CH-7-9 Process Improvement – Service Management: Operations, Strategy, Information Technology : Book Guide

This Document Contains Chapters 7 to 9 Chapter 7 Process Improvement TEACHING NOTE This chapter focuses on acquiring the tools of quality and productivity analysis to achieve continuous improvement. The philosophy of continuous improvement is illustrated by the Deming wheel or PDCA (Plan, Do, Check, Act) cycle. Organizational quality programs are discussed including the new focus on lean six-sigma. Data Envelopment Analysis, a computer model for measuring service productivity is found in the chapter supplement. SUPPLEMENTARY MATERIALS Michael Brassard and Diane Ritter, The Memory Jogger II, 2nd. Ed. GOAL/PPC, Methuen, MA, 2012. This pocket guide contains quality and continuous improvement tools for quick reference including a section on team building, and new charts, detailed diagram samples, and a case study. The guide is available at http://www.goalqpc.com/shop_products_detail.cfm?PID=1085 and from amazon.com. Case: Florida Power and Light’s Quality Improvement Program (HBS case 9-688-043) This case describes the continuous quality and process improvement program that inspired the Baldrige National Quality Award. Florida Power is the only U.S. Company to win the coveted Deming Prize given by the Japanese for outstanding quality accomplishments. Software: DEA_Solver A comprehensive and user-friendly collection of DEA models on the Excel platform is available from Honghui Deng. Professor Honghui Deng Department of MIS College of Business Administration University of Nevada, Las Vegas (702) 895-1803 Email: [email protected] LECTURE OUTLINE 1. Quality and Productivity Improvement Process Foundations of Continuous Improvement Plan-Do-Check-Act Cycle (Figure 7.1) Problem Solving (Table 7.1) 2. Quality Tools for Analysis and Problem Solving Check Sheet (Figure 7.2) Run Chart (Figure 7.3) Histogram (Figure 7.4) Pareto Chart (Figure 7.5 and Table 7.2) Flow Chart (Figure 7.6) Cause-and-Effect Diagram (Figure 7.7) Scatter Diagram (Figure 7.8) Control Chart (Figure 7.9) 3. Benchmarking 4. Improvement Programs Deming’s 14-Point Program Baldrige National Quality Award (Figure 7.10) ISO 9000 Six-Sigma (Tables 7.3, 7.4 and Figs. 8.11, 7.12) Lean Service TOPICS FOR DISCUSSION 1. Discuss why Deming’s 14-point program was rejected by U.S. firms but embraced by the Japanese following World War II. Answer: After WW II manufacturers in the United States were switching from war-time production to consumer products. They were faced with pent-up domestic demand following rationing during the war. Thus, any product was in demand no matter the quality. Corporate focus was on producing as much as possible to meet this demand and quality was seen as a deterrent to production volume (i.e., the old view held that there was a tradeoff between quality and output). Following the war, manufacturing capability in Japan was demolished and the domestic market was impoverished. Deming visited Japan and convinced their managers that to compete in the world market required a competitive advantage found in product quality. 2. Explain how the application of the PDCA cycle can support a competitive strategy of low cost leadership. Answer: The essence of low cost leadership is captured by process efficiency. To maintain the position of leader requires continuous improvement to reduce cost and allow price pressure to dominate competitors. Repeated application of the PDCA cycle will systematically drive out process inefficiencies. A caveat, however, is not to be blind-sided by a competitor’s technological innovation that would change the process entirely. Consider for example, the experience of Blockbuster video rental when DVDs began to replace VHS format, thereby allowing the entry of Netflix as a competitor. 3. What are the limitations of "benchmarking?" Answer: Benchmarking allows a firm to observe "best in class" operations of non-competitors. These operations insights need to be translated into a different context. For example, Southwest airlines observed pit crews at the Indiana Speedway in order to improve the turn-around of planes at departure gates. By its very nature benchmarking is an attempt to bring one’s operations up to the level of "best in class" and, thus, does not guarantee a competitive advantage beyond what others can emulate. 4. Explain why the introduction of Six Sigma at 3M was blamed for stifling creativity. Answer: James McNerney, a former executive at General Electric, upon assuming the CEO position at 3M introduced Six Sigma throughout the firm. After several years, Six Sigma was abandoned because it had the effect of stifling creativity at this innovation-driven firm. Because Six Sigma focuses on incremental process improvement, radical innovation is sacrificed for short term gains. This phenomenon is further explored in the book, Going Lean by Stephen A. Ruffa (2010), which provides data to show that Ford's Six Sigma program did little to change its fortunes. INTERACTIVE CLASS EXERCISE Have the class prepare a process flow chart (value stream map) of a familiar service and identify the non-value added activities. Make suggestions for elimination of waste. Typical shared experiences would include a visit to the student health clinic, a local restaurant, post office, or bank. This exercise will demonstrate the difficulty of getting agreement on what is the process. Identification of non-value-added activities will ensure a lively discussion. Try to use techniques such as “brain storming” to elicit suggestions for waste elimination. CASE: SONORA COUNTY SHERIFF 1. Prepare a run chart on each of the incident categories. Does she have reason to be concerned about Burglaries? What variable might you plot against Burglaries to create a scatter diagram to determine a possible explanation? Answer: Yes, the run diagram clearly shows a significant increase in reported burglaries beginning in August. Such a sustained increase in burglaries might suggest gang activity. A possible variable to plot against burglaries could be incidents of graffiti or other gang activity during those months. 2. What is unusual about the pattern of reported Disorderly and DUI incidents by month? What could be an explanation for this behavior? How could the sheriff address this pattern and reduce the number of incidents? Answer: Disorderly incidents peak during the summer months of June, July, and August. During summer people are outdoors in congested areas like beaches and, thus, opportunities for altercations are more likely. This problem could be addressed by deploying extra deputy sheriffs at beach areas during the summer months. DUI incidents peak during the months of December and January perhaps reflecting holiday parties and associated drinking. The sheriff could institute a designated-driver program to reward responsible driving. 3. Would you recommend preparing control charts for Assault and Theft incidents? Why or why not? Answer: Yes, the run diagram clearly shows these two incident reports to be in steady state (i.e., the mean is constant over time). Only when a measure of performance reaches steady state can a control chart can be useful to determine if and when the process goes out of control. 4. Prepare a Pareto Chart based on the total of last year’s incidents. Why might the sheriff not prioritize efforts on incident reduction according to the results of the Pareto Chart? Answer: The Pareto Chart suggests focusing on burglary and theft incidents (both are property-related crimes) before turning attention to DUI and Assault (both are crimes against people). CASE: MEGA BYTES RESTAURANT 1. How is the SSM different from Deming's PDCA cycle? Answer: In the Seven-Step Method (SSM), there is a strong emphasis on defining the problem. This is of critical importance, because presumptions and unjustified inferences lead teams to address symptoms and remedies rather than the problems themselves. In steps two and three of the SSM, a loop is built into the method to ensure that sufficient data is gathered before potential solutions are considered. Therefore, a very important aspect of the SSM is the pre-planning stage. Once a solution is implemented and checked, there are clear guidelines for standardization and the establishment of future plans. The SSM has a clear hierarchy of steps to be followed, while the PDCA cycle is not as rigidly defined. The wheel representation of the PDCA cycle emphasizes the continuous improvement nature of Deming's philosophy. However, the SSM is more suited to specific projects and is linear rather than cyclic in nature. Thus, the SSM is more of a step-wise method to address problems and the PDCA cycle is a method to implement the management philosophy of continuous improvement. 2. Prepare a cause-and-effect or fishbone diagram for a problem such as "Why customers have long waits for coffee." Your fishbone diagram should be similar to that in Figure 7.17, using the main sources of cause: policy, procedure, people, and physical environment. Answer: 3. How would you resolve the difficulties that study teams have experienced when applying SSM? Answer: (a) Develop a problem statement: One of the aims of the SSM is to avoid framing a solution as the problem. One approach to avoid this problem is to use the Walk-through-Audit technique. A member of the team would temporarily consider himself or herself to be external to the organization and physically walk through each stage of the process from a customer's viewpoint. At each stage, he or she would list problems observed without making any suggestions of possible solutions. The Walk-through-Audit technique allows the team member to break away from the organization's frame of reference and focus on customer-related problems. Once a preliminary definition of the problem is made, how do we confirm that the statement is a workable starting point and then address customer issues? The following checklist is helpful: • Does the statement of the problem advocate/suggest a course of action? • Is the response to the statement a plan of action and not a search for possible causes? • Does the statement involve organizational or operational details with which customers would not be directly concerned? If the answer to any one of the above questions is yes, then it is highly probable that the problem statement needs to be reexamined. An application of this test reveals some poor problem statements for the Mega Bytes Restaurant: • "Too few servers" suggests a course of action. • "There are not enough tables,” suggests an action to be taken. • "The servers need to work faster,” suggests an operational concern. (b) Allow improvements to be driven by customer requirements: A good method for relating the importance of a processing step to the final result is Value-Added Analysis from the customer viewpoint. Each step in the process is examined and categorized as: • Real-value added, which means it adds value to the service that directly influences the customer's perception (e.g., greeting the customer upon arrival). • Business-value added, which means it might not affect the customer's perception, but is necessary for the transaction or for performing the service (e.g., using trays to hold buns). • No-value added, which means it is unnecessary and should be eliminated. By conducting such an analysis, it can be made clear to the team how a particular process step adds value to the service from the customer's point of view. However, value-added analysis can also uncover unnecessary or redundant steps in the back-office operation, which, if eliminated, will result in cost savings that could benefit the customer. Chapter 8 Service Facility Location TEACHING NOTE This chapter begins by using La Quinta Motor Inns to illustrate the strategic considerations in the facility location decision. Several strategies are explored including the impact of the Internet on service location. A discussion of geographical information systems follows. Because techniques for facility location analysis tend to be very complex, only a few simple approaches are discussed in length. The "cross median" approach to the location of a single facility using a metropolitan travel metric is pleasing intuitively because it is based on the statistical property of the median. This approach is easily implemented graphically and often produces counterintuitive results. The Huff retail-location model has been used extensively for locating shopping centers, retail banks, convenience stores, and other profit-making endeavors. The location set covering model is a popular approach to the public sector multiple facility location problem. Returning to La Quinta we consider an application of regression analysis for motel site selection. SUPPLEMENTARY MATERIALS Case: Southwest Airlines-1993 (A) (HBS case 9-694-023) Southwest Airlines, the only major U.S. airline to be profitable in 1992, makes a decision as to which of two new cities to open, or to add a new long-haul route. This case provides a window into Southwest’s strategy, operations, marketing, and culture. Lessons can be learned about how an airline can be a low-cost leader, service leader, and profit leader simultaneously. Software: Excel spreadsheet of Huff model An Excel spreadsheet application of the Huff model to the Athol Furniture case can be found at the textbook website http://www.mhhe.com/support. LECTURE OUTLINE 1. Strategic Location Considerations Competitive Clustering Saturation Marketing Marketing Intermediaries Substitution of Communications for Travel Separation of Front from Back Office (Table. 8.1) Impact of the Internet on Service Location Site Considerations (Table 8.2) 2. Geographic Information Systems (Figure 8.1) 3. Modeling Considerations Geographic Representation (Figures 8.2 and 8.3) Number of Facilities Optimization Criteria (Figure 8.4) 4. Facility Location Techniques (Figure 8.5) Cross Median Approach for a Single Facility (Figure 8.6 and Table 8.3, 8.4, 8.5) Huff Model for a Retail Outlet (Tables 8.6, 8.7, 8.8, 8.9) Location Set Covering for Multiple Facilities (Figure 8.7 and Table 8.10) 5. Regression Analysis in Location Decisions (Table 8.11) TOPICS FOR DISCUSSION 1. Pick a particular service and identify shortcomings of its site selection. [Student Frank Tyler provided the following response.] Answer: Many times the extent to which a poor decision regarding the location of a service facility affects the business is not apparent until a competitor locates on a better site. The location of Kemper Arena in Kansas City is a case in point. The arena is located in the old stockyard district near downtown and it no longer is in a safe area. It is not served directly by any freeway or interstate system and most people travel to the arena through the downtown area. Therefore, events that are scheduled for early evening exacerbate the usual downtown evening rush hour traffic. An additional problem occurs when the event ends and people must exit the many small parking lots. Although no causality has been proved, it is often suggested that the poor attendance at games for the professional sports teams based at Kemper results from the stadium's location. In fact, attendance is a serious problem that has prompted two teams (the Kansas City Comets and the Kansas City Kings) to leave Kansas City. The Harry S. Truman Sports Complex offers a striking contrast to Kemper Arena. The Complex stadiums, which house the Kansas City Royals and the Kansas City Chiefs, are located in a suburban area next to a major freeway and two large multilane city streets. These thoroughfares expedite traffic into and out of the stadiums. Most people who live in metropolitan Kansas City can reach the Complex faster than they can reach Kemper. This is an excellent example of the situation where the shortest distance is not always the quickest route. The location of the Complex offers advantages other than the savings in travel time for patrons. Its location is safer than the Kemper area, it offers many restaurants and bars for pre-game and post-game dining, and has three hotels within walking distance so out-of-town people have a convenient place to stay when they come to cheer their visiting teams. A disadvantage that Kemper and the Complex share is a lack of good public transportation. A final irony is noted: Kemper was invited to be a part of the Complex ... but declined! Consider a national chain of coffee shops that chooses to open locations in areas with limited foot traffic and poor visibility. The shortcomings in site selection include low customer accessibility, inadequate exposure to potential customers, and reduced convenience. These factors can lead to lower footfall, decreased sales, and overall poor performance due to the suboptimal location. 2. How would you proceed to estimate empirically the parameter "*" in the Huff retail location model for a branch bank? Answer: From equation 12 we have the following function that describes the attraction of facility j for customers located in area i: Thus: Using logarithms solve for *: The value of Sj could represent the size of the facility in square feet. The value of is the time for customers in area i to travel to a bank located at site j. The value of Aij could be measured as the percentage of potential consumers in area i who have accounts at bank j. An expected value for * is determined by applying the above function to areas that are served by the branch, weighted by the number of customers in each area. 3. What are the characteristics of a service that would make communication a good substitute for travel? Answer: • The service usually involves the creation, transfer, or storage of information rather than products. • The cost of transportation must be greater than the cost of the communications system. • Saving time is an important factor. • The technological base must be available to the customers. • A communication network is required. • The quality of the service might need to be apparent in advance of the delivery of the service. • No face-to-face contact is needed. • Cash payment is not required. The most promising opportunities to substitute communications for travel occur in services such as health care (paramedics, telemedics), education, government services (tornado warnings, satellite estimations of crop yields), extension of databases (interlibrary reference services), and computerized mail delivery. 4. What are the benefits of using intermediaries in the service distribution channel? Answer: The distribution of services presents problems because the services are intangible and cannot be stored, stockpiled, or moved. These factors restrict the geographical area for services. The use of marketing intermediaries eliminates the problems and creates an unlimited geographic service area. Therefore, a business might see an increase in the demand for its services. In addition, because of the greater service area, the entire service industry might become more competitive, which in turn fosters increases in efficiency. Another benefit of the increased availability is the increased convenience for the customer. Examples of intermediaries include credit charge cards such as MasterCard and Visa. These cards can be used worldwide even though local banks issue them. Many times the use of marketing intermediaries can affect the ultimate cost to the customer directly. For instance, group insurance policies can be written through businesses and labor unions, thus aggregating the demand for services and providing insurance at a lower cost for the employees. Also, because the insurance is written through the business or labor union, the employees might be assured of quality service. 5. Go to http://www.pbinsight.com/welcome/mapinfo and find the definition of “location intelligence.” What use can be made of geographic information? Answer: Relating data to geographic location can be useful for making business location decisions because retail sites can be selected near concentrations of customers (e.g., branch banks). Supply centers can be located near transportation hubs (e.g., FedEx sorting center at Memphis airport). INTERACTIVE CASE EXERCISE The class discusses the business opportunities of using Google Earth. Google Earth often is used in business Web sites to facilitate finding the service location. With GPS becoming available on cell phones, Google Earth can show what businesses, such as restaurants, are in the vicinity of the caller. EXERCISE SOLUTIONS 8.1 Copying Service revisited No need to relocate because optimal location is line segment (2, 2-3), which includes location A at (2,2). 8.2 Temporary-help Agency Optimum location lies along line between end points of (7,7) and (7,11). 8.3 Hospitals Optimum location is at (7,3). 8.4 Pizza Delivery Optimum location is area defined by corner points: (2,3), (2,4), (3,3), and (3,4). 8.5 Airport Terminal Optimum location is (8,3) or terminal C. 8.6 Catering Service Locate site in area defined by: 8.7 Copying Service Revisited Using Huff Model For the existing store at A assume that and for the new store at B assume that (i.e. three times the capacity of existing store) and  = 2. Assume new demand weights from question 7.1. First calculate: Area 1 2 3 4 New (S=3) 3/22 = .75 3/22 = .75 3/32 = .3333 3/22 = .75 Old (S=1) 1/12 = 1.0 1/12 = 1.0 1/42 = .0625 1/32 = .11 1.75 1.75 0.3958 0.86 Second, calculate: Store Customer Area Sales ($) Share (%) 1 2 3 4 New .43 .43 .84 .87 17,170 .61 Old .57 .57 .16 .13 10,830 .39 Orders 700 900 500 700 Sales ($) 7,000 9,000 5,000 7,000 28,000 1.00 8.8 (a) Department Store Customers Areas 1 2 3 4 5 1 $ 100 $ 75 $ 125 $ 100 $ 120 2 $ 150 $ 100 $ 125 $ 120 $ 125 Avg. budget (Bi) $ 125 $ 87.50 $ 125 $ 110 $ 122.50 No. customers (Ci) 1500 2500 1000 3000 2000 Annual home appliance sales (in thousands) 8.8 (b) For store 1 (existing locally owned store) assume that and for store 2 (Bull's Eye new store) assume that (three times the size) and  = 1. First calculate: Area 1 2 3 4 5 Local (S=1) 1/20 = .05 1 /35 = .0286 1/30 = .0333 1/20 = .05 1/25 = .04 Bull's Eye (S=3) 3/15 = .20 3/20 = .15 3/25 = .12 3/25 = .12 3/25 = .12 0.25 0.1786 0.1533 0.17 .16 Second, calculate: Store Customer Area Sales (1000s) 1 2 3 4 5 1 Local .2 .16 .217 .29 .25 $ 257.98 2 Bull's Eye .8 .84 .783 .71 .75 $ 848.27 *Sales (1000s) $187.5 $218.75 $125 $330 $245 $1106.25 * using data from problem 7.8 8.9 (a) Gas Stations For the old station assume that and for the new station assume that (double the number of pumps) and  = 2. First calculate: Area 1 2 3 4 Old (S=1) 1/52 = .04 1/102 =.01 1/92 =.0123 1/152 = .004 New (S=2) 2/202 = .005 2/82 = .0312 2/122 = .0139 2/62 = .055 0.045 0.0412 0.0261 0.059 Second calculate: Station Customer Area 1 2 3 4 Old .88 .24 .47 .07 New .12 .76 .53 .93 Customers 100 150 80 50 (b) 8.10 Rural Medical Clinics Community Set Served by Community Sites that Serve Community (#6 omitted) 1 1,2,3 1,2,3 2 1,2 (1,2) 3 1,3,4,5 1,3,4,5 4 3,4,5,6 3,4,5 5 3,4,5,6 3,4,5 6 4,5,6 (4,5) 7 7,8 7,8 8 7,8 (7,8) 9 9 (9) Possible solutions: {1 or 2, 4 or 5, 7 or 8, 9} 8.11 Banks Locating ATM’s Site Could Reach 1 1,2,3 2 1,2, 4,5 3 1, 3,4 4 2,3,4, 6,7 5 2, 5,6 6 4,5,6 7 4, 7 Solution {2 and 4} 8.12 (a) Volunteer Fire Department Site Could Reach 1 1,2,3 2 1,2, 4,5 3 1, 3,4 4 2,3,4, 6,7 5 2, 5,6 6 4,5,6,7 7 4, 6,7 Possible solutions {2 and 4} or {1 and 6} (b) Consider the population at the different communities (i.e., fire potential). CASE: HEALTH MAINTENANCE ORGANIZATION (C) First calculate the median value: (81)/2 = 41 enrollees (in 1000s). Next with the x and y axes oriented in the direction of the major streets shown on the map below, we can see that a location for the facility in census tract 5 or 6 would be appropriate. It is interesting to note that St. David’s Hospital is located in census track 5. CASE: ATHOL FURNITURE, INC. Athol Furniture Inc. is preparing to open a new store in Bluff Lake, a small community that already has two stores that sell furniture and large appliances. Athol has identified three possible sites for its new outlet. The designated sites and their respective store size options are (1) Site X: 10,000 or 15,000 sq. ft.; Site Y: 10,000, 15,000, or 20,000 sq. ft.; Site Z: 10,000 sq. ft. An analysis of the six options using the Huff Model is performed to select the site and store size that will maximize the net operating profit before taxes. Bluff Lake is divided into 12 census tracts and detailed information about the population including incomes and spending habits (relative to purchases of furniture and large appliances) is available. The probability that a customer in a given census tract will shop at one of the new stores can be computed based on the travel time (of the customer to the store) and the size of the proposed store. These calculations provide a probability matrix (6 variables across 12 census tracts) that is used to estimate customer expenditures and the pre-tax profits for each variable. When the probabilities obtained from the model are applied to the detailed information on expenditures, we can calculate estimates of the gross sales at each proposed site. The equation for this procedure is shown below: The term remains constant within a census tract for each decision option. The estimates of customer expenditures for each store are shown in the spreadsheets that appear with the following answers. 1. Utilizing a spreadsheet version of the Huff location model (with * = 1.0), recommend a store size and location for AFI that will maximize expected net operating profit before taxes. Assuming that AFI does not wish to consider a store smaller than 10,000 square feet, assess the store sizes (based on increments of 5,000 square feet) up to the maximum allowable sales area for each potential site. Answer: Using the Excel spreadsheet HUFF Model for Retail Location, the results shown below indicate that a 15,000 sq. ft. store at site Y with an "annual profit" of $23,393 maximizes the expected net operating profit before taxes. 2. What is the expected annual net operating profit before taxes and market share for the outlet you have recommended? Defend your recommendation. Answer: Although a 15,000 sq. ft. store at site Y yields an expected annual net operating profit of $23,393, a 20,000 sq. ft. store at the site would maximize the market share at 45.9 percent. With the larger store the market share of the competition is eroded severely (see head-to-head comparison). Store A with a 10 percent loss in market share (33% to 23%) probably will not survive. Furthermore, with store B and Athol located in close proximity, the effect of clustering will draw even more customers to shop both stores simultaneously. 3. Try two other values of * (e.g., 0.5 and 5.0) to measure the sensitivity of customer travel propensity on your recommended location. Answer: 4. Briefly state any shortcomings you may perceive in this model. Answer: (a) Size might not be an adequate approximation of the attractiveness of a furniture store. Other qualitative aspects such as perceived quality of the furniture, friendliness of the sales staff, and the customer's loyalty to an existing store can confound the size variable. (b) At first glance, a long travel time to the store might be seen as a disincentive to visit a furniture store. To counteract such a disincentive, furniture stores can emulate automobile dealers who establish "motor miles" in many communities. This strategy of locating all or most dealers in one area is effective in drawing many customers from great distances away. (c) Other factors, most of which are not quantifiable, can also alter a customer's perception of the utility of the shopping center. For example, consider the effect of an established firm's reputation or the lure of a new store. The visibility of a store and the nature of adjoining stores or neighborhoods also can influence the store's ability to attract customers, but these factors are not measured easily. Chapter 9 Service Supply Relationships TEACHING NOTE The physical supply chain for goods is receiving considerable attention by operations managers because taking a total systems view of the entire process has allowed firms to realize efficiencies beyond the factory walls. We explore the concept of a customer-supplier duality that leads to a view that services are better understood as relationships instead of a chain. Sources of value in the service relationship include bi-directional optimization, management of productive capacity, and management of perishability. Social media such as Facebook and Twitter are recognized as elements in service strategy. Students will identify with the professional service firm material because many aspire to positions in accounting or consulting firms. The chapter concludes with a discussion of the issues associated with service outsourcing. SUPPLEMENTARY MATERIALS Case: Laura Ashley and FedEx Strategic Alliance (HBS 9-693-050) Laura Ashley, a global clothing and furnishing retailer, is faced with a disastrous distribution system resulting in simultaneous high inventories and frequent stock outs. Turning to FedEx's Business Logistics Services, a strategic alliance is formed that results in FedEx performing the entire distribution function for Laura Ashley. Case: Otis Elevator: Managing the Service Force (HBS N9-191-213) The high margin service business of Otis Elevator is under attack from small local providers. Poor communications have resulted in nonproductive travel and preventive maintenance is being shortchanged because of unscheduled callbacks. Emerging communications technologies and scheduling software provide an opportunity to improve the productivity of the field force significantly. LECTURE OUTLINE 1. Supply Chain Management Network model (Figure 9.1) Managing uncertainty (Table 9.1) 2. Service Supply Relationships Customer-supplier duality (Figure 9.2 and Table 9.2) Service supply relationships are hubs, not chains (Table 9.3) Service capacity is analogous to inventory Customer supplied inputs can vary in quality 3. Managing Service Relationships Bidirectional Optimization (Table 9.4) Productive Capacity Perishability 4. Social Media in Services Social Media as a Competitive Strategy Social Media and Customer Convenience 5. Professional Service Firms Attributes of Professional Services Service Consulting (Figure 9.3) Operational Characteristics (Table 9.5) 6. Outsourcing Services Benefits and Risks of Outsourcing Services (Figure 9.4) Classification of business services (Table 9.6) Managerial Considerations with Service Outsourcing (Table 9.7) TOPICS FOR DISCUSSION 1. How can effective goods supply chain management support environmental sustainability? Answer: Sustainability is defined as the ability to meet present needs without compromising those of future generations (http://www.wikipedia.com). With Figure 9.1 in mind, one can see opportunities for environmental sustainability. For example, the design of products for ease in remanufacturing will avoid disposal and waste of resources. Finally, demand transparency by manufacturers will avoid the waste of overproduction. 2. Explain why the goods analogy of a supply chain is inappropriate for services. Answer: For physical goods the analogy of a chain ideally captures the linear hand-off of inventory between players in the distribution of product from supplier, to manufacturer, to distributor, to retailer, to the final consumer. The chain can be rather short for a Dell Computer that sells direct but substantially longer for an automobile manufacturer selling through independent dealers. The simultaneous production and consumption nature of services does not lend itself to the chain analogy, instead, the service encounter is the essence of the service experience. The service provider can in turn have suppliers but the visual analogy is a hub rather than chain. 3. Discuss the implications of service outsourcing for employees, stockholders, customers, and host-country economy when a firm outsources a call center overseas. Answer: Employees of the firm will lose their jobs resulting in personal hardships, a loss of a tax base for the local economy, and unemployment expenses for the government. Stockholders probably will see some initial improvement in profits owing to cost savings but this will dissipate when competition follows the outsourcing practice. Customers might be unaware of the change but could be put off if the outsourced call center is less responsive to customer needs. For example, Dell Computer gave up its overseas call center for its high dollar business clients following complaints of poor service. The host country economy and its citizens should benefit from the creation of new jobs. 4. How has social media affected the growth of the service industry in the past five years? Answer: We can see the recent explosive growth of social media by looking at the popularity of Facebook, LinkedIn, and other such groups. Their growth in membership has been exponential. The blending of technology and social interaction results in numerous service innovations where firms try to outperform each other, especially in the service industry where innovations typically are not patentable. 5. What features of social media have service firms leveraged in developing their competitive strategies? Answer: Service firms have leveraged the following features of social media in developing their competitive strategies: • Outreach: social media expands widely through multiple points of production and consumption. • Immediacy: news travels instantaneously in the social media and generates immediate reactions. • Access: generally, social media venues are available readily to the public at little or no cost. • Easy to use: Web sites such as Facebook and LinkedIn need little or no specialized training to use. • Easy to change: social media Web sites can be altered by quick comments and editing. 6. Identify areas within a few selected service industries (e.g., health care and hospitality) that can benefit from external consultants. Answer: The health care industry engages external consultants mostly for productivity improvement and cost cutting where necessary expertise is not available within the firm. However, there are examples, such as Mayo Clinic, where a very strong internal consulting group is available for most projects. With the increasing use of electronic media and information technology in medical practices, IT consultancy is gaining ground in health care. Generally, niche expertise in external consulting, and a demonstrated internal track record need to be balanced against current cost and potential return on investment in measures such as patient safety and staff morale. In the hospitality industry such as hotels, restaurant and entertainment, external consultants are engaged for strategic and operational goals. Human relations development is an important strategic and operational goal. So are quality improvement, yield management, and facility/layout planning. IT expertise might, also, be necessary for control systems, dispatching, and office automation. Overall, high customer satisfaction that leads to increased loyalty is the primary objective employing outside consultants. 7. How would you train yourself to be a successful consultant in the service sector? Answer: To be successful in any sector, service or manufacturing, one needs to possess good analytical skills. Such skills can be applied at different stages of the consulting cycle, such as proposal development, problem analysis, solution development, performance measurement, change implementation, and report generation. The question of whether these skills can be developed better in a classroom or in on-the-job training is debatable, but certainly, a combination of a good business school curriculum and internships in outside organizations will serve anyone well. Other important factors to success in the service industry are to develop good “people” skills and an ability to communicate effectively. 8. Identify activities that compare Walmart’s vertical integration efforts with maintaining an arm’s-length relationship with suppliers. Answer: Walmart is a good example of a balance between vertical integration and maintaining an arm’s-length relationship with suppliers. In its coordination efforts with its suppliers, Wal-Mart developed a standardized interface between tasks where requisite information is highly codified on price, volume, and arm’s-length delivery schedules. On the other hand, Walmart developed vertical integration for high strategic control, where significant investment is made in highly durable relationship-specific assets that include co-location of specialized facilities, investment in brand equity, and long-term investments in some R&D programs. Finally, Walmart has developed appropriate intellectual property protection with its suppliers for difficult-to-imitate technology. INTERACTIVE CLASS EXERCISE The class divides into small groups and members come up with examples of multi-level bi-directional service relationships (i.e., service supplier relationships with three or more levels). Be prepared to argue why such service relationships are so rare. Unlike in manufacturing where a physical item can be inventoried without feelings, services generally have humans as participants who have little tolerance for being passed from one service operation to another. The exceptions are services that are directed at a customers belongings (e.g., repairs) or information-based (e.g., investments). CASE: BOOMER CONSULTING 1. How does The Boomer Technology Circle illustrate the concept of the bidirectional service supply relationship? Answer: The Boomer Technology Circle is a clever application of bidirectional consulting that is cost effective to deliver and rich in information transfer. Bringing clients with similar interests together quarterly for a day and one-half conference maximizes the valuable time of L. Gary Boomer and enriches the participants’ experiences by sharing problems in small groups in self-led seminars. Using Figure 9.5 as a guide, we can modify the first row to show The Boomer Technology Circle as a single-level bidirectional service supply relationship: Service Category Customer- Supplier >Input/ Output> Service Provider Minds Client >Experience/Knowledge> L. Gary Boomer and other circle clients 2. How has Boomer Consulting, Inc., made the client a coproducer in the service delivery process? Answer: The Boomer Technology Circle is built on the concept of “round tables” where clients share common concerns and solutions. In breakout sessions, five-to-seven participants share the most pressing issues in their firm and the solutions they are pursuing with facilitation by BCI staff. Presentations are participant-led with accountability promoted by a 90-day game plan and later progress reports motivated by peer pressure. 3. How is the concept of “leverage” achieved by Boomer Consulting? Answer: Leverage is achieved in several ways. First, the reputation of L. Gary Boomer as a recognized leading authority on technology and firm management and being named by Accounting Times as one of the 100 most influential people in accounting, gives credibility to Boomer Consulting. Second, the positive word-of-mouth from existing Circle members about how they have built innovative and profitable service delivery systems draws new clients to Boomer Consulting. Finally, leverage is illustrated by the Boomer Technology Circles where clients come to Kansas City to hear the latest developments in technology from L. Gary Boomer and are facilitated by the Boomer Consulting staff in small group seminars. 4. Can the Boomer Technology Circles be applied to other industries? What are some of the risks in pursuing this strategy? Answer: The Boomer Technology Circles target a large market of small to medium CPA firms. Similar markets that might benefit include independent and small restaurant or motel/hotel firms. An independent consulting firm fashioned after Boomer could focus on one of these industries. However, because franchising is common in these industries, the franchiser could perform the Boomer function for their franchisees. The existence of McDonald’s University, for example, suggests that such an approach would be easy to implement. For Boomer Consulting, the most critical risk is the singular dependence on L. Gary Boomer, the founder and credible expert in the field of technology. Additional experts need to be recruited and given the visibility with clients to ensure the sustainability of the firm. Finally, imitators are a threat because the concept is very transparent. CASE: EVOLUTION OF B2C E-COMMERCE IN JAPAN 1. What features of the 7-Eleven Japan distribution system illustrate the concept of the bidirectional service supply relationship? Answer: Figure 9.6 captures the central role 7-Eleven center plays in coordinating the customer order, payment, and delivery to store for pickup. The customer’s input is via an Internet website with output the delivery of the purchased item. The 7-Eleven Japan distribution system exemplifies the bidirectional service supply relationship through its integration of real-time sales data and inventory management. Stores send sales data to the distribution center, which then adjusts inventory levels and supplies accordingly. This dynamic feedback loop ensures that stores receive the right products at the right time, optimizing stock levels and responding quickly to customer demand. 2. Does the 7-Eleven Japan distribution system exhibit scalability economies? Answer: The ability to consolidate goods ordered by different customers and make delivery on established routes to Konbinis exhibits scalability because each additional order represents negligible variable costs of shipping and handling. 3. How does the 7-Eleven example of B2C E-commerce in Japan illustrate the impact of culture on service system design? Answer: Culture (i.e., desire to pay with cash), geography (i.e., population density speeds delivery), and commuting (i.e., use of trains with access to convenience stores in stations) all had an effect on the design. 4. Will the 7-Eleven “Konbini and Mobile” system be adopted in the United States? Answer: The United States eventually might reach an equally high penetration of wireless devices and acquire an abundant number of content providers and e-tailers that target mobile users. At one time, it was hard to imagine, however, that people in the U.S. would spend at least one hour daily looking at their cellular phones, a phenomenon that has been seen on commuter trains in Japan for a long time. Perhaps the legacy effect of excellent landline telephone service in the United States has delayed the rapid adoption of M-commerce as witnessed in other countries. CASE: MORTGAGE SERVICE GAME1 The Mortgage Service Game is played under two main strategies: decentralized and new-application-starts information strategy. In the decentralized strategy each stage operates autonomously and makes its capacity decisions based on its own backlog. In the new-application-starts information strategy each stage makes capacity decisions based on its own backlog and the new applications rate. In other works, each stage gains more visibility by being able to observe end-user demand in each time period. In the experimental use of the game, each team of students manages only the survey stage in the chain, leaving the computer to manage the remaining stages. Teams are assigned to an intermediate stage in the supply chain in order to illustrate the dynamics resulting from information and capacity adjustments lags. In order to mitigate the perception of the computer performing “black box” functions, we provide students with the complete details about the operations of the game at all stages. In fact, the only information the students were not given was how and when the demand stream changed (i.e., teaching strategy used in the classic “beer game”). The Mortgage Service Game is used to demonstrate two main points. The first point is to illustrate the supply chain dynamics resulting from information and capacity adjustment lags. The second point is to illustrate the impact of end-user demand information. Therefore, during the class, each team performs two exercises with the Game: one is to manage capacity and backlogs at one of the stages (i.e., Credit Check, Appraisal, Survey, or Title Check) without new applications information and the other is to manage the same stage with that information. The play instructions are reviewed before the Game commences. Hence, the students are given complete information on what they are to do and what the computer would do with respect to each exercise. The results show that with the parameters used, rational decision making behavior will lead to improved performance with new applications information. Both exercises can be conducted in one 75-minute class period. Graphical User Interface “Target Lead Time” and “Capacity Adjustment” are displayed in the top left-hand corner of the screen. Players cannot change these parameters. Just above are listed the four stations: Credit Check, Appraise, Survey, and Title Check. The “Target Capacity” box allows players to control the target capacity. The “Run” button advances each round. The “Summary Data” button opens a window that provides summary data at the end of each game. Two tables appear below the “Status Graphs.” The table on the left contains: Arrival Rate, Completions Rate, Backlog, and Capacity for the stage under player management. The table on the right contains salary costs, backlog costs, hiring and firing costs, and totals. Game Instructions The game is played with groups assuming the role of the survey company. The game is played twice with some groups starting with no new- applications information scenario and the second round with new applications information provided. Other groups play the scenarios in reverse order beginning with new-application information provided. The target lead-time is two weeks (10 working days) and capacity adjustment time equals four weeks. For the computer-controlled stages, the weight α on the new-application rate will be equal to zero when no new-applications information is provided and 0.5 when new-applications information is provided. New-applications will begin at 20 per day but then will change by an unspecified amount at an unspecified point in time. Hence, there is no reason to anticipate the change or timing from the previous round. The entire supply chain is in equilibrium with each stage beginning with a backlog of 200, capacity of 20 per day, and target capacity of 20 applications per day. Each game will be played for a period of 50 weeks. Mathematical Relationships Embedded in Game Mathematically, the structure for each processing stage (Credit Check, Survey, Appraisal, and Title Search) of the mortgage service chain is: where B(i,t), C(i,t), and r(i,t) refer respectively to the backlog, capacity, and completion rate at stage i on day t. Because each employee has a productivity rate of one application per day, the completion rate of applications at any stage is constrained to the minimum of the backlog plus any inflow from the previous stage (if available work is the constraint) or the capacity. At the beginning of each week, each stage (company) can change its target capacity by deciding to hire or lay off employees. However, it takes time to advertise, interview, and hire employees; so the rate of capacity change is given in Equation (3). The target capacity C*(i,t) set by the player is restricted to be nonnegative. The capacity adjustment time, τ, is set to one month or 20 business days. In essence, each day’s capacity will close one twentieth of the remaining gap from its current value to its target in an exponentially decreasing manner. Thus, capacity change is not achieved all at once but over several days. This translates into an average lag for hiring (or firing employees) of 20 days. If the player makes another change before the original adjustment is reached, the old target will be discarded, and capacity will begin to adjust the following day from its current value advancing towards the new target. For stages operated by the computer, the target capacity decision will be made using Equation (4) in the scenario when no new application information is available. Thus, each week the target capacity for each stage will be set directly proportional to the stage’s current backlog B(i,t) and inversely proportional to the nominal service delay time λ. For the scenario when new-application-starts information is known, Equation (4) changes to: Equation (5) has simply used the concept of exponential smoothing with parameter, α, to revise the capacity gradually (see Chapter 17 for a discussion of exponential smoothing). The condition “if (t modulo 5) = 0” in Equation (4) and (5) guarantees that capacity is only reset once a week on Fridays (i.e., because the day divided by 5 yields a zero). These computer equations are not meant to be an optimal policy in any sense; however, it seems to reflect reasonably well how players make capacity management decisions. 1 From Edward G. Anderson and Douglas J. Morrice, “A Simulation Game for Service-Oriented Supply Chain Management: Does Information Sharing Help Managers with Service Capacity Decisions?” The Journal of Production and Operations Management, vol. 9, no. 1, 2000, pp. 40-55. Solution Manual for Service Management: Operations, Strategy, Information Technology James A. Fitzsimmons, Mona J. Fitzsimmons 9789339204471