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ISM 270

Service Engineering and Management Lecture 2

Notes

Video of class available from website

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Homework 1 due next week Homework 2 due 2 weeks Office hours 5pm room 2085 Computer access to SOE account available Library challenges

Homework: Week 1
Link

Data Envelopment Analysis (DEA)

Method for evaluating efficiency of similar venues/products


Incorporates inputs and outputs not just one dimensional Uses LINEAR PROGRAMMING (LP) Weight the inputs and outputs to make one unit as efficient as possible, relative to all others If this is 100% efficient, then the unit is on the frontier of efficiency; If less than 100%, there are other units that could utilize the SAME inputs for MORE outputs

KEY IDEA:

DEA summary of terms

Define variables

E_k = efficiency of unit k u_j= coefficient for output j (relative decrease in efficiency per unit reduction of output value) v_i = coefficient for input i (relative increase in efficiency per unit decrease of input value) O_jk = observed ouput j units generated by service unit k during one time period I_ik = no. units input used by service unit k during one period k=1..K = service unit counter j=1..M = output counter i=1..N = input counter

Note:

DEA Objective and constraints


max Ee s.t. u1O1k u 2O2 k ... u M OMk 1, k 1,...,K v1 I1k v2 I 2 k ... v N I Nk u j 0, j 1,2,...,M vi 0, i 1,2,...,N u1O1e u 2O2 e ... u M OMe v1 I1e v2 I 2 e ... v N I Ne

Evaluating unit e Trick = Rescaling to get linear equations


v1 I1e v2 I 2e ... vN I Ne 1 s.t. u1O1k u2O2 k ... uM OMk (v1 I1k v2 I 2 k ... vN I Nk ) 0, k 1,...,K

Example from Text: Burger Palace


Small,

artificial example for illustration! Page 68 Excel formulation

The Nature of Services

Learning Objectives

Classify a service into one of four categories using the service process matrix. Describe a service using the four dimensions of the service package. Discuss the managerial implications of the distinctive characteristics of a service operation. Discuss the insights obtained from a strategic classification of services. Discuss the role of a service manager from an open-systems view of service.

An Integrated Approach to Service Management


The Eight Components Product Elements Place, Cyberspace, and Time Promotion and Education Price and Other User Outlays + Process + Productivity and Quality + People + Physical Evidence Require the Integration of Marketing, Operations, and Human Resources

Service/Product Bundle
Element
Business Core

Core Goods Example Custom clothier


Business suits

Core Service Example Business hotel


Room for the night

Peripheral Goods Peripheral Service Variant

Garment bag
Deferred payment plans Coffee lounge

Bath robe
In house restaurant Airport shuttle

The Service Process Matrix


Degree Degree of Interaction and Customization of labor Intensity Low High
Service factory: * Airlines * Trucking * Hotels * Resorts and recreation Mass service: * Retailing * Wholesaling * Schools * Retail aspects of commercial banking Service shop: * Hospitals * Auto repair * Other repair services

Low

High

Professional service: * Doctors * Lawyers * Accountants * Architects

The Service Package

Supporting Facility: The physical resources that must be in place before a service can be sold. Examples are golf course, ski lift, hospital, airplane. Facilitating Goods: The material consumed by the buyer or items provided by the consumer. Examples are food items, legal documents, golf clubs, medical history. Information: Operations data or information that is provided by the customer to enable efficient and customized service. Examples are patient medical records, seats available on a flight, customer preferences, location of customer to dispatch a taxi. Explicit Services: Benefits readily observable by the senses. The essential or intrinsic features. Examples are quality of meal, attitude of the waiter, on-time departure.

Implicit Services: Psychological benefits or extrinsic features which the consumer may sense only vaguely. Examples are privacy of loan office, security of a well lighted parking lot.

Distinctive Characteristics of Services

Customer Participation in the Service Process: attention to facility design but opportunities for co-production Simultaneity: opportunities for personal selling, interaction creates customer perceptions of quality

Perishability: cannot inventory, opportunity loss of idle capacity, need to match supply with demand
Intangibility: creative advertising, no patent protection, importance of reputation Heterogeneity: customer participation in delivery process results in variability

Strategic Service Classification (Nature of the Service Act)


Direct Recipient of the Service

Nature of the Service Act

People Peoples bodies:


Health care Passenger transportation Beauty salons Exercise clinics Restaurants

Things Physical possessions:


Freight transportation Repair and maintenance Veterinary care Janitorial services Laundry and dry cleaning

Tangible actions

Peoples minds:
Education Broadcasting Information services Theaters Museums

Intangible assets:
Banking Legal services Accounting Securities Insurance

Intangible actions

Strategic Service Classification (Relationship with Customers)


Type of Relationship between Service Organization and Its Customers Nature of Service Delivery

Membership relationship
Insurance Telephone subscription Electric Utility Banking

No formal relationship
Radio station Police protection Lighthouse Public Highway

Continuous delivery of service

Discrete transactions

Long-distance phone calls Theater series tickets Transit pass Sams Wholesale Club Airline frequent flyer

Restaurant Pay phone Toll highway Movie theater Public transportation

Strategic Service Classification (Customization and Judgment)


Extent to Which Service Characteristics Are Customized Extent to Which Personnel Exercise Judgment in Meeting Customer Needs High Low
Surgery Taxi services Gourmet restaurant Preventive health programs Education (large classes) Family restaurant

High

Low

Telephone service Hotel services Retail banking Cafeteria

Public transportation Spectator sports Movie theater Institutional food service

Strategic Service Classification (Nature of Demand and Supply)


Extent of Demand Fluctuation over Time

Extent to which Supply Is Constrained


Electricity

Wide
Insurance Legal services Banking

Narrow

Peak demand can usually be met without a major delay

Telephone Police emergency Hospital maternity unit

Laundry and dry cleaning

Tax preparation

Fast food restaurant Movie theater Gas station

Peak demand regularly exceeds capacity

Passenger transportation Hotels and motels

Strategic Service Classification (Method of Service Delivery)


Availability of Service Outlets Nature of Interaction between Customer and Service Organization

Single site

Multiple site

Customer travels to
Theater

service organization Service provider travels to customer Transaction is at arms length

Bus service Barbershop Taxi Pest control service

Fast-food chain Mail delivery AAA emergency repairs

Credit card company Local TV station

Broadcast network Telephone company

Open Systems View of Services


Service Process Consumer Evaluation

Consumer arrivals (input)

Consumer participant Consumer-Provider interface


Control

departures ( output)

Criteria Measurement

Monitor Service personnel Empowerment Training Attitudes

Customer demand Perceived needs Location

Service operations manager Production function: Alter Monitor and control process Schedule demand Marketing function: supply Interact with consumers Control demand Modify as necessary Define standard Service package Supporting facility Facilitating goods Explicit services Implicit services

Communicate by advertising

Basis of selection

Topics for Discussion

When does collecting information through service membership become an invasion of privacy? What are some management problems associated with allowing service employees to exercise judgement in meeting customer needs? What factors are important for a manager to consider when attempting to enhance a service firms image?

Sample Quiz
Link

Service Strategy

Learning Objectives

Formulate a strategic service vision. Discuss the competitive environment of services. Describe how a service competes using the three generic service strategies. Discuss the service purchase decision. Discuss the competitive role of information in services. Explain the role of the virtual value chain in service innovation. Discuss the limits in the use of information. Categorize a service firm according to its stage of competitiveness. Conduct a data envelopment analysis (DEA).

Strategic Service Vision


Target Market Segments

What are common characteristics of important market segments? What dimensions can be used to segment the market, demographic, psychographic? How important are various segments? What needs does each have? How well are these needs being served, in what manner, by whom?

Strategic Service Vision


Service Concept

What are important elements of the service to be provided, stated in terms of results produced for customers? How are these elements supposed to be perceived by the target market segment, by the market in general, by employees, by others? How do customers perceive the service concept? What efforts does this suggest in terms of the manner in which the service is designed, delivered, marketed?

Strategic Service Vision


Operating Strategy

What are important elements of the strategy: operations, financing, marketing, organization, human resources, control? On which will the most effort be concentrated? Where will investments be made? How will quality and cost be controlled: measures, incentives, rewards? What results will be expected versus competition in terms of, quality of service, cost profile, productivity, morale/loyalty of servers?

Strategic Service Vision


Service Delivery System

What are important features of the service delivery system including: role of people, technology, equipment, layout, procedures? What capacity does it provide, normally, at peak levels? To what extent does it, help insure quality standards, differentiate the service from competition, provide barriers to entry by competitors?

Competitive Environment of Services


Relatively

Low Overall Entry Barriers Economies of Scale Limited High Transportation Costs Erratic Sales Fluctuations No Power Dealing with Buyers or Suppliers Product Substitutions for Service High Customer Loyalty Exit Barriers

Competitive Service Strategies (Overall Cost Leadership)


Seeking

Out Low-cost Customers Standardizing a Custom Service Reducing the Personal Element in Service Delivery (promote self-service) Reducing Network Costs (hub and spoke) Taking Service Operations Off-line

Competitive Service Strategies (Differentiation)


Making the Intangible Tangible (memorable) Customizing the Standard Product Reducing Perceived Risk Giving Attention to Personnel Training Controlling Quality
Note: Differentiation in service means being unique in brand image, technology use, features, or reputation for customer service.

Competitive Service Strategies (Focus)


Buyer

Group: (e.g. USAA insurance and military officers) Offered: (e.g. Shouldice Hospital and hernia patients)

Service

Geographic

Region: (e.g. Austin Cable Vision and TV watchers)

Customer Criteria for Selecting a Service Provider

Availability Convenience Dependability Personalization Price Quality Reputation Safety Speed

(24 hour ATM) (Site location) (On-time performance) (Know customers name) (Quality surrogate) (Perceptions important) (Word-of-mouth) (Customer well-being) (Avoid excessive waiting)

Service Purchase Decision

Service Qualifier: To be taken seriously a certain level must be attained on the competitive dimension, as defined by other market players. Examples are cleanliness for a fast food restaurant or safe aircraft for an airline.

Service Winner: The competitive dimension used to make the final choice among competitors. Example is price. Service Loser: Failure to deliver at or above the expected level for a competitive dimension. Examples are failure to repair auto (dependability), rude treatment (personalization) or late delivery of package (speed).

Competitive Role of Information in Services


Strategic Focus Competitive Use of Information

On-line (Real time)

Off-line (Analysis)

External (Customer)

Creation of barriers to entry: Reservation system Frequent user club Switching costs

Data base asset: Selling information Development of services Micro-marketing Productivity enhancement Inventory status Data envelopment analysis (DEA)

Internal (Operations)

Revenue generation: Yield management Point of sale Expert systems

The Virtual Value Chain

Marketplace vs Marketspace Creating New Markets Using Information (Gather, Organize, Select, Synthesize, and Distribute) Three Stage Evolution

1st Stage (Visibility): See physical operations more effectively with information Ex. USAA paperless operation 2nd Stage (Mirroring Capability): Substitute virtual activities for physical Ex. USAA automate underwriting 3rd Stage (New Customer Relationships): Draw on information to deliver value to customer in new ways Ex. USAA event oriented service

Limits in the Use of Information


Anti-competitive Fairness Invasion

(Barrier to entry)

(Yield management) of Privacy (Micro-marketing)

Data

Security (Medical records)


(Credit report)

Reliability

Using Information to Categorize Customers

Coding grades customers on how profitable their business is. Routing is used by call centers to place customers in different queues based on customer code. Targeting allows choice customers to have fees waived and get other hidden discounts. Sharing data about your transaction history with other firms is a source of revenue.

Stages in Service Firm Competitiveness


1. Available for service Customers patronize service firm for reasons other than performance. 2. Journeyman Customers neither seek out nor avoid the firm. 3. Distinctive competence Customers seek out the firm on the basis of its sustained reputation for meeting customer expectations 4. World-class service delivery The companys name is synonymous with service excellence. Its service doesnt just satisfy customers; it delights them and thereby expands customer expectations to levels its competitors are unable to fulfill. Operations is a quick learner and fast innovator; it masters every step of the service delivery process and provides capabilities that are superior to competitors. Raises customer expectations and seeks challenge; improves continuously.

Operations is reactive, at best.

Operations functions in a mediocre, uninspired fashion.

Operations continually excels, reinforced by personnel management and systems that support an intense customer focus. Exceeds customer expectations; consistent on multiple dimensions.

SERVICE QUALITY Is subsidiary to cost, highly variable.

Meets some customer expectations; consistent on one or two key dimensions.

Stages in Service Firm Competitiveness


1. Available for service BACK OFFICE Counting room. 2. Journeyman 3. Distinctive competence 4. World-class service delivery Contributes to service, plays an important role in the total service, is given attention, but is still a separate role. A market segment whose basic needs are understood. Is equally valued with front office; plays integral role. Is proactive, develops its own capabilities, and generates opportunities.

CUSTOMER Unspecified, to be satisfied at minimum cost.

A collection of individuals whose variation in needs is understood. When promises to enhance service.

A source of stimulation, ideas, and opportunity.

INTRODUCTION OF NEW TECHNOLOGY When necessary for When justified by cost survival, under duress. savings. WORKFORCE Negative constraint.

Source of first-mover advantages, creating ability to do things your competitors cant do. Innovative; creates procedures.

Efficient resource; disciplined; follows procedures. FRONT-LINE MANAGEMENT Controls workers. Controls the process.

Permitted to select among alternative procedures.

Listens to customers; coaches Is listened to by top management and facilitates workers. as a source of new ideas. Mentors works to enhance their career.

Mini case: America West


Read

America West Airlines Strategy


Target Strategic Advantage
Low cost Entire Market Market Segment Overall cost leadership Focus Differentiation Uniqueness

America West Winning Customers


Service

Qualifiers:

Service

Winners:

Service

Losers:

America West Strategic Service Vision


Target

market segments concept strategy

Service

Operating Service

delivery system

America West Airlines Positioning


CABIN SERVICE
Full Service

PREFLIGHT SERVICE
Inconvenient Convenient

No Amenities

Homework 2

Paul Maglio

Next week:
Alan

Karp, HP Labs Technology in Services Project 1 given Homework 1 due

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