CH-10-11 Globalization of Services – Service Management: Operations, Strategy, Information Technology : Book Guide

This Document Contains Chapters 10 to 11 Chapter 10 Globalization of Services TEACHING NOTE Successful service innovations involve two fundamental growth strategies: (1) duplication of the service in different geographical locations with multiple sites called a "focused network" strategy or (2) incorporation of new services at the original site, which results in offering a group of multiple services called a "clustered service" strategy. Some services combine both approaches and create a "diversified network." Franchising is a common method to implement a multisite strategy that uses the entrepreneurial spirit of investors. The responsibilities of both the franchisee and franchiser are discussed in the context of a super organization. In today's borderless world, service firms find that a global presence is necessary because no domestic market is secure from competition. A discussion of the considerations in planning multinational operations includes: cultural transferability, network development, and host-government policy. The chapter concludes with seven global service strategies including offshoring services. SUPPLEMENTARY MATERIALS Case: Fairfield Inn (HBS 9-689-092) The management of Fairfield Inn, Marriott's new entry into the economy limited-service motel industry, faced significant issues concerning how best to develop the chain. Marriott first decided on two strategies: (1) provide only a few services and (2) utilize an innovative process of selecting, evaluating, and rewarding employees. Next, a decision had to be made whether or not to utilize some form of franchising as a way to gain access to prime real estate sites in order to grow more rapidly. Case: Coopers & Lybrand in Hungary (A) (HBS 9-692-112) Because financial accounting practices and standards differ across country lines, Coopers & Lybrand's historical growth strategy has been to align itself with existing accountancies in the foreign countries it was entering. However, to develop profitable offices overseas more quickly, this strategy was questioned. At issue was which elements critical to the success of the Hungarian office could be adapted from other established offices and which would have to be developed specifically for Hungary. Case: Euro Disney: The First 100 Days (HBS 9-693-013) Located 20 miles west of Paris, Euro Disney opened in April 1992 within its $4.4 billion budget. The reception has been mixed with much criticism from the French who view it as an assault on their culture. Attendance is far below projections and the quality of service is substandard when compared with other Disney theme parks. LECTURE OUTLINE 1. Domestic Growth and Expansion Strategies (Figure 10.1) Focused Service Focused Network Clustered Service Diversified Network 2. Franchising Nature of Franchising Benefits to the Franchisee Issues for the Franchiser 3. Globalization of Services (Figure 10.2) Generic International Strategies (Figure 10.3) The Nature of the Borderless World Planning Transnational Operations (Table 10.1) 4. Global Services Strategies (Table 10.2) Multi-country Expansion Importing Customers Following Your Customers Service Offshoring (Figure 10.4) Beating-the-clock TOPICS FOR DISCUSSION 1. Recall that service operations can be classified as processing people, goods, or information. What challenges are faced in each category when globalization is undertaken? Answer: This discussion is based on the following article: Lovelock, Christopher H., and George S. Yip: “Developing Global Strategies for Service Businesses,” California Management Review, vol. 38, no. 2, Winter 1996, pp. 64-86. The authors propose four dimensions of global strategy: market participation, standardized service, location of value chain, and uniform marketing. Market participation: All three types of services have examples of simple service concepts that can be replicated around the world (e.g., fast food in the people-processing category, package delivery for goods processing, and English language news for information processing). However, banking, telecommunications, hospitals, and airlines operate in regulated environments making it difficult to penetrate foreign markets. Standardized service: Goods-processing services need not cope with cultural and taste differences, but, for people-processing, some deviation from standardization almost always is needed. Information processing will vary from little (news broadcast) to considerable (local tax advice). Location of value chain: Because of their virtual nature, information-based services should find it easiest to locate globally. The presence of the customer requires local sites for people-processing services. Goods-processing services have the flexibility of selecting different locations for the front- and back-office operations. Uniform marketing: All three services benefit from globally uniform marketing. Uniform pricing, however, will be least possible for people-processing. In fact, The Economist magazine uses a “McDonald’s Big Mac Price Index” to compare the costs of living in major business cities around the world. In processing people, globalization challenges include managing diverse customer expectations and cultural differences. For processing goods, issues involve coordinating supply chains across different countries and dealing with varied regulations. In processing information, challenges arise from handling data privacy laws and ensuring consistent IT infrastructure. Each category requires tailored strategies to address these complexities effectively. 2. Chili’s, a United States based restaurant chain that offers Mexican food, has its largest establishment in Monterrey, Mexico. Why is Chili’s so successful in Monterrey? Answer: There are two explanations for the success in Monterrey and both are influenced by the established brand. First, the restaurant serves visitors from the U.S. to this industrialized city in northern Mexico. Second, the local population dines there for an “American experience,” not necessarily for the cuisine. 3. What is the inherent conflict in a franchising arrangement? Answer: A franchiser is interested in delivering a consistent offering across all units in order to establish a brand that attracts traveling customers. However, franchising attracts either entrepreneurial owner-operators or large firms operating several franchises. In the case of the owner-operator there is a desire to personalize the establishment and cater to the local customer base. Large firms with multiple units under management have the power and economy of scale incentive to challenge the franchiser, in particular, with respect to any binding agreements (e.g. suppliers of materials). 4. What explains the continuing trade surplus in services for the United States? Answer: The United States’ trade surplus in services is a reflection of the superior service brands (e.g., McDonald’s, Walmart, and amazon.com) that have arisen from the leading service economy in the world. Developing countries first focus on the manufacturing sector of their economy and seek financial and information services from abroad. INTERACTIVE CLASS EXERCISE Break the class into small groups with at least one international student in each group, if possible. Based on overseas travel, have each group report on features of day-to-day living that they have found different from home and worth emulating. A spokesperson from each group will summarize the group's examples of overseas features worth emulating for the class. Questions then can be raised about what has been learned from experiences in other cultures. For example, upon my first visit to Europe, I was impressed by the use of door “levers” instead of the round doorknobs that I grew up with in the United States. The superiority of door handles becomes obvious when one is trying to enter a door with arms full of groceries. Door handles subsequently have become more common in the U.S. CASE: GOODWILL INDUSTRIES INTERNATIONALOF CENTRAL TEXAS [This analysis provided by teaching assistant Edmond Gonzales] 1. Who are Goodwill's customers and how have their demographics changed over time? Answer: Goodwill serves a customer base that is diverse both in terms of socioeconomic status and reasons for shopping. Accordingly, it is useful to categorize Goodwill’s customers along one of several dimensions. Certain individuals shop at Goodwill in order to find older, out-of-style items such as antiques, out-of-print books, or vintage collectibles. Others shop at Goodwill in order to satisfy a moral obligation that they feel towards society. These shoppers, knowing that the employees often hired by Goodwill have relatively unmarketable talents, feel that shopping at Goodwill aids those individuals as well as society as a whole. Some shoppers are bargain hunters who know that one person’s trash is another’s treasure. Still others are treasure seekers, hoping to find that “diamond in the rough.” Some shoppers know that Goodwill is an excellent source of 1970s and 1980s attire and treat Goodwill as a costume parlor. Of course, Goodwill also caters to those shoppers whose financial resources are insufficient to support large expenditures on necessities. In the early years, this final category of shoppers was Goodwill’s primary concern. The service that Goodwill saw itself providing was to employ and supply the less wealthy members of society. Clearly, the unique aspects and charm of Goodwill have broadened its customer base to encompass almost every aspect of the public. Goodwill's customers primarily include individuals seeking affordable second-hand goods, such as clothing and household items, as well as those interested in supporting charitable causes. Over time, demographics have shifted to include a broader range of socio-economic backgrounds and age groups, with increased focus on sustainability and value-driven shopping, reflecting growing awareness and interest in eco-friendly and charitable consumption. 2. How should the introduction of for-profit thrifts affect Goodwill's decisions about the role of customer service? Answer: The advent of for-profit thrifts that focus on customer service could have profound effects on Goodwill. Indeed, Goodwill is highly vulnerable to an attack on the customer service front. The fact that Goodwill was the only large and recognized thrift store for such a long time, coupled with the fact that its primary marketing tactic was the emotionally based ‘shop with us and you’ll help society’ plea, resulted in an environment at Goodwill in which customer service was unimportant. This lack of importance placed on customer service challenges management today. High employee turnover resulted in employees who often were unknowledgeable, unfriendly, and unempowered. The stores often were unclean, items for sale were disorganized, and a return/guarantee policy was nonexistent. Improving the quality of customer service (e.g., employee training and empowerment, guarantees, improving cleanliness and visual appeal, and increasing the ease of dropping off donations) is an obvious and important priority. Goodwill began to improve customer service, but unfortunately, improving the quality of customer service is expensive initially. Although it is imperative that customer service be improved, Goodwill, as a non-profit organization, had to consider carefully how increased costs would affect its ability to perform its multiple roles towards society. 3. How can Goodwill differentiate itself from the competition? Answer: In the new generation of the thrift store industry, Goodwill must compete with non- and for-profit companies both for sales and donations. Competing for donations has two dimensions: 1) making individuals want to donate, and 2) facilitating the donation. Increasing the desire to donate is little more than successful advertising and the approach should be basically the same when competing against non- and for-profits. Certainly, Goodwill should broadcast the beneficial effect that it has had on the local society (and economy). Goodwill should state that it was the first with the high-minded mission to help society in this way. Against the for-profits, Goodwill should question how much of the money generated from donated goods actually goes back into the community. After the desire to donate has been raised, Goodwill either must make the act of donating easier, or educate the population on the proper ways to donate. Goodwill has a number of ways to make donating more enjoyable and even if Goodwill revives home pick-ups, increases the number of drop boxes/stations, implements a recycling-type pick-up system, or offers incentives, it needs to improve its method of receiving donated items. Clearly, most individuals will not donate to an establishment if they do not know how to do so and many will not donate if it is bothersome to do so. Attracting shoppers is another challenge for Goodwill. The same tactics used to attract donors also should be effective in building a customer base. The buildings should have an appealing exterior, both in terms of an attractive building and a secure parking area. Moreover, Goodwill should attempt to develop a reputation for carrying a wide variety of specialized goods in addition to the Halloween-style clothing mentioned in the case. After Goodwill has the customer inside the store, it should attempt to increase the amount the customer spends by making the experience as enjoyable as possible. In order to do this, Goodwill should have clean, organized stores and a friendly, helpful staff. Goodwill should remind the customers of the beneficial acts that it is performing for society and, also, offer a guarantee. 4. Visit http://shopgoodwill.com/ where Goodwill auctions items of special interest and discuss why this online store has great profit potential. Answer: Shopgoodwill.com has all of the advantages associated with other online retailers and more. For any online retailer, the homepage, if designed properly, can function as an eloquent front office while being almost costless to maintain. In addition, the Internet can be used to obtain a great deal of information about the customer. In addition to the advantages available to all companies operating in cyberspace, Goodwill is uniquely positioned to increase its revenue through use of the Internet. The demand for the older, and often odd nature of some of the goods that Goodwill receives as donations is spread extremely thinly throughout the country (and world). The Internet allows Goodwill to show its unique items to every individual who has access to a computer, thereby greatly increasing the probability of finding an interested buyer. Because Goodwill’s items are so unique and the demand so thin, accurate pricing of the item is difficult and the likelihood that an item will sit in a store unnoticed or unpurchased for years is high. In this situation, a brick-and-mortar Goodwill either must mark the price down or allow the item to occupy shelf space for an indefinite length of time. With the Internet auction, however, Goodwill has a guarantee that it will move the item at the highest possible price and in a relatively short time. CASE: FEDERAL EXPRESS: TIGER INTERNATIONAL ACQUISITION [Students Elizabeth Shin and Anh Tran supplied the responses to these questions] 1. Describe the growth strategy of Federal Express. How did this strategy differ from those of its competitors? Answer: Federal Express (FedEx) has a focused network strategy in which it offers guaranteed overnight parcel delivery service from multiple sites. Initially serving only the domestic U.S. market, the firm has expanded its service to international locations. Its growth strategy included acquisitions of other companies that provided similar services. Since 1984, FedEx has acquired companies from locations around the world, most recently from India. FedEx is able to charge a modest premium for its services and uses this extra capital to finance its growth. FedEx has nearly 50 percent of the U.S. market share, and is the leading express transportation company in the world. The growing internationalization of its domestic customers and their requests for overseas service provided the initial impetus for FedEx to extend its service worldwide. Not only did the company expand overseas through acquisitions, FedEx also moved towards a diversified network, although it still focused on the delivery of items by air. Through the acquisition of Flying Tigers, the firm moved into the transport of heavy cargo. Heavy cargo is less time-critical than FedEx's usual business, so it serves a different target market. This growth strategy differs from that of some of its competitors. For example, Airborne Express grows through internal expansion by buying new planes. UPS is expanding its overnight service, introducing a computerized tacking system, and generally becoming more like FedEx. However, Emery, DHL, and TNT are all following a similar growth strategy through acquisition. FedEx has captured much of the first-mover advantage, except in Europe where DHL is well established. 2. What risks are involved in the acquisition of Tiger International? Answer: Several risks were involved in the acquisition of Tiger International. The first risk was the possibility that FedEx would lose control over day-to-day activities, because Tiger International serves twenty-one different countries. Also, the politics of dealing with the various governments were a new challenge for FedEx. Second, if FedEx lost its control and failed to perform as guaranteed, it ran the risk of tarnishing its well-earned reputation. Although overnight service was impossible worldwide, second day service was possible (disregarding the international date line). Third, Tiger International employees were represented by a union and, thus this merger of two different corporate cultures would increase the risk that FedEx employees would unionize. Fourth, the acquisition would cause FedEx's long-term debt to double to $2.1 billion. Because FedEx's growth strategy was extremely capital-intensive, this increased debit could have made it difficult to raise funds for other investments such as new computer technology or aircraft. Lastly, the acquisition created currency fluctuation risks for the company. FedEx had to take precautions to hedge against these risks. 3. In addition to the question of merging FedEx and Flying Tiger pilots, what other problems could have been anticipated in accomplishing this merger? Answer: First, the company would have to face the cultural differences of the two carriers. FedEx's culture required long hours, time constraints, and open communication with management. This culture might not have fit Tiger International's unionized culture, and its employees might have had a hard time adapting to the new environment. Not only are the differing corporate cultures a problem, but also the cultural differences that could arise from the global operations could present a problem. All of these various backgrounds had to be integrated to achieve a common philosophy following the merger. Second, the acquisition might have created tracking problems for FedEx. One of its competitive advantages still today is its ability to locate a customer's package within 30 minutes. However, unless FedEx developed a sophisticated control system to integrate all of the other systems, it would no longer be able to provide the service that it now guarantees. In order to increase its market share through this acquisition, FedEx had to continue its existing quality of service, including tracking a customer's package within a short time. Third, the tracking of employee compensation through PRISM also presented problems. Although human resource experts have declared PRISM to be the best available, it might not have been able to incorporate all of the information on the additional employees. Therefore, FedEx might not have had the compensation information it needed at any given time. Fourth, because many of Tiger International's customers were FedEx's competitors, the acquisition could have caused some political problems. Those competitors might have might have favored other FedEx’s competitors instead of going with Tiger’s new owner. Such actions would have eliminated a large portion of Tiger International's customer base. A loss of this base could have decreased FedEx’s overall profitability significantly. Finally, because Fred Smith had to face the possibility of a pilot morale problem because he was not able to promise his FedEx pilots that the new Tiger pilots would be placed at the bottom of the seniority list. The existing FedEx pilots were loyal, but this broken promise could have caused hostility towards management and further aggravated the difficult consolidation of the corporate cultures. 4. Suggest a plan of action that Fred Smith could have used to address the potential acquisition problems given in your answer to the previous question. Answer: Each of the above problems could be addressed by the following recommendations. First, in order to combat the problem of cultural differences, FedEx could have provided training classes for its new employees. These classes would teach the new workers about the philosophy of Fed Ex, complete with stories to illustrate the firm's culture. Continuing education for all employees would address the concerns of the merger. Second, because the tracking systems of the two organizations probably could not be integrated, each division could continue to operate its own system. Because Internet or other technology communications were unavailable at the time, when one division wanted to inquire about a package in another division, it could call an operator in the other division to request the information. This operation would allow each division to maintain its reputation for fast response to customer's questions. Third, employees' compensation tracking could be accomplished in a manner similar to that of the tracking system decentralization. Each division could use the PRISM to account for its own employees and pass the information up to corporate headquarters for consolidation. Fourth, to avoid resentment from competitors, FedEx could offer volume discounts to it competitors in order to retain their business. A competitor that did not accept the offer, might, in the long run, have found itself at a disadvantage. Finally, because FedEx wanted to retain its present employees' loyalty, it could have developed more incentives and a detailed evaluation process to promote and increase salaries of individuals who worked hard and exceeded expectations. Because FedEx’s existing pilots and employees already understood FedEx's culture, they would have been able to succeed more easily than l the new Tiger employees. Therefore, the current FedEx employees might have been appeased when they received promotions and raises faster than the new Tiger employees. It should be noted that the Tiger personnel would not have been deprived of opportunities for career and monetary advancement, however. This approach could have facilitated the acceptance of the FedEx culture by the new employees. Chapter 11 Anaging Capacity and Demand TEACHING NOTE Many of the approaches to matching capacity and demand discussed in the chapter should be familiar to students and prompt lively discussion. The controversial practice of "overbooking" is treated in economic terms, but the behavioral implications of this policy for both service personnel and consumers should be discussed. This chapter presents a number of techniques to assist management in matching supply and demand, but leaves to the imaginative student the opportunity for other creative approaches. The chapter concludes with a discussion of yield management, a computer-based approach for maximizing revenues. Instructions for playing the yield management game are given in the textbook and students should be encouraged to familiarize themselves with the material before “game day.” The tally sheets and other instructional materials are presented in this manual. SUPPLEMENTARY MATERIALS Case: American Airlines, Inc. Revenue Management (HBS 9-190-029) Following deregulation, American Airlines embarked on an ambitious program of revenue management by building on its SABRE reservation system. The case presents the reader with pricing decisions on two routes and describes the development of yield management. Case: University Health Services: Walk-In Clinic (HBS 9-681-061) In response to complaints of excessive waiting, a triage system was introduced and one year later the director reviews the results to decide whether or not the patient waiting time is acceptable. LECTURE OUTLINE 1. Generic Strategies of Level Capacity and Chase Demand (Table 11.1 and Figure 11.1) 2. Strategies for Managing Demand Customer-induced Variability (Table 11.2) Segmenting Demand (Figure 11.2 and Table 11.3) Offering Price Incentives (Tables 11.4 and 11.5) Promoting Off-peak Demand Developing Complementary Services Reservation Systems and Overbooking (Tables 11.6 and 11.7) 3. Strategies for Managing Capacity Defining Service Capacity Daily Workshift Scheduling (Figures 11.3, 11.4, 11.5) Weekly Workshift Scheduling with Days-off Constraint (Table 11.8) Increasing Constomer Participation Creating Adjustable Capacity Sharing Capacity Cross-training Employees Using Part-time Employees Scheduling Part-time Tellers at a Drive-in Bank (Figures 11.6 and 11.7) 4. Yield Management (Figures 11.8, 11.9, 11.10, 11.11, 11.12) Yield Management Applications TOPICS FOR DISCUSSION 1. What organizational problems can arise from the use of part-time employees? Answer: The use of part-time employees can be very helpful to businesses that have peak demand periods such as restaurants, supermarkets, and banks. Part-time employees usually are paid lower wages and they enjoy fewer, if any, of the company benefits that are provided for full-time employees. Also, it is not generally feasible for a company to offer career development incentives to part-time employees and it is more difficult to fit them into the organizational structure. In addition, part-time employees generally have lower experience levels than do full-time workers. As a result, part-time employees might have poorer attitudes and less loyalty and commitment, which could affect reliability, performance, and the quality of work. This situation can have a direct impact on customers and the business. In view of these conditions, part-time employees might require greater supervision and control than would be necessary for full-time employees. Also, there usually is a greater turnover in part-time employees, so more time must be spent in training new employees. Finally, when a business must hire more part-time employees than full-time people to staff positions, more administrative work for work scheduling, personnel records, and payroll is required. 2. How can computer-based reservation systems increase service capacity utilization? Answer: The main function of the reservation system is to pre-sell the service. A reservation system allows the customer to reserve a service long before it actually is utilized. Allowing the customer to make reservations has numerous advantages. The reservation system can be used to deflect demand to other times or locations where service capacity is available. For example, if a passenger wants a flight that is full, a reservation clerk can suggest immediately alternative flights that are available. Thus, the demand for service capacity can be rerouted to under-utilized capacity effectively. Reservation systems also allow the service to overbook its capacity when it reasonably expects to have no-shows. Finally, when computer-based systems are standardized among different service organizations in the same industry, each participant can make use of a larger information base. For example, a passenger can call a Delta Air Lines reservation agent and book a flight on American Airlines if a Delta flight is unavailable. Such a system benefits all of the participants and the customers. 3. Illustrate how a particular service has implemented strategies for managing both demand and capacity successfully. Answer: Because a service is produced and consumed simultaneously, a failure to provide enough capacity to serve results in idle servers and facilities. Public schools have been experiencing this variability in demand recently owing to fluctuations in the numbers of school age children, a move of families from central cities to the suburbs, and increasing enrollments in private schools. The agrarian pattern of closing school during summer months has contributed to idle servers and facilities during that period. As a public service, education has been somewhat slow at adapting to its fluctuating demand, but the recent trend of more competition for scarce resources in public services and the public outcry for educational accountability has spurred some strategies for managing the demand and supply. Some examples follow: Managing demand: • Expand educational services by offering adult education, early childhood education programs, and before- and after-school childcare programs. • Offer social services such as community education programs, job retraining programs, programs for senior citizens, and summer recreation programs. • Offer incentives to attend particular schools by making them magnet schools, open-area schools, or open-enrollment schools, which any child in the community may attend. • Promote off-peak demand in some areas by offering summer school classes. • Partition demand by using educational voucher systems. Managing capacity: • Use school buildings where classes are no longer held because of declining enrollment for warehousing school supplies, or for administrative offices, or lease those to other organizations until school demographics change. • Arrange flexible schedules on a daily basis and a school-year basis for crowded schools. For example, on a daily basis in an elementary school, schedule hours for kindergarten through third grade students from 8 a.m. to 2 p.m. and hours for fourth through sixth grade students from 10 a.m. to 4 p.m. Another alternative is to stagger the students throughout the calendar year instead of offering classes only during the typical nine-month school year, i.e., some students would attend school December to September, others would go from June to March, and still others would attend the typical September to June period. • Merge two or more grades in under-utilized schools or, in a crowded grade school, shift sixth graders to a junior high/middle school. • Hire teachers who are trained in more than one subject in order to cope with a fluctuating demand for courses. • Hire part-time teachers in small schools for support areas such as art, music, and physical education. • Share capacity with other public service agencies to utilize space better. 4. What possible dangers are associated with developing complementary services? Answer: One of the possible dangers associated with developing complementary services is an increase in the firm's liability because of those added services. For instance, adding cold and hot sandwiches at convenience grocery stores incur the possibility that a customer might suffer food poisoning and take legal action against the store. Another example is seen with the addition of self-service gas pumps, which involve a risk of fire, damage, and injury. Another problem associated with offering complementary services can occur when the complementary service attracts customers who might hurt business. Consider a shopping mall that installs a video arcade. The arcade can become a haven for noisy and rowdy teenagers who will drive away those customers who want to shop in peace. Finally, a complementary service should enhance the firm's image; as noted above, a poorly selected complementary service could compromise business seriously. 5. Will the widespread use of yield management eventually erode the concept of fixed prices for any service? Answer: Most services exhibit, to some extent, the capacity-constrained dilemma faced by airlines and hotels that are unable to inventory their products (seats on a flight or rooms for a night). To avoid losing the revenue from this perishable capacity, capacity-constrained services are motivated to pre-sell the inventory when possible by using reservations and giving discounts to avoid lost sales. For example, travelers find that the published room rates (rack rates) for underutilized hotels are quickly abandoned if the guest requests a discount (e.g., government or AARP). The exceptions to businesses that practice this strategy are the budget motels that fill all of their rooms each night. Yield management has alerted customers to the perishable nature of capacity-constrained services and this knowledge destroys the myth of fixed prices for many such services and leads to price negotiation for all services. 6. Go to http://en.wikipedia.org/wiki/Yield_Management and discuss the ethical issues associated with yield management. Answer: Yield management is a form of price discrimination, and thus can be seen as unfair. For example, why should two customers receive the identical service (coach seat on an airline flight) and pay different prices? However, demand-responsive pricing in which last minute purchases are more expensive than purchases far in advance is considered by most customers as reasonable. INTERACTIVE CLASS EXERCISE Watch the PowerPoint presentation concerning the overbooking experience at the Doubletree Hotel in Houston, Texas. How could this situation been handled differently? Clearly, the night desk clerk was not trained properly to handle such a late arrival for a reserved room. The desk clerk should have apologized for the problem and immediately secured alternative accommodations and transportation, if necessary. Note the guests contributed to the situation by not notifying the hotel in advance of their late arrival. Figure 6.13, the service recovery framework, from the Service Quality chapter can be displayed and used as a focus of the discussion. EXERCISES 11.1 (a) (b) Appointments should not be scheduled at their maximum level because the walk-ins are only expected values. There will be some variation both in time of arrival and in the actual demand. We learned from queuing theory that capacity to serve must always exceed demand. Thus, some slack time should be scheduled into the system in order to avoid excessive patient waiting. (c) In order to avoid physician waiting, a few appointments should be made at the very beginning of the day. The majority of appointments should be made in the late afternoon to avoid excessive waits for walk-in patients. 11.2 From Table 11.6 in the textbook, a strategy of overbooking three rooms guarantees that 48 percent of the no-shows will be covered. This represents a change from the previous policy of overbooking two rooms. 11.3 No Shows Frequency Probability 0 6 .30 0 1 5 .25 .30 2 4 .20 .55 3 3 .15 .75 4 2 .10 .90 11.4 Daily Demand Frequency Probability 10 1 .05 0 11 1 .05 .05 12 2 .10 .10 13 2 .10 .20 14 2 .10 .30 15 3 .15 .40 16 3 .15 .55 17 2 .10 .70 18 2 .10 .80 19 1 .05 .90 20 1 .05 .95 Crazy Joe should lease 16 canoes. 11.5 Using a payoff matrix approach: Passengers Overbooked No Shows P(NS) 0 1 2 3 4 0 .30 180* 130 80 30 – 20 1 .25 100 180 130 80 30 2 .20 20 100 180 130 80 3 .15 – 60 20 100 180 130 4 .10 –140 – 60 20 100 180 Expected Profit: $ 60 $101 $109.50 $ 92 $ 55 * Cell value = Thus, overbook 2 passengers (i.e., take 8 reservations) and expect a profit of $109.50 per flight. Using the critical fractile model: Where: = Cost of underestimating no-shows (i.e., there are more no-shows than expected and the airline must fly empty seats) = Cost of overestimating no-shows (i.e., there are fewer no-shows than expected and the passengers who cannot be accommodated get free lift tickets) 11.6 Emergency Room Nurse Staffing Objective Function: Constraints: RHS Sun. 0 1 1 1 1 1 0 * 3 Mon. 0 0 1 1 1 1 1 * 6 Tue. 1 0 0 1 1 1 1 * 5 Wed. 1 1 0 0 1 1 1 * 6 Th. 1 1 1 0 0 1 1 * 6 Fri. 1 1 1 1 0 0 1 * 6 Sat. 1 1 1 1 1 0 0 * 5 For: Where: = Number of nurses assigned to a shift that has two consecutive days off beginning with day i (i = 1 for Sunday, 2 for Monday, etc.) Solution Summary for Emergency Room Variable Solution Objective Coefficient Variable Solution Objective Coefficient x1 x2 x3 x4 1 1 1 0 1 1 1 1 x5 x6 x7 2 0 3 1 1 1 Minimized OBJ = 8 Iteration = 7 Elapsed CPU seconds = .109375 Weekly Staff Schedule for Emergency Room Day Req. Staff Excess Sun. - 1 1 0 2 0 - 3 4 1 Mon. - - 1 0 2 0 3 6 6 0 Tue. 1 - - 0 2 0 3 5 6 1 Wed. 1 1 - - 2 0 3 6 7 1 Th. 1 1 1 - - 0 3 6 6 0 Fri. 1 1 1 0 - - 3 6 6 0 Sat. 1 1 1 0 2 - - 5 5 0 11.7 Sheriff Patrol Problem Objective Function: Constraints: RHS Sun. 0 1 1 1 1 1 0 * 6 Mon. 0 0 1 1 1 1 1 * 4 Tue. 1 0 0 1 1 1 1 * 4 Wed. 1 1 0 0 1 1 1 * 4 Th. 1 1 1 0 0 1 1 * 5 Fri. 1 1 1 1 0 0 1 * 5 Sat. 1 1 1 1 1 0 0 * 6 For: Where: = Number of deputies assigned to a shift that has two consecutive days off beginning with day i (i = 1 for Sunday, 2 for Monday, etc.) 11.8 F = $79 D = $59 p = 0.8  = 75  = 15 Full-fare seats reserved =  +z = 75 + (-.48)(15) = 67 11.9 (a) Model Car Rental Rate (F) Discount Rate (D) % Discount Seekers (p) Daily Demand (*) Standard Deviation (*) Fleet Size Compact $30 $20 80 50 15 60 Midsize $45 $30 60 30 10 30 (b) Because the current fleet of midsize cars is smaller than the optimal number of midsize cars that should be reserved for full-price paying customers, an expansion of the midsize fleet should be considered. CASE: RIVER CITY NATIONAL BANK Assignment As Ms. Chen's top aide, you are assigned the task of providing an analysis of the situation and recommending a solution. This is your opportunity to serve your company and community as well as to make yourself "look good" and earn points toward your raise and promotion. Gary Miller is faced with the problem of fluctuating demand at the recently constructed drive-in facility. The customer complaints of excessive waiting occur for the most part on Fridays. Little congestion is experienced during the remainder of the week. This represents the classical service problem of managing capacity. The problem can be addressed from two perspectives: managing both demand and supply. Altering demand: The bank customers could be encouraged to use the facility on off-peak days, thus avoiding delays in service. The customers can be informed of the peak times with notices in their monthly statements or signs outside the remote facility. A further inducement to try the facility on an off-peak day could be accomplished by giving those customers some small gift such as a pocket calendar or pen. A more ambitious incentive would be an offer of free or reduced monthly service charges for customers who bank regularly on off-peak days. Cashing payroll checks represents a major transaction on Fridays. Customers should be informed of the convenient direct deposit option where employers can deposit paychecks directly into employee bank accounts. The bank might wish to approach large employers in the community to promote the direct deposit idea. Finally, customers might need encouragement to be prepared to conduct their transactions as soon as they reach the tellers' windows. A preparation stand containing deposit slips and pens could be placed just before the entry to the drive-in station so customers could do their paperwork while waiting for the customer currently being served. Controlling capacity: With the use of part-time tellers and proper shift scheduling, the bank could match service capacity with the fluctuations in daily demand better. Because there are no problems on Saturdays, we will consider only weekdays. Our analysis begins with an assessment of teller availability. Tellers available for the remote drive-in include 2 full-time tellers who work the morning shift only (7 a.m. to 2 p.m.), Monday through Friday, and 4 part-time tellers who work various combinations of morning shifts (10 a.m. to 2 p.m.) or afternoon shifts (2 p.m. to 7 p.m.). Each part-time teller works 20 hours per week, excluding Saturdays. This yields a total of 80 part-time teller-hours per week to supplement the 70 full-time hours for the two full-time tellers. The problem involves allocating these 150 teller hours to meet the daily demand levels for the week. Table 1 is developed from the data provided in Table 11.10 of the case in the textbook. This table summarizes the daily transaction demand by calculating the mean and standard deviation for each day by morning and afternoon shift. The last column of the table gives the 95 percent demand level assuming normal distribution. This demand level divided by teller capacity represents the percent of utilization. From a queuing standpoint, this percent utilization must be less than 100 percent and probably not more than 80 percent to avoid excessive customer-waiting times. In order to calculate teller capacity it is assumed that each teller can service two lanes and that all eight lanes can be used when needed. The number of transactions per lane that are possible is based on a typical transaction, which takes approximately five minutes per customer when we account for all the delays such as moving the car into position, filling out forms, counting money, and pulling away. Thus, each open lane can accommodate 12 transactions per hour. For the morning shift (7 a.m. – 2 p.m.), one teller can accommodate 168 transactions, a teller working during the midday period (l0 a.m. – 2 p.m.) can process 96 transactions, and one afternoon (2 p.m. – 7 p.m.) teller can handle 120 transactions. Because of the prevailing policy, the two full-time tellers are scheduled to cover the morning shift each day. The remaining 80 hours of part-time teller capacity is allocated to the midday and afternoon to create a schedule that has a reasonably consistent percent utilization across the weekdays. Table 2 shows the proposed teller schedule. Note that 81 part-time teller hours have been scheduled. In Table 3 the percent utilization for each period is calculated. It is interesting to note that now customers might perceive Monday and Thursday afternoons as being busier than Friday. Total teller hours per week: 70 full-time and 81 part-time 1 Lanes Open assumes each teller serves two lanes. 2 Total Capacity is calculated as follows: (lanes open) * (hours/shift) * (12 transactions/hour/lane) 3 Percent Utilization is calculated as follows: 95 percent demand level/total capacity *Calculated using a weighted average, because the two full-time tellers work from 7 to 2 and the part-time teller(s) work(s) from 10 to 2. CASE: GATEWAY INTERNATIONAL AIRPORT Questions 1. Assume that you are the assistant to the manager for operations at the FAA. Use the techniques of workshift scheduling to develop an analysis of the total workforce requirements and days-off schedule. Answer: The most restrictive problem assumes the following constraints: • Each controller must be allowed two consecutive days off. • All controllers must work five 8-hour days. • All controllers on a shift begin work at the same time (i.e., no starting times may overlap). • The shifts run from 00:01 to 08:00, 08:01 to 16:00, and 16:01 to 24:00. • The ratio of take-offs and landings to the number of controllers on duty cannot exceed 16. Shown below is the number of operations and controller requirements for each hour of each day. The size of the workforce that is needed to meet the minimum requirements considering the constraints of this problem is determined using the following integer linear programming (ILP) model: If each shift is started one hour earlier, the workload will be smoothed enough to eliminate one controller's position. The new shifts begin at 7 a.m. (day), 3 p.m. (evening), and 11 p.m. (night) and yield the following ILP model: 2. On the basis of your primary analysis, discuss the potential implications for workforce requirements and days-off scheduling if assumptions (a) and (b) above are relaxed so that analysis can be based on the hourly demand without the constraints of a preset number of shifts and no overlapping of shifts. In other words, discuss the effects of analyzing hourly demand requirements on the basis of each ATC position essentially having its own shift, which can overlap with any other ATC shift to meet that demand. Answer: Relaxing the shift time constraint: As shown above, beginning each shift one hour earlier smoothed the workload enough to eliminate one ATC position. Flexibility in shift times allows a better match between service requirements and employee scheduling. The most efficient shift times will minimize the number of controllers needed, subject to the operations/controllers ratio. Relaxing the shift demand with no overlap of shifts constraint: Relaxing the shift profile of demand requirements and allowing shifts to overlap permit better utilization of the workforce, because the service requirements and workforce capacity can be matched better. The operations/controller ratio could be met with a smaller workforce. However, a tradeoff exists between efficient workforce utilization and scheduling difficulties. In this case, it will become easier to accommodate the general requirements of the problem, but the effort involved in scheduling the workshifts will increase. Relaxing other constraints: Relaxing the days-off constraint would equalize the workload and facilitate the scheduling task. Using part-time employees or a split-shift schedule can reduce workforce requirements and allow the work schedule to match demand better. However, implementing these two strategies might be inadvisable because they might have an adverse effect on employee morale. 3. Do you feel that this would result in a larger or smaller degree of difficulty in meeting the four general constraints? Why? Answer: Relaxing the shift time constraint seems an attractive option. This action improves the match between service requirements and employee schedules and reduces the number of employees by one. Except for the sensitive issue of eliminating jobs, this option does not have major drawbacks. As noted in question 2, relaxing the shift demand and no-shift overlap constraint offers some benefits but the implementation of this policy requires considerable expertise on the part of the scheduler. Using part-time employees and split-shift scheduling, on the other hand, could make scheduling easier, but such a method might have adverse effects on employee morale. Moreover, these alternatives might also have implications for maintaining a high level of ATC skills. 4. What additional suggestions could you make to the manager of operations to minimize the workforce requirements level and days-off scheduling difficulty? Answer: • Allow workers to choose if they want consecutive days or non-consecutive days off. • Allow overlapping shift times. This will equalize workloads of all of the controllers, allow smooth shift changes, and create a better match between workload capacity and requirements. • Decrease the length of workshifts or allow controllers to work split-shifts. For example, if a controller were to work from 5 to 8 p.m. on Wednesday, the airport would save more than one-half of a day's ATC pay and still meet FAA requirements. • Consider allowing controllers to work more than five days per week (within the bounds of safety) or fewer than five days per week (within the bounds of maintaining skills). • Attempt to alter demand. GIA could offer airlines incentives, such as lower take-off/landing fees during off-peak times, to alter timing of their operations. CASE: THE YIELD MANAGEMENT ANALYST [This material is reprinted with permission of Kevin Baker and Robert Freund.] Airplane Capacity: 100 seats Historical Market Information: Average no-show, misconnect, and cancellation rate: 20 percent Average revenue per passenger: $400 Example Oversale Penalty (108 passengers): (5)($200)+(3)($500)=$2500 After reading the game instructions presented in the textbook and explaining the tally sheet, students should be ready to begin the game. The game begins with revealing each of the demand opportunities in Phase I in turn, one at a time, beginning with opportunity (A) and proceeding to the next opportunity on the list only after everyone has made his and her decision. This demand revelation process is accomplished using the PowerPoint presentation available on the McGraw-Hill/Irwin Web site (http://www.mhhe.com/support). Students should make their decisions in ink, because once a passenger group has been accepted, it is final. Also, students cannot return to an earlier passenger group that has been rejected previously. Thus, as each group is revealed, the students must make a non-reversible YES or NO decision to accept or reject that opportunity and be ready to move on without knowledge of the future opportunities. Students record the group ID and number of passengers in the first two columns of the tally sheet, keeping in mind a running total of seats sold in order to hold some in reserve for Phase II, but also realizing that not all passengers will show up. The final stage of the game requires each student to complete the last two columns of the tally sheet, given the actual passengers who show up for each of the demand groups they accepted (i.e., booking ID in column one). In Phase III the number of passengers who show up and the revenue contribution are reported, again using the PowerPoint presentation. After Phase III is revealed, the total number of passengers and gross revenue is known. Net revenue is determined by adjusting for the costs of oversale or spoilage. Upon completion of the game, the instructor records the total revenue for the flight for each student on the black board. We find a range of $20,000 to $60,000 is not uncommon. CASE: SEQUOIA AIRLINES 1. For the forecast period (i.e., July - December), determine the number of new trainees who must be hired at the beginning of each month so that total personnel costs for the flight attendant staff and training program are minimized. Formulate the problem as a linear programming model and solve. Answer: Sequoia Airlines faces the problem of planning the optimal use of its resources during the next six months. It must hire new employees and develop them through three stages of training, first as trainees, then as junior flight attendants, and finally as full flight attendants. Moreover, Sequoia must meet staff requirements for all flights during the training period. This problem is analyzed using total personnel cost as the selection criterion. Other resources in addition to the available personnel create constraints that must be considered when hiring and training new employees. We will solve the problem by using linear programming and then follow up with an analysis of the objective function and the constraints and assumptions on which they are based. We also will offer an interpretation of the results. Because cost is the only criterion we will use to solve this problem, the objective function is straightforward. One assumption is noteworthy: we assume that once an experienced attendant becomes an instructor, he or she continues to receive the instructor's salary even when there is a surplus of instructors who act as attendants. The objective function, therefore, becomes the sum of the number of employees in each class during each period multiplied by the appropriate wage. Minimize: We also must deal with several resource constraints. First, we must meet the requirement for hours of in-flight attendant service. We assume that a surplus instructor works the same number of hours as an experienced attendant does. Next, we must satisfy the constraint that requires the total number of hours for junior attendants to be less than or equal to 25 percent of the total attendant hours in each month. Also, there must be one instructor for every five trainees. The remaining constraints deal with the relationships between the status of employees during the current and prior periods. In this case we make assumptions that pertain to the initial staffing levels for the positions of junior attendant, full attendant, and instructor. We see a total of 42 constraints in the following computer model. 2. How would you deal with the noninteger results? Answer: The real number value solution for this problem is shown in Table 1. However, it should be noted that Sequoia could only hire whole people, not fractions of people. Ordinarily we would attempt to apply integer programming to this problem, but, unfortunately, an integer solution is not possible owing to the large number of constraints that have decimal parameters. Nevertheless, we can still obtain an integer solution by assigning ranges to some of the decimal parameters. An example integer solution is presented in Table 2. Note that the integer solution is radically different from the continuous solution. This difference is explained by the large ranges given to the constraint parameters. Which solution should be used? Perhaps rounding-up the continuous solution and then adjusting for constraint requirements would provide the best solution. In fact, this solution is preferable because the integer solution implicitly assumes that management can control the number of employees who quit each month, which clearly is not the case. In order to use the integer solution, we might first use forecasting methods to estimate the number of employees who will quit and then use integer programming to plan for hiring new employees. 3. Discuss how you would use the LP model to make your hiring decision for the next six months. Answer: Following the hiring decisions for the current month (July in this case), the program can be run again at a later date by dropping the July requirements and adding the January requirements. This "leap frog" approach can be used to fine tune proposed hiring levels by extending the planning horizon for another six months. The decision on future hiring (July through December in this case) is postponed until a commitment must be made. At that time the decision can be based on a six-month projection of requirements. Solution Manual for Service Management: Operations, Strategy, Information Technology James A. Fitzsimmons, Mona J. Fitzsimmons 9789339204471