Ch. 12- Supply Chain Management in the Service Industry

Hiring, training, supervising, and equipping personnel is costly

(≈ 75% of operating costs)

Service providers are

*100% reliant on the customers* to create the flow of demand, which has a direct impact on their ability to fully utilize capacity.

Types of Services

1. Pure Services 2. End Products 3. State Utility

The four primary activities of Service Response Logistics:

1. Service Capacity 2. Waiting Time 3. Distribution Channels 4. Service Quality

Service Capacity Utilization =

Actual customers served per period/ Capacity

Franchising

Allows business to expand quickly in dispersed geographic markets Protects existing markets Builds market share and facilitates business when owners have limited financial resources.

Managing Perceived Waiting Times

Often, demand exceeds expectations & capacity

Queuing Systems

Can be utilized for almost any situation where large numbers of persons are gathering, or waiting in line to purchase tickets, enter a facility, etc. Are common in airports, amusement parks and retail stores.

Long-Range

Capacity can be used as a preemptive strike where the market is too small for two competitors to co-exist (e.g., the first to build a luxury hotel in a mid-sized city may capture all the business) - A strategy of building ahead of demand is often taken to avoid losing customers.

Balance

Capacity decisions must be balanced against the costs of lost sales if capacity is inadequate . . . or against operating losses if demand does not reach expectations.

Service Capacity Planning Challenges

Customer arrivals *fluctuate* and service demands also vary. Customers are *participants* in the service and the level of congestion impacts on perceived quality. Idle *capacity* is a reality for services Inability to *control demand* results in capacity measured in terms of inputs (e.g. number of hotel rooms rather than guest nights).

Managing Service Quality

Customer satisfaction with the service depends not only on the ability of the firm to deliver what customers want, but on the *customers perceptions'* of the quality of the service received - e.g., Was the car fixed properly? - e.g., Was the client properly defended? - e.g., Was the hired comedian funny? Service quality depends on the *firm's employees* to satisfy customers varying expectations. Service quality may vary from person-to-person even within the same organization. The key is to exceed the *customer expectations* . . . so you also need to help form their *expectations* - e.g., You promise 4 hour service, knowing that you can do it in 3.5 hours

The *Involvement of the customer* in the service process.

Customers are much more directly involved in the service industry

Queuing System Input

Customers are the *demand source* for services and their arrival triggers the start of the service experience. Customers generally appear in *predictable arrival patterns* (e.g., the dinner rush at a restaurant). There are models used to predict customer arrivals such as a Poisson distribution

Service recovery systems require:

Developing *recovery procedures* that are thought out prior to the bad event happening *Training* employees in these procedures prior to the event *Empowering* employees to remedy customer problems and recognizing them when they do. (e.g., employee who rented a U-Haul to deliver a part to a customer on a weekend)

Managing Distribution Channels

Distribution channels involve traditional methods and new channels that incorporate new Internet technologies

*Improving service productivity* is challenging due to:

High *Labor* content Individual *customized* services Difficulty of *automating* services Problem of assessing *service quality*

Global Services are *increasing globally* and managing them involves a number of issues:

Identifying global customers. Labor, facilities, and infrastructure support vary by country Legal and political issues: -Laws may restrict foreign competitors. Domestic competitors and the economic climate: -Managers must be aware of local competition and their environment.

Waiting Time Management Techniques

Keep customers *Occupied* Start the service *Quickly* Relieve customer *Anxiety* Keep customers *Informed* -Examples: "The wait time from this point is..." or "The ride is stopped but will resume in 4 minutes" Group customers *Together* (they often talk to pass the time) Design a *Fair* waiting system

Recovering from poor service quality

Keeping customers loyal and coming back serves as good *word of mouth advertising*

Layout Strategy

Layouts designed to *reduce distance traveled* within the store Departmental layouts to *maximize closeness* desirability -e.g., Doctors office waiting room -e.g., Service center at the car dealership, pet grooming, car wash, etc. (i.e., Watch them working on your prized possession)

Cost Leadership Strategy

Lowest cost service provider. Requires large capital investment in state-of-the art equipment and significant efforts to control and reduce costs. *Examples*: Auto diagnostics software, route planning to reduce windshield time, UPS optimization, etc.

Location Strategy

Make it easy for customers to find the *facility/store*. Once they arrive, make it easy to find *what they want*, or to find what you want them to find. -e.g., Drop off / pick up your clothes at dry cleaners on the way to work.

pure strategy

Many retailers today sell products exclusively over the Internet (e.g., Amazon)

Queue System Assumptions:

Most queuing models assume that customers enter the queue, and stay in the queue until served. That may not be true: - Balking - Reneging Queuing models assume there is an *infinite length of a queue*

International Expansion

Operate / partner with firms familiar with the region's markets, suppliers, infrastructure, government regulations, and customers Must address language and cultural barriers

The *Assessment of Quality*.

Quality is assessed differently in the service industry

Queue System Characteristics:

Queue *discipline* describes the order in which customers are served. Queuing can be comprised of *single* or *multiple phases*. Queue lines can be serviced by either a *single* or *multiple servers* Multiple servers can also act in *series* or in *parallel*

Mobile Queues

Queues *formed virtually with technology*. Customers can use technology such as a smartphone to place their name in a real-time electronic queue such as at a restaurant. This type of queuing has provided a great deal of flexibility and allows for reduced stress level on the part of the customer.

Managing Service Capacity

Regardless of the specific breakdown, it's the *number of customers* that the service provider can service at any one time. The *planned* capacity for the service environment.

Focus Strategy

Serve a narrow niche better than other firms. *Examples*: Grocery shopping for you, Mechanic specializing in Volvo or Porsche repair, Custom stereo in your house or car

Differences Between Goods and Services

Services *cannot be inventoried* (in most cases). Typically, services are produced and consumed simultaneously. Services are often *unique to the customer* (e.g., insurance policies, legal services, tax preparation, etc.) Services have high *customer interactions* Services are *decentralized*. Due to the inability to inventory or transport most services, they must be located near to the customer base.

The *Tangibility* of the end product.

Services are generally not tangible [i.e., you can't touch or hold them in your hands]

The *Facility Location* considerations.

Services are largely provide and heavily impacted by location decisions.

Facilitating Goods

Services may require the use of these which are tangible elements that are used or consumed by the customer or the service provider along with the service provided. *Examples*: Banks (cash & coins, office supplies, computers, records), Hospitals (pharmaceuticals, medical supplies, medical equipment, office furniture), Restaurants (food, kitchen equipment, tables & chairs, cutlery)

Pure Services

Services offering very few or no tangible products to customers (e.g., consulting, storage facilities, training / education, etc.)

State Utility

Services which directly involve things owned by the customer (e.g., car repair, dry cleaning, haircut, and healthcare).

End Products

Services which offer tangible components along with the service component (e.g., restaurants; food along with the dining service)

Service Delivery System

Some service offerings *blend* these delivery systems together *Example*: Restaurant - Front of the house staff tend to be customer centric - Back of the house staff generally do not have contact with customers May be designed to keep these separate in order to use various and different management techniques to maximize performance in each area. *Any service system should be audited often to assess performance*

Short-Range

The lack of short-term capacity planning can generate customers for the competition (e.g., if restaurant staffing is inadequate to handle the volume of customers arriving at the restaurant, customer will likely go elsewhere)

No one likes to wait in line, however it is a reality, and even a necessary evil, for many service offerings...

There are mathematical formulas used to help predict wait times. These formulas are based on certain predetermined assumptions and probabilities. There are also techniques for reducing the time spent waiting, and/or the perception of the time waiting, for the service to be delivered. - Disney and other theme parks use these techniques. - The answer is to try and keep the customers' mind of off waiting.

The *Labor Content*.

There is a much higher ratio of labor to materials in the service industry

Structured Queues

These queues are *set in a fixed position* such as a super market checkout line, airport or bank. In some cases queue management systems can be structure with or without numbers such as "take-a-ticket number" allowing a person to walk around and wait for their number to be called.

Differentiation Strategy

Unique service created based on customer input and feedback. *Examples*: Sunday car servicing at Hyundai, Ford, etc. Being different from another local dealer. This may be helpful in selling a car to someone who can't take off work on a Monday-thru-Friday when their car needs repair.

Key questions to ask to determine waiting time strategy:

What is the average arrival rate of the customers? In what order will customers be serviced? What is the average service rate of providers? How are customer arrival and service times distributed? How long will customers wait before they either leave or lower their perceptions of service quality? How can customers wait even longer without lowering their perceptions of service quality?

Unstructured Queues

When *people form queues somewhat informally* in various directions and locations. These types of queues are often seen in outside large venues, trains, ATM machines, elevators, etc.

Mixed Strategy

While others use it as a supplemental distribution channel (e.g., Walmart)

Balking

is when a customer *refuses* the queue.

Facilitating Goods

tangible elements that are used or consumed by the customer or the service provider along with the service provided. (e.g., deposit forms, statements, etc.)

Service Capacity - Examples

*Airline Capacity* = number of seats and number of planes *Restaurant Capacity* = number of tables - How many servers will I need? - Maître d's / Hostesses? - Chefs / Kitchen staff? - "Bus-boys" / Dish-washers? *Hotel Capacity* = number of rooms - How many people will I need to : - Check-in / Check-out the customers - Tend the bar - Clean the rooms - Handle the luggage - Provide room service

Level Demand Strategy

*Capacity remains constant regardless of demand*. When demand exceeds capacity, queue management tactics deal with excess customers - One line instead of many lines at a Bank or at McDonald's so its 1st come 1st serve. - Numbers at the deli in the grocery store. Note: This technique does not work well in a Hospital Emergency Room.

Chase Demand Strategy

*Capacity varies with demand*. So you can handle fluctuations but must take appropriate actions prior. Need to have options. - Open up additional line(s) - Call in additional off-shift workers to meet increased demand.

To minimize the cost of hiring and laying off employees, the following strategies deal with periods of *high demand*:

*Cross Training* and *Sharing* employees so that they can help on the task that is busy at the moment. Using *Part Time* employees (e.g., during the holiday season) Using *customers* - "hidden employees" (e.g., self check out) Using *technology* (e.g., Scanning documents in insurance industry for use in multiple departments as necessary) Using employee *scheduling policies* (e.g., nurses have to work alternating holidays)

Queuing System Design

*Single channel, single phase, single server*. - Example: customer, to service representative. *Single channel, multiple phase, multiple servers acting in series*. - Example: customer, to hostess, to wait staff, to chef. *Multiple channel, single phase, single server*. - Example customer, to one of multiple available service representatives. *Multiple channel, multiple phase, multiple servers acting in parallel*. - Example: customer, to one of multiple fast food order takers, to fast food cook.

The delivery of services can be expressed as a

*continuum* with mass produced, low-customer contact systems at one end, and highly customized, high-customer-contact systems at the other end. *Lower Customer Contact Systems* (ticket kiosk, vending machine, atm) <-------- *Mass Produced* <-----*Blended Delivery* (restaurant) ----> *Highly Customized* ----> *High Customer Contact Systems* (personnel shopper, hair stylist, financial manager)

A queue management system is used to help...

*control the flow and prioritization* of people expecting to receive a service.

Facilitating goods need to be

*purchased, transported, received, and warehoused* in order to provide the service activity. Generally these supply chain activities occur behind the scenes (i.e., out of view of the service customer) Customers have no idea how these facilitating goods actually get to the destination but they sure notice if they are not available as expected!

Service capacity can be expressed as

*the number of customers per day, per shift, per hour, per month, or per year, that the company's service system is designed to serve*.

How does supply chain management in the service industry differ from supply chain management in manufacturing?

- Tangibility - Involvement of the customer - Assessment of Quality - Labor Content - Facility Location

Service Capacity Decisions

- long-range - short-range - balance

There are a variety of queue types:

-Structured -Unstructured -Mobile

The Five Dimensions of Service Quality

1. *Reliability* - consistently performing the service correctly and dependably 2. *Responsiveness*- promptly and timely service 3. *Assurance*- ability to convey trust and confidence to customers 4. *Empathy*- providing caring attention to customers 5. *Tangibles*- the physical characteristics of the service including, facilities, servers, equipment, associated goods, and other customers

If the *demand exceeds capacity*, and the provider *does not currently have the capacity* to serve all of the customers, there are three basic alternatives:

1. *Turn Customers Away* and not service them, i.e., lose business. 2. *Make them wait* until service is available for them 3. *Increase Service Capacity*, i.e., the number of service personnel and the associated infrastructure to provide the service.

Service Capacity Utilization

1. A hotel has 80 rooms booked out of a total of 100 rooms available. Utilization = 80%. - This is pretty straight forward in that there are a fixed number of rooms and they are either booked or not booked. 2. On average, a doctor can see X patients per hour. But, if the doctor takes longer with each patient than the average, the patients start to get backed-up and some patients wait longer. - The doctor's office is not going to call in a temporary doctor for the rest of the day to catch up.

If capacity exceeds demand, instead of disposing of excess capacity (e.g., laying off personnel), find other uses for the available capacity:

Do *other jobs* when it's not busy. - Example: in a restaurant you might have workers clean the bathrooms, prep for the dinner rush, etc. Do *training* or cross training Use *demand management* techniques to shift demand from peak demand periods into non-peak periods by offing incentives like discounts and special sales - Example: early bird specials, 20% off from 9am to noon, etc.

Internet Distribution Strategy

Internet retailing is growing faster than traditional retailing Primary advantages of the Internet include the ability to offer convenient sources of real-time information, integration, feedback, and comparison shopping

First and Second Rules of Service

Rule 1: *Satisfaction* = customer perception - customer expectation Rule 2: It is hard to make-up for poor perception. You get one chance to get it right

Demand management tactics are also important,

as services cannot be inventoried and customer demand must be met

Implicit Service

attitude of the servers, atmosphere, waiting time, status, privacy, security, and convenience

Explicit Service

availability and access to the service, consistency of service performance, comprehensiveness of the service, and training of service personnel (e.g., vault, safe deposit boxes, loans, etc.).

Bundle of Service Attributes

can deliver more than expected and enhance customer satisfaction. *Example*: Banking Industry - Supporting Facility - Facilitating Goods - Explicit Service - Implicit Service

When Demand Exceeds Capacity it makes forecasting service demand critically important, particularly because services

cannot be inventoried or carried out in advance.

Edutainment (infotainment)

combines learning with entertainment to appeal to customers looking for substance along with play (e.g., Epcot Center, Liberty Science Center. etc.)

Eatertainment

combines restaurant and entertainment elements (e.g., Medieval Times, Rainforest Café, Dave & Busters, etc.)

Entertailing

combines retail with entertainment elements (e.g., Mall of America has a ferrous wheel, rock climbing wall, fashion shows, play area, etc.)

Service Strategies

cost leadership, differentiation, and focus

Reneging

is when customers *decide to leave* the queue.

Supporting Facility

location, layout, architectural appropriateness, equipment, decoration. (e.g., drive-up tellers, ATM's, etc.)

Managing waiting time involves managing both...

the *actual* waiting time AND the *perceived* waiting time.

The primary concern of service response logistics is

the management and coordination of the organization's service activities