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ISM 270

ISM 270. Service Engineering and Management Lecture 2. Notes. Video of class available from website Username: Password: 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.

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ISM 270

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  1. ISM 270 Service Engineering and Management Lecture 2

  2. Notes • Video of class available from website • Username: • Password: • Homework 1 due next week • Homework 2 due 2 weeks • Office hours 5pm room 2085 • Computer access to SOE account available • Library challenges

  3. Homework: Week 1 • Link

  4. Data Envelopment Analysis (DEA) • Method for evaluating efficiency of similar venues/products • Incorporates inputs and outputs – not just one dimensional • Uses LINEAR PROGRAMMING (LP) • KEY IDEA: • 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

  5. 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 • Note: • k=1..K = service unit counter • j=1..M = output counter • i=1..N = input counter

  6. DEA Objective and constraints Evaluating unit e Trick = Rescaling to get linear equations

  7. Example from Text: Burger Palace • Small, artificial example for illustration! • Page 68 • Excel formulation

  8. The Nature of Services

  9. 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.

  10. 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

  11. Service/Product Bundle

  12. The Service Process Matrix Degree Degree of Interaction and Customization of labor IntensityLow High Service factory: Service shop: * Airlines * Hospitals Low * Trucking * Auto repair * Hotels * Other repair services * Resorts and recreation Mass service: Professional service: * Retailing * Doctors High * Wholesaling * Lawyers * Schools * Accountants * Retail aspects of * Architects commercial banking

  13. 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.

  14. 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

  15. Strategic Service Classification (Nature of the Service Act) Direct Recipient of the Service Nature of the Service ActPeople Things People’s bodies: Physical possessions: Health care Freight transportation Passenger transportation Repair and maintenance Tangible actions Beauty salons Veterinary care Exercise clinics Janitorial services Restaurants Laundry and dry cleaning People’s minds: Intangible assets: Education Banking Intangible actions Broadcasting Legal services Information services Accounting Theaters Securities Museums Insurance

  16. Strategic Service Classification (Relationship with Customers) Type of Relationship between Service Organization and Its Customers Nature of Service Delivery“Membership” relationship No formal relationship Insurance Radio station Telephone subscription Police protection Continuous delivery Electric Utility Lighthouse of service Banking Public Highway Long-distance phone calls Restaurant Theater series tickets Pay phone Discrete Transit pass Toll highway transactions Sam’s Wholesale Club Movie theater Airline frequent flyer Public transportation

  17. Strategic Service Classification (Customization and Judgment) Extent to Which Service Characteristics Are Customized Extent to Which Personnel Exercise Judgment in Meeting Customer NeedsHigh Low Surgery Preventive health programs High Taxi services Education (large classes) Gourmet restaurant Family restaurant Telephone service Public transportation Hotel services Spectator sports Low Retail banking Movie theater Cafeteria Institutional food service

  18. Strategic Service Classification (Nature of Demand and Supply) Extent of Demand Fluctuation over Time Extent to which Supply Is ConstrainedWide Narrow Electricity Insurance Peak demand can Telephone Legal services usually be met Police emergency Banking without a major delay Hospital maternity unit Laundry and dry cleaning Tax preparation Fast food restaurant Peak demand regularly Passenger transportation Movie theater exceeds capacity Hotels and motels Gas station

  19. Strategic Service Classification (Method of Service Delivery) Availability of Service Outlets Nature of Interaction between Customer and Service OrganizationSingle site Multiple site Customer travels to Theater Bus service service organization Barbershop Fast-food chain Service provider Taxi Mail delivery travels to customer Pest control service AAA emergency repairs Transaction is at Credit card company Broadcast network arm’s length Local TV station Telephone company

  20. Open Systems View of Services Service Process Consumer Evaluation Consumer arrivals Consumer participant departures Criteria (input) Consumer-Provider ( output) Measurement interface Control Monitor Customer demandService operations managerService personnel Production function: Perceived needs Alter Monitor and control process Schedule Empowerment Location demand Marketing function: supply Training Interact with consumers Attitudes Control demand Modify as necessary Define standard Service package Supporting facility Communicate Facilitating goods Basis of by advertising Explicit services selection Implicit services

  21. 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 firm’s image?

  22. Sample Quiz • Link

  23. Service Strategy

  24. 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).

  25. Strategic Service VisionTarget 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?

  26. Strategic Service VisionService 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?

  27. Strategic Service VisionOperating 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?

  28. Strategic Service VisionService 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?

  29. 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

  30. 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

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

  32. Competitive Service Strategies (Focus) • Buyer Group: (e.g. USAA insurance and military officers) • Service Offered: (e.g. Shouldice Hospital and hernia patients) • Geographic Region: (e.g. Austin Cable Vision and TV watchers)

  33. Customer Criteria for Selecting a Service Provider • Availability (24 hour ATM) • Convenience (Site location) • Dependability (On-time performance) • Personalization (Know customer’s name) • Price (Quality surrogate) • Quality (Perceptions important) • Reputation (Word-of-mouth) • Safety (Customer well-being) • Speed (Avoid excessive waiting)

  34. 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).

  35. Competitive Role of Information in Services Strategic Focus Competitive Use of Information

  36. 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”

  37. Limits in the Use of Information • Anti-competitive (Barrier to entry) • Fairness (Yield management) • Invasion of Privacy (Micro-marketing) • Data Security (Medical records) • Reliability (Credit report)

  38. 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.

  39. Stages in Service Firm Competitiveness 1. Available for service 2. Journeyman 3. Distinctive competence 4. World-class service delivery Customers patronize service Customers neither seek Customers seek out the firm The company’s name is synonymous firm for reasons other than out nor avoid the firm. on the basis of its sustained with service excellence. Its service performance. reputation for meeting doesn’t just satisfy customers; it customer expectations delights them and thereby expands customer expectations to levels its competitors are unable to fulfill. Operations is reactive, Operations functions in a Operations continually excels, Operations is a quick learner and fast at best. mediocre, uninspired reinforced by personnel innovator; it masters every step of the fashion. management and systems service delivery process and provides that support an intense capabilities that are superior to customer focus. competitors. SERVICE QUALITY Is subsidiary to cost, Meets some customer Exceeds customer Raises customer expectations and highly variable. expectations; consistent expectations; consistent seeks challenge; improves on one or two key on multiple dimensions. continuously. dimensions.

  40. Stages in Service Firm Competitiveness 1. Available for service 2. Journeyman 3. Distinctive competence 4. World-class service delivery BACK OFFICE Counting room. Contributes to service, plays Is equally valued with front Is proactive, develops its own an important role in the total office; plays integral role. capabilities, and generates service, is given attention, opportunities. but is still a separate role. CUSTOMER Unspecified, to be A market segment whose A collection of individuals A source of stimulation, ideas, satisfied at minimum cost. basic needs are understood. whose variation in needs is and opportunity. understood. INTRODUCTION OF NEW TECHNOLOGY When necessary for When justified by cost When promises to enhance Source of first-mover advantages, survival, under duress. savings. service. creating ability to do things your competitors can’t do. WORKFORCE Negative constraint. Efficient resource; disciplined; Permitted to select among Innovative; creates procedures. follows procedures. alternative procedures. FRONT-LINE MANAGEMENT Controls workers. Controls the process. 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.

  41. Mini case: America West • Read

  42. America West Airlines Strategy TargetStrategic Advantage Low cost Uniqueness Entire Market Market Overall cost Differentiation Segment leadership Focus

  43. America West Winning Customers • Service Qualifiers: • Service Winners: • Service Losers:

  44. America West Strategic Service Vision • Target market segments • Service concept • Operating strategy • Service delivery system

  45. America West Airlines Positioning CABIN SERVICE Full Service PREFLIGHT SERVICE Inconvenient Convenient No Amenities

  46. Homework 2

  47. Paul Maglio

  48. Next week: • Alan Karp, HP Labs • Technology in Services • Project 1 given • Homework 1 due

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