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Services Operations Management (SOM)WMP-Term VI

Dr. S VenkatQM and OM Area

IIM Lucknow

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Outline• Recap on OM learnings• Introduction and Importance of services• Role of services in economy-India’s GDP • Characteristics of Services• Decision Framework and their importance• Design of services• Automation in Services• Conclusions

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Introduction and importance of services

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• Economic issues- Macro level• Survey Article- Omega (2002)• Framework – EMJ (1993)• Best Practices- CMR ( 2001)

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Re-cap on OM Topics

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Specific Learnings

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• What is the role of services in economy?• Which OM problems are the most important for

service organisations?• Elements of service process maps and its

relevance• SOM- Important Ops problems and OM methods

to address them• How to conduct a survey to know the important

problems and remedies?• What kind of survey instruments to use?• What is the acceptance rate for high level

employee surveys?• Role of framework and best practices

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What are Services?• Material gains- achieved by adding value to

natural resources.• Many org transform input materials to more value

added output (goods) through transformation process.

• Similarly organisations also add value to personal lives through intangibles (services).

• Services can be defined as economic activities that produce time, place, form or psychological utilities.

• Services are acts, deeds, performances which are intangibles.

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What are Services?• Time-maid servant (saves consumer’s time)• Place- supermarket etc (provide many at one place)• Form- useful form to the manager/consumer

(database)• Psychological- Refreshment/movie etc• Services are contrast to goods• Goods are tangibles and can be stored/used later• Services are intangible/perishable and can’t be

stored• TV is a good and programme in a TV is a service• Goods are accompanied by facilitating services• Services are accompanied by facilitating goods

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Problems in Service Orgs

• McDonald's to pay Rs 15,000 for delivering wrong burger (Feb 2, 2013)

• The order came on the plea of Delhi resident Vimal Chaudhary who had alleged that she had ordered for two vegetarian burgers, but she was delivered one non-vegetarian and one vegetarian burger

• New Delhi: Fast food giant McDonald's has been directed by a consumer forum here to pay Rs 15,000 as compensation to one of its customers for delivering a non-veg burger instead of the vegetarian one she had ordered. The South West District Consumer Disputes Redressal Forum said, "By delivering her a non-vegetarian burger instead of the vegetarian burger ordered by her is a gross negligence on the part of the delivery-crew-member, whose conduct is tantamount to deficiency-in-service.

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Problems in Service Orgs• "Allowing the complaint, we direct the opposite party (McDonald's) to pay to

the complainant Rs 10,000 as compensation and Rs 5,000 as cost of litigation," the bench presided by Narendra Kumar said. The order came on the plea of Delhi resident Vimal Chaudhary who had alleged that she had ordered for two vegetarian burgers, but she was delivered one non-vegetarian and one vegetarian burgers. She had said that she realised it was a non-veg burger only after eating half of it and thereafter, she had started vomiting. The woman had also alleged that being an Arya Samaj follower and a Hindu, eating the non-vegetarian food has hurt her emotionally and she also suffered religiously.

• In its defence, the McDonald's had contended that the woman had willfully accepted the non-veg burger instead of the vegetarian one ordered by her. The forum, however, rejected the contention, saying had she wanted a non-veg burger she would have ordered one.

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What are the lessons from MD?• Order details Vs actual deliveries (Service ………

problem)• Dispute resolution mechanism• Cost of penalties• Importance of training for workforce• Customer sensitivity to religious beliefs• Impact of such incidents on overall business and brand

image• Need for continuous improvement or quality mgt

systems (QC Vs QA)• Other examples like US Bank and Indian Bank

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Airline Industry-Innovations• Unbundling services: A new revenue stream for

airlines (May 8, 2013, BL)• Government’s decision to unbundle certain services on

domestic flights is good news or bad for flyers. • Learning from developed countries, many airlines,

especially low-cost airlines charges for various services.• List of services: Preferential seat, Meal/snack/drinks,

airline lounges, check in baggage, sports equipment carriage, musical instruments, special declaration of valuable baggage

• Civil Aviation Ministry studied the airline industry and its services before unbundling move.

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Airline Industry-InnovationsRevenue stream • Charging for services is seen as a separate revenue

stream for airlines. • Ryanair charges a priority boarding fee of €7-10 (Rs

500-700) and this allows the flyer to be among the first to board a flight.

• AirAsia, plans to charge Rs 90 for a standard seat and Rs 450 for a “hot seat”. This allows the flyer priority boarding and get a comparatively comfortable seat with more leg space.

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Airline Industry-InnovationsRevenue stream • For sports equipment and musical instruments (20 kg/per

item/one way) Ryanair charges €50-60 (Rs 3,500-4,200). • Checked-in bags will attract the usual charge. The

unbundling in India covers these two categories. • For every first checked-in bag (15 kg) Ryanair charges

€15 (about Rs 1,100) if done at the time of booking on the airline’s Web site.

• This figure goes up to €60 (Rs 4,200) if the booking is made through the call centre or if the ticket is purchased at the airport.

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Airline Industry-InnovationsRevenue stream • For the second checked-in bag (15 kg), the rate ranges

from €105 (Rs 7,500) to €160 (Rs 11,000), depending on the flight and low/peak season.

• American Airlines charges domestic flyers $25 (about Rs 1,400) for the first checked-in bag and $35 (about Rs 1,900) for the second.

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Airline Industry-InnovationsCommercial decision • DGCA has allowed airlines in India also to start

charging separately for these services. • Air India (is the first one) to reduce the baggage

allowance to 15 kg and setting a fee of Rs 250/kg for excess weight. This applies from May 13.

• British Airlines Example for students • Other airlines are yet to make their minds. • SpiceJet CEO said this will be a “commercial

decision” which the airline will take at an appropriate time.

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Airline Industry-InnovationsFundamental issues on service unbundling• Is it good in Indian context? Yes or No and why?• How many fly by air in India compared to other

countries?• What are the alternate channels for customers?• How these alternate channels are going to evolve?• What will be role of Govt and service providers?• How customers will get the benefit?• What about issues related to customer service like

delays, quality of services, loss/damage of baggage?

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World Economy-An overviewIMF Global Report: 2012 Growth ForecastUS: 2.2% Japan: 2.2% 17 Country Euro Zone: -0.4% China: 7.8% India: 4.9%

World economy is expected to grow at 3.3% this yearSlowest growth in three years and IMF sees weak global recovery as wellThis is IMF’s second GDP downgrade since April 2012 India GDP forecast to 4.9%, down from a forecast of 6.1% in July.

Rationale behind India’s GDP forecast cutWaning business confidence, slow approvals for new projects, sluggish structural reforms, rising current account deficit, depreciating rupee and weak demand.

Monetary policy should stay on hold until a sustained decrease in inflation materializes. Reaccelerate infra investment, launch structural reforms and lower subsidies.

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India GDP -Sectoral

* Economic Survey of India 2011-12, Government of India, Ministry of Finance, Economic Division.SOM-WMP S Venkat

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India GDP growth –Sectoral

* Economic Survey of India 2011-12, Government of India, Ministry of Finance, Economic Division.

Sector 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Avg StdAgriculture 5.5 -4.9 8.2 1.1 4.6 4.6 5.5 0.4 1.7 6.8 1.9 3.22 3.66Manf 2.7 7.1 7.9 10 10.7 12.7 10.3 4.7 8.6 7.4 4.5 7.87 3.02Trade, Hotels, Transport, Commn 8.6 8.5 11.1 9.7 12 11.6 10.9 7.5 10.3 11.1 11.2 10.23 1.46Fin, Insurance, Real Estate & biz services 7.1 7.7 5.8 8.7 12.6 14 12 12 9.4 10.4 9.1 9.89 2.55Public adm & defence and other services 4.1 3.9 5.4 4.9 7.1 2.8 6.9 12.5 12 4.5 5.9 6.36 3.18Services-Comb 6.6 6.70 7.43 7.77 10.57 9.47 9.93 10.67 10.57 8.67 8.73 8.83 1.54Overall GDP 5.5 4 8.1 7 9.5 9.6 9.3 6.7 8.4 8.4 6.9 7.58 1.76

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India GDP-Growth SectoralIndia's GDP -Sector wise (Source: B L Dec 5, 2012)FY Agri & Alld Industry Services GDP at F Cost Non-Agri

2009 0.4 4.7 10 6.7 8.12010 1.7 9.8 10.5 8.4 9.82011 6.8 7.4 9.3 8.4 8.62012 2.3 3.4 8.9 6.5 7.1

2013 (1H) 2 3.4 7 5.4 5.8Avg 2.64 5.74 9.14 7.08 7.88

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GDP Growth

Restart of GDP growth - future seems to be bright

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GDP growth

GDP growth is strongly driven by service sector & Industry

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GDP growth

Inflation continue to grow

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Banking Sector

NPA stands at 3%, Competition is very high

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Insurance Sector

Increase in income level will drive the sector

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IT/ITeS Sector

New opportunities and niche areas are going to drive the growth

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Retail Sector

Customer Service is utmost concern for the playersSOM-WMP S Venkat

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Macro Level factors/Issues• Is service sector growth sustainable? (Azim Premji)• Govt Policy related issues- governance structure• Tax structure and uniform implementation of policy

across states• Infrastructure support for service delivery• Adequacy of skilled workforce• Support of FIs and subsidies• Highly fragmented sector (though Sunrising industry)

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Design of ServicesCharacteristics

FrameworksBest practices

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Nature of ServicesSeven major aspects (Colours)1. Everyone is an expert on services2. Services are idiosyncratic (what works well in

one case may be disastrous in another case)3. Quality of work is not quality of service- Ex.

Completing a repair in one day instead of an hr

4. Most services contain a mix of tangible and intangible attributes that constitute a service package- pure service does not exist

5. High-contact services are experienced, whereas goods are consumed

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Nature of Services6. Effective management of services requires

an understanding of marketing and personnel, as well as operations

7. Services often take the form of cycles of encounters involving face-to-face, phone, Internet, electromechanical, and/or mail interactions

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Characteristics of Services • Intangibility- legal advise, classroom training, special

show tickets etc. Services are performances and actions rather than objects, therefore having poor tangibility.

• Inseparability-service can’t be stored or inventoried as in the case of manufactured products an degree of customer contact is very high

• Perishability- simultaneous production and consumption. • Variability- outcome of service depends on amount of

interaction and mode of interaction etc. Heterogeneity leads to high variability in the system performance

• Service system- operations sys, mrkt sys, service, delivery sys, service personnel

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Characteristics of Services • Intangibility- Expectations and perceptions,

appropriability, materialisation• Perishability- Services can not be inventoried in

traditional sense (Idle time is costly), managers need to match demand and supply. Ex preventive maintenance during low demand time, pre-packaged goods, filling of forms while waiting in the line, differential pricing

• Heterogeneity-inconsistency in service delivery as well as customers

• Simultaneity- co-production and co-consumption• Transferability – customer experience comparison

with non-related service providers (Car and tennis racket)

• Cultural Specificity- culture influences the service offered (Ex. Restaurants, health care)

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Characteristics of Services • External environment- Customers and competitors

present- Mgrs need to identify customer needs (Mrktg) and sizing up the opportunity and threats (Strategy) – Strategy (PST- product, segment and target)- Product definition and differentiation, org culture and leadership ( Ex. Telecom seconds billing), market segmentation, competitive forces

• Internal- Planning and Execution related- Information packaging, efficiency, resource org and their utilisation, performance measurement and evaluation. System design, matching demand and supply

• Interface- Execution/delivery of service- Moment of truth- understand the characteristics of service and customer (quality, encounters etc)

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Service – Manufacturing Continuum

Pure Product Pure Service

Ayurvedic Healing Treatment

Legal/Tax Consulting

Cyber Café – Telephone Booths

Emergency Maintenance Services

Facilities Maintenance

High quality restaurant meal

Fast food in a eat out joint

Customised durable goods

Fast moving commodities

Vending Machines

Adopted from Hill, T. (2005), Operations Management (Palgrave Macmillan), 2nd Edition, pp 14.

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Manufacturing & ServiceSimilarities & DifferencesManufacturing Organizations Service Organizations

Differences

Physical durable product Intangible, perishable product

Output can be inventoried Output can’t be inventoried

Low customer contact High customer contact

Long response time Short response time

Regional, national, Intl. markets Local markets

Large facilities Small facilities

Capital intensive Labour intensive

Quality easily measured Quality not easily measured

Similarities

Is concerned about quality, productivity & timely response to its customers

Must make choices about capacity, location, layout

Has suppliers to deal with

Has to plan its operations, schedules and resources

Balance capacity with demand by a careful choice of resources

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Critical Indicators

Time Cost Variability

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Operations Prob in Service OrgsAs per survey of Service Organisations • Most important problems

• Least important problems

• Study methodology and uniqueness

• Problems and their identification

• Problems and implications for educatorsSOM-WMP S Venkat

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Operations Prob in Service Orgs• Most important problems

• Resource utilisation (18)• Quality of services (15)• Forecasting (5)

• Least important problems • Location decisions (1)• Layout decisions (2)• Distribution requirements (21)

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Issues in Service Operations

• Based on Organisational context: Service business and internal services

• A service business is the management of organizations whose primary business requires interaction with the customer to produce the service.

• Ex. Banks, airlines, hospitals, law firms, retail stores and restaurants etc.

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Issues in Service Operations

What is the Role of technology?

• Facilities-based services: Where customers go to service facility

Ex. Po, hospitals, ed inst

• Field-based services: Where the production and consumption of the service takes place in the customer’s site

Ex. Cleaning, home repair

Service business

Transfer of facility based services to field based services Ex. Telemarketing, BPO, mobile/online based

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The Service Triangle

TheCustomer

The ServiceStrategy

ThePeople

TheSystems

A philosophical view -Similar to quality triangle

Customer quality is the basis Organizations exists to serve the customer, the systems and the employees exist to facilitate the process of service.

Relation between org (TM) and employee reflect the service to the customer (TVS case) then the focus shifts from external customer to internal employee welfare/trg etc In service triangle operations

play a vital role, Why?SOM-WMP S Venkat

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The Service Triangle

Operations are responsible for performance of service system Ex. Procedures, equipment, facilities, personnel, customers etcCustomers affect the operations function

In service triangle operations play a vital role, Why?

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Classification of services Customer affect the time of demand, nature of

service, quality of service etc Design decision depends on customer contact/

presence Work done behind scenes is performed on customer

surrogates. Ex. Reports, databases, invoices, diagnostic tests etc

This is similar to maximisation of units produced in a manufacturing system

Diversity in services is due to customer related issues Ex. Bank- ATM, cash withdrawal, teller services, loan, TT, etc

HCC and LCC in a bank on various design decisions like facility location, layout, product design etc

HCC systems subject to higher variability unlike LCCSOM-WMP S Venkat

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Service Process matrix (Schmenner, 1986)

Deg

ree

of la

bour

inte

nsity

Low HighDegree o f interaction & Customisation

Hig

hLo

w

MassService

Service Shop

Service Factory

ProfessionalService

Airlines, truckingHotels, Resorts etc

Hospitals, Auto repair,

Repair services

Retailing, wholesaleSchools, Bank

Doctors,Lawyers, consultants

Degree of labour intensity and degree of customer interactionMass and professional service firms refers to general industry and other two are more descriptiveThe nature of work performed should be the basis for classification Routine and knowledge work has been widely used in the industry and other issue is integrated vs decoupled tasks-specifies how service is delivered and useful for improvement

Service firms differ widely and poses different problems. Clear demarcation helps in addressing them better.

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Types of service businesses (Davis, 1999)

Serv

ice

deliv

ery

Routinised KnowledgeService task/process

Dec

oupl

edIn

tegr

ated

Service Store(SSt)

Service Shop(SSh)

Service Factory(SF)

Service Complex(SC)

Fast food rest, Car rentals etc

Auto repairPersonal servicesProfesl services

Dept stores, hotelsAirlines, insurance

Hospitals, large clinics, adv

Inv banks

CharacteristicsProblemsImprovement stepsTransition relationship

SF- routine processes, tightly integrated in deliverySSt-variety of routine services, decoupledSSh-non-routine knowledge/ craft work, closely integrated in deliverySC- delivering decoupled, non-routine knowledge work

Mass

services

Profel services

This is simple to understand. Considers size and scope of services delivered, improvement can be achieved through SERVQUAL attributes-tangibles, reliability, responsiveness, assurance and empathy

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Types of service businesses (Davis, 1999)Characteristics; Problems; Improvement steps and Transition rel

• SF: Chrs-m/c like opns, Simple, std servs, commodity, follow same linear flow, minor variations,easy to price, value chain is same in all locations, less flexible, high conformity, replicability

• Prob: design of operating system, less flexible, managing growth is difficult, tedious, repetitive nature and variability, worker absenteeism, easy disapproval of customer

• Imprv: OS must be effective and efficient, reliable quality, price and speed are core assembly line methods are used for improving quality and efficiency for recurring services, work study and time study tools are used, closer to manf org, competitive adv is due to SOP.

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Types of service businesses (Davis, 1999)Characteristics; Problems; Improvement steps and Transition rel

• SSt: Chrs-less specialised, more diversified and larger than SF and perform broader range of services delivered by many at different places and times. Work is unbundled/extensive, more variety and fragmented and more variable, more encounters, service tasks may be independent or interdependent, more difficult thing is coordination, work is regulated by policies than SOP, centralised buying and inventory control and customised to local needs (Central planning and local execution)- self service is predominant

• Ex. Large retail stores, dept stores, hotels, airlines, insurance cos,

• Prob: Due to different locations and fragmentation no total responsibility or accountability, customers can react fast for quality problems, difficult to assign costs to services, Value chain for different services is difficult, shared cost structure, adopt low prices as strategy, uses large number of PT employees, use of IT is high

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Behavioral Science to Service EncountersManagers in service firms need to understand customer perceptions and technical features of service processes. Customer perception depends on three aspects via, the flow of service experience, the flow of time and encounter performance

The front-end and back-end of the encounter are not created equal

Segment the pleasure, combine the pain Let the customer control the process Pay attention to norms and rituals People are easier to blame than systems Let the punishment fit the crime in service recovery

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Designing service org, systems and services

• Design of– Service organisation– Service system– Service (approaches- production line, self

service, personal attention)– Service delivery design

• Design drivers- service guarantees

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Service design factors

• Location• Layout• Product-process design

– Features– Customer contact– Standardization– industrialization

• Resources: workers, technology, etc.• Management: Quality, capacity, standards, etc.

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Service Development Cycle

Full Launch Design

AnalysisDevelopment

Execution Stage Planning Stage

People

Products

Tech-nology Systems

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Planning for Service LEVEL OF PLANNING

MANUFACTURING FIRMS

SERVICE FIRMS

Aggregate planning

Translate strategic decisions into productive capacity. ( 1-3 years)

Translate strategic decisions into technology & resource planning. ( 1-3 years)

Disaggregate planning

1.Decisions on individual product lines.2. Disaggregated facilities decision. ( 1 y ahead )

1.Decisions on basic service design. 2. Capacity management decisions. ( 1 y ahead)

Scheduling 1.Production vs. capacity.2.Inventory 3.Priority decisions

Assignment of individual work

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Automation in Services

Example• Airlines – air traffic control, passenger reservation• Banks – ATMs, computerized bank statements• Gas Stations – automated payment (pay-at-the-pump)• Health Care – MRI system, AGVS for waste disposal• Grocery Store – self-service checkout stations• Real Estate – web based house-for-sale tour video• Vending machines

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Automation in Services• Trend developing toward more-standardized

services and less customer contact.• Service standardization brings trade-offs:

– - Service not custom-designed for each customer– + Price of service reduced, or at least contained

• Banking industry is becoming increasingly automated

• Service firm can have a manual/automated mix:– Manual - “front room” operations– Automated - “back room” operations

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Degree of Customer Contact in Servicesand the Use of Automated Equipment

Degree of Degree of Customer ContactCustomer Contact

CapitalCapitalIntensityIntensity

HighHigh

HighHigh

LowLow

LowLow

Manual OperationsManual Operations

Mechanized OperationsMechanized Operations

AutomatedAutomatedOperationsOperations

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Lesson 1: Base decisions on what the customer wants and expects Ex. customer business not furniture business, customer experience focus, SW airlines-low fares, on-time, friendly serviceMgrs need to identify key drivers of Customer satisfaction

Lesson 2: Think and act in terms of the entire customer experience- what, where and how of customer experience- Airlines missed flight example

Lesson 3: Continuously improve all parts of the customer experience

Lesson 4: Hire and reward people who can effectively build relationships with customers(Ex.Taj palace customer safety)

Lesson 5: Train employees in how to cope with emotional labour cost- do the job consistently for each customer.

Best Practices

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Lesson 6: Create and sustain a strong service cultureTruly guest focused- helps guide the employee, gives meaning and value to the work, it helps to fill the gaps

Lesson 7: Avoid failing your customer twice- focus on cost of failure

Lesson 8: Empower customers to co-produce their own experience- customers as quasi employees

•Lesson 9: Get managers to lead from the front, not the top•Examples- Marriot owner, Automobile Company

•Lesson 10: Treat all customers as if they were guests- call them as guests instead of customers.

Best Practices

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Conclusions• Services are characterised by different

dimensions and needs special approaches • Highly varies, intangible, perishable• Data from the University of Michigan's survey

of customer satisfaction show that services are getting worse.

• In other words, the apparent common sense underlying these lessons isn't common.

• While the principles may seem simple, they are hard to follow on a consistent basis by everyone throughout the organization.

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Thank you

Discussion

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