. Area covered will include the following:
• Structure
• Management
• Advertising and Promotion Plans

Financials, HR etc need not be covered.

Divide yourselves into 10 groups to study and prepare a Business Plan
document in ppt. 4 or 5 slides per group,
12 minutes per group. Two hours for the batch.
To be ready in 15 days from today.
Refer to slide number 2 in ‘Assignments_oisi.ppt”.
America West Airlines
Generic Competitive Strategy

Target Strategic Advantage

Low cost Uniqueness
Entire Overall cost Differentiation
Market leadership

Market Focus
Segment
 America West Airlines
Competitive Features
! Service Qualifiers:

! Service Winners:

! Service Losers:
 America West Airlines
Strategic Service Concept
! Delivery System:

! Location:

! Facility Design:

! Capacity Planning
 America West Airlines
Strategic Service Concept (cont.)
! Service Encounter:

! Quality:

! Managing Capacity and Demand:

! Information:
 America West Airlines
Positioning
CABIN SERVICE

Full Service

PREFLIGHT SERVICE
Inconvenient Convenient

No Amenities
 Mrs. Fields Strategic Use of
Information
Strategic Focus Competitive Use of Information
On-line Off-line
(Real time) (Analysis)
Creation of barriers to entry: Data base asset:
External
(Customer)

Revenue generation: Productivity enhancement:

Internal
(Operations)
 Mrs. Fields Management
Information System
! Advantages

! Disadvantages
 Mrs. Fields Questions

! Howmight the MIS contribute to a reported

100% turnover of store managers?

! Willthe MIS support or inhibit the growth

of outlets (domestic and overseas)?
 Alamo Drafthouse Positioning

FOOD QUALITY
Good

MOVIE SELECTION
Few Many

Poor
 Alamo Drafthouse Strategic
Service Vision
! Target market segments

! Service concept

! Operating strategy

! Service delivery system

 Alamo Drafthouse Winning
Customers
! Qualifiers

! Service winners

! Service losers
 Alamo Drafthouse Profitability
Recommendations
!

!
 Discussion Topics

! Give examples of service firms that use both the strategy

of focus and differentiation and the strategy of focus and
overall cost leadership.
! Use the service design elements for a service of your
choice to illustrate how all eight elements support the
service strategy.
! What ethical issues are associated with micro-marketing?
! For each of the three generic strategies (i.e., cost
leadership, differentiation, and focus) which of the four
competitive uses of information is most powerful?
 Interactive Class Exercise

! The class divides and debates the

proposition “Frequent flyer award programs
are or are not anticompetitive.”
New Service Development
and Process Design
Learning Objectives
! Discuss the new service development process.
! Prepare a blueprint for a service operation.
! Describe a service process using the dimensions of
divergence and complexity.
! Use the taxonomy of service processes to classify a service
operation.
! Compare and contrast the generic approaches to service
system design.
! Place an example of service automation in it proper
category.
! Discuss the managerial issues associated with the adoption
of new technology.
Service Design Elements
Service Design Elements
! Structural
– Delivery system
» Front office operations (processes)
» Back office operations (separate / integrated)
» Automation like self-service technologies
» Customer participation & behavior
– Facility design
» Size of facility, availability of space
» Aesthetics and ambience
» Layout and expansion consideration
» Ease of access / distance travelled
Service Design Elements
! Structural
– Location
» Customer needs, demographics & competition
» Single versus multiple sites
» Site characteristics
» Service concepts and objectives of service delivery
– Capacity planning
» Minimize waiting lines / periods (number of
servers)
» Accommodating average and / or peak demand
» Service –line balancing
Service Design Elements
! Managerial
– Service encounter
» Characteristics of service providers, customers
» Staff selection and training
» Staff rewards and incentive systems (culture, empowerment)
– Quality
» Reduce gaps between customer perceptions & expectations
» Process quality assurance and control (measurement,
guarantee, escalation process)
Service Design Elements
! Managerial
– Managing capacity and demand
» Planning and controlling queues (queues)
– Information
» Customer feedback
» Corrective action (data collection, resource)
Customer Benefit Package
Hierarchy Element Core Good Core Service
Level Example Example

Category Business Custom Business

clothier hotel

First Core Business Room for

suits the night

Second Peripheral Garment Bath robe

Good bag

Peripheral Deferred In house

Service payment restaurant
plans
Third Variant Coffee Airport
lounge shuttle
 New Service Development Cycle
• Customers, Suppliers, Employees
• Full-scale launch
• Post-launch review Feedback
Full Launch Enablers Development
• Formulation
of new services
l
• Service design nte na People
Co izatio
xt
Customers, objective / strategy
and testing

Tea
Suppliers, • Idea generation
n

• Process and system

ms
ga

Employees and screening

design and testing
Or

• Concept
• Marketing program development
design and testing Product - Validation and
• Personnel training testing
• Service testing and
pilot run
Technology Systems
• Test marketing

Tools
Analysis
Design • Business plan
• Business analysis (I&E)
• Project authorization
• Project approval
New Service Development Cycle
New Service Development Cycle
New Service Development Cycle
New Service Development Cycle
 New Service Development : Steps
1. Location
2. Facility Design
3. Work Instructions, SOPs
4. QC Methods
5. Extent of Customer Involvement
6. Selecting Equipment, Instruments
7. Capacity Calculations
8. Level of “Standardization / Customization”
9. Voice of Customer (Feedback Loops )
10. Financials (Break Even Sales / Pay back period)
11. Critical Success factors
12. Project Calendar
Strategic Positioning Through Process Structure

! Degree of Complexity: Measured by the number of

steps in the service blueprint. For example a clinic is
less complex than a general hospital.
! Degree of Divergence: Amount of discretion permitted
the server to customize the service. For example the
activities of an attorney contrasted with those of a
paralegal.
! Degree of Customer Contact: Three possibilities viz.,
direct contact, indirect contact, no contact
! Actual Recipient of Service: Services can be performed
on customer’s body, property goods, data
Generic Approaches to Service Design
Generic Approaches to Service Design

! Production-line / Industrial (Attain Cost Leadership)

• Emphasis on control of service process
• Limit discretion of employees
• Division of labor
• Substitute technology for people
• Standardize the service
! Customer as Co-producer
• Substitution of customer labor for service provider
• Smoothing service demand
• Customer participation in service process
Generic Approaches to Service Design

! Customer Contact
• Degree of customer contact (% of service time
customer is present)
• Separation of high and low contact operations
• Sales opportunity v/s Service delivery
! Information Empowerment (Using IT)
• Information is major contributor of value generation
• Empowering employees (Database management)
• Empowering customers (On line booking, complaint
logging)
 Capacity Cost Trade Off
Cost

Combined Cost

Cost of Service

Cost of Waiting

Capacity to Serve
Drivers of Service Innovation
! Financial pressures or increased competition to decrease
costs, increase efficiency
! The changing economy
! Stricter government regulations
! Need for sustainable development
! Shorter product life cycles
! Community and social expectations and pressures
! Demographic, social, and market changes
! Rising customer expectations regarding service and quality
! Greater availability of potentially useful and inexpensive new
technologies
! New ideas from customers, strategic partners, and employees
 Levels of Service Innovation

Features Radical Innovation Continuous Innovation

Effect Radical transformation (Rebuild) Incremental change (Improve existing)
Focus Technology People
Direction Vision led Process led
Level of Investment Large Small
Basis of improvement Technology Systems & procedure reviews
Relative time frame Long term Short term
 Levels of Service Innovation

Features Radical Innovation Continuous Innovation

Involvement Few, led by specialists (Champion driven) Many, with all staff contributing (Work unit
driven)
Maintaining the gains Self-sustaining improvements are inherent High level of maintenance necessary to
in the investment sustain gains and to make future
improvements
Nature of task One-off, additional large project Continuous, inherent part of the day-to-day
activity
Attitudes and behavior Changes attitudes and behavior Assumes attitudes and behavior
Limited no. of initiatives Various simultaneous projects
Levels of Service Innovation
Radical Innovations
! Major Innovation: new service for undefined
markets driven by information and computer based
technology (internet banking, mobile banking,
eBay)
! Start-up Business: new service for existing market
already served by existing services (insurance,
restaurants, fast food)
! Add On / New Services for the Market Presently
Served: new services to existing customers of an
organization (payTM, book stall in coffee shop,
amusement parks, ATM at airports)
Levels of Service Innovation
Incremental Innovations
! Service Line Extensions: augmentation of existing
service line (e.g. new menu items, multi brand)
! Service Improvements: changes in features of
currently offered service (web based check by
airlines, change in layouts, ambience)
! Style Changes: modest visible changes in
appearances (new logo, aesthetics, ACs)
Levels of Service Innovation
Technology Driven Service Innovation
! Power/energy - International flights with jet aircraft,
solar, wind
! Physical design – Enclosed/covered sports stadiums
! Materials – Astroturf, Mat
! Methods – JIT, TQM, TPM, TOC
! Information - E-commerce using the Internet (DTH,
Demat)
Classification of Service Automation
! Fixed-sequence (F) - parking lot gate
! Variable-sequence (V) - ATM
! Playback (P) - answering machine
! Numerical controlled (N) - animation
! Intelligent (I) - autopilot
! Expert system (E) - medical diagnosis
! Totally automated system (T) - EFT
Adoption of New Technology in
Services
! Challenges of Adopting New Technology
The Process is the Product
Back Office vs Front Office Changes
Need for Standardization
! Managing the New Technology Adoption
Process
Ten step process with concern for employees
and customers
 Mapping /Designing Processes
• Similar to a manufacturing process
• Helps to identify
– “Bottlenecks”
– Time per stage in the process
– Back office and front office activities
– Checklists
– Critical Operation/s
 Flow Chart Example : Handling a Complaint:
History
Complaint arrives Data
Letter
e-mail file

Y
Repeat? Get History

N
Schedule Call with Deput a Senior
Customer Person/ Engineer

Visit Customer or
Repair in w/shop
Order / Get Parts

Y
Call for Help or N
N
Deput a Senior Need Parts? Repair OK?
Person / Engineer Update History File
Y

Explain Repairs done Send Report Next Call/Job

 Position Defines Process Requirement
High Complexity Of Service Delivered
Hi-End product Repair
Health
Routine Health Check
Housing Loan
Air Travel- Foreign
Air Travel- Local

Railway reservation
Convention/Seminar
Low High
Motel Diversity of Service Delivered
Current A/c
SB A/c

College Admissions

Immunisation Drives
Lo-End product Repair
Low
 Service Blue Print

Components of Service Blue Print

Service Blueprint - Benefits
! Better visualization (direct customer contact activities,
back-office activities)
! Identification of training areas & training needs
! Determine potential areas of service failure
! Facilitates problem solving and creative thinking.
! Provides a service process structure which can help in
devising different approaches for service system design
appropriate for different types of service organizations
! Everybody gain insights into how their roles fit into the
integrated whole, which facilitate innovation
Service Blueprint of Luxury Hotel
Structural Alternatives for a Restaurant

LOWER COMPLEXITY/DIVERGENCE CURRENT PROCESS HIGHER COMPLEXITY/DIVERGENCE

No Reservations TAKE RESERVATION Specific Table Selection

Self-seating. Menu on Blackboard SEAT GUESTS, GIVE MENUS Recite Menu: Describe Entrees & Specials
Eliminate SERVE WATER AND BREAD Assortment of Hot Breads and Hors D’oeuvres
Customer Fills Out Form TAKE ORDERS At table. Taken Personally by Maltre d’
PREPARE ORDERS

Pre-prepared: No Choice Salad (4 choices) Individually Prepared at table

Limit to Four Choices Entree (15 choices) Expand to 20 Choices: Add Flaming Dishes;
Bone Fish at Table; Prepare Sauces at Table
Sundae Bar: Self-service Dessert (6 choices) Expand to 12 Choices

Coffee, Tea, Milk only Beverage (6 choices) Add Exotic Coffees; Sherbet between
Serve Salad & Entree Together: SERVE ORDERS Courses; Hand Grind Pepper
Bill and Beverage Together

Cash only: Pay when Leaving COLLECT PAYMENT Choice of Payment. Including House Accounts:
Serve Mints
Taxonomy of Service Processes
Low divergence High divergence
(standardized service) (customized service)
Processing Processing Processing Processing Processing Processing
of goods Information of people of goods Information of people
Dry Check Auto repair Computer
No Cleaning processing Tailoring a programming
Customer Restocking Billing for a suit Designing a
Contact a vending credit card building
machine
Ordering Supervision
Indirect groceries of a landing
customer from a home by an air
contact computer controller

No Operating Withdrawing Operating Sampling Documenting Driving a

customer- a vending cash from an elevator food at a medical rental car
service machine an ATM Riding an buffet dinner history Using a
worker Assembling escalator Bagging of health club
interaction premade groceries Searching for facility
(self- furniture information
Direct service) in a library
Customer Customer Food Giving a Providing Home Portrait Haircutting
Contact service service in a lecture public carpet painting Performing
worker restaurant Handling transport- cleaning Counseling a surgical
interaction Hand car routine bank a tion Landscaping operation
washing transactions Providing service
mass
vaccination
Discussion Questions

! What ethical issues are raised in the promotion of

sales during a service transaction?
! What are some drawbacks of customer
participation in the service delivery process?
! What are the limits in the production-line
approach to service?
! Give an example of a service in which isolation of
the technical core would be inappropriate.
100 Yen Sushi House Questions
! Prepare a service blueprint for the 100 Yen Sushi
House
! What features differentiate 100 Yen Sushi House
and how do they create a competitive advantage?
! How has the 100 Yen Sushi House incorporated
the just-in-time system into its operations?
! Suggest other services that could adopt the 100
Yen Sushi House service delivery concept.
100 Yen Sushi House Layout
Dishwashing Counter in Back
CONVERSATION AREA
Miso and Tea Station

CONVEYOR
BELT

CONVERSATION AREA
TAKE-OUT
POSITION

ENTRANCE = CHEF
100 Yen Sushi House Service Package
! Supporting Facility

! Facilitating Goods

! Information

! Explicit Service

! Implicit Service
INTERACTIVE CLASS EXERCISE

The class breaks into small groups and

prepares a service blueprint for Village
Volvo.
The Service Encounter
 Learning Objectives
• Use the service encounter triad to describe a
service firm’s delivery process.
• Describe features of an organization’s culture.
• Discuss how information technology is an enabler
of employee empowerment.
• Prepare abstract questions and write situational
vignettes.
• Discuss the role of customer as coproducer.
• Discuss the concept of a service profit chain.
 Service Encounter : Stages
• Before Going to the Place (Ads, Friends, Dealers)
• At the gate
• At the reception
• With the Service Representative/Advisor/ Engineer
• Making a Job order
• During Service Performance
• Trial / After Service Performance
• Bill Payment / Explaining the job done
• At the gate
• During usage after service has been performed
• During feedback
• While complaining if not RFT
 The Service Encounter Triad
(Players in Service Encounter)

Service
Efficiency v/s Autonomy Organization
(Empowerment)
Training of Employee Standardized v/s Personalized Service
Service delivery Efficiency v/s satisfaction
Service scape
system

Employee /Contact
Customer
Personnel Perceived
control
(Extent of
Domination)
 The Service Encounter Triad
(Effect of Domination)
Service By Service Organisation
Organization
• Fast food outlets, Govt. Hotels/Outle
• Standard & Inflexible choices
• Restricted by Rules
• Reduced Job Satisfaction

Employee /Contact
Customer
Personnel

By Service Employee: By Customer

• Doctor – Patient • Super market
• Customer Trusts the Service provider • Own Judgment
• Customer has no control on Service provider • Full Control
• Highly Personalised • Standardised
• Efficiency Suffers • More Efficient
Factors Influencing Service Encounter
•Unrealistic Demands by Customer
• Failure of Service
– Not Operational
– Slow
– Nonconforming
 The Service Organization
• Culture
Set of Values & Beliefs
ServiceMaster (Service to the Master)
Disney (Choice of language)
• Employee Empowerment
Invest in people
Use IT to enable personnel
Recruitment and training critical
Pay for performance
 The Service Organization
Definitions of Culture
• Schwartz and Davis (1981) - Culture is a pattern
of beliefs and expectations shared by the
organization’s members.
• Mintzberg (1989) - Culture is the traditions and
beliefs of an organization that distinguish it from
others.
• Hoy and Miskel (1991) - Culture is shared
orientations that hold the unit together and give a
distinctive identity.
The Service Organization
Organizational Control
Beliefs To Core values Identify core
Systems contribute & mission values

Boundary To do right Specify and Risks to be

Systems enforce avoided
rules
Diagnostic To achieve Build clear Critical
Control targets performance
Systems variables

Interactive To create Encourage Strategic

Control learning Uncertainties
Systems
 Employee / Contact Personnel
• Selection
1. Abstract Questioning
2. Situational Picture
3. Role Playing
• Training
Unrealistic customer expectations
Unexpected service failure
 The Customer
• Expectations and Attitudes
– Economizing customer (Econo-miser)
– Loyal customer (Loyal Ambassador)
– Personalizing customer (Individualist)
– Convenience customer (I want No hassles)
– Ethical customer
– Pro-sumer
• Customer as Co-Producer
 The Customer
• Economizing Customer (Econo-miser)
– Hunts before buying
– Tells about Competitor’s strengths
• Loyal Customer (Loyal Ambassador)
– Sticks to the Brand
– Canvasses for the Brand
• Personalizing Customer (Individualist)
– Demands Personalised Service
– Likes to be called by the name
• Convenience Customer (“I want No hassles”)
– Wants “More” and can pay
– Looks for value added Service
– Wants to be in Control of the encounter
• Ethical
customer
•“Pro-sumer”
– Proactive Consumer (ET 21-06-05)
 Difficult Interactions with Customers

Unrealistic customer expectations Unexpected service failure

1. Unreasonable demands 1. Unavailable service
2. Demands against policies 2. Slow performance
3. Unacceptable treatment of 3. Unacceptable service
employees
4. Drunkenness
5. Breaking of societal norms
6. Special-needs customers

Use scripts to train for proper response

Service Encounter Success Factors
Customer Service Provider
Human Machine
Employee selection User friendly
Interpersonal skills Verification
Human Support technology Security
Engender trust Easy to access
Easy to access Compatibility
Fast response Tracking
Machine Verification Verification
Remote monitoring Security
Satisfaction Mirror: Perceptions v/s Effectiveness

More More Familiarity with

Repeat Customer Needs and Ways of
Purchases Meeting Them
Stronger Tendency to Greater Opportunity for
Complain about Service Recovery
Errors from Errors
Time Savings in Identity Known Customer
Verification

Higher Customer Higher Employee

Satisfaction Satisfaction
Lower Higher
Costs Productivity
Better Results, Loyal Improved Quality
Customers, Good Spread of Service
of Word of Mouth
Employee Perceptions of Customer Service at a
Branch Bank
Outstanding 6

Custom er 5

Terrible 1
1 2 3 4 5 6
Terrible Outstanding
Employee
 The Cycle of Capability
• Careful employee and customer selection
• High-quality training
• Well-designed support systems
• Greater latitude to meet customer’s needs
• Clear limits on expectations of employees
• Appropriate rewards and recognition
• Satisfied employees
• Employee referrals of job candidates
 Service Profit Chain

Internal External
Operating strategy and Service
service delivery system concept Target market

Loyalty
Customers Revenue
Satisfaction growth
Productivity Line of Internal Interaction -
& > Service
Employees Satisfaction Loyalty
Output value
quality
Capability
Profitability

Service
quality

Workplace design Quality & Attractive Value Lifetime value

Job design / decision-making latitude productivity Retention
Selection and development improvements yield Service designed Repeat Business
Rewards and recognition higher service quality & delivered to Referral
Information and communication and lower cost meet targeted
Adequate “tools” to serve customers customers’ needs
 Measuring an Encounter Quality: Tool
Rating By
Performance Indicator Employees Customers
1 2 3 4 5 6 1 2 3 4 5 6
Follow Rules
As one family
Know Customer by Name
Special treatment to "Big" Customers
Ability to perform variety of Jobs
Teamwork
Community Projects - Involvement
Verify identity
Meet target at All costs <2 Not Essential
>2 but <4 Somewhat Essential
Performing More than one's job
>4 Very Essential
Caring for Customer's problem
Caring for Quality
Creativity
Speed of response
11/7/21 oisi_N4 19
 Measuring an Encounter Quality:Result
Rating By
Performance Indicator Employees Customers
1 2 3 4 5 6 1 2 3 4 5 6
Follow Rules
As one family
Know Customer by Name
Special treatment to "Big" Customers
Ability to perform variety of Jobs
Teamwork
Community Projects - Involvement
Verify identity
Meet target at All costs
Performing More than one's job
Caring for Customer's problem
Caring for Quality
Creativity Gap leads to CAP
Speed of response
11/7/21 oisi_N4 20
 Capping the Gap
• Gaps are known
• Corrective Action Plan (Caps the Gap)

11/7/21 oisi_N4 21
Case Studies
 Topics for Discussion
• What are the organizational and marketing
implications of considering a customer as a
“partial employee”?
• Comment on the different dynamics of one-
on-one service and group service.
• How does use of a “service script” relate to
service quality?
• If the roles played by customers are
determined by cultural norms, how can
services be exported?
 AMY’S ICE CREAM
Abstract Questions

• What was your most rewarding past

experience and why?
• What are you looking for in your next job?
• What have you done in the past to irritate a
customer?
• What flavor of ice cream best describes
your personality?
 AMY’S ICE CREAM
Situational Vignette

A particular customer has the irritating habit

of always showing up about two minutes
before closing and staying late. Often this
occurs on the night when weekly store
meeting are held after closing time. This
delays starting the meeting and furthermore
employees are on the clock waiting for the
customer to leave. What would you do?
 AMY’S ICE CREAM
Situational Vignette

As a new employee at a busy store, you

have been routinely performing clean-up
tasks (garbage removal and restroom
cleaning). Company policy dictates that
these are tasks to be shared. It has become
clear that two employees consistently avoid
these jobs in favor of more pleasant duties.
How would you handle this situation?
 Group Assignment 3

1. Divide yourselves into 10 groups.

2. Select 10 Service Activities on Campus or around
3. Identify 10 PIs for each Activity
4. Map the response of employees involved
5. Ask the views of 10 users on the same parameters
6. Make a grid as shown in slide14
7. Prepare a ppt presentation of 2 slides (10 Minutes)
a) Slide 1 – the “filled” Grid
b) Slide 2 – your comments (How to improve)
8. To be presented from 15 days from today
Service Quality

“If your delivered quality is good, customers

come back. Else Goods come back”.
Chairman – Philips India
Learning Objectives
! Describe the five dimensions of service quality.
! Use the service quality gap model to diagnose
quality problems for a service firm.
! Illustrate how Taguchi methods and poka-yoke
methods are applied to service design.
! Perform service quality function deployment.
! Construct a statistical process control chart.
! Develop unconditional service guarantees.
! Plan for service recovery.
Moments of Truth
! Each customer contact is called a moment
of truth.

! You have the ability to either satisfy or

dissatisfy them when you contact them.

! A service recovery is satisfying a previously

dissatisfied customer and making them a
loyal customer.
Definition of Service Quality

Your Ideas …
Comparison between perceptions of Service Quality
Received and Service Quality Desired.

• If R > D ,Then Service Quality is Excellent

• If R = D ,Then Service Quality is Acceptable
• If R < D ,Then Service Quality is Poor

The challenge is in the ability to define R & D.

“Purpose of a Business is to create & keep Customers” Theodore Levitt

Dimensions of Service Quality
! Reliability: Perform promised service
dependably, consistently, timely and accurately
(error free).
– Example: receive mail at same time each day.
! Responsiveness/Speed: Willingness to help
customers promptly. Waiting time. Recovery
from an error. Example: avoid keeping
customers waiting for no apparent reason.
! Competence: Technical, Behavioral,
Communication
Dimensions of Service Quality
! Assurance: Ability to convey trust and
confidence. Example: being polite and showing
respect for customer.
! Empathy: Ability to be approachable.
Listening skills and personal attention.
Example: being a good listener.
! Tangibles: Physical facilities and facilitating
goods. Example: cleanliness.
Quality Dimensions: Product & Service

The Management and Control of Quality: Evans,Lindsay.

David Garvin’s Model- PP:167-170

11/7/21 oisi_N3 7
Measuring Service Quality : Some examples
In “Durable” Service:
• RFT %
• Repeat job %
• Call Back %
In Telecom:
• Number of failed calls due to network
• Number of failed calls due to other reasons
In Banking Sector:
• “Tellering” Time
• NPA
• Loan Document processing RFT
In Call Centres:
• Number calls “escalated” and unresolved
• Number of calls unresolved
• Time to respond
• RFT
• Time Taken per “Successful” call
 Measuring Service Quality
• SERVQUAL* Model
– Measure of Customer’s perception on scale 1 to 7 for a given industry
– Measure of Customer’s perception after actually experiencing the
Service of a particular Marketer
– Yields best in class performance levels
• Results in Gaps causing Customer Dis-satisfaction
• Corrective Action Plan (“Capping” the gap)
• Helps benchmarking
* Fitzsimmons pp 193-195
Perceived Service Quality

Word of Personal Past

mouth needs experience

Service Quality Expected Service Quality Assessment

Dimensions service 1. Expectations exceeded
Reliability ES<PS (Quality surprise)
Responsiveness 2. Expectations met
Assurance Perceived ES~PS (Satisfactory quality)
Empathy service 3. Expectations not met
Tangibles ES>PS (Unacceptable quality)
Gaps in Service Quality

• Gap1
– Customer Expectation and
– Management’s perception of Customer Expectation
• Gap 2
– Managements inability to specify target performance levels
to meet Customer Expectations and
– Translate them into measurables
• Gap3
– Actual delivered Service level and
– Specified Service level by the management
• Gap4
– Claimed Service Level and
– Experienced Service level
• Gap5
– Dependent on gaps 1 to 4
 Gaps in Service Quality
Word -of-mouth
Personal needs Past experience
communications

Customer

Expected service

GAP 5
Perceived service

Service delivery (including External communications

pre- and post-contacts) to consumers

GAP 1 GAP 3 GAP 4

Translation of perceptions into
service quality specifications
GAP 2
Provider
Management perceptions of
consumer expectations
 Measuring Service Quality

• Taguchi
method
–Poka-Yoke
– Checklist (preflight, pre and post surgery)
– Error free execution
• Quality Function Deployment
– A detailed process of translating
o Customer Expectations into
o Measurable Design/Conformance Parameter/Specification
o Service Company’s facets
– Into a relationship grid leading to an action plan

These methods are mainly used in manufacturing but, can be adopted to Service
as well. (Fitzsimmons pp 200-205)
Quality Service by Design
! Quality in the Service Package
Budget Hotel example
– Taguchi Methods (Robustness)
“Robust” Design to withstand abuse
Better capacity planning and utilization
Notifying maids of rooms for cleaning
Quality Service by Design
! Poka-yoke (fail-safing)
Height bar at amusement park
! Quality Function Deployment
House of Quality
Classification of Service Failures
with Poka-Yoke Opportunities
Server Errors Customer Errors
Task: Preparation:
Doing work incorrectly Failure to bring necessary
Treatment: materials
Failure to listen to customer Encounter:
Tangible: Failure to follow system flow
Failure to wear clean uniform Resolution:
Failure to signal service
failure
 House of Quality
Relationships

* Strong

Medium

O Weak
Relative

O O
* * Customer Perc eptions
Servic e Elements

Informatiion
Imp o Village Volvo

Equipment
orta

Capacity
Attitude
nce + Volvo Dealer

Training
Customer Expectations 1 2 3 4 5
Reliability 9 8 5 5 + o
Responsiveness 7 3 9 3 2 o +
Assurance 6 5 9 6 + o
Empathy 4 7 + o
Tangibles 2 2 3 + o

+
o o
Comparison with Volvo Dealer o o
_ o

Weighted score 127 82 63 102 65

Improvement difficulty rank 4 5 1 3 2
Achieving Service Quality
! Cost of Quality (Juran)

! Service Process Control

! Deming’s 14 Principles

! Unconditional Service Guarantee

Costs of Service Quality
Failure costs Detection costs Prevention costs
External failure: Process control Quality planning
Customer complaints Peer review Training program
Warranty charges Supervision Quality audits
Liability insurance Customer comment card Data acquisition and analysis
Legal judgments Inspection Preventive maintenance
Loss of repeat service Supplier evaluation
Recruitment and selection
Internal failure:
Scrap
Rework

Recovery:
Expedite
Labor and materials
Costs of Service Quality
Failure costs Detection costs Prevention costs
External failure: Process control
a.Pre-manufacturing Qualitya.Training,
planning
Customer complaints
a.Post-shipment Peerinspection
review of raw Training program
b.Audits,
defects
Warranty charges material
Supervision Qualityc.Vendor
audits Rating
b.Transit
Liability insurance b.Linecomment
Customer failures due
card to d.Preventive
Data acquisition and analysis
damages materials maintenance
Legal judgments Ins
c.DOAs (Dead
LossOnof repeat service
Arrival)
d.Warranty
Repair cost
Internal failure:
Scrap
a.Pre-shipment defects
b.Failure during manufacturing
Rework
due to workmanship
c.Raw material rejected during
inspection
Service Process Control
Customer
input Service
concept

Service Customer
Resources output
process

Take Monitor Establish

corrective conformance to measure of
action requirements performance

Identify reason
for
nonconformance
Control Chart of Departure Delays
Percentage of flights on

100
expected
90
Lower Control Limit
tim e

80

70

60
1998 1999

p (1 - p p (1 - p
UCL = p + 3 LCL = p - 3
n n
 Basics of Quality Improvement
• Customer Satisfaction
o Customer First
• Management by Facts
o Collect & Analyse data
o Team working
• Respect for people Quality level
• Deming’s Wheel
(PDCA Cycle)

Act Plan

Check Do

Bench Mark

Time

11/7/21 oisi_N3 23
Unconditional Service Guarantee:
Customer View
! Unconditional (L.L. Bean)
! Easy to understand and communicate
(Bennigan’s)
! Meaningful (Domino’s Pizza)
! Easy to invoke (Cititravel)
! Easy to collect (Manpower)
Unconditional Service Guarantee:
Management View
! Focuses on customers (British Airways)
! Sets clear standards (FedEx)
! Guarantees feedback (Manpower)
! Promotes an understanding of the service
delivery system (Bug Killer)
! Builds customer loyalty by making
expectations explicit
Customer Satisfaction
! All customers want to be satisfied.

! Customer loyalty is only due to the lack of

a better alternative

! Giving customers some extra value will

delight them by exceeding their
expectations and insure their return
Expressing Dissatisfaction

Public Action

Seek redress directly from

Action the firm

Take legal action

Dissatisfaction
Complaint to business, private,
occurs or governmental agencies

Private Action
Stop buying the product or
boycott the seller
No Action Warn friends about the product
and /or seller
Customer Feedback and Word-
of-Mouth
! The average business only hears from 4% of their customers who are
dissatisfied with their products or services. Of the 96% who do not bother
to complain, 25% of them have serious problems.

! The 4% complainers are more likely to stay with the supplier than are the
96% non-complainers.

! About 60% of the complainers would stay as customers if their problem

was resolved and 95% would stay if the problem was resolved quickly.

! A dissatisfied customer will tell between 10 and 20 other people about

their problem.

! A customer who has had a problem resolved by a company will tell about
5 people about their situation.
Number of People Told Based
on Level of Dissatisfaction
Average number of people told

30
25
20
15
10
5
0
Slight Annoyed Very Ext Abs
diss annoyed annoyed furious
 Action Taken Based on Level of
Dissatisfaction

Percent of customers that take action

100
Tell friends
80 Complain
60 Make a fuses

40 Not use again

Dissuade others
20
Complain against
0
Slightly Annoyed Very Ext Abs
diss annoyed annoyed furlous
Approaches to Service Recovery
! Case-by-case addresses each customer’s
complaint individually but could lead to
perception of unfairness.
! Systematic response uses a protocol to handle
complaints but needs prior identification of
critical failure points and continuous updating.
! Early intervention attempts to fix problem before
the customer is affected.
! Substitute service allows rival firm to provide
service but could lead to loss of customer.
 Making Customers into Champions
easy
Walking wounded Champions
Could complain but don’t; Active in providing
not happy but repurchase British Airways with
information on quality
How easy customers feel it is to

of its services; loyal

contact British Airways

Remain Loyal

Defect
Missing in action Detractors
Defected; Defected;
non-complaining vocally critical
not easy
don’t complain complain

Propensity to contact British Airways

Topics for Discussion
! How do the five dimensions of service
quality differ from those of product quality?
! Why is measuring service quality so
difficult?
! Illustrate the four components in the cost of
quality for a service.
! Why do service firms hesitate to offer a
service guarantee?
! How can recovery from a service failure be
a blessing in disguise?
The Complaint Letter
! Briefly summarize the complaints and
compliments in Dr. Loflin’s letter.
! Critique the letter of Gail Pearson in reply
to Dr. Loflin. What are the strengths and
weaknesses of the letter?
! Prepare an “improved” response letter from
Gail Pearson
! What further action should Gail Pearson
take in view of this incident?
Internet Service
Learning Objectives

! Describe different Internet business

models.
! Contrast an electronic and traditional
service.
! Understand the importance of scalability
to E-commerce success.
! Distinguish among the E-business
models.
Technology Convergence
Enabling E-Business
! Internet
! Global telephone system
! Communications standard TCP/IP
(Transfer Control Protocol/Internet Protocol)
! Addressing system of URLs
! Personal computers and cable TV
! Customer databases
! Sound and graphics
! User-friendly free browser
Purpose of Web-site
! A retail channel (Amazon.com)
! Supplemental channel (Barnes & Nobel)
! Technical support (Dell Computer)
! Embellish existing service (HBS Press)
! Order processing (Delta Airline)
! Convey information (Kelly Blue Book)
! Organization membership (POMS.org)
! Games (Treeloot.com)
E-Business Models
(Weill & Vitale, Place to Space, HBS Press, 2001)
! Content Provider: Reuters
! Direct to Customer: Dell
! Full-Service Provider: GE Supply Co.
! Intermediary: eBay
! Shared Infrastructure: SABRE
! Value Net Integrator: Seven-Eleven Japan
! Virtual Community: Monster.com
! Whole-of-Enterprise: Government
Service Package and E-Service
Selling Selling value- Selling Selling goods
(providing) added service services with
information goods
Used car Online travel Computer Online retailer
prices agent support

Kelly Blue Biztravel.com Everdream Amazon.com

Book

Information Goods
dominates dominates
service service
package package
 Electronic and Traditional Services
Features Electronic Traditional
Interaction Screen-to-face Face-to-face
Availability Anytime Working hours
Access From anywhere Travel to location
Market Area Worldwide Local
Ambiance Electronic Physical
interface environment
Payment Credit card Cash or check
Speed Immediate Physical waiting
Privacy Anonymity Social interaction
Grocery Shopping Comparison
On-line Traditional
Shopping Shopping

Advantages Convenience See new items

Saves time Memory trigger
Less impulse Product sampling
buying Social interaction
Disadvantages Forget items Time consuming
Less control Waiting lines
Need computer Carry groceries
Delivery fee Impulse buying
E-Business Supply Chain
(Network) Elements
! Major entities including firm of interest and its
customers, suppliers, and allies
! Major flows of product, information, and
money
! Revenues and other benefits each participant
receives
! Critical aspects: participants, relationships,
and flows

Example: 7-Eleven Japan

Economics of E-Business

! Sources of Revenue:
- Transaction fees
- Information and advice
- Fees for services and commissions
- Advertising and listing fees
! Ownership
- Customer relationship
- Customer data
- Customer transaction
Economics of Scalability

! Information vs goods content of service

package
! Degree of customer contact
! Standardization vs customization
! Shipping and handling costs
! Cost of after sales service
 Economics of Scalability
Dimensions High Scalability Low

E-commerce Selling Selling value- Selling Selling goods

continuum information added service services with (E-commerce)
(E-service) goods

Information vs. Information Information with Goods with support Goods dominate
Goods Content dominates some service services

Degree of Customer Self-service Call center backup Call center support Call center order
Content processing

Standardization vs. Mass distribution Some Limited Fill individual orders

Customization personalization customization

Shipping and Digital asset Mailing Shipping Shipping, order

Handling Costs fulfillment, and
warehousing

After-sales service None Answer questions Remote maintenance Returns possible

Example Service Used car prices Online travel agent Computer support Online retailer

Example Firm Kbb.com Biztravel.com Everdream.com Amazon.com

Topics for Discussion
! Can an Internet service encounter be a
memorable experience?
! How does the economics of scalability
explain the failure of Living.com, an online
furniture retailer?
! What is the contribution to gross national
product (GNP) of “self-service” activities?
! What is the future of mobile E-commerce in
the United States
Amazon.com

! How would you contrast Amazon’s

business design with that of Barnes &
Noble before Barnes & Noble went
online?
! From a customer’s perspective, what
are the advantages and disadvantages
of each design?
Amazon.com (cont.)

! Why has Amazon.com not turned a profit yet

and what needs to be done to achieve
profitability?
! Will amazon continue to be successful
against “click and mortar” competitors, such
as Barnes & Nobel, which go online?
! Is Amazon.com a model for the future of
retailing?
Service Facility Location
Learning Objectives
! Discuss the competitive role of service facility
location on internal and external customers.
! Discuss how different customer service
criteria affect facility location.
! Locate a single facility using the cross-
median approach.
! Use the Huff model to evaluate the economic
feasibility of a retail service location.
! Discuss nontraditional location strategies.
 About Service Providers
• Private (Aim – Profit Maximisation)
– Clinics, Hospitals
– Durable Service Centres
– “Cleaning” Services
– Super/ Hyper Markets
– Grocery Shops
– Education
• Public (Aim – Benefit Maximisation)
– General Hospitals
– Transportation
– Ration Shops
– Education
Strategic Location Considerations
Front Office Back Office

External Accessibility Co-location(?)

Customer Barrier to entry Communication
Process people Visibility
(consumer)
Internal Skilled labor Low labor costs
availability Economy of scale
Customer
Process
(employee) information
Service Facility Location Planning

! Competitive positioning: prime location can

be barrier to entry.
! Demand management: diverse set of
market generators.
! Flexibility: plan for future economic
changes and portfolio effect.
! Expansion strategy: contiguous, regional
followed by “fill-in,” or concentrated.
Geographic Representation
Location on a Plane
Y

Destination j
Yj Euclidean

[ ]
1/ 2
dij = ( xi - x j ) + ( yi - y j )
2 2

Yi Origin i

Metropolitan
dij = xi - x j + yi - y j
0 X
Xi Xj
Effect of Optimization Criteria
City A
3

15
10
*
2

5
*
-15 -10 -5 5 10 15 20 25
*

-5
-10
City B City C
1

1. Maximize Utilization
(City C: elderly find distance a barrier)
2. Minimize Distance per Capita
(City B: centrally located)
3. Minimize Distance per Visit
(City A: many frequent users)
Estimation of Geographic Demand

! Define the Target Market

(Families receiving AFDC)
! Select a Unit of Area
(Census track, ZIP code)
! Estimate Geographic Demand
(Regression analysis)
! Map Geographic Demand
(3D visual depiction)
 Site Selection Considerations
1. Access: 4. Parking:
Convenient to freeway exit and Adequate off-street
parking
entrance ramps 5. Expansion:
Served by public transportation Scope for expansion
2. Visibility: 6. Environment:
Set back from street Immediate surroundings
should Sign placement
complement the service
3. Traffic: 7. Competition:
Traffic volume on street that may Location of competitors
Indicate potential impulse buying 8. Government:
Traffic congestion that could be a Zoning restrictions
hindrance (e.g.., fire stations) Taxes
9. Costs:
Land, Construction, Infrastructure, Transportation/Commuting
 Breaking the Rules
! Competitive Clustering (Among Competitors)
(e.g. Auto Dealers, Motels)
! Saturation Marketing (Same Firm)
(e.g. An Bon Pain, Ice Cream Vendors)
! Marketing Intermediaries
(e.g. Credit Cards, HMO)
! Substitute Electronic Media for
Transportation
(e.g. telecommuting, e-Commerce)
Single Facility Location Using
Cross Median Approach

5
3 (W3=3)

4 Median =16/2 =8

3
Y miles

2 (W2=1)

2 1 (W1=7)

1 4 (W4=5)

0
0 1 2 3 4
X miles
Huff Retail Location Model

First, a gravity analogy is used to

estimate attractiveness of store j for
customers in area i.
Aij= Attraction to store j for customers in area i
Sj = Size of the store (e.g. square feet)
Tij= Travel time from area i to store j
lambda = Parameter reflecting propensity to travel
Sj
Aij = l
Tij
Huff Retail Location Model
Second, to account for competitors we
calculate the probability that customers
from area i will visit a particular store j.
Aij
Pij = n

åA
j =1
ij
 Huff Retail Location Model
Third, annual customer expenditures for
item k at store j can now be calculated.

Pij = Probability customers from area i travel to store j

Ci = Number of customers in area i (e.g. census track)
Bik = Annual budget for product k for customers in area i
m = Number of customer areas in the market region

( )
m
E jk = å Pij Ci Bik
j =1
Huff Retail Location Model

Fourth, market share of product k

purchased at store j can now be
calculated.

E jk
M jk = m

å (C B
i =1
i ik )
 Athol Furniture Site Alternatives

4
1 State Park

2 3

5 Bluff lake
6 Z 7
9
Railroad 8
B

Freeway
Major street Y
Park boundary 11
River
4 Census block group 10
Existing retail outlets 12
X
Potential sites
 Athol Furniture Data
COMPETITORS’ STORE SIZES MAXIMUM SIZE LIMIT OF SITES
Store Sales area, sq ft Site Maximum sales area, sq ft
A 10,000 X 15,000
B 15,000 Y 20,000
Z 10,000

MINIMUM TRAVEL TIME BETWEEN POTENTIAL AND EXISTING SITES

AND BLOCK GROUPS, Min
Census block group
Site 1 2 3 4 5 6 7 8 9 10 11 12
A 7 5 5 9 1 3 4 5 7 10 14 17
B 10 8 8 10 7 3 3 2 1 2 2 5
X 16 14 14 16 13 8 7 6 4 4 2 2
Y 12 10 10 12 9 5 4 3 2 4 2 5
Z 7 5 5 7 4 2 1 4 3 10 10 13

RELATIONSHIP OF STORE SIZE TO MARGIN ON SALES, EXPENSES,

AND NET OPERATING PROFIT AS % OF SALES

Sales area, Margin Net operating profit

sq ft on sales Expenses before taxes
10,000 16.2 12.3 3.9
15,000 15.6 12.0 3.6
20,000 14.7 11.8 2.0
 Athol Furniture Demographics

MARKET DATA

Census block Number of Average annual Average annual furniture

group households income expenditures per household
1 730 $12,000-$12,500 $180
2 1130 8,500-9,000 125
3 1035 19,500-20,000 280
4 635 25,000-over 350
5 160 4,500-5,000 75
6 105 4,000-4,500 50
7 125 4,000-4,500 60
8 470 8,000-8,500 115
9 305 6,000-6,500 90
10 1755 18,500-19,000 265
11 900 15,000-15,500 215
12 290 25,000-over 370
7640
Store Site Selection

Store Profit as a Function of

Lambda
X10
Annual Profit ($)

30000
X15
20000
Y10
10000 Y15
0 Y20
0.1 0.5 1 2 5
Z10
Market Share Analysis

Now X15 Y15 Y20

A 30% 22% 21% 19%

B 70% 47% 46% 41%

Athol 31% 33% 40%

The Supporting Facility
Creating the Right Environment
Learning Objectives
! Discuss the impact of the “servicescape” on the
behavior of customers and employees.
! Describe the critical facility design features.
! Identify the bottleneck operation in a product
layout and rebalance for increased capacity.
! Use operations sequence analysis to minimize
flow-distance in a process layout.
! Prepare a process flowchart.
! Recommend facility design features to remove
anxiety of disorientation.
Servicescapes

Designing Physical Surroundings to Affect

Employee and Customer Behavior
! Ambient Conditions: background
characteristics such as noise level, music,
lighting, temperature, and scent.
! Spatial Layout and Functionality: reception
area, circulation paths of employees and
customers, and focal points.
! Signs, Symbols, and Artifacts: selection,
orientation, location, and size of objects.
Typology of Servicescapes
Who Performs in Physical Complexity of the Servicescape
Servicescape Elaborate Lean
Self-service Golf course Post office kiosk
(customer only) Water slide park E-commerce
Interpersonal Luxury hotel Budget hotel
(both) Airline terminal Bus station
Remote service Research lab Telemarketing
(employee only) L.L. Bean Online tech support
Facility Design Considerations
! Nature and Objectives of Service
Organization
! Land Availability and Space
Requirements
! Flexibility
! Aesthetic Factors
! The Community and Environment
Product Layout
Line-balancing Problem
! Automobile Driver’s License Office
Review Payment Violations Eye Test Photograph Issue

1 2 3 4 5 6
In 240 120 60 90 180 120 Out
15 30 60 40 20 30

Activity
numbers
Flow rate
per hour
Time
in seconds
Automobile Driver’s License
Office (Improved Layout)

1,4 3
In 65 60
55 60
2 5 6 Out
120 180 120
30 20 30

1,4 3
In 65 60
55 60
Process Layout
Relative Location Problem
! Ocean World Theme Park Daily Flows

A B C D E F A B C D E F
A 7 20 0 5 6 15 30 0 15 6
B 8 6 10 0 2 12 40 10 8
Net
C 10 6 15 7 8 flow 20 8 8
D 0 30 5 10 3 30 6
E 10 10 1 20 6 10
F 0 6 0 3 4

Flow matrix Triangularized matrix

Description of attractions: A=killer whale, B=sea lions, C=dolphins, D=water skiing,
E=aquarium, F=water rides.
Ocean World Theme Park
(Proposed Layout)
(a) Initial layout (b) Move C close to A
Pair Flow distances Pair Flow distances
C
A B C AC 30 * 2 = 60 CD 20 * 2 =40
A B
AF 6 * 2 = 12 CF 8 * 2 =16
D E F D E F
DC 20 * 2 = 40 DF 6 * 2 = 12
DF 6 * 2 = 12 AF 6 * 2 = 12
Total 124 CE 8 * 2 = 16
Total 96
(c ) Exchange A and C (d) Exchange B and E and move F
Pair Flow distances Pair Flow distances
A A F
AE 15 * 2 = 30 AB 15 * 2 =30
C B CF 8 * 2 = 16 C E AD 0*2=0
D E F AF 6 * 2 = 12 FB 8 * 2 = 16
AD 0*2= 0 D B FD 6 * 2 = 12
DF 6 * 2 = 12 Total 58
Total 70
Process Flow Charting Symbols
Category Symbol Description

Operation An operation performed by the server off-line or customers

self-service. A possible service failure point.
Customer An occasion when server and customer interact. An
contact opportunity to influence customer service perceptions.
Travel The movement of customers, servers, or information
between operations.
Delay D Delay resulting in a queue and a need for waiting space for
customers.
Inspection An activity by customer or server to measure service quality.
Credit Card Processing (Before)
Distance Time Activity
Customer requests check
30 ft. 0.5 min. D Server walks
0.5 min. D Server prepares check
30 ft. 0.5 min. D Server walks
0.25 min. D Server presents check
30 ft. 0.5 min. D Server walks
0.5 min. D Customer inspects, puts card out
30 ft. 0.5 min. D Server returns to table
0.25 min D Server picks up card
30 ft. 0.5 min. D Server walks to process
0.5 min D Server fills out slip
0.5 min. D Server processes slip
1.0 min. D Server obtains preauthorization
30 ft. 0.5 min. D Server walks
0.25 min. D Server presents slip
30 ft. 0.5 min. D Server walks
0.5 min. D Customer signs (leaves)
30 ft. 0.5 min. D Server walks
0.25 min. D Server picks up slip
30 ft. 0.5 min. D (Customer leaves) Server walks
Total time: Server:9 min. (270 ft.) Customer: 7.75 min.
Credit Card Processing (After)
Distance Time Activity
Customer requests check
30 ft. 0.5 min. D Server walks
0.5 min. D Server prepares check
0.5 min. D Server fills out slip
30 ft. 0.5 min. D Server walks
0.25 min. D Server presents check and slip
30 ft. 0.5 min. D Server returns to table
0.5 min D Customer inspects, puts card out, signs slip
30 ft. 0.5 min. D Server returns to table
0.25 min D Server picks up card and slip
30 ft. 0.5 min. D Server walks
0.5 min. D Server processes slip an card
1.0 min. D Server obtains authorization
30 ft. 0.5 min. D Server walks
0.25 min. D Server presents card and receipt
30 ft. 0.5 min. D Server walks
D Customer leaves
Total time: Server: 7.5 min. (210 ft.) Customer: 6.75 min.
Environmental Orientation
Considerations
! Need for spatial cues to orient visitors
! Formula facilities draw on previous
experience
! Entrance atrium allows visitors to gain a
quick orientation and observe others for
behavioral cues
! Orientation aids and signage such as “You
Are Here” maps reduce anxiety
Topics for Discussion
! Compare the attention to aesthetics in waiting
rooms that you have visited. How did the
different environments affect your mood?
! Give an example of a servicescape that supports
the service concept and another that detracts.
Explain the success or failure in terms of the
servicescape dimensions
! Based on your work experience, contrast a
supportive servicescape with a poor one in terms
of job satisfaction and productivity.
Managing Capacity and Demand
Learning Objectives
! Describe the strategies for matching supply
and demand for services.
! Recommend an overbooking strategy.
! Use Linear Programming to prepare a
weekly workshift schedule.
! Prepare a work schedule for part-time
employees.
! Use yield management.
Strategies for Matching Supply
and Demand for Services

DEMAND SUPPLY
STRATEGIES STRATEGIES

Partitioning Increasing
demand customer
Developing participation
Sharing
complementary
capacity
services
Establishing
Scheduling
price
Developing Cross- work shifts
incentives training
reservation
systems employees
Promoting Creating
off-peak adjustable
Using
demand part-time capacity
employees

Yield
management
 What is capacity?
Your Views
 What is Capacity Planning?
Views:
• Ability to deliver service over a particular time period
• Types and amounts of resources needed to execute the
organisations strategic business plan
• It’s a challenge to balance input and output
• Usually measured as “Input” and not “output”
• Is a complicated decision because Customers participate
in the Service Process.
• Result: Congestion, Waiting,Poor Quality of Service
Examples:
• Units served per employee
• Number of Operations “performable“per unit of time
• Number of “occupiable” slots per unit
• Frequency at which an operation can be performed
 Capacity Cost Trade Off
Cost

Combined Cost

Cost of Service

Cost of Waiting

Capacity to Serve
Strategic Importance of Capacity Planning
• Has to provide for future (Expansion,Growing Market)
• Threat of Losing Customers (Short term)
• Irreversible decision (Financial & Other Investments)
• Balancing against cost of Lost Sales
• Remaining Competitive
 Inputs to Capacity Planning
• Existing Market size
• Planned Market Share
• Existing Service level / Best in Class
• Planned Service level
• Existing Waiting Time
• Planned Waiting Time
• Planned Position On the Grid
• Stage of Competitiveness
• Customer Inputs
• Industry Trends
• Seasonality of Demand
 Position Defines Capacity Requirement
High Complexity Of Service Delivered
Hi-End product Repair
Health
Routine Health Check
Housing Loan
Air Travel- Foreign
Air Travel- Local

Railway reservation
Convention/Seminar
Low High
Motel Diversity of Service Delivered
Current A/c
SB A/c

College Admissions

Immunisation Drives
Lo-End product Repair
Low
 Methods of Capacity Planning
• Little’s law : Facility (Seating)
l = Arrival rate
W = Average Waiting Time
L = l * W = Average number of Customers in a system L
• Analytical Queuing Models
A = Distribution of Time between Arrivals
B = Distribution of Service Times
C = Number of Parallel Servers
• Symbols
M = Service rate / Poisson Distribution of Arrival
D = Service Time / Constant Inter arrival time
Ek= Erlang Distribution with Shape parameter (if k=1then, Erlang
equivalent to exponential, if k= ¥ then Deterministic)
G = General Distribution (normal,uniform or empirical) with mean &
variance
Stages In Service Competitiveness
Overview Of Queuing Models
 General Relationships Between System Characteristics
S.No. Remarks Equation

1. Ls = Expected Number in the system

Lq = Expected Number in Q Ls = Lq + E
E = Number in Service
2. Ws = Expected Time in System
Wq = Expected Time in Q Ws = Wq + 1/µ
µ = Expected Time in Service
3. Expected number in Q for a busy system
is expected number under all system states Lb = Lq /P(n>c)
divided by the probability of the system
being busy
4. Expected Waiting Time for a Busy System Wb = Wq /P(n>c)
5. Expected number & the expected time in
the system are (Little’s law) = Ws = Ls / l
6. Expected Waiting Time Wq = Lq / l
 Capacity & Workload Planning
Capacity Planning Demand Capacity

300

250

Overload
200
Demand

150

100

50
Over Capacity

0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Month
 Planning Weekly Off
Day Mon Tue Wed Thu Fri Sat Sun Mon Tue Wed Thu Fri Sat Sun
Demand 120 140 130 100 110 180 200 130 140 120 110 120 160 200
Capacity
20 20 20 20 20 20 20 20 20 20 20 20 20 20
per person

Number of
Persons 6 7 7 5 6 9 10 7 7 6 6 6 8 10
Try on Book1.xls
Needed
Sheet: Cap Plng.
Number Of Fitzsimmons Pp 375-380
persons 9 9 9 9 9 9 9 9 9 9 9 9 9 9
Available
(Short) or
Excess 3 2 2.5 4 3.5 0 -1 2.5 2 3 3.5 3 1 -1
Capacity

Weekly off
Yes Yes Yes Yes Yes No No Yes Yes Yes Yes Yes Yes No
Possible?

Hire Temp No No No No No No No No No No No No
Hire Hire
Staff Hire Hire Hire Hire Hire Hire Hire Hire Hire Hire Hire Hire
 Example Of Capacity Planning
Estimated Annual CTC in Rs.'000
Sl.No.

Required Manpower to Handle this repair load

Job Holder Avg/Yr
Per person Worst Case
M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12 Moderated
1 Engineers 5 5 5 10 10 10 14 14 14 20 20 20 12 302 3692 2041
2 Group Leader 1 1 1 2 2 2 2 2 2 3 3 3 2 342 684 872
3 Branch Service Manager 1 1 1 1 1 1 1 1 1 1 1 1 1 693 693 606
4 Sparepart Incharge 1 1 1 1 1 1 1 1 1 1 1 1 1 336 336 294
5 Front Office Manager 1 1 1 1 1 1 1 1 1 1 1 1 1 390 390 341
6 Front Office Staff 1 1 1 2 2 2 3 3 3 3 3 3 2 189 425 567
7 Security (3 Shift) 3 3 3 3 3 3 3 3 3 3 3 3 3 36 108 108
8 Housekeeping 2 2 2 2 2 2 2 2 2 2 2 2 2 36 72 72
9 Helpers 1 1 1 2 2 2 3 3 3 3 3 3 2 36 81 72
10 Head of Service 1 1 1 1 1 1 1 1 1 1 1 1 1 1185 1185 859
11 Sparparts Manager 1 1 1 1 1 1 1 1 1 1 1 1 1 549 549 419
12 Operations Manager 1 1 1 1 1 1 0.5 573 287 437
13 F&A Support 1 1 1 1 1 1 1 1 1 1 1 1 1 378 378 288
Total Headcount 19 19 19 27 27 27 34 34 34 41 41 41 30 8880 6977
Average
Per
MonthCTC 740.0 581.4
 Example Of Capacity Planning
Sl.No.

Required Manpower to Handle this repair load

Job Holder Avg/Yr
M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12
1 Engineers 5 5 5 10 10 10 14 14 14 20 20 20 12
2 Group Leader 1 1 1 2 2 2 2 2 2 3 3 3 2
3 Branch Service Manager 1 1 1 1 1 1 1 1 1 1 1 1 1
4 Sparepart Incharge 1 1 1 1 1 1 1 1 1 1 1 1 1
5 Front Office Manager 1 1 1 1 1 1 1 1 1 1 1 1 1
6 Front Office Staff 1 1 1 2 2 2 3 3 3 3 3 3 2
7 Security (3 Shift) 3 3 3 3 3 3 3 3 3 3 3 3 3
8 Housekeeping 2 2 2 2 2 2 2 2 2 2 2 2 2
9 Helpers 1 1 1 2 2 2 3 3 3 3 3 3 2
10 Head of Service 1 1 1 1 1 1 1 1 1 1 1 1 1
11 Sparparts Manager 1 1 1 1 1 1 1 1 1 1 1 1 1
12 Operations Manager 1 1 1 1 1 1 0.5
13 F&A Support 1 1 1 1 1 1 1 1 1 1 1 1 1
Total Headcount 19 19 19 27 27 27 34 34 34 41 41 41 30
 Example Of Capacity Planning
Expected Repair Load per Month
Sl.No. Product Category Total
M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12
1 CTV 14" 50 50 50 100 100 100 120 120 120 150 150 150 1260
2 CTV 20,21" 50 50 50 80 80 80 120 120 120 120 120 120 1110
3 CTV > 25,29" 10 10 10 20 20 20 30 30 30 40 40 50 310
4 DVD 20 20 20 40 40 40 50 50 50 100 100 100 630
5 Audio CD System 50 50 50 100 100 100 150 150 150 200 200 200 1500
6 Video CD System 50 50 50 100 100 100 150 150 150 200 200 200 1500
7 Portable Audio CD 30 30 30 50 50 50 60 60 60 100 100 100 720
8 Portable VCD 20 20 20 30 30 30 40 40 40 60 60 60 450
9 Video Movie Camera 20 20 20 40 40 40 50 50 50 60 60 60 510
10 TV,VCD Combi System 20 20 20 30 30 30 40 40 40 50 50 50 420
11 TV,DVD Combi System 10 10 10 20 20 20 30 30 30 40 40 40 300
12 Colour Monitors 30 30 30 50 50 50 60 60 60 100 100 100 720
13 Mobile Phones 20 20 20 50 50 50 100 100 100 200 200 200 1110
14 Walkman 40 40 40 100 100 100 150 150 150 200 200 200 1470

15 Lo-End Audio 50 50 50 100 100 100 150 150 150 250 250 250 1650
Warranty Jobs Oncluding
16 40 40 40 60 60 60 80 80 80 150 150 150 990
Demo Calls
Total Repair Load 510 510 510 970 970 970 1380 1380 1380 2020 2020 2030 14650
 Managing Demand

• Demand varies
• Variations can be plotted / tracked
• Based on trend analysis in the past,
• Strategies can be planned to manage the variations
• What are the options available?
 Managing Demand : Strategy Options
Managing Managing
Managing Service Capacity
Supply Demand

•Appointments • Uniform Load

Partition Demand
• Walk Ins • Better Customer Service

Offer Price Incentive • Apex , off Season

Fares
Promote Off Peak
Demand • Happy Hours

Develop • Diversion For

• Improved Waiting Experience
Complimentary Waiting Customers
• Improved revenues
Services
• Source Of Revenue

Develop & Handle • Ensures “Houseful” • Minimise Cost of “Idle” Capacity

“Overbooking”
Res.System. • Non refundable tickets? • Treating “Excess” demand
• Training Employees
 Managing Demand : Strategy Options
Managing Managing
Managing Service Capacity
Supply Demand

Sharing / Adjusting • Resources • Uniform Load,Reduced Waiting

Capacity • Customers • Better Customer Service
• Resource & Cost Optimisation
Direct by Indirect
Cross Functional • Need Based Capacity
Training Augmentation
Part Time Help
• Willingness to wait
Increased Customer • Self Service • Cost Effective
Participation • Self Adjusting Labour • Risk Of “Damages”

Scheduling Work shifts • “Forecast” Load • Minimise Cost of “Idle” Capacity

• Calculate Capacity
• Treating “Excess” demand
• Match Load to Capacity
 Managing Demand : Strategy Options
Managing Managing
Managing Service Capacity
Demand Supply

•Appointments • Uniform Load

Partition Demand
• Walk Ins • Better Customer Service

Offer Price Incentive • Apex , off Season

Fares
Promote Off Peak
Demand • Happy Hours

Develop • Diversion For

• Improved Waiting Experience
Complimentary Waiting Customers
• Improved revenues
Services
• Source Of Revenue

• Ensures “Houseful”
Develop & Handle • Minimise Cost of “Idle” Capacity
“Overbooking” • Non refundable tickets? • Treating “Excess” demand
Res.System.
• Training Employees
Partitioning Demand at a Health
Clinic

140
Per centa ge of aver age da ily

130 Smoothing Demand by Appointment

120 Scheduling
physician visits

110 Day Appointments

100
Monday 84
90
Tuesday 89
80 Wednesday 124
70 Thursday 129
Friday 114
60
1 2 3 4 5
Day of week
Discriminatory Fee Schedule for
Camping
Experience No. of Daily
type Days and weeks of camping season days fee
1 Saturdays and Sundays of weeks 10 to 15, plus 14 $6.00
Dominion Day and civic holidays
2 Saturdays and Sundays of weeks 3 to 9 and 15 to 19, 23 2.50
plus Victoria Day
3 Fridays of weeks 3 to 15, plus all other days of weeks 43 0.50
9 to 15 that are not in experience type 1 or 2
4 Rest of camping season 78 free

EXISTING REVENUE VS PROJECTED REVENUE FROM DISCRIMINATORY PRICING

Existing flat fee of $2.50 Discriminatory fee

Experience Campsites Campsites
type occupied Revenue occupied (est.) Revenue
1 5.891 $14,727 5,000 $30,000
2 8,978 22,445 8,500 21,250
3 6,129 15,322 15,500 7.750
4 4,979 12,447 …. ….
Total 25,977 $ 64,941 29,000 $59,000
Hotel Overbooking Decision Matrix
Number of Reservations Overbooked
No- Prob-
shows ability 0 1 2 3 4 5 6 7 8 9
0 .07 0 100 200 300 400 500 600 700 800 900
1 .19 40 0 100 200 300 400 500 600 700 800
2 .22 80 40 0 100 200 300 400 500 600 700
3 .16 120 80 40 0 100 200 300 400 500 600
4 .12 160 120 80 40 0 100 200 300 400 500
5 .10 200 160 120 80 40 0 100 200 300 400
6 .07 240 200 160 120 80 40 0 100 200 300
7 .04 280 240 200 160 120 80 40 0 100 200
8 .02 320 280 240 200 160 120 80 40 0 100
9 .01 360 320 280 240 200 160 120 80 40 0
Expected loss, $ 121.60 91.40 87.80 115.00 164.60 231.00 311.40 401.60 497.40 560.00
 Scheduling Part-time Bank
Tellers
7 5 6
Tellers required

Decreasing part-time teller demand histogram

Tellers required
0 1 2 3 4 5
5
2 3 4

4 4
3 3
2 2 1
Two Full-time Tellers 1 1 5 2
1

Fri. Mon. Wed. Thurs Tues.

0

Mon. Tues. Wed. Thurs. Fri.

Object ive funct io n:
Minimize x1 + x2 +x3 +x4 +x5 +x6 +x7

Co nst raint s:
Sunday x2 +x3 +x4 +x5 +x6 ³ b1
Mo nday x3 +x4 +x5 +x6 +x7 ³ b2

DAILY PART-TIME WORK SCHEDULE, X=workday

Teller Mon. Tues. Wed. Thurs. Fri.

1 x …. x …. x
2 x …. …. x x
3,4 x …. …. …. x
5 …. …. x …. x
 Daily Scheduling of Telephone
Operator Workshifts

2500
30
Topline profile
25

Number of operators
2000

20
1500
Calls

Scheduler program assigns

15 tours so that the number of
1000 operators present each half
hour adds up to the number
10 required
500
5 Tour

0
12 2 4 6 8 10 12 2 4 6 8 10 12
012 2 4 6 8 10 12 2 4 6 8 10 12
Time
Time
Weekly Workshift Scheduling
with Days-off
Objective function:
Minimize x1 + x2 + x3 + x4 + x5 + x6 + x7

Constraints:
Sunday x2 + x3 + x4 + x5 + x6 ³3
Monday x3 + x4 + x5 + x6 + x7 ³6
Tuesday x1 + x4 + x5 + x6 + x7 ³5
Wednesday x1 + x2 + x5 + x6 + x7 ³6
Thursday x1 + x2 + x3 + x6 + x7 ³5
Friday x1 + x2 + x3 + x4 + x7 ³5
Saturday x1 + x2 + x3 + x4 + x5 ³5
xi ³ 0 and integer

Schedule matrix, x = day off

Operator Su M Tu W Th F Sa
1 x x … … … … ...
2 … x x … … … …
3 … ... x x … … …
4 … ... x x … … …
5 … … … … x x …
6 … … … … x x …
7 … … … … x x …
8 x … … … … … x
Total 6 6 5 6 5 5 7
Required 3 6 5 6 5 5 5
Excess 3 0 0 0 0 0 2
Seasonal Allocation of Rooms by
Service Class for Resort Hotel
Percentage of capacity allocated
to different service classes

20% 20% 20%

First class 30%

30%
50% 50%
Standard
60%

50% 30%
Budget 30%
10%

Peak Shoulder Off-peak Shoulder

(30%) (20%) (40%) (10%)
Summer Fall Winter Spring

Percentage of capacity allocated to different seasons

Ideal Characteristics for Yield
Management
! Relatively Fixed Capacity
! Ability to Segment Markets
! Perishable Inventory
! Product Sold in Advance
! Fluctuating Demand
! Low Marginal Sales Cost and High
Capacity Change Cost
Demand Control Chart for a
Hotel
300
Expected Reservation Accumulation

250
2 standard deviation control limits

200
Reservations

150

100

50

0
1

11

16

21

26

31

36

41

46

51

56

61

66

71

76

81

86
Days before arrival
 Yield Management

• Service Capacity is a perishable commodity

• Hence its yield is important & needs to be managed
• Yield º Productivity / Revenue generated per unit
• Appropriate when:
Ø Relatively Fixed Capacity
Ø Ability/ Possibility to segment market
Ø Perishable nature of “Inventory”
Ø Reservation System
Ø Fluctuating Demand
Ø Marginal Cost of Increasing Sales Vs. Fixed Costs
Yield Management Using the
Critical Fractile Model
Cu ( F - D)
P(d < x ) £ £
Cu + Co p× F
Where x = seats reserved for full-fare passengers
d = demand for full-fare tickets
p = proportion of economizing (discount) passengers
Cu = lost revenue associated with reserving one too few seats
at full fare (underestimating demand). The lost opportunity is the
difference between the fares (F-D) assuming a passenger, willing
to pay full-fare (F), purchased a seat at the discount (D) price.
Co = cost of reserving one to many seats for sale at full-fare
(overestimating demand). Assume the empty full-fare seat would
have been sold at the discount price. However, Co takes on two
values, depending on the buying behavior of the passenger who
would have purchased the seat if not reserved for full-fare.
ìD if an economizing passenger
Co = í
î- ( F - D) if a full fare passenger (marginal gain)
Expected value of Co = pD-(1-p)(F-D) = pF - (F-D)
Examples of “Preparation”
 Questions for PQR Consumer Survey on Service
1 Where do you get Service from today?
a) Authorised Service Centre of the Company?
Plotting Customer Behaviour b) Your technician friend?
c) Multibrand Service Centre Authorised?
d) MultiBrand Service Centre without any authorisation?
2 Would you prefer to take your Audio/Video (ACD,VCD,CTV,DVD,Movie Camera to:
a) Authorised Service Centre of the Company?
b) Your technician friend?
c) Multibrand Service Centre Authorised?
d) MultiBrand Service Centre without any authorisation?
3 How is the Quality of Service rendered?
a) Execellent
b) OK
c) Below Average
d) Poor
4 Would you like to try any other Service Centre from those stated above?
a) Yes
b) No
If No can you tell us the reason/s?
5 About your present Service Centre what impresses you most
a) The Quality of repairs
b) Low labour vharges
c) Nice people/staff
d) Delivery on the promised date
e) Speed of repair
6 About your present Service Centre,what do you dislike most?
a) High repair bills
b) Indifferent people
c) Delayed repairs with no information to you
d) Repeated visits to solve the same problem
7 Where would you prefer the Service Centre to be located?
a) In the heart of the city?
b) In suburbs
c) In suburbs with a collection centre in town?
8 From where would you prefer to collect your equpt after repairs?
a) From the collection centre in town?
b) From the Service centre in Suburbs?
9 In your opinion which Brand provides the best Service?
10 What do you like most about the Service of this Brand?
a) The Quality of repairs
b) Low labour vharges
c) Nice people/staff
d) Delivery on the promised date
e) Speed of repair
 Planning to Perform
•Reliability
Ø Know what is being done (Customer needs*)
Ø Do it right
Ø Do it right first time (RFT)
•Assurance
Ø Skilled & Trained Employees (*Training process)
Ø Empowered Employees
•Tangibles
Ø Layout , Décor , Uniforms , Equipments
Ø Communication Material / Documentation
Empathy
Ø Listening not hearing (*Training Process)
Ø Treating as individuals & not numbers
•Responsiveness
Ø Speed of response
Ø Quality of response, going beyond
 Marketing Communication in Service
What will you communicate? How? When?

What? How? When?

1. Response speed 1. Product Ads 1. Launch & later
2. Response Quality 2. In Shop poster 2. On Going
3. Ease of Access 3. Product Ads 3. On Going
4. Punctuality 4. Product Ads 4. On Going
5. RFT or else 5. Product Ads 5. On Going
6. Standby Eqpt. 6. Product Ads 6. Launch & later
7. Replacement 7. Tacit 7. On Going
8. Free Check-up 8. Product Ads 8. Lean load
SMD: Satisfaction Measuring Device.
Your Rating (Please Tick a on your choice)
SL.No. Question Poor Average Good Excellent
1 2 3 4
Our People
Promptness in answering your
1
telephone call
2 Behaviour of our receptionist
3 Behaviour of our technical staff
In case of home service:
4 Punctuality of our engineer
5 Speed of repair
6 Quality of repair
Explanation of repairs carried
7
out
Your level of satisfaction with
8
repair
In case of workshop service
9 Delivery on promised date
10 Quality of repair
Explanation of repairs carried
11
out
Your Over all impression about
12
our Service
13 Will you use our services again? Yes No
Will you recommend us to your
14 Yes No
friends?
 Your Rating (Please Tick a on your choice)
SL.No. Question Poor Average Good Excellent
1 2 3 4
Our People
Promptness in answering your
1 a
telephone call
2 Behaviour of our receptionist a
3 Behaviour of our technical staff a
In case of home service:
4 Punctuality of our engineer a
5 Speed of repair a
6 Quality of repair a
Explanation of repairs carried
7 a
out
Your level of satisfaction with
8 a
repair
In case of workshop service
9 Delivery on promised date a
10 Quality of repair a
Explanation of repairs carried
11 a
out
Your Over all impression about
12 a
our Service
13 Will you use our services again? Yes a No
Will you recommend us to your
14 Yes a No
friends?
SMD: Satisfaction Measuring Device
TRSAM Format
11/7/21 oisi_N10 42
 Strategy for Customer Relations (People)

Dogged!
Dedicated
Obliging
Graceful
Gratifying
Energetic
Dynamic
 Topics for Discussion
! What organizational problems can arise from the
use of part-time employees?
! How can computer-based reservation systems
increase service capacity utilization?
! What possible dangers are associated with
developing complementary services?
! Will the widespread use of yield management
eventually erode the concept of fixed prices?
! What possible negative effects can yield
management have on customer relations?
Managing Waiting Lines
Learning Objectives
• Describe how queues form.
• Apply Maister's two “laws of service.”
• Discuss the psychology of waiting.
• Describe the essential features of a queuing
system.
• Explain the equivalence of Poisson arrival
rates and exponential time between arrivals
 Who Waits ?
Customer / Consumer

Service Employee Service Organisation

If Number of Customers at Service Counter =0,then Service Waits

If Number of Customers at Service Counter >1,then Customer Waits

No Customer Likes to be kept waiting.

Waiting should be made bearable/ enjoyable.

That is Managing Waiting Lines

 Effect Of Waiting
On Customer On Service Employee:
• I am wasting my Time • Relief , if no Customers in Line
• No! Not another Q • “Pressure” if Q is long
• Other Q’s are moving faster • Tendency to make mistakes or
• Feeling of Discrimination • Be irritable with Customer
• If I can, I will come some other time • Efficiency Suffers
• These chaps are inefficient • Worry about job

Hence Waiting Lines need very careful management

It takes all kinds to make a Customer
• Economizing Customer (Econo-miser)
– Hunts before buying
– Tells about Competitor’s strengths Don’t mind waiting
• Loyal Customer (Loyal Ambassador)
– Sticks to the Brand
– Canvasses for the Brand
•“Pro-sumer”
– Proactive Consumer
• Personalizing Customer (Individualist)
– Demands Personalised Service
– Likes to be called by the name
•Convenience Customer (“I want No hassles”) Don’t want to wait
– Wants “More” and can pay
– Looks for value added Service
– Wants to be in Control of the encounter
Significance of a Waiting Line for the firm
• If an Employee waits = Unproductive wages
• If a Customer waits = Waste of time,Boredom,anxiety,psyche
• Excessive waiting could mean either
– Loss of sales or
– The Service is of very good Quality (Customers don’t mind waiting)
• A waiting line is = WIP Inventory in Manufacturing
• A trade off between cost of waiting & Cost of Serving

The decision to select the method of Managing the waiting line will
be decided by the waiting experience expected by the customers.
Waiting Realities
• Inevitability of Waiting: Waiting results
from variations in arrival rates and service
rates

• Economics of Waiting: High utilization

purchased at the price of customer waiting.
Make waiting productive (salad bar) or
profitable (drinking bar).
Laws of Service
• Maister’s First Law:
Customers compare expectations with perceptions.
• Maister’s Second Law:
Is hard to play catch-up ball.
• Skinner’s Law:
The other line always moves faster.
• Jenkin’s Corollary:
However, when you switch to another other line,
the line you left moves faster.
Remember Me
• I am the person who goes into a restaurant, sits
down, and patiently waits while the wait-staff does
everything but take my order.
• I am the person that waits in line for the clerk to
finish chatting with his buddy.
• I am the one who never comes back and it amuses
me to see money spent to get me back.
• I was there in the first place, all you had to do was
show me some courtesy and service.
The Customer
Psychology of Waiting
• That Old Empty Feeling: Unoccupied time goes
slowly
• A Foot in the Door: Pre-service waits seem longer
that in-service waits
• The Light at the End of the Tunnel: Reduce
anxiety with attention
• Excuse Me, But I Was First: Social justice with
FCFS queue discipline
• They Also Serve, Who Sit and Wait: Avoids idle
service capacity
Approaches to Controlling Customer Waiting

• Animate: Disneyland distractions, elevator

mirror, recorded music
• Discriminate: Avis frequent renter
treatment (out of sight)
• Automate: Use computer scripts to address
75% of questions
• Obfuscate: Disneyland staged waits (e.g.
House of Horrors)
 The Art of Service Recovery
“To err is human; to recover, divine”

• Measure Cost of Lost Customer

• Listen Carefully
• Anticipate Need for Recovery
• Act Fast
• Train Employees
• Empower the Frontline
• Inform Customers of Improvement
 What Happens in a Q ….
Start Customer Arrives

Q too long to wait?

Y Leave to try
again
Y
N
Wait for One’s Turn Waiting time too long?

N
Service Takes Place

Customer Leaves End

 Essential Features of Queuing Systems

Renege

Arrival Queue
process Departure
Calling discipline Service
Queue
population configuration process
Balk No future
need for
service
 Customer Arrivals
• Are not homogeneous & at regular intervals
• Need to measure
– Inter arrival time
– Forecast the time of arrival of next customer
– Gives in Forecasting arrival per unit of time
– Assists in Planning Service Headcount (Capacity
Planning)
• Methods#
– Exponential Distribution
– Poisson Distribution
• Supports Q Configuration
 Arrival Process
Arrival
process

Static Dynamic

Random Random arrival Customer-

Facility- exercised
arrivals with rate varying
controlled control
constant rate with time

Accept/Reject Price Appointments Reneging Balking

Distribution of Patient Interarrival Times
Relative frequency, %

40

30

20

10

0
1 3 5 7 9 11 13 15 17 19
Patient interarrival time, minutes
Temporal Variation in Arrival Rates
3.5 140

Percenta ge of average da ily

130
Avera ge calls per hour

physician visits
2.5 120

2
110
100
1.5
90
1
80
0.5 70
0 60
1 3 5 7 9 11 13 15 17 19 21 23 1 2 3 4 5
Hour of day Day of week
 Poisson and Exponential Equivalence

Poisson distribution for number of arrivals per hour (top view)

One-hour
1 2 0 1 interval
Arrival Arrivals Arrivals Arrival

62 min.
40 min.
123 min.

Exponential distribution of time between arrivals in minutes (bottom view)

 Queue Configurations
Multiple Queue Single queue

Take a Number
Enter
3 4 2

8 6 10
12 7
11 9
5
 Queue Configuration Choices : Multiple “Q”s
• Examples
– fast Food
– Immigration,Customs at International Airports
– Check in “Q”s at Domestic Airports
• Key features
– Customer decides to join a Q with smallest line
– Service Provider can balance the load on each server to
reduce waiting time
– Customer can choose the server
• Advantages
– Service can be differentiated
– SP can assign servers based on skills
– Chance of a Customer leaving because of long Q is reduced

Servers ?

Customers

11/7/21 oisi_N5 23
 Single “Q” Multiple Servers
Servers

Customers

Advantages
• Ensures fairness: First come First served
• “Q” Jumping is prevented
• Service performed 1 to 1. Privacy assured
• Reduces average time spent in the “Q”

11/7/21 oisi_N5 24
 Multiple Servers and “Q”s, take a Number
Servers 6 Next Number Displayed

2 3 5 4 No “Q” Jumping possible

Seated 10 7 8 9 6
Customers 12 11 14 13 15

Advantages
• Formal Q is not required
• Customer can relax while waiting
• Transparent nature of Waiting Time
• Single Entrance with “Take a Number” prompt
• If Number of Waiting Customers > Seating Capacity – “FULL” sign displayed
with an approximate time indication when a seat falls vacant
• Example : Taiwan Visa office HK

11/7/21 oisi_N5 25
 Queue Discipline
Queue
discipline

Static
Dynamic
(FCFS rule)

selection Selection based

based on status on individual
of queue customer
attributes

Number of Processing time

customers Round robin Priority Preemptive of customers
waiting (SPT rule)
 Principles of “Q” Discipline
• First Come First Served
• Discrimination
– Express / Tele Check in in Airlines
– Emergency cases first in Hospitals
– Short Processing Time Jobs First
• Transparent nature and display of Waiting Time
• This helps Customers to decide whether to join the ‘Q” or not
• Responsive not Reactive
• Objective: Not to lose a Customer because the “Q” is long
• Training Employees to handle Long “Q” situations
• Control the ‘Service” time , Augment Capacity
Outpatient Service Process Distributions
Relative frequency. %

Relative frequency, %
15 15

10 10

5 5

0 0
1 11 21 31 41 1 11 21 31 41

Minutes Minutes
15
Relative frequency, %

10

0
1 11 21 31 41
Minutes
 Service Facility Arrangements
Service facility Server arrangement
Parking lot Self-serve

Cafeteria Servers in series

Toll booths Servers in parallel

Supermarket Self-serve, first stage; parallel servers, second stage

Hospital Many service centers in parallel and series, not all used by each patient
 Class Assignment 5
1. In the Mess , study the “Q” during lunch and Dinner hour.
2. Find out the following:
a. Average waiting Time before the student starts self service of meals
b. Average time to fill the plate
c. Average time to finish the meals
d. Number of times a student has to return later because either the food
supply is over or the mess hall is full
e. Average Time from Start to Finish
3. What can you improve? How?
4. Divide the various tasks between yourselves (6 per task)
5. 20 Minute presentation, 10 minutes Q&A.
6. To be ready in 21 days from today
 Topics for Discussion
• Suggest some strategies for controlling variability in
service times.
• Suggest diversions that could make waiting less
painful.
• Select a bad and good waiting experience, and
contrast the situations with respect to the aesthetics
of the surroundings, diversions, people waiting, and
attitude of servers.
• Suggest ways that management can influence the
arrival times of customers.
• What are the benefits of a fast-food employee taking
your order while waiting in line?
Case Studies
Eye’ll Be Seeing You
• How are Maister’s First and Second Laws of
Service illustrated?
• What good and bad features of a waiting process
are evident?
• How should Dr. X respond to Mrs. F’s letter?
• How could Dr. X prevent future incidents?
• Should customers be rewarded for offering
constructive criticism?
Pronto Pizza
• Draw a process flow diagram and identify the
bottleneck operation.

• Use the ServiceModel computer simulation

software and the Pronto.pkg file to determine the
number of drivers that minimizes the total cost of
salaries and guarantee discounts.
 Pronto Pizza (cont.)
• Based on your simulation recommended staffing
level, what is the probability of paying off on the
guarantee?

• What do you think of this service guarantee

policy?

• What other design or operating suggestions could

improve Pronto Pizza’s performance and customer
service?
 Queuing Models
and Capacity Planning
Learning Objectives
! Discuss the strategic role of capacity planning.
! Describe a queuing model using A/B/C notation.
! Use queuing models to calculate system
performance measures.
! Describe the relationships between queuing
system characteristics.
! Use queuing models and various decision criteria
for capacity planning.
Capacity Planning Challenges
! Inability to create a steady flow of demand to fully
utilize capacity
! Idle capacity always a reality for services.
! Customer arrivals fluctuate and service demands
also vary.
! Customers are participants in the service and the
level of congestion impacts on perceived quality.
! Inability to control demand results in capacity
measured in terms of inputs (e.g. number of hotel
rooms rather than guest nights).
Strategic Role of Capacity Decisions

! Using long range capacity as a preemptive strike

where market is too small for two competitors
(e.g. building a luxury hotel in a mid-sized city)
! Lack of short-term capacity planning can generate
customers for competition (e.g. restaurant staffing)
! Capacity decisions balance costs of lost sales if
capacity is inadequate against operating losses if
demand does not reach expectations.
! Strategy of building ahead of demand is often
taken to avoid losing customers.
Queuing System Cost Tradeoff
Let: Cw = Cost of one customer waiting in
queue for an hour
Cs = Hourly cost per server
C = Number of servers
Total Cost/hour = Hourly Service Cost +
Hourly Customer Waiting Cost
TotalCost/hour = Cs C + Cw Lq
l
Note: Only consider systems where C > r = µ
Queuing Formulas
Single Server Model with Poisson Arrival and Service Rates: M/M/1

1. Mean arrival rate: l

2. Mean service rate: µ
l
3. Mean number in service: r =
µ
4. Probability of exactly “n” customers in the system: Pn = r (1 - r )
n

5. Probability of “k” or more customers in the system: P (n ³ k ) = r k

6. Mean number of customers in the system: l
Ls =
µ-l
7. Mean number of customers in queue: rl
Lq =
1 µ-l
8. Mean time in system: Ws =
µ-l
9. Mean time in queue: r
Wq =
µ-l
Queuing Formulas (cont.)
Single Server General Service Distribution Model: M/G/1
r 2 + l2s 2
Lq =
2(1 - r )

Mean number of customers in queue for two servers: M/M/2

r3
Lq =
4 - r2
Relationships among system characteristics:
Ls = Lq + r
1
Ws = Wq +
µ
1
Ws = Ls
l
1
Wq = Lq
l
Congestion as r ® 10
.

100
l
With: r=
µ
r
Then: Ls =
1- r
10

8 r Ls
6 0 0
0.2 0.25
4
0.5 1
2 0.8 4
0.9 9
0
0.99 99
0 1.0
Foto-Mat Queuing Analysis
On average 2 customers arrive per hour at a Foto-Mat to process film.
There is one clerk in attendance that on average spends 15 minutes
per customer.

1. What is the average queue length and average number of customers

in the system?

2. What is the average waiting time in queue and average time spent
in the system?

3. What is the probability of having 2 or more customers waiting in queue?

4. If the clerk is paid $4 per hour and a customer’s waiting cost in queue is
considered $6 per hour. What is the total system cost per hour?

5. What would be the total system cost per hour, if a second clerk were
added and a single queue were used?
White & Sons Queuing Analysis
White & Sons wholesale fruit distributions employ a single crew whose
job is to unload fruit from farmer’s trucks. Trucks arrive at the unloading
dock at an average rate of 5 per hour poisson distributed. The crew is
able to unload a truck in approximately 10 minutes with exponential
distribution.

1. On the average, how many trucks are waiting in the queue to be

unloaded ?

2. The management has received complaints that waiting trucks have

blocked the alley to the business next door. If there is room for 2 trucks
at the loading dock before the alley is blocked, how often will this
problem arise?

3. What is the probability that an arriving truck will find space available
at the unloading dock and not block the alley?
Capacity Analysis of Robot
Maintenance and Repair Service
A production line is dependent upon the use of assembly robots that
periodically break down and require service. The average time between
breakdowns is three days with a poisson arrival rate. The average time
to repair a robot is two days with exponential distribution. One
mechanic repairs the robots in the order in which they fail.
1. What is the average number of robots out of service?
2. If management wants 95% assurance that robots out of service will not
cause the production line to shut down due to lack of working robots,
how many spare robots need to be purchased?
3. Management is considering a preventive maintenance (PM) program at
a daily cost of $100 which will extend the average breakdowns to six
days. Would you recommend this program if the cost of having a robot
out of service is $500 per day? Assume PM is accomplished while the
robots are in service.
4. If mechanics are paid $100 per day and the PM program is in effect,
should another mechanic be hired? Consider daily cost of mechanics
and idle robots.
Determining Number of
Mechanics to Serve Robot Line
1. Assume mechanics work together as a team

Mechanics M l $100 M l $500 Ls Total system

µ= r= Ls =
in Crew (M) 2 µ Mechanic cost µ-l Robot idleness Cost per day

1/ 6 1/ 6
= 1/ 3 = 1/ 2
1 1/2 1/ 2 1/ 2 -1/ 6
100(1)=$100 500(1/2)=$250 $350

1/ 6 1/ 6
2 1 = 1/ 6 = 1/ 5
1 100(2)=$200 1- 1/ 6 500(1/5)=$100 $300

3 3/2 1/ 6 1/ 6
= 1/ 9 100(3)=$300 = 1/ 8 500(1/8)=$62 $362
3/ 2 3 / 2 -1/ 6
Determining Number of
Mechanics to Serve Robot Line
2. Assume Robots divided equally among mechanics working alone

Identical $100 n $500 Ls (n) Total System

l/n
Queues (n) l/n r= Mechanic l/n Robot idleness Cost per day
µ cost Ls =
µ-l /n

1 1/ 6 1 / 3 $100 1/ 2 $250 $350

1 / 12 1 / 12
2 1/ 12 = 1/ 6 $200 = 1 / 5 500 (1/5) 2=$200 $400
1/ 2 1 / 2 - 1 / 12
Determining Number of
Mechanics to Serve Robot Line
3. Assume two mechanics work alone from a single queue.

Note:
l 1/ 6 1 r3
r= = = Ls = +r
µ 1/ 2 3 4-r 2
= 0.01 + 0.33
= 0.34

Total Cost/day = 100(2) + 500(.34) = 200 + 170 =$370

Comparisons of System
Performance for Two Mechanics

Ls 1
Ws = Wq = Ws -
Ls l µ
System

Single Queue l 1/ 6
= = 1/ 5
with Team Service µ - l 1- 1/ 6 6/ 5 =1.2 days 0.2 days

Single Queue
r3
with Multiple + r = 0.34 6 (.34) = 2.06 days 0.06 days
4 - r2
Servers

Multiple Queue l 1 / 12
= = 1/ 5
and Multiple µ - l 1 / 2 - 1 / 12 12 (1/5) =2.4 days 0.4 days
Servers
Single Server General Service
Distribution Model : M/G/1
r 2 + l2s 2
Lq =
2(1 - r )
1
1. For Exponential Distribution: s2 =
µ2
r 2 + l2 / µ 2 2r 2 r2
Lq = = =
2(1 - r ) 2(1 - r ) (1 - r )

2. For Constant Service Time: s2 = 0

r2
Lq =
2(1 - r )

3. Conclusion:

Congestion measured by Lq is accounted for equally by

variability in arrivals and service times.
General Queuing Observations
1. Variability in arrivals and service times contribute equally to
congestion as measured by Lq.

2. Service capacity must exceed demand.

3. Servers must be idle some of the time.

4. Single queue preferred to multiple queue unless jockeying

is permitted.

5. Large single server (team) preferred to multiple-servers if

minimizing mean time in system, WS.

6. Multiple-servers preferred to single large server (team) if

minimizing mean time in queue, WQ.
Lq for Various Values of C and r
r C=1 C=2 C=3 C=4
0.15 0.026 0.001
0.2 0.05 0.002
0.25 0.083 0.004
0.3 0.129 0.007
0.35 0.188 0.011
0.4 0.267 0.017
0.45 0.368 0.024 0.002
0.5 0.5 0.033 0.003
0.55 0.672 0.045 0.004
0.6 0.9 0.059 0.006
0.65 1.207 0.077 0.008
0.7 1.633 0.098 0.011
0.75 2.25 0.123 0.015
0.8 3.2 0.152 0.019
0.85 4.817 0.187 0.024 0.003
0.9 8.1 0.229 0.03 0.004
0.95 18.05 0.277 0.037 0.005
1 0.333 0.045 0.007
 Topics for Discussion
! Example 18.1 presented a naïve capacity planning
exercise criticized for using averages. Suggest
other reservations about this exercise.
! For a queuing system with a finite queue, the
arrival rate can exceed the capacity. Explain with
an example how this is possible.
! What are some disadvantages associated with the
concept of pooling service resources?
! Discuss how one could determine the economic
cost of keeping customers waiting.
Service Supply Relationships
 Learning Objectives

! Discuss the concept of customer-

supplier duality.
! Discuss the challenge of managing a
bidirectional service supply relationship.
! Classify the purchase of a business
service.
! Discuss the implications of purchasing
business services.
Supply Chain for Physical Goods

Suppliers

Recycling/Remanufacturing

Process and Customer

Product Manufacturing Distribution Retailing Customer
Service
Design

Material transfer Information transfer

Customer-Supplier Duality in
Service Supply Relationships (Hubs)
Supplier

Service Service
Provider Customer
Design

Material transfer Information transfer

Single-Level Bidirectional
Service Supply Relationship
Service Customer >Input Service
Category -Supplier Output> Provider

Minds Student >Mind Professor

Knowledge>
Bodies Patient >Tooth Dentist
Filling>
Belongings Investor >Money Bank
Interest>
Information Client >Documents Tax Preparer
1040>
Two-Level Bidirectional Service
Supply Relationship
Service Customer >Input Service >Input Provider’s
Category -Supplier Output> Provider Output> Supplier

Minds Patient >Disturbed Therapist >Prescription Pharmacy

Treated> Drugs>

Bodies Patient >Blood Physician >Sample Lab

Diagnosis> Test Result>

Belongings Driver >Car Garage >Engine Machine

Repaired> Rebuilt> Shop

Information Home >Property Mortgage >Location Title

Buyer Loan> Company Clear Title> Search
 Managing Service Supply
Relationships
! Bi-directional Optimization
! Managing Productive Capacity
- Transfer: make knowledge available (e.g.
web based FAQ database)
- Replacement: substitute technology for
server (e.g. digital blood pressure device)
- Embellishment: enable self-service by
teaching (e.g. change surgical dressing)
! Management of Perishability
Impact of Service Supply Management
Element or Link Before After
Channel Structure Functional silos Process orientation
Service Recipient Passive Active as a co-producer
Channel Integration Vertical (own the channel to Virtual (IT and other
integrate) mechanism permit integration
without ownership)
Flow of Service Available waiting for demand Activated upon demand
Flow of Information Pull: manual reporting of Push: high level of connectivity
(upstream) demand data results in and transparency with fast or
delayed management instantaneous access to most
response. recent demand data.
Flow of Information Little or no knowledge of Real-time tracking and
(downstream) resource deployment dispatching
Business Processes Predominantly in-house; In-house for key processes,
locally optimized for others out-sourced for
efficiency flexibility; integrated and
synchronized to match supply
with demand
Demand Management Limited to use of Proactive involving customer in
appointments and scheduling to achieve bi-
reservations. directional optimization
 Impact of Service Chain Management
Element or Link Before After
Capacity Management Limited to use of part-time Creative use of cross-trained
employees employees, outsourcing, and
customer self-service.
Facilitating Goods High; in anticipation of Lower; owing to process
demand transparency
Service Delivery Inflexible; standardized and Flexible; personable with
impersonal customization possible.
Routing and scheduling Static; fixed daily schedules Dynamic; based on system
connectivity and process
visibility
New Service Design Marketing initiatives based on Virtual value chain design with
firm's perception of customer customer data base information
needs driving new services
Pricing Fixed Variable; yield management
promotes off-peak demand and
avoid idle capacity
International Focus on domestic market Global reach with Internet
Operations
 Purchasing Business Services

! The Business Service Purchasing Process:

intangible, many personnel affected, often
customized, end user involvement, and
complex.
! Classification of Business Services
- Focus of Service (property, people,
process) with consideration for tangibility
- Importance of Service (in relation to firm’s
core business)
 Purchasing Process

Need Identification Information Search Vendor Selection

Problem Definition References Experience Cost
"Do-versus-Buy" Analysis Personal Contact Reputation Location
Involve Interested Parties Recommendations References Size
Specification Development Trade Directory

Performance Evaluation
Identify Evaluator Meet Deadlines
Quality of Work Flexibility
Communication Dependability
 Taxonomy for Purchasing
Business Services
Importance of Service
Low High
Facility Support: Equipment Support:
Property -Laundry -Repairs
-Janitorial -Maintenance
Focus -Waste disposal -Product testing
Employee Support: Employee Development:
of People -Food service -Training
-Plant security -Education
-Temporary personnel -Medical care
Service Facilitator: Professional:
Process -Bookkeeping -Advertising
-Travel booking -Public relations
-Packaged software -Legal
 Purchasing Considerations
Focus on Property
Facility Support Service

• Low cost
• Identify responsible party to evaluate performance
• Precise specifications can be written

Equipment Support Service

• Experience and reputation of vendor
• Availability of vendor for emergency response
• Designate person to make service call and to
check that service is satisfactory
 Purchasing Considerations
Focus on People

Employee Support Service

• Contact vendor clients for references

• Specifications prepared with end user input
• Evaluate performance on a periodic basis
Employee Development Service
• Experience with particular industry important
• Involve high levels of management in vendor
identification and selection
• Contact vendor clients for references
• Use employees to evaluate vendor performance
 Purchasing Considerations
Focus on Process
Facilitator Service

• Knowledge of alternate vendors important

• Involve end user in vendor identification
• References or third party evaluations useful
• Have user write detailed specifications

Professional Service

• Involve high level management in vendor

identification and selection
• Reputation and experience very important
• Performance evaluation by top management
 Topics for Discussion
! What are some possible disadvantages
associated with the product postponement
strategy?
! Discuss the similarities and differences in the
product postponement strategy used by
Hewlett-Packard and Taco Bell?
! Speculate on the effect that the Internet will
have on the process of business-to-business
purchase of services?
Managing Facilitating Goods
 Managing Facilitating Goods
Replenishment Replenishment Replenishment Customer
order order order order

Factory Wholesaler Distributor Retailer Customer

Production
Delay

Shipping Shipping Item Withdrawn

Delay Delay

Wholesaler Distributor Retailer

Inventory Inventory Inventory
Learning Objectives
• Discuss the role of information technology in managing
inventories.
• Describe the functions and costs of an inventory system.
• Determine the order quantity.
• Calculate the reorder point and safety stock for an
inventory system.
• Design a continuous or periodic review inventory-control
system.
• Conduct an ABC analysis of inventory items.
• Determine the order size for the single-period inventory
case.
• Describe the rationale behind the retail discounting model.
Role of Inventory in Services
• Decoupling inventories
• Seasonal inventories
• Speculative inventories
• Cyclical inventories
• In-transit inventories
• Safety stocks
Considerations in Inventory Systems

• Type of customer demand

• Planning time horizon

• Replenishment lead time

• Constraints
Relevant Inventory Costs
• Ordering costs

• Receiving and inspections costs

• Holding or carrying costs

• Shortage costs
Inventory Management Questions
• What should be the order quantity
(Q)?
• When should an order be placed,
called a reorder point (ROP)?
• How much safety stock (SS) should
be maintained?
Inventory Models
• Economic Order Quantity (EOQ)
• Special Inventory Models
With Quantity Discounts
Planned Shortages
• Demand Uncertainty - Safety Stocks
• Inventory Control Systems
Continuous-Review (Q,r)
Periodic-Review (order-up-to)
• Single Period Inventory Model
Inventory Levels For EOQ Model
Units on Hand

0
Q Time
D
Annual Costs For EOQ Model
900
800
700
Annual Cost, $

600
Holding Cost
500
Ordering Cost
400 Total Cost
300
200
100
0
100

120

140
0

20

40

60

80

Order Quantity, Q
EOQ Formula
• Notation
D = demand in units per year
H = holding cost in dollars/unit/year
S = cost of placing an order in dollars
Q = order quantity in units
• Total Annual Cost for Purchase Lots
TCp = S ( D / Q) + H (Q / 2)
• EOQ
2 DS
EOQ =
H
 Annual Costs for Quantity
Discount Model
22,000
C = $20.00 C = $19.50 C = $18.75

21000
Annual Cost, $

20000

2000

1000

0 100 200 300 400 500 600 700

Order quantity, Q
 Inventory Levels For Planned
Shortages Model
Q-K

0 TIME

-K
T1 T2
T
Formulas for Special Models
• Quantity Discount Total Cost Model
TCqd = CD + S ( D / Q) + I (CQ / 2)
• Model with Planned Shortages
D (Q - K ) 2 K2
TCb = S + H +B
Q 2Q 2Q
2 DS æ H + B ö
Q =
*
ç ÷
H è B ø
æ H ö
K =Q ç
* *
÷
è H + Bø
 Values for Q* and K* as A
Function of Backorder Cost
B Q* K* Inventory Levels

B® ¥ 2DS 0
0
H

2DS æ H + B ö é H ù
0< B<¥ ç ÷ Q*ê 0
H è B ø ë H + B úû

B® 0 undefined Q* 0
 Demand During Lead Time
Example
sL = 3

s = 15
. s = 15
. s = 15
. s = 15
.

+ + + =

u=3 u=3 u=3 u=3 -

d L = 12 ROP
ss

Four Days Lead Time Demand During Lead time

Safety Stock (SS)
• Demand During Lead Time (LT) has
Normal Distribution with
- Mean(d L ) = µ ( LT )
- Std . Dev.(s L ) = s LT
• SS with r% service level
SS = zrs LT
• Reorder Point
ROP = SS + d L
 Continuous Review System (Q,r)
Amount used during first lead time
Inventory on hand

Order quantity, EOQ

EOQ
Reorder point, ROP

d3
Average lead time usage, dL
d1
d2 EOQ

Safety stock, SS First lead

time, LT1 LT2 LT3

Time
Order 1 placed Order 2 placed Order 3 placed

Shipment 1 received Shipment 2 received Shipment 3 received

 Periodic Review System
(order-up-to)
Inventory on Hand
Review period

RP RP RP
Target inventory level, TIL

First order quantity, Q1

Q2 Q3

d1 d3
Amount used during
first lead time

d2

Safety stock, SS First lead time, LT1

LT2 LT3

Time
Order 1 placed Order 2 placed Order 3 placed

Shipment 1 received Shipment 2 received Shipment 3 received

Inventory Control Systems
• Continuous Review System
2 DS
EOQ =
H
ROP = SS + µ LT
SS = zrs LT

• Periodic Review System

RP = EOQ / µ
TIL = SS + µ ( RP + LT )
SS = zrs RP + LT
ABC Classification of Inventory
Items
Percenta ge of dol lar volume
100
90
80
70
60
50
40
30
20 A B C

10
0
0

10

20

30

40

50

60

70

80

90

100
Percentage of inventory items (SKUs)
 Inventory Items Listed in
Descending Order of Dollar Volume
Monthly Percent of
Unit cost Sales Dollar Dollar Percent of
Inventory Item ($) (units) Volume ($) Volume SKUs Class

Computers 3000 50 150,000 74 20 A

Entertainment center 2500 30 75,000

Television sets 400 60 24,000

Refrigerators 1000 15 15,000 16 30 B
Monitors 200 50 10,000

Stereos 150 60 9,000

Cameras 200 40 8,000
Software 50 100 5,000 10 50 C
Computer disks 5 1000 5,000
CDs 20 200 4,000

Totals 305,000 100 100

 Single Period Inventory Model
Newsvendor Problem Example
D = newspapers demanded
p(D) = probability of demand
Q = newspapers stocked
P = selling price of newspaper, $10
C = cost of newspaper, $4
S = salvage value of newspaper, $2
Cu = unit contribution: P-C = $6
Co = unit loss: C-S = $2
Single Period Inventory Model
Expected Value Analysis
Stock Q
p(D) D 6 7 8 9 10

.028 2 4 2 0 -2 -4
.055 3 12 10 8 6 4
.083 4 20 18 16 14 12
.111 5 28 26 24 22 20
.139 6 36 34 32 30 28
.167 7 36 42 40 38 36
.139 8 36 42 48 46 44
.111 9 36 42 48 54 52
.083 10 36 42 48 54 60
.055 11 36 42 48 54 60
.028 12 36 42 48 54 60

Expected Profit $31.54 $34.43 $35.77 $35.99 $35.33

 Single Period Inventory Model
Incremental Analysis
E (revenue on last sale) ³ E (loss on last sale)

P ( revenue) (unit revenue) ³ P (loss) (unit loss)

P( D ³ Q)Cu ³ P( D < Q)Co

[1- P( D < Q)]C u ³ P ( D < Q) Co

Cu
P ( D < Q) £ (Critical Fractile)
Cu + Co
where:
Cu = unit contribution from newspaper sale ( opportunity cost of underestimating demand)
Co = unit loss from not selling newspaper (cost of overestimating demand)
D = demand
Q = newspaper stocked
Critical fractile for the
newsvendor problem
P(D<Q)
(Co applies)

P(D>Q)
(Cu applies)
Probability

0.722

0 2 4 6 8 10 12 14
New spaper demand, Q
 Topics for Discussion
• Discuss the functions of inventory for different
organizations in the distribution system.
• How would one find values for inventory costs?
• How can information technology create a competitive
advantage through inventory management?
• How valid are the assumptions for the EOQ model?
• How is a service level determined for inventory
items?
• What inventory model would apply to service capacity
such as seats on an aircraft?
Managing Service Projects
Learning Objectives

! Describe the nature of project management.

! Construct a project network.
! Perform critical path analysis on a project network.
! Allocate limited resources to a project.
! Crash activities to reduce the project completion time.
! Analyze a project with uncertain activity times.
! Use the earned value chart to monitor a project.
! Discuss the reasons why projects fail to meet
performance, time, and cost objectives.
The Nature of Project
Management
! Characteristics of Projects: purpose, life cycle,
interdependencies, uniqueness, and conflict.
! Project Management Process: planning (work
breakdown structure), scheduling, and controlling.
! Selecting the Project Manager: credibility, sensitivity,
ability to handle stress, and leadership.
! Building the Project Team: Forming, Storming, Norming,
and Performing.
! Principles of Effective Project Management: direct
people individually and as a team, reinforce excitement,
keep everyone informed, manage healthy conflict,
empower team, encourage risk taking and creativity.
! Project Metrics: Cost, Time, Performance
Work Breakdown Structure

1.0 Move the hospital (Project)

1.1 Move patients (Task)
1.1.1 Arrange for ambulance (Subtask)
1.1.1.1 Prepare patients for move
1.1.1.2 Box patients personnel effects
1.2 Move furniture
1.2.1. Contract with moving company
•
•
•
Project Management Questions
! What activities are required to complete a
project and in what sequence?
! When should each activity be scheduled to
begin and end?
! Which activities are critical to completing the
project on time?
! What is the probability of meeting the project
completion due date?
! How should resources be allocated to
activities?
Tennis Tournament Activities

ID Activity Description Network Immediate Duration

Node Predecessor (days)
1 Negotiate for Location A - 2
2 Contact Seeded Players B - 8
3 Plan Promotion C 1 3
4 Locate Officials D 3 2
5 Send RSVP Invitations E 3 10
6 Sign Player Contracts F 2,3 4
7 Purchase Balls and Trophies G 4 4
8 Negotiate Catering H 5,6 1
9 Prepare Location I 5,7 3
10 Tournament J 8,9 2
Notation for Critical Path Analysis

Item Symbol Definition

Activity duration t The expected duration of an activity

Early start ES The earliest time an activity can begin if all previous
activities are begun at their earliest times

Early finish EF The earliest time an activity can be completed if it

is started at its early start time

Late start LS The latest time an activity can begin without

delaying the completion of the project

Late finish LF The latest time an activity can be completed if it

is started at its latest start time

Total slack TS The amount of time an activity can be delayed

without delaying the completion of the project
Scheduling Formulas

ES = EFpredecessor (max) (1)

EF = ES + t (2)

LF = LSsuccessor (min) (3)

LS = LF - t (4)

TS = LF - EF (5)

or TS = LS - ES (6)
Tennis Tournament Activity on
Node Diagram
TS
ES EF

LS LF

A2 C3 D2 G4

START
E10 I3 J2

B8 F4 H1
Early Start Gantt Chart for Tennis
Tournament

ID Activity Days Day of Project Schedule

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
A Negotiate for 2
Location
B Contact Seeded 8
Players
C Plan Promotion 3

D Locate Officials 2

E Send RSVP 10
Invitations
F Sign Player 4
Contracts
G Purchase Balls 4
and Trophies
H Negotiate 1
Catering
I Prepare Location 3

J Tournament 2

Personnel Required 2 2 2 2 2 3 3 3 3 3 3 2 1 1 1 2 1 1 1 1

Critical Path Activities

Activities with Slack
Resource Leveled Schedule for
Tennis Tournament
ID Activity Days Day of Project Schedule
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
A Negotiate for 2
Location
B Contact Seeded 8
Players
C Plan Promotion 3

D Locate Officials 2

E Send RSVP 10
Invitations
F Sign Player 4
Contracts
G Purchase Balls 4
and Trophies
H Negotiate 1
Catering
I Prepare Location 3

J Tournament 2

Personnel Required 2 2 2 2 2 2 2 2 2 2 2 2 2 3 2 2 2 2 1 1

Critical Path Activities

Activities with Slack
Incorporating Uncertainty in
Activity times

F(D)
P(D<A) = .01

P(D>B) = .01

TIME
A M D B

optimistic most pessimistic

likely
Formulas for Beta Distribution of
Activity Duration

Expected Duration

_ A+4M + B
D=
6

Variance
2
é B - Aù
V =ê ú
ë 6 û

Note: (B - A )= Range or 6s
Activity Means and Variances for
Tennis Tournament

Activity A M B D V
A 1 2 3
B 5 8 11
C 2 3 4
D 1 2 3
E 6 9 18
F 2 4 6
G 1 3 11
H 1 1 1
I 2 2 8
J 2 2 2
 Uncertainly Analysis

Assumptions
1. Use of Beta Distribution and Formulas For D and V
2. Activities Statistically Independent
3. Central Limit Theorem Applies ( Use “student t” if less than
30 activities on CP)
4. Use of Critical Path Activities Leading Into Event Node

Result
Project Completion Time Distribution is Normal With:
_
µ = åD For Critical Path Activities

s 2 = åV For Critical Path Activities

Completion Time Distribution for
Tennis Tournament

Critical Path
Activities D V
A 2 4/36
C 3 4/36
E 10 144/36
I 3 36/36
J 2 0

µ = 20 188/36 = 5.2 = s
2
 Question

What is the probability of an overrun if a 24 day completion time

is promised?

X -µ
Z=
s
2
s = 52. Z=
24 - 20
5.2
Z = 1.75

24 Days

P (Time > 24) = .5 - .4599 = .04 or 4%

Costs for Hypothetical Project
Total Cost

Indirect Cost
Cost

Opportunity Cost

Direct Cost
(0,0)
Duration of Project

Schedule with Minimum Total Cost

Activity Cost-time Tradeoff

Cost
Crash
C* Slope is cost to expedite per day

Normal
C

D* D Activity Duration (Days)

Cost-Time Estimates for Tennis
Tournament

Time Estimate Direct Cost Expedite Cost

Activity Normal Crash Normal Crash Slope
A 2 1 5 15
B 8 6 22 30
C 3 2 10 13
D 2 1 11 17
E 10 6 20 40
F 4 3 8 15
G 4 3 9 10
H 1 1 10 10
I 3 2 8 10
J 2 1 12 20

Total 115
Progressive Crashing
Project Activity Direct Indirect Opportunity Total
Duration Crashed Cost Cost Cost Cost
20 Normal 115 45 8 168
19 41 6
18 37 4
17 33 2
16 29 0
15 25 -2
14 21 -4
13 17 -6
12 13 -8

Normal Duration After Crashing Activity

Project Paths Duration
A-C-D-G-I-J 16
A-C-E-I-J 20
A-C-E-H-J 18
A-C-F-H-J 12
B-F-H-J 15
Applying Theory of Constraints to
Project Management
! Why does activity safety time exist and is subsequently lost?
1. The “student syndrome” procrastination phenomena.
2. Multi-tasking muddles priorities.
3. Dependencies between activities cause delays to accumulate.
! The “Critical Chain” is the longest sequence of dependent
activities and common (contended) resources.
! Measure Project Progress as % of Critical Chain completed.
! Replacing safety time with buffers
- Feeding buffer (FB) protects the critical chain from delays.
- Project buffer (PB) is a safety time added to the end of the
critical chain to protect the project completion date.
- Resource buffer (RB) ensures that resources (e.g. rental
equipment) are available to perform critical chain activities.
 Accounting for Resource
Contention Using Feeding Buffer

NOTE: E and G cannot be performed simultaneously (same person)

A2 C3 D2 FB=7 G4

START
E10 I3 J2

FB=5
B8 F4 H1

Set feeding buffer (FB) to allow one day total slack

Project duration based on Critical Chain = 24 days
 Incorporating Project Buffer

NOTE: Reduce by ½ all activity durations > 3 days to eliminate safety time

A2 C3 D2 FB=2 G2

START
E5 I3 J2 PB=4

B4 F2 H1 FB=3

Redefine Critical Chain = 17 days

Reset feeding buffer (FB) values
Project buffer (PB) = ½ (Original Critical Chain-Redefined Critical Chain)
Sources of Unexpected Problems
Cost Time Performance

• Difficulties require • Delay owing to • Unexpected

more resources technical difficulties technical problems
• Scope of work • Initial time estimates arise
increases were optimistic • Insufficient
• Initial bids or • Task sequencing resources are
estimates were too was incorrect available
low • Required resources • Insurmountable
• Reporting was poor not available as technical difficulties
or untimely needed • Quality or reliability
• Budgeting was • Necessary preceding problems occur
inadequate tasks were • Client requires
• Corrective control incomplete changes in
was not exercised in • Client-generated specifications
time changes • Complications with
• Price changes of • Unforeseen functional areas
inputs government • A technological
regulations breakthrough occurs
Earned Value Chart

Dollars Today

ACWP

Actual

Cost Variance
Cost
Budgeted Cost
BCWS (Baseline)

Schedule
Variance
BCWP
ATWP
STWP

Days

Value Time
Completed Variance
 Quality and Productivity
Improvement
Quality level

Check Do

Act Plan

Time
 Learning Objectives

! Identify the stage of competitiveness for a service firm.

! Discuss the analogous roles of inventory and queuing.
! Perform a Walk-Through-Audit.
! Lead a Plan-Do-Check-Act (PDCA) process improvement
initiative.
! Use quality tools for analysis and problem solving.
! Discuss the corporate programs for quality improvement.
! Conduct a data envelopment analysis (DEA).
 Customer Value Equation

Value =
(Re sults Pr oduced ) + (Pr ocessQuality )
(Pr ice) + (CostsofAcquiringtheService)
 Four Stages in Service Firm
Competitiveness
1. Available for service 2. Journeyman 3. Distinctive competence 4. World-class service delivery

Customers patronize service Customers neither seek Customers seek out the firm The company’s name is synonymous
firm for reasons other than out nor avoid the firm. on the basis of its sustained with service excellence. Its service
performance. reputation for meeting doesn’t just satisfy customers; it
customer expectations delights them and thereby expands
customer expectations to levels its
competitors are unable to fulfill.

Operations is reactive, Operations functions in a Operations continually excels, Operations is a quick learner and fast
at best. mediocre, uninspired reinforced by personnel innovator; it masters every step of the
fashion. management and systems service delivery process and provides
that support an intense capabilities that are superior to
customer focus. competitors.
SERVICE QUALITY
Is subsidiary to cost, Meets some customer Exceeds customer Raises customer expectations and
highly variable. expectations; consistent expectations; consistent seeks challenge; improves
on one or two key on multiple dimensions. continuously.
dimensions.
 Four Stages in Service Firm
Competitiveness (cont.)
1. Available for service 2. Journeyman 3. Distinctive competence 4. World-class service delivery
BACK OFFICE
Counting room. Contributes to service, plays Is equally valued with front Is proactive, develops its own
an important role in the total office; plays integral role. capabilities, and generates
service, is given attention, opportunities.
but is still a separate role.
CUSTOMER
Unspecified, to be A market segment whose A collection of individuals A source of stimulation, ideas,
satisfied at minimum cost. basic needs are understood. whose variation in needs is and opportunity.
understood.
INTRODUCTION OF NEW TECHNOLOGY
When necessary for When justified by cost When promises to enhance Source of first-mover advantages,
survival, under duress. savings. service. creating ability to do things your
competitors can’t do.
WORKFORCE
Negative constraint.
Efficient resource; disciplined; Permitted to select among Innovative; creates procedures.
follows procedures. alternative procedures.
FRONT-LINE MANAGEMENT
Controls workers. Controls the process. Listens to customers; coaches Is listened to by top management
and facilitates workers. as a source of new ideas. Mentors
works to enhance their career.
 Continual Improvement as a
Competitive Strategy
! Analogy with Just-in-Time Manufacturing
! Inventory and Waiting Line Analogy
! Continual Improvement as a Service
Organization Culture
! Management Implications
 Inventory and Waiting Line
Analogy
Feature Inventory Waiting line

Costs Opportunity cost of capital Opportunity cost of time

Space Warehouse Waiting area
Quality Poor quality hidden Negative impression
Decoupling Promotes independence of Allow division of labor and
production stages specialization
Utilization Work in process keeps machines busy Waiting customers keep servers busy
Coordination Detailed scheduling not necessary Avoids matching supply and demand
 Traditional vs World-Class
Service Organizations
Dimension Traditional World-class

System assumption Closed system Open system

Job design premise Division of labor Flexibility
Structure Rigid Fluid
Relation to others Individual Team player
Employee orientation Task Customer
Management Supervisor Coach and facilitator
Technology Replace human effort Assist service delivery
Information Efficiency Effectiveness
 Walk-Through-Audit

! Service delivery system should conform to

customer expectations.
! Customer impression of service influenced
by use of all senses.
! Service managers lose sensitivity due to
familiarity.
! Need detailed service audit from a
customer’s perspective.
 Quality and Productivity
Improvement Process
! Foundations of Continuous Improvement
- Customer Satisfaction
- Management by Facts
- Respect for People
! Plan-Do-Check-Act (PDCA) Cycle
! Problem Solving (10 steps)
 Quality Tools

! Check Sheet
! Run Chart
! Histogram
! Pareto Chart
! Flowchart
! Cause-and-Effect Diagram
! Scatter Diagram
! Control Chart
 Check Sheet

Month Lost Departure Mechanical Overbooked Other

Luggage Delay
January 1 2 3 3 1
February 3 3 0 1 0
March 2 5 3 2 3
April 5 4 4 0 2
May 4 7 2 3 0
June 3 8 1 1 1
July 6 6 3 0 2
August 7 9 0 3 0
September 4 7 3 0 2
October 3 11 2 3 0
November 2 10 1 0 0
December 4 12 2 0 1

Total 44 84 24 16 12
 Run Chart

14

12

10
Departure Delays

0
1 2 3 4 5 6 7 8 9 10 11 12

Months
 Histrogram of Lost Luggage

3.5

2.5
Frequency

1.5

0.5

0
1 2 3 4 5 6 7

Occurrences per Month

 Cause-and-Effect Chart for Flight
Departure Delay (Fishbone Chart)
Equipment Personnel

Gate agents cannot process passengers quickly enough

Too few agents
Aircraft late to gate Agents undertrained
Late arrival Agents undermotivated
Gate occupied Agents arrive at gate late
Other Mechanical failures Late cabin cleaners
Late pushback tug Late or unavailable cabin crews
Weather
Air traffic Late or unavailable cockpit crews
Delayed
Flight
Poor announcement of departures Departure
Weight and balance sheet late
Delayed checkin procedure
Late baggage to aircraft Confused seat selection
Late fuel Passengers bypass checkin counter
Late food service Checking oversize baggage
Issuance of boarding pass

Acceptance of late passengers

Cutoff too close to departure time
Desire to protect late passengers
Material Desire to help company’s income
Poor gate locations

Procedure
 Pareto Analysis of Flight
Departure Delay Causes
Cause Percentage of Incidents Cumulative Percentage

Late passengers 53.3 53.3

Waiting for pushback 15.0 68.3

Waiting for fuel 11.3 79.6

Late weight and 8.7 88.3

balance sheet
 Flowchart
Passenger
Arrives

Ticket No Wait for

For Flight Appropriate
Flight

Yes

Check Yes Excess

Luggage Carry-on

No

Issue
Boarding Pass

Passenger
Boards Airplane
 Scatter Diagram

12

10

8
Departure Delays

0
0 1 2 3 4 5 6 7

Late Passengers
 Control Chart of Departure Delays
Percentage of flights on

100
expected
90
Lower Control Limit
tim e

80

70

60
1998 1999

p (1 - p p (1 - p
UCL = p + 3 LCL = p - 3
n n
 Corporate Programs for Quality
Improvement

! Marriott Personnel Programs

! Zero Defects (Crosby)
! Deming’s 14 Point Program
! Malcolm Baldrige Quality Award
! ISO 9000
! Benchmarking
 Topics for Discussion

! Could firms in the “world-class service delivery”

stage of competitiveness be described as “learning
organizations?”
! Contrast the philosophies of “continuous
improvement” and “process reengineering.” Is
there a role for both points of view in services?
! Compare the philosophies of Deming (i.e 14-
point) and Crosby (i.e. Zero Defects).
! What are the limitations of “benchmarking?”
 The Museum of Art and Design

! Critiquethe WtA gap analysis.

Awareness of Exhibits
Information
Experience
Visitor Habits
Facilities
Language
! Could there be other explanations for the
gaps?
 The Museum of Art and Design

! Make recommendations for closing the gaps

found in the WtA.

! How can the servicescape help in self-

selecting customers and employees?
 Mega Bytes Restaurant

! How is the Seven-Step Method (SSM)

different from Deming’s PDCA cycle?
! Prepare a cause-and-effect or fishbone
diagram for a problem such as “Why
customers have long waits for coffee.” Use
Figure 18.17 as a guide.
! How would you resolve the difficulties that
study teams have experienced when
applying the SSM?
 The Seven-Step Method

! Step 1: Define the project

! Step 2: Study the current situation
! Step 3: Analyze the potential causes
! Step 4: Implement a solution
! Step 5: Check the results
! Step 6: Standardize the improvement
! Step 7: Establish future plans
Growth and Global Expansion
 Learning Objectives
! Recommend an expansion strategy for a
service firm.
! Discuss the nature of franchising.
! Discuss the factors to be considered in
multinational development.
! Describe and contrast global service
strategies.
Expansion Strategies

Single Service Multiservice

Focused service: Clustered service:

Single * Dental practice * Stanford University
Location * Retail Store * Mayo Clinic
* Family restaurant * USAA Insurance

Focused network: Diversified network:

Multisite * Federal Express * Nations Bank
* McDonald’s * American Express
* Red Roof Inns * Arthur Andersen
 Franchising
! Benefits to the Franchisee
Management Training
Brand Name
National Advertising
Acquisition of Proven Business
Economics of Scale
! Issues for the Franchisor
Franchisee Autonomy
Franchise Contract
Conflict Resolution
 Multinational Development
! The Nature of the Borderless World (Triad)
Customers - information has empowered
Competitors - nothing stays proprietary
Company - fixed costs require large markets
Currency - become currency neutral
Country - deprive competitor of home market
! Planning Multinational Operations
Cultural Transferability
Worker Norms
Host Government Policy
 International
Strategic Service Vision
Target Market Service Concept Operating Strategy Service Delivery System
--culture --culture --labor market --technology

--industry structure --perceptions --managerial --operating premises

of value practices

--demographics --expectations --labor market norms

--language and customs
--usage patterns
Considerations in Selecting a
Global Service Strategy
Globalization Global Service Strategies
Factors
Multicountry Importing Follow Your Service Beating the
Expansion Customers Customers Unbundling Clock

Customer Train local Develop foreign Develop Specialize in Provide

Contact workers language & foreign front- or back- extended
cultural sensitivity customers office service hours of
skills components service
Customization Usually a Strategic Re-prototype Meet segments’ More need for
standard opportunity locally needs better reliability &
service coordination
Complexity Usually Strategic Modify Opportunity for Time
routine opportunity operations focus compression
Information Satellite On site advantage Move May require Exploit
Intensity network experienced heavy capital opportunity
managers investments
Cultural Modify Accommodate Could be Manage worker Common
Adaptation service foreign guests necessary to diversity language
achieve scale necessary
Labor Intensity Reduced Increased labor Hire local Reduced labor Reduced labor
labor costs costs personnel costs costs
Other Government Logistics Inadequate Merchandise Capital
restrictions management infrastructure unbundled investments
component
 Topics for Discussion
! For service firms, how does the operations strategy
differ from the marketing strategy?
! Is the competitive role of operations more important
for a service firm than a manufacturing firm?
! Do you agree that the effect of learning and
experience on total unit cost has not been
demonstrated in a service situation?
! Manufacturing firms often grow through product
innovation. Are there examples of service firms that
practice the equivalent strategy?
! What is your assessment of the multinational
competition in services?
Goodwill Industries International
! Who are Goodwill’s customers and how have
their demographics changed over time?
! How should the introduction of for-profit thrifts
affect Goodwill’s decisions about the role of
customer service?
! How can Goodwill differentiate itself from the
competition?
! Visit http://shopgoodwill.com/ where Goodwill
auctions items of special interest and discuss
why this on-line store has great profit
potential.
Goodwill Industries International
Sources of Revenue
Donated Goods

4%5% Temporary
5%
6% Services
Subcontract
Services
15%
Public Support
65%

Grants

Miscellaneous
Forecasting Demand for
Services
 Learning Objectives

! Recommend the appropriate forecasting

model for a given situation.
! Conduct a Delphi forecasting exercise.
! Describe the features of exponential
smoothing.
! Conduct time series forecasting using
exponential smoothing with trend and
seasonal adjustments.
 Forecasting Models

! Subjective Models
Delphi Methods
! Causal Models
Regression Models
! Time Series Models
Moving Averages
Exponential Smoothing
 Delphi Forecasting
Question: In what future election will a woman become president of the united states?
 N Period Moving Average

Let : MAT = The N period moving average at the end of period T

AT = Actual observation for period T

Then: MAT = (AT + AT-1 + AT-2 + …..+ AT-N+1)/N

Characteristics:
Need N observations to make a forecast
Very inexpensive and easy to understand
Gives equal weight to all observations
Does not consider observations older than N periods
 Moving Average Example

Saturday Occupancy at a 100-room Hotel

Three-period
Saturday Period Occupancy Moving Average Forecast

Aug. 1 1 79
8 2 84
15 3 83
22 4 81
29 5 98
Sept. 5 6 100
12 7
 Exponential Smoothing
Let : ST = Smoothed value at end of period T
AT = Actual observation for period T
FT+1 = Forecast for period T+1

Feedback control nature of exponential smoothing

New value (ST ) = Old value (ST-1 ) + a [ observed error ]

ST = ST-1 + a [ AT - ST -1 ]
or : ST = a AT + (1 - a ) ST -1
FT +1 = ST
 Exponential Smoothing
Hotel Example
Saturday Hotel Occupancy (a =0.5)

Actual Smoothed Forecast

Period Occupancy Value Forecast error
Saturday t At St Ft |At - Ft|
Aug. 1 1 79
8 2 84
15 3 83
22 4 81
29 5 98
Sept. 5 6 100

MAD =

Mean Absolute Deviation (MAD) = å | At - Ft |/ n

t
 Exponential Smoothing
Implied Weights Given Past Demand

ST = aAT + (1 - a ) ST -1
Substitute for ST -1 = aAT + (1 - a )[aAT -1 + (1 - a ) ST - 2 ]
ST = aAT + (1 - a )[aAT -1 + (1 - a ) ST - 2 ]
ST = aAT + a (1 - a ) AT -1 + (1 - a ) 2 ST - 2
If continued:

ST = aAT + a (1 - a ) AT -1 + a (1 - a ) 2 AT -2 +.....+a (1 - a ) T -1 A1 + (1 - a ) T S0
 Exponential Smoothing
Weight Distribution
0.3 a = 0.3
a (1 - a ) = 0.21
0.2
Weight

a (1 - a ) 2 = 0147
.
a (1 - a ) 3 = 0103
.
0.1 a (1 - a ) 4 = 0.072
a (1 - a )5 = 0.050
0
0 1 2 3 4 5
Age of Observation (Period Old)
Relationship Between a and N

a (exponential smoothing constant) : 0.05 0.1 0.2 0.3 0.4 0.5 0.67
N (periods in moving average) : 39 19 9 5.7 4 3 2
Saturday Hotel Occupancy
Effect of Alpha ( a =0.1 vs. a =0.5)

105
100 Actual
Occupancy

95
90 Forecast
(a = 0.5)
85 Forecast
80 (a = 01
.)

75
0

6
Period
 Exponential Smoothing With
Trend Adjustment
St = a ( At ) + (1 - a )( St -1 + Tt -1 )
Tt = b ( St - St -1 ) + (1 - b )Tt -1
Ft +1 = St + Tt
Commuter Airline Load Factor (a = 0.5, b = 0.3)

Week Actual load factor Smoothed value Smoothed trend Forecast Forecast error
t At St Tt Ft | At - Ft|

1 31 31.00 0.00
2 40 31 9
3 43
4 52 47.10 3.74
5 49 49.92 3.47 51 2
6 64 58.69 5.06 53 11
7 58 60.88 4.20 64 6
8 68 66.54 4.63 65 3
MAD 6.7
 Exponential Smoothing with
Seasonal Adjustment
St = a ( At / I t - L ) + (1 - a ) St -1
Ft +1 = ( St )( I t - L +1 )
At
It = g + (1 - g ) I t - L
St
Ferry Passengers taken to a Resort Island (a = 0.2, g = 0.3)
Actual Smoothed Index
Period t At value St It Forecast Ft | At - Ft|
1995
January 1 1651 ….. 0.837 …..
February 2 1305 ….. 0.662 …..
March 3 1617 ….. 0.820 …..
April 4 1721 ….. 0.873 …..
May 5 2015 ….. 1.022 …..
June 6 2297 ….. 1.165 …..
July 7 2606 ….. 1.322 …..
August 8 2687 ….. 1.363 …..
September 9 2292 ….. 1.162 …..
October 10 1981 ….. 1.005 …..
November 11 1696 ….. 0.860 …..
December 12 1794 1794.00 0.910 …..
1996
January 13 1806 …..
February 14 1731
March 15 1733
April 16 1904
May 17 2036
 Topics for Discussion

! What characteristics of service organizations make

forecast accuracy important?
! For each of the three forecasting methods, what are
the developmental costs and associated cost of
forecast error?
! Suggest independent variables for a regression
model to predict the sales volume for a proposed
video rental store location.
! Suggest how the Delphi method can be incorporated
into a cross-impact analysis.