Operations Management

Case Analysis Manzana Insurance EPGP Group 6

Group Members Roll no 1314007 1314009 1314028 1314030 1314040 Name Archibald Jerald Serrao Ashish Gupta Martand Srivastava Nagendra Yadav Rahul Kumar

0 Overview

Figure: Service flow at Fruitvale with throughput at each stage

Profits of Fruitvale are declining since 1989 and it is losing customers every quarter which is accentuating its losses further. Fruitvale has reported a loss of $174k and $121k in first two quarters of 1991. Number of new policy subscriptions is also stagnant. Following are major concern for Bill Pippen (who has been passed on the problem by his boss John Lombard): 1) High Turnaround Time is driving away originating agents from referring new customers to buy policies from Fruitvale branch. Average TAT for Fruitvale has slipped from 5 days to 6 days in last one year at a time when Golden Gate is offering 1 day guaranteed TAT. 2) Renewal losses even though the process of renewing an existing policy is triggered automatically 30 days before the expiry, still Fruitvale has high late renewals (44%) and renewal losses (47%). Compare this to Golden gate insurance which has no late renewals and only 15% losses of renewals. 3) Operating procedure there is difference between the stated policy of the company to go with FIFO method of handling requests and actual practice (of prioritizing RUNs and RAPs) that is followed which is causing major delays in the renewals. 4) Standard deviation in service delivery is quite high for RUN and RAP requests at each department which shows underwriting teams are not very good at responding to RUNs and RAPs requests. 5) Organization structure and compensation policy are not in line with the organization goals, employees are incentivized in such a way which tempts them to maximize their commission by focusing on only RAPs and RUNs.

1 Turnaround Time Turnaround time (TAT) is the total time required to complete the operating process from distribution clerk to policy writing for one request.

Originating agents who bring business to the Fruitvale, take TAT as the measure of service quality and based on that they recommend insurance policies to their customers.
Arrival Rate (rqst) Weighted Avg Processing Time (min/rqst) Weighted Avg Processing Time (hour/rqst) Total time required (hours) Workers available Hours available Capacity available per day (hours/day) Capacity available per day (mins/day) Capacity utilization
Table 1: Capacity Utilization

Distribution 39 41 0.68 26.65 4 7.5 30 1800 89%

Underwriting 39 28.4 0.47 18.46 3 7.5 22.5 1350 82%

Rating 39 70.4 1.17 45.76 8 7.5 60 3600 76%

Policy Writing 29 54.8 0.91 26.49 5 7.5 37.5 2250 71%

Fruitvale is overstating their TAT using 95% Standard Completion Time (SCT) [Appendix 1]. With current capacity they are already processing approximately 39 policies per day with a WIP of 82 policies. This means a turnaround time of approximately 2 days (by Littles Law). By overstating their turnaround time, Fruitvale is sending wrong signal to its agents, which in turn is hurting its business. Using 95% SCT is not a good measure to calculate the TAT because of the high variation in processing RAPs and RUNs. Appendix 2 shows the calculation for TAT using the mean time [from Exhibit 4] which gives the TAT of 4.7 days. Through put time for RERUNs alone is 3.2 days whereas for RAPs RUNs and RAINs it is less than 1 day. Case mentions that Rating and Policy Writing procedures have been fairly automated after the introduction of desktop computers and it is more of a mechanical job now in these departments. Assuming that because of the use of computers now rating and policy writing takes minimum time for all the requests we recalculated the TAT in Appendix 3. This comes to 2.8 days with 1.9 days for RERUNs alone. We feel that the average time required to process requests in Rating and Policy Writing is overstated which is inflating the overall TAT. Reason for this could be the veracity of data in Exhibit 4. Since the data in exhibit 4 is from 1986 it might not be reflective of the impact of automation that has recently taken place in rating and policy writing department.

2 Renewals delay and loss of revenue In first half of 1991 alone Fruitvale have lost 926 [Exhibit 7 of case] renewals worth $5,745,830 [$6205 X 926] or revenue over the year which directly impacts its bottom line. This decline in branch profit has started from the 4th Quarter of 1989 [Exhibit 5] and starting from then on the branch is losing money every quarter. In fact it has made losses during 1st ($174k) and 2nd ($121k) quarter of 1991. Among lost renewals Territory 1 renewals lost percentage is highest in first half of 1991.
Territory 1 636 403 63% Territory 2 840 227 27% Territory 3 605 296 49%

RERUN's received Renewals lost

3 Standard operating procedure Company policy in effect is to use First in First out system at each stage of the underwriting process. But in reality RUNs and RAPs are given higher priority because of the expected commission associated with them. Because of this the RERUNs processing is suffering significantly. Following are the total throughput times for each type of requests flowing through all four departments.

RUN Total Throughput in days for individual requests (SCT 95%) 0.7

RAP 1.1

RAIN 0.8

RERUN 5.5

RUN Total Throughput in days for individual requests (Mean time) 0.4

RAP 0.6

RAIN 0.5

RERUN 3.2

RUN Total Throughput in days for individual requests (Minimum time for Rating and Policy Writing)

RAP

RAIN

RERUN

0.3

0.4

0.3

1.9

Also there is problem of unbalanced workload for the 3 underwriting teams. From Exhibit 7 it is clear that Underwriting Team 1 is running at a very high utilization compared to Underwriting Team 3.

Requests (H1 of 1991) Per day (120 days) Time required (28.4 minutes weighted avg) Total time available Utilization

Territory 1 1867 15.6 441.9 450 98%

Territory 2 1657 13.8 392.2 450 87%

Territory 3 1430 11.9 338.4 450 75%

4 High service response variability Looking at Exhibit 4 we find that variability (coefficient of variation = standard deviation / mean) in the servicing times is showing an interesting pattern. Highest variability is shown in underwriting department (especially for RERUNs) Primary cause of this could be lack of formal procedures (or in this case motivation of employees to process RERUNs) to process requests in underwriting teams. Standardizing the processes for RUNs and RAPs will improve the overall service time and reduce the mean time to complete the request.
RUN 44.8% 73.4% 27.2% 14.5% RAP 49.8% 64.5% 21.0% NA RAIN 21.1% 51.8% 24.3% 15.9% RERUN 22.1% 105.9% 12.8% 19.0%

Distribution Underwriting Rating Policy Writing

Table: Coefficient of Variation

5 Organization Structure and Compensation Policy Underwriting department (Bob Melrose) is more inclined towards prioritizing RUNs and RAPs relative to RAINs and RERUNs. On the other hand Rick Ramirez (Rating Dept) and Phyllis Chen (Policy Writing) are in line with the organizational policy of using FIFO. In order to retain its senior underwriters Manzana introduced Salary/Plus scheme which seems to be backfiring. They are incentivizing senior employees to write new policies and will be paid bonus (25% commission) for each new policy written above their established quota. This is making employees de-prioritize the RAINs and RERUNs which is hurting the business.

Recommendations
We recommend following measures for Fruitvale

1 Right Signalling of TAT

Fruitvale should use right method of calculating the TAT. We recommend using the Mean time for Distribution and Underwriting departments and Minimum time for Rating and Policy Writing departments (As shown in Appendix 3). They should also look at revising their service times in departments based on recent automations in rating and policy writing departments.

2 Proper prioritization of RERUNs

FIFO method should be used across all departments. RERUNs shouldnt be de-prioritized. There is no reason for keeping the RERUNs waiting for 30 days and process only on the last day. We recommend that distribution department should release the RERUNs 2 days prior to the expiry date. [Please refer Appendix 4] After rearranging the team sizes the throughput for RERUNs comes to 1.8 days.

3 Service quality improvement

We recommend introducing 6-sigma initiatives (started by Motorola in 1985) to reduce variations in service delivery timings and reduction in the mean time to process the requests. There could be inefficiencies across operating procedures which can be addressed by formalizing the processes across departments.

4 Automation and Organizational restructuring

There should be more focus on automating the mechanical tasks. Since there is already a drive in Rating and Policy Writing departments to bring automation, it can free up some people from these departments who can then be trained and reassigned to Distribution and Underwriting departments. Also we recommend i) ii) iii) iv) v) Having 5 teams in underwriting 2 people in rating and 5 in policy writing 8 people in distribution Increasing the daily working hours from 7.5 to 8 hours per day. Rationalizing the rating and policy writing times to complete requests

Arrival Rate (rqst) Weighted Avg Processing Time (min/rqst) Weighted Avg Processing Time (hour/rqst) Total time required (hours) Workers available Hours available Capacity available per day (hours/day) Capacity available per day (mins/day) Request that can be processed per day Capacity utilization

Distribution 82 41 0.68 56.03 8 8 64 3840 93.7 88%

Underwriting 82 28.4 0.47 38.81 5 8 40 2400 84.5 97%

Rating 82 7 0.12 9.57 2 8 16 960 137.1 60%

Policy Writing 61.5 30 0.50 30.75 5 8 40 2400 80.0 77%

(Assuming minimum times are achievable and sustainable for Rating and Policy Writing with the computerized systems.) Using this new alignment the total turnaround time can be brought below 1 day considering 82 WIP requests. Fruitvale should also centralize the underwriting teams into a single big team to cater to all requests instead of having territorial divisions of the teams. This will balance the disproportionate work load among the teams.

Appendix 1 (TAT Using SCT 95%)

Total WIP Total Throughput (days) Total Throughput for individual requests Distribution (Workers = 4) Total at DC To be processed Avg per distribution clerk SCT 95% Total Minutes Throughput for each request Total time needed (minutes) Total time available (minutes/worker) Through put days WIP at Distribution Through put rate (requests/day) Underwriting (Workers/Teams = 3) Total at UT From DC To be processed Avg per worker SCT 95% Total Minutes Throughput for each request Total time needed (minutes) Total time available (minutes/worker) Through put days WIP at Distribution Through put rate (requests/day) Rating (Workers = 8) Total at Rating Underwriting From DC To be processed Avg per worker SCT 95% Total Minutes Throughput for each request Total time needed (minutes) Total time available (minutes/worker) 82.0 8.2 RUN 0.7 RUN 1 1 0.25 128.1 32.0 0.07 248.7 450 0.6 16.0 26.7 RUN 3 1 4 1.3 107.2 142.9 0.32 1534 450 3.4 68.0 20.0 RUN 1 3 1 5 0.625 112.3 70.2 0.16 915 450

RAP 1.1 RAP 3 3 0.75 107.8 80.9 0.18

RAIN 0.8 RAIN 1 1 0.25 68.1 17.0 0.04

RERUN 5.5 RERUN 11 11 2.75 43.2 118.8 0.26

RAP 7 3 10 3.3 87.5 291.7 0.65

RAIN 6 1 7 2.3 49.4 115.3 0.26

RERUN 36 11 47 15.7 62.8 983.9 2.19

RAP 2 7 3 12 1.5 88.7 133.1 0.30

RAIN 1 6 1 8 1 89.4 89.4 0.20

RERUN 7 36 11 54 6.75 92.2 622.4 1.38

Through put days WIP at Distribution Through put rate (requests/day) Policy Writing (Workers = 5) Total at policy writing Rating Underwriting From DC To be processed Avg per worker SCT 95% Total Minutes Throughput for each request Total time needed (minutes) Total time available (minutes/worker) Through put days WIP at Distribution Through put rate (requests/day)

2.0 79.0 38.9 RUN 1 3 1 5 1 89.3 89.3 0.20 969 450 2.2 82.0 38.1 RAP 2 7 3 12 2.4 0 0.00 RAIN 1 1 6 1 9 1.8 72.1 129.78 0.29 RERUN 2 7 36 11 56 11.2 67 750.4 1.67

Appendix 2 (TAT Using Mean Time)

Total WIP Total Throughput (days) Total Throughput for individual requests Distribution (Workers = 4) Total at DC To be processed Avg per distribution clerk Mean Time Total Minutes Throughput for each request Total time needed (minutes) Total time available (minutes/worker) Through put days WIP at Distribution Through put rate (requests/day) Underwriting (Workers/Teams = 3) Total at UT From DC To be processed Avg per worker Mean Time Total Minutes Throughput for each request Total time needed (minutes) Total time available (minutes/worker) Through put days WIP at Distribution Through put rate (requests/day) Rating (Workers = 8) Total at Rating Underwriting From DC To be processed Avg per worker Mean Time Total Minutes Throughput for each request Total time needed (minutes) Total time available (minutes/worker) 82.0 4.7 RUN 0.4 RUN 1 1 0.25 68.5 17.1 0.04 142.5 450 0.3 16.0 50.5 RUN 3 1 4 1.3 43.6 58.1 0.13 531 450 1.2 68.0 57.7 RUN 1 3 1 5 0.625 75.5 47.2 0.10 719 450

RAP 0.6 RAP 3 3 0.75 50 37.5 0.08

RAIN 0.5 RAIN 1 1 0.25 43.5 10.9 0.02

RERUN 3.2 RERUN 11 11 2.75 28 77.0 0.17

RAP 7 3 10 3.3 38.0 126.7 0.28

RAIN 6 1 7 2.3 22.6 52.7 0.12

RERUN 36 11 47 15.7 18.7 293.0 0.65

RAP 2 7 3 12 1.5 64.7 97.1 0.22

RAIN 1 6 1 8 1 65.5 65.5 0.15

RERUN 7 36 11 54 6.75 75.5 509.6 1.13

Through put days WIP at Distribution Through put rate (requests/day) Policy Writing (Workers = 5) Total at policy writing Rating Underwriting From DC To be processed Avg per worker Mean Time Total Minutes Throughput for each request Total time needed (minutes) Total time available (minutes/worker) Through put days WIP at Distribution Through put rate (requests/day)

1.6 79.0 49.4 RUN 1 3 1 5 1 71 71 0.16 729 450 1.6 82.0 50.6 RAP 2 7 3 12 2.4 0 0.00 RAIN 1 1 6 1 9 1.8 54 97.2 0.22 RERUN 2 7 36 11 56 11.2 50.1 561.12 1.25

Appendix 3 (TAT Using Minimum Time for Rating & Policy Writing Dept)
Total WIP Total Throughput (days) Total Throughput for indv requests Distribution (Workers = 4) Total at DC To be processed Avg per distribution clerk Mean Time Total Minutes Throughput for each request Total time needed (minutes) Total time available (minutes/worker) Through put days WIP at Distribution Through put rate (requests/day) Underwriting (Workers/Teams = 3) Total at UT From DC To be processed Avg per worker Mean Time Total Minutes Throughput for each request Total time needed (minutes) Total time available (minutes/worker) Through put days WIP at Distribution Through put rate (requests/day) Rating (Workers = 8) Total at Rating Underwriting From DC To be processed Avg per worker Minimum Time Total Minutes Throughput for each request Total time needed (minutes) 82.0 2.8 RUN 0.3 RUN 1 1 0.25 68.5 17.1 0.04 142.5 450 0.3 16.0 50.5 RUN 3 1 4 1.3 43.6 58.1 0.13 531 450 1.2 68.0 57.7 RUN 1 3 1 5 0.625 7 4.4 0.01 79

RAP 0.4 RAP 3 3 0.75 50 37.5 0.08

RAIN 0.3 RAIN 1 1 0.25 43.5 10.9 0.02

RERUN 1.9 RERUN 11 11 2.75 28 77.0 0.17

RAP 7 3 10 3.3 38.0 126.7 0.28

RAIN 6 1 7 2.3 22.6 52.7 0.12

RERUN 36 11 47 15.7 18.7 293.0 0.65

RAP 2 7 3 12 1.5 8 12.0 0.03

RAIN 1 6 1 8 1 15 15.0 0.03

RERUN 7 36 11 54 6.75 7 47.3 0.11

Total time available (minutes/worker) Through put days WIP at Distribution Through put rate (requests/day) Policy Writing (Workers = 5) Total at policy writing Rating Underwriting From DC To be processed Avg per worker Minimum Time Total Minutes Throughput for each request Total time needed (minutes) Total time available (minutes/worker) Through put days WIP at Distribution Through put rate (requests/day)

450 0.2 79.0 452.1 RUN 1 3 1 5 1 39.5 39.5 0.09 530 450 1.2 82.0 69.6 RAP 2 7 3 12 2.4 0 0.00 RAIN 1 1 6 1 9 1.8 30 54 0.12 RERUN 2 7 36 11 56 11.2 39 436.8 0.97

Appendix 4 (TAT Using Minimum Time for Rating & Policy Writing Dept & Changing Team Sizes)
Total WIP Total Throughput (days) Total Throughput for indv requests Distribution (Workers = 4) Total at DC To be processed Avg per distribution clerk Mean Time Total Minutes Throughput for each request Total time needed (minutes) Total time available (minutes/worker) Through put days WIP at Distribution Through put rate (requests/day) Underwriting (Workers/Teams = 3) Total at UT From DC To be processed Avg per worker Mean Time Total Minutes Throughput for each request Total time needed (minutes) Total time available (minutes/worker) Through put days WIP at Distribution Through put rate (requests/day) Rating (Workers = 8) Total at Rating Underwriting From DC To be processed Avg per worker Minimum Time Total Minutes 82.0 2.6 RUN 0.2 RUN 1 1 0.125 68.5 8.6 0.02 71.25 480 0.1 16.0 107.8 RUN 3 1 4 0.8 43.6 34.9 0.07 318 480 0.7 68.0 102.5 RUN 1 3 1 5 2.5 7 17.5 RAP 2 7 3 12 6 8 48.0 RAIN 1 6 1 8 4 15 60.0 RERUN 7 36 11 54 27 7 189.0 RAP 7 3 10 2.0 38.0 76.0 0.16 RAIN 6 1 7 1.4 22.6 31.6 0.07 RERUN 36 11 47 9.4 18.7 175.8 0.37

RAP 0.3 RAP 3 3 0.375 50 18.8 0.04

RAIN 0.3 RAIN 1 1 0.125 43.5 5.4 0.01

RERUN 1.8 RERUN 11 11 1.375 28 38.5 0.08

Throughput for each request Total time needed (minutes) Total time available (minutes/worker) Through put days WIP at Distribution Through put rate (requests/day) Policy Writing (Workers = 5) Total at policy writing Rating Underwriting From DC To be processed Avg per worker Minimum Time Total Minutes Throughput for each request Total time needed (minutes) Total time available (minutes/worker) Through put days WIP at Distribution Through put rate (requests/day)

0.04 315 480 0.7 79.0 120.6 RUN 1 3 1 5 1 39.5 39.5 0.08 530 480 1.1 82.0 74.2

0.10

0.13

0.39

RAP 2 7 3 12 2.4 0 0.00

RAIN 1 1 6 1 9 1.8 30 54 0.11

RERUN 2 7 36 11 56 11.2 39 436.8 0.91