04-08-2022

Services Management – Integrating What is Operations Management?

Marketing and Operations Management
Perspectives

Term IV Operations management is the management of systems or

processes that create goods and / or provide services through the
transformation of inputs into outputs

Prof. Abhishek Srivastava

Indian Institute of Management, Kashipur

What is Operations Management?

Services??????

Making consumers happy by proving value

How much value????

https://www.youtube.com/watch?v=XUBeW_NFggM

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Goods and Services

Service Operations Management • Tangible
• Uniformity of input/output
• Production usually separate
The implementation of the organizations strategy through the operational from consumption
control of the organization by focusing on not only product or service
development,
• Can be inventoried
But also the delivery of products and services to the end customer in a way
• Low customer contact
that drives co-creation of value between customer and business’ • Capital intensive

Characteristics of Services
Role of Services in an Economy
• Intangible
• Produced and consumed at same
time
• Often unique
• High customer interaction
• Inconsistent product definition
• Often knowledge-based
• Frequently dispersed
• Labor intensive

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17 of top 25 are services (59.7% of Top 25 Co’s revenues)

Stages of Economic Activity (ctd..) Rank Company Name Revenues Profits S=Service Service Description

1 2013 Fortune 25 Companies

Wal-Mart Stores
($ billions)
469.2
($ millions) H=Hybrid
16,999 S Retail
2 Exxon Mobil 449.9 44,880
3 Chevron 233.9 6,179
4 Phillips 66 169.6 4,124
5 Berkshire Hathaway 162.5 14,824 S Financial Services
6 Apple 156.5 41,733
7 General Motors 152.3 6,188
8 General Electric 146.9 13,641 H Mfg + Financial Services
9 Valero Energy 138.3 2,083
10 Ford Motor 134.3 5,665
11 AT&T 127.4 7,264 S Communications
12 Fannie Mae 127.2 7,220 S Financial Services
13 CVS Caremark 123.1 3,877 S Retail
14 McKesson 122.7 1,403 S Healthcare (pharma distrib)
15 Hewlett-Packard 120.4 -12,650
16 Verizon Communications 115.8 875 S Communications
17 UnitedHealth Group 110.6 5,526 S Healthcare
18 J.P. Morgan Chase & Co. 108.2 21,284 S Financial Services
19 Cardinal Health 107.6 1,069 S Healthcare (pharma distrib)
20 International Business Machines 104.5 16,604 S Consulting
21 Bank of America Corp 100.1 4,188 S Financial Services
22 Costco Wholesale 99.1 1,709 S Retail
23 Kroger 96.8 1,497 S Retail
24 Express Scripts Holding 94.4 1,313 S Insurance
25 Wells Fargo 91.2 18,897 S Financial Services

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Service Operations Management

• https://www.youtube.com/watch?v=iL65JZJ_K
Vo
Services
Vs.
Operations

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1
Manufacturing vs. Service ! 4
Goods vs. Service Operations
Characteristic Manufacturing Service

Output
• Differences
Customer contact
1. Customer contact
2. Uniformity of input Uniformity of output
3. Labor content of jobs Labor content
4. Uniformity of output
5. Measurement of productivity Uniformity of input

6. Production and delivery Measurement of

7. Quality assurance productivity
8. Amount of inventory Opportunity to correct
quality problems

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1 The Service Characteristics and Operational

Manufacturing vs. Service ! 5 Issues
Characteristic Manufacturing Service • In purchasing a service, the consumer interacts with the workforce, equipment,
and physical environment that create the service.
Output Tangible Intangible
• The process itself is, therefore, one dimension of the product. In contrast, the
Customer contact Low High manufacturing process is isolated from the consumer and has an impact on the
consumer only through what effect it has on the product.
Uniformity of output High Low
• The elements of the manufacturing process are designed for the effective
Labor content Low High production of the physical good that is its output.
Uniformity of input High Low
• The labor, equipment, and facilities are functionally designed with the cost and
Measurement of Easy Difficult quality of the product being the primary criteria for evaluating how effectively
productivity these resources are utilized.

Opportunity to correct Easy Difficult • In contrast, the service delivery system must be designed with the presence of the
quality problems
consumer in mind.”

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The Service Characteristics and Operational

The Service Characteristics and Operational
Issues Issues (ctd..)
• Most goods are produced in factories without the presence of customers. Services are
usually sold first and then produced and consumed simultaneously.

• The inseparability of production and consumption, often called simultaneity, makes the DamagedIntangibility
brand reputation and
production process exposed for customer examination and influence. There is no buffer Consumer trust
or clear distinction between the production stage and the consumption stage.
Heterogeneity
• Heterogeneity in service outputs exists for two reasons. First, the service may be
intentionally customized.
Inseparability of production
• Second, because of human involvement of the service provider and the customer,
and consumption
variability is naturally created.

Perishability & labor intensity.

• The output of the service can vary from service provider to service provider, from customer to
customer, and from day to day.

• To make it more complicated and interesting, customers’ evaluation of the same service
performance can be quite different.

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The Service Characteristics and Operational Variability and Services

Issues (ctd..)

• In services, unused capacity is capacity lost forever. Airline seats not taken, motel rooms • Customers introduce tremendous variability
not occupied, and theater tickets not sold cannot be stored and sold tomorrow.
• Dealing with that variability is a central challenge in making a service offering
profitable.
• This characteristic is often called perishability. Perishability leads to difficulty in demand
management, capacity utilization, production planning, and personnel scheduling.
• Operations management theory, rooted in the manufacturing context, typically has
only one thing to say about variability: It must be eliminated.
• Finally, service organizations are often characterized as being more labor intensive
than manufacturing organizations. Service management is seen as being different • Any educated manager learns to recognize it as the enemy of quality.
from manufacturing management because of the higher labor content in most service
settings.

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Variability in the supply chain

Causes of the bullwhip effect (BWE)

The ordering patterns • Demand forecast updating

share a common
recurring theme; the • Order batching
variabilities of the
upstream site are always • Price fluctuation
greater than those of the
downstream site • Rationing and shortage gaming

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Why Variability in Services is Important and difference

from Production variability? Types of Variability

In the service context, the challenge is far more subtle:

Arrival variability

(1) it wouldn’t be wise to drive out all variability;

Damaged brand
Request reputation and
variability
• customers judge the quality of their experience in large part by how much of the variability Consumer trust
they introduce is accommodated, not how sternly it is denied.

(2) While manufacturers have virtually complete control over the cost and quality Capability variability
of their production inputs, service companies face this one, huge exception:
• Their customers are themselves key inputs to the production process. Effort variability

• That form of input is, by its nature, capricious, emotional, and adamantly
Subjective preference
disinterested in the company’s profit agenda variability

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1. Arrival variability
• Customers do not all want service
at the same time or at times
necessarily convenient for the
company.
• Many a grocery store manager has
bemoaned shoppers’ inability to space
their transactions such that checkout
clerks remain busy and lines do not form at
the registers.
3. Capability variability.
• Service businesses must also
work with customers whose
own capabilities differ.
• Whether because of greater
knowledge, skill, physical
abilities, or resources, some
customers perform tasks easily
and others require hand-holding.
• Capability variability clearly
becomes more important when
customers are active participants
in the production and delivery of
a service.
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2. Request variability
• The classic way to address arrival
variability is to require
appointments or reservations, • The range of what customers ask for in a
but that makes sense only in certain service environment
situations. • At a resort, vacationers want different amenities.
• In many service environments, such as
retail stores, call centers, or emergency
rooms, the customers themselves cannot
foresee or delay their needs. The
resulting inefficiencies have inspired a
large body of work in what’s known as
queuing theory and many solutions
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4. Effort variability
• An internal accountant may or may not
take care to hand over well-organized files to
her company’s independent auditor.
• A cleaning service may arrive, do its • A shopper at a warehouse club may or
work, and leave, having had no real may not have the remaining energy to return
interaction with the customer. his massive shopping cart to one of the
When customers must perform a role
in a service interaction, it’s up to them corrals in the parking lot.
• The customer’s particular capabilities how much effort they apply to the task.
make little difference to how well the
• Such effort variability has an
crew does its job.
impact on service quality and
cost.
• In a medical setting, by contrast, a
patient may be more or less able to
describe his symptoms, and that will
affect the quality of the health
care he receives
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Types of Customer Variability

5. Subjective preference variability.
TYPE CUSTOMERS EXAMPLE

Don’t all want service at the same

Arrival time, or at times convenient for your
company.

Request Ask for a range of things

• Customers also vary in their opinions about what it means to be treated
well in a service environment.
Vary in their ability to perform tasks
Capability
needed to receive service.
• One diner appreciates the warmth of a waiter’s first-name introduction; another resents his
presumption of intimacy.
• When a top partner in a law firm lavishes attention on engagements, some clients will be gratified Expend varying degrees of energy on
Effort
by the proof of their cases’ importance. Others will think those expensive billable hours could be tasks needed to receive service.
doled out more judiciously.

Subjective Have different opinions about what it

• These are personal preferences, but they introduce as much unpredictability preference means to be treated well.
as any other variable and make it that much harder to serve a broad base of
customers.

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Types of Customer Variability

A Classic Trade-Off: Accommodate vs. Reduction
TYPE CUSTOMERS EXAMPLE

Don’t all want service at the same
Arrival time, or at times convenient for your
company.
Request Ask for a range of things
Vary in their ability to perform tasks
Capability
needed to receive service.
Expend varying degrees of energy on
Effort
tasks needed to receive service.
Subjective Have different opinions about what it
preference means to be treated well.
• Wherever customer-introduced
Grocery shoppers can’t space their transactions such
variability creates operational issues
that checkout clerks remain busy and lines don’t form.
for a company, managers face a choice:
At a resort, vacationers all want different amenities Do they want to accommodate that
variability or reduce it?
A patient has difficulty describing his symptoms,
Generally, companies that emphasize the
affecting the quality of health care received.
service experience tend toward
accommodation, and
A warehouse club shopper doesn’t return his cart to a
parking lot corral—raising the store’s costs and
impinging on other customers’ experience. those that emphasize operational
simplicity—usually as a means to keep costs
low—tend toward reduction.
One diner appreciates the warmth of the waiter’s first-
name introduction; another resents his presumption
of equal footing.
• Consider a classic illustration of a reduction
strategy: the restaurant menu. Menus, by their
nature, are a way to constrain request
variability. They put a limit on what would
otherwise be an infinite number of potential
orders and therefore make it possible for a
restaurant to offer meals of consistent quality at a
reasonable cost. But customers chafe under too
many constraints
• For them, the ability to request variations in
preparation, ingredients, and side dishes—or to
order off the menu entirely—is part of a premier
dining experience. When restaurants do not
accommodate special orders, they reduce the
complexity of the operating environment but also
may diminish service quality

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Accommodation strategies
Reduction Strategy
• Accommodation strategies take different forms, depending on the business and
type of customer-introduced variability.

• Companies that use reduction strategies tend to attract price-conscious
customers who are willing to trade off an excellent service experience for low
prices.
• People who choose discount airlines, bulk retailers, movie matinees, and off-peak travel options
essentially reduce their collective variability by conforming to a company’s operational needs, even
at the risk of an inferior service experience.
• Very often, accommodation involves asking experienced employees to
compensate for the variations among customers
• For example, in a business where customers have divergent views of how service should be
delivered (a business, that is, with high subjective-preference variability), a veteran employee learns
to diagnose customer types. By making on-the-fly adaptations to suit their preferences, he
essentially “protects” the customers from having to make many adjustments of their own.
• It costs more, of course, to hire, train, and keep employees who can compensate for customers.
• Therefore, the success of an accommodation strategy usually hinges on a
company’s ability to persuade customers to pay more to cover the added expense.

• Generally, only companies at the high end of their competitive landscape can
command such a premium.

• Those at the low end must rely on strategies to reduce variability.

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The Service Characteristics and Operational

Issues (ctd..)

• https://www.youtube.com/watch?v=fkgv7lXw3x
The matrix shows possibilities beyond
c classic reduction and classic
accommodation strategies:
• https://www.youtube.com/watch?v=4BSfWh9u
HoY A company can greatly reduce the
impact of variability on its operating
• https://www.youtube.com/watch?v=tNpGFaoY environment without compromising
the service experience by targeting
WVA customers on the basis of variability type.

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Creative Strategies for Managing Variability Creative Strategies for Managing Variability

STRATEGY EXAMPLES

STRATEGY
Low-cost
accommodation (paying
little or nothing to serve
highly variable customers)
EXAMPLES
(1) Online auction house eBay accommodates arrival, request, capability,
and effort variability at low cost by having customers, not employees,
perform virtually all the labor of buying and selling items on its Web site.
(2) Dell Computer accommodates arrival and request variability by
outsourcing on-site customer service to third-party providers. To maintain
high-quality customer relationships, Dell puts a “service wrapper” around
outsourced customer contacts, disguising the third party’s role.
Uncompromised
reduction (decreasing
variability without eroding
customers’ experience)
(1) At Starbucks, customers can order many permutations of beverages—
choosing among sizes, flavors, and preparation techniques. To reduce request
variability and fill orders accurately and efficiently, Starbucks trains counter
clerks to call out orders to beverage makers in a particular way. It also reduces
capability variability by teaching customers its ordering protocol. For
instance, it provides a “guide to ordering” pamphlet and has clerks repeat
orders to customers in the correct way (not the way they were presented).
Most customers learn to avoid the implied correction by stating their order
according to protocol.
(2) Zipcar, a car-sharing service, reduces effort variability by charging
penalties to customers who return cars to their parking spaces late—behavior
that raises Zipcar’s costs and spoils other customers’ experience

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Classic Low-Cost Classic Reduction Uncompromised

Accommodation Accommodation Reduction

Arrival • Make sure plenty of Hire lower-cost • Require • Create

employees are on hand labor • Automate reservations complementary Classic Accommodation Low-Cost Classic Reduction Uncompromised
tasks • Provide off-peak demand to smooth Accommodation Reduction
• Outsource customer pricing arrivals without
contact • Limit service requiring customers Effort • Make sure employees are • Hire lower-cost • Use rewards and Target customers on
• Create self-service availability to change their on hand who can labor • Create self- penalties to get the basis of
options behavior compensate for service options customers to motivation • Use a
customers’ lack of effort • with extensive increase their normative approach
Do work for customers automation effort to get customers to
Request • Make sure many Hire lower-cost • Require customers Limit service increase their effort
employees with specialized labor to make breadth • Target
specialized skills are on • Automate tasks reservations for customers on the
hand • Create self-service specific types of basis of their requests Request • Make sure employees are on • Create self-service Persuade • Target customers
• Train employees to options service • Persuade hand who can diagnose options that permit customers to on the basis of their
handle many kinds of customers to differences in customization adjust their subjective
requests compromise their expectations and adapt expectations to preferences
requests • Limit accordingly match the value
service breadth proposition

Capability Make sure employees are • Hire lower-cost • Require customers Target customers
on hand who can adapt to labor to increase their on the basis of their
customers’ varied skill • Create self-service level of capability capability
levels • Do work for options that require no before they use the
customers special skills service

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