Operations Management

Case Analysis

Shouldice Hospital Limited

Submitted by
Group 10
22 September 2015

Anuj Parekh (1511009)

Khizar Sheriff (1511027)
Sumanth KVV (1511028)
Palash Jain (1511036)
Ravinder Singh (1511044)
Shireen Salma (1511055)

Shouldice Hospital Limited

1. How Successful is the Shouldice Hospital?
Shouldice Hospital is a service organization which delivers a customer service as against a product. Hence parameters
that are critical for its success include
1. Attractive service offering
2. Proper employment management
3. High customer satisfaction
The hospital has been able to effectively integrate these elements in its services that make it a successful organization.
1.1 Attractive Service Offering
Superior operating method:
The Shouldice method of operating hernias was based on the idea of early ambulation and involved a minimal surgical
procedure that was superior to other prevailing methods and became a hit in the market. The operations were
performed by highly trained doctors who performed 750 or more operations in a year. There was an effective system of
diagnosis for a large customer base of out-of-town patients through mail system.
Pleasant environment for Patients:
The recreational environment created inside the hospital where patients are encouraged to interact with fellow inmates
during both pre-operative and post-operative stages helps them make friends and develops a positive attitude among
them which made the Shouldice program an effective one. The entire hospital works like a service shop where each step
is clearly defined and the service is delivered seamlessly.

1.2 Employee Management

Shouldice has robust recruitment and training procedures for surgeons. The selection policy looks at experience,
education, personal interest, habits and domestic situations of surgeons to get the right fit for the hospital. A surgeon is
provided proper training on the Shouldice method over a period of several months. He learns the small nuances of the
technique and becomes an expert by performing 25 times more operations than a typical general surgeon. Surgeons get
rewarded for their expertise by receiving 15% more compensation than an average surgeon in Ontario. The work hours
are very comfortable and the surgeons get to spend time with their families. Overall they remain motivated to provide
excellent services. The rotation of teams and frequent consultations allow for performance appraisal and corrective
action.
Shouldice is an employee-friendly organization that has no firing policy. The administrative and support staff are non-
union and are given a share of the profits of the hospital. The hospital has no organization chart which keeps the
organization flat. The staff help each other and substitute in case of someones absence. Overall, the employee
management policy at Shouldice is very effective that is instrumental in delivering a good service to customers.

1.3 Customer Satisfaction

Customers seem to be extremely satisfied which is demonstrated by the survey data (exhibit 3 in the case). The most
important drivers for customer satisfaction include operation procedure (98%), physicians care (100%), nursing care
(98%), friendships with patients (81%) and the overall hospital environment (88%).
Customers come in large numbers to attend the annual reunion and the hospital topped it up with a free checkup, which
is an indicator of satisfied customers. The overall friendly experience of Shouldice hospital is quite pleasing that
customers sometimes ask for an extra day of stay. In fact, the hospital relied entirely on word-of-mouth advertising
which even resulted in backlog of 2400 patients. Overall customers are happy and satisfied.


2. How do you account for its performance?
Profitability:
Shouldice operates at a very high operating margin of 21%. Total cost incurred = 8.5+3.5 = $12 million. Total revenue =
$1990*7600 = $15.12 million. Operating Profit = $3.12 million/year.
Cost efficiency:
The industry average operation charges per patient is $5,240. Let's compare this with the figures of Shouldice Hospital:
(320 X 4) + 650 + (300 X 0.2) = $1,990/patient. The operation charges of Shouldice is 62% lesser than that of the average
Industry. This is one of the reasons why Shouldice is able to attract more customers with increasing backlog.
As for the high efficiency in cost management, the following key factors may be cited as the reasons:

Here are the calculations. High surgeon utilization rates. Average surgeon conducts only 25-50 operations per
year, as compared to (7500 operations/10 surgeons) 750 operations per year.
High utilization rates of the nurses. The average ratio of nurses-patients was 1:4. But Shouldice was able to
maintain a ratio of 1:15.
Only 2 equipment were required for administering anesthesia for 5 operating rooms as against a ratio of 1:1.
This reduced equipment cost by 60%.
Nurses spent an unusually large proportion of their time in counselling activities. Secondly, Shouldice uses the
network of patients as a support system. This reduced the load on the medical staff and the post-operative care.
Because the patients don't stay in bed all day, there is no need to change linens every day and hence, only 3
housekeeping staff is required for the entire facility.

Service Efficiency:
Besides, it is also mentioned that the recurrence rate for hernia under Shouldice method is 0.8% as compared to the
recurrence rate in the United States which averages 10%. This is a remarkable achievement as far as effectiveness of
surgery goes. And to maintain the quality of service high, recurrence cases were sent to the same surgeons who initially
operated the patients, and thereby giving a chance to reduce mistakes in future.

3. As Dr. Shouldice, what actions, if any, would you take to expand the hospital's capacity?
It is known that Shouldice Hospital currently has a backlog of 2,400 patients that increases by 100 every six months.
Hence, there is a need to expand the hospitals practices for which following options are laid down before Dr. Shouldice
for consideration:
A) Running hospital services on Saturday
B) Expanding bed capacity by 50% in existing unit
C) Setting up a new hospital in Ontario or United States
D) Diversify into other specialties such as eye surgery, varicose veins or diagnostic services
The preferred option should be the one that satiates the current backlog of 2,400 patients and also the increasing
backlog of 200 patients (100 x 2) per annum for at least the next 10 years.
A) Running hospital services on Saturday
Shouldice Hospital believes in maintaining good working relationships with its surgeons on board. The idea of running
hospital services on Saturday has already been criticized by 4 out of 10 surgeons and Dr. Shouldice sees a possible rift
among the doctors on this issue. Hence, going against the consent of certain doctors is not recommended given that
Shouldice Hospital wants to maintain service quality levels of its treatments and therefore, cannot afford to hire new
surgeons in replacement of dissenting doctors. Even otherwise, the hospital capacity would increase only by 20% i.e.
7600 x 20% = 1,320 surgeries as against the current backlog of 2,400 patients which is bound to further increase by 200
patients every year. Hence, the option of running hospital services on weekends is being ruled out since it does not solve
the purpose of expansion.
B) Expanding bed capacity by 50% in existing unit
Given that the bed capacity is a bottleneck for the firm, Dr. Shouldice may choose to increase the bed capacity by 50%
with an investment of $4 million in the new space and thereby, scale up the number of surgeries by 2,650 (Exhibit 1).
This is attainable even without corresponding increase in number of operating rooms and staff resources (detailed
execution plan explained in response to Q.4). This option will help the hospital in not just addressing the current backlog
of 2,400 patients but also sustaining the increasing demand of 200 patients for at least next 13 years (2650/200). Thus,
this is a feasible option provided Shouldice Hospital has sufficient funds for investing in expansion of bed capacity.
C) Setting up a new hospital in Ontario (outside Toronto) or United States
By starting another hospital in the US, Dr. Shouldice will be able to manage the backlog to a good extent, because 10% of
its patients came from outside Ontario, mostly from the United States. But the challenges with the idea are recruiting
new doctors, maintaining service quality levels and government regulations. The existing government regulations like
minimum wage rate, worker unions, patient to nurse ratio etc. might not be favorable to a hospital like Shouldice which
currently operates in a business friendly environment. It is also clear that even by travelling to Ontario, the patients are
incurring a comparatively lesser cost than the average of $5,240.
Given that 60% of the patients coming for treatment are from areas in Toronto outside Ontario, Dr. Shouldice may
consider starting a new hospital in this zone. This stint would entail higher capital investment as compared to the second
option; however, it is at least more practicable than directly starting a new hospital in the US. The reason being that
starting a new hospital in Canada will enable them to position themselves as a stronger brand in the home country first
before moving to a new country. However, the issue of maintaining service quality service levels is still not resolved and
hence, this option is also ruled out.

D) Diversify into other specialties such as eye surgery, varicose veins or diagnostic services
This option is clearly not an encouraging one as this way, Shouldice Hospital will be diluting its brand value and will be
losing its strategic focus to other specialties.

4. How would you implement changes you propose?
The pros of option B far outweigh the cons and most importantly it helps the Shouldice Hospital in addressing the
current backlog of 2,400 patients. Hence, we propose that Dr. Shouldice should consider investing in increasing the bed
capacity by 50% so as to use the operating rooms more productively. For this an extra floor could be constructed over
the existing unit. The main benefits of this option are utilization of the current staff and a tested process with no radical
changes required.
With increased bed capacity more number of operations can be scheduled. The operation rooms can be utilized in the
evening hours by calling the available full-time surgeons in two shifts with 5 doctors in first shift from 7.30 PM to 3 PM
and the second shift timings from 1:00 AM to 07:30 PM. This will require employment of 2 new part-time assistant
surgeons, making it 5 for each shift. The number of operations will go up to 40 to 45 operations per day with surgeons in
second shift performing 4 to 5 operations. The increased number of operations will help clear existing backlog and cater
to increased demand through advertisements (The calculations are shown in Exhibit 1).
The above option entails infrastructure cost ($4 million) and increased salary expenses for additional part-time assistant
surgeons. These can be covered by increased revenues from increased number of surgeries.
Recommendations for Shouldice Hospital:
1. Shouldice Hospital should consider doing extensive advertising through brochures, pamphlets etc in Year 2 after
clearing the existing backlog in order to utilize the excess capacity in proposed option i.e. 2,250 beds (2650-200-200)
through increased demand generated from advertising in Canada and US.
2. It is recommended that the long term strategy of the hospital should be to set up a hospital facility in US and capture
a sizeable market share in the growing demand for hernia operations in US (1 million operations in 2,000).
3. The hospital could patent its treatment process so as to prevent its emulation by its competitors in future.

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Exhibit 1 Computation of increase in number of operations
Existing capacity
Current number of beds = 89
Number of full-time surgeons = 10
Operations carried out per day = 30 to 36 -----> (A)
With expansion in capacity by a new floor
Increased number of beds = 133 (50% increase)
Maximum number of operations in a day with increased bed capacity = 45
Number of full time surgeons in 1st shift i.e. 7.00 AM to 3.00 PM = 5
(Surgery 7.00 AM to 12.30 AM and Examination 1.00 PM to 3.00 PM)
Number of operations in 1st working shift 7.00 AM to 12.30 PM = 20 (4 operations per doctor)
Number of full time surgeons in 2nd shift i.e. 1:00 AM to 07.30 PM = 5
Number of operations in 2nd working shift = 20 to 25 (4 to 5 operations per doctor)
Total number of operations with new capacity = 44 to 45 operations -----> (B)
Considering lower of (A) and (B),
Number of operations that can be undertaken in a day = 44 to 45 operations
Net percentage increase in operations = 34.84%

Increase in number of operations = 7,600 x 34.84% = approx. 2,650 operations

Exhibit 2: Process flow diagrams for Day 1 and Day 2

Day 1

Day 2

Exhibit 3: Inflow of patients

Existing Capacity:

Increased Capacity:

Total no. of Panents

0

20

40

60

80

100

120

Monday

45

Tuesday

44

44

Wednesday

45

44

44

Thursday

45

44

44

Friday

45

44

44

Saturday

45

45

Sunday

45

45

Monday

45

44

140

44

No. of Incoming patients

No. of Carried over patients

Note - It is understood that the patients who check in on a given day will leave the hospital on the fourth day morning
and new patients will check in on same day afternoon. It is further understood that patients who check in on Friday will
stay in the hospital over the weekend and will be operated on Monday.