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<HTML><CENTER></HTML> From [[http://marriottschool.byu.edu/emp/employee.cfm?emp=ses3|Dr. Scott Sampson]]'s **//[[usb:toc|Understanding Services Businesses]]//** Book (click for [[usb:toc|table of contents]])\\ [[usb:unit7:sbp7a|SBP 7a: The Costs of Utilization]]<=Prior ---[in [[usb:unit7|Unit 7: Cost Issues]]]--- Next=>[[usb:unit7:sbp7c|SBP 7c: Cost Savings by Service-Manufacturing]] <HTML></CENTER></HTML> ====== SBP 7b: Potential Operating Objectives ====== |**With services, the potential objectives of the production process is limited by the types and amounts of customer content. The potential operating efficiency will be inversely related to the amount and variety of customer-self content.**| ===== Why it occurs ===== This principle occurs because customers consider themselves as unique individuals (and rightly so), and are resistant to the impersonalization that generally comes with high efficiency. This is an issue for service organizations because customers are providing themselves (or their belongings or information) as inputs to the production process. ===== Details ===== The idea behind this Service Business Principle came from Richard Chase, who wrote an article titled "The Customer Contact Approach to Services." In his article(( "The Customer Contact Approach to Services: Theoretical Bases and Practical Extensions," by Richard B. Chase, //Operations Research//, Volume 29, Issue 4, 1981.)) he presented the following equation: <HTML><CENTER></HTML> potential facility efficiency = //f//(1- [customer contact time � service creation time]) <HTML></CENTER></HTML> This equation means that services involving more contact with customer will have less potential for operating efficiently. Customer contact breeds inefficiency. In the words of Dr. Chase: "Service facilities characterized by high customer contact are perceived as being inherently limited in their production efficiency because of the uncertainty that people introduce into the service creation process." I have found that the more I study Chase's supposition, the more it makes sense. One modification I would make to his perspective is to change from calling it characterizing by "customer contact" to characterizing by "customer //content//," which is semantically more aligned with the Unified Services Theory. ===== How it effects decisions ===== The service organization needs to decide whether to allow for large amounts of "customer content" or for increased efficiency (or an optimal balance between the two). ===== What to do about it ===== If a service that involves substantial customer inputs wants to increase operating efficiency, then probably the amount and types of customer inputs need to be controlled or reduced. One way to do this is to delay the introduction of customer inputs until later stages of the production process, which will be discussed in the next Service Business Principle (//Cost Savings by Service-Manufacturing//). Another way to control the customer inputs into the production process is to provide structure in the receipt of inputs. Shouldice Hospital, mentioned under the //Positioning Amid Customers and Competitors// Service Business Principle, is one of the most efficient hospitals in existence. A key way they do this is by limiting the variety of customer-self inputs into the process. Customers have to conform to a certain profile to be considered. For one thing, Shouldice only treats a certain type of hernia. Customers with other problems, including more complex hernias, will be rejected. Also, people with health problems such as high blood pressure are also generally filtered out. The result is tightly controlled customer inputs, allowing for high "operating" efficiencies. ===== For example ===== {{ http://upload.wikimedia.org/wikipedia/commons/1/19/FedEx_Trucks_Alaska.jpg?320x186|FedExTrucks}} Federal Express has a need to operate efficiently, despite the necessity of processing customer-belonging inputs (i.e. the packages and documents to ship). One way the company reduces the variety of inputs is by providing standardized packaging. There are FedEx envelopes for documents, FedEx boxes for items of small or medium size, and FedEx tubes for large documents. Even though it costs the company money to produce those forms of packaging, one would expect the benefits of increased efficiency to outweigh the costs. This increased efficiency comes as a result of controlling the variability in the way many items are shipped. Two types of popular fast food restaurants are hamburger places like Wendy's and McDonald's, and sandwich places like Subway and Hogi Yogi. One main difference is that customers of the hamburger places order items directly from the menu with only occasional modification, whereas at the sandwich shops, customers specify which of perhaps ten optional ingredients (pickles, oil, peppers, etc.) to include, and in what amounts. {{http://upload.wikimedia.org/wikipedia/commons/3/3c/Subway-33265-german-tuscany-decor.jpg?285x224 }}This increased intensity of customer preference inputs makes the sandwich shops much less efficient than the hamburger shops. If I go to Wendy's and see that there are twenty customers in line in front of me I will probably wait, since the line moves quite fast. However if there were twenty customers in line at Hogi Yogi, the twentieth will be waiting a long time before getting to the front of the line. Some custom home builders want to appeal to entry-level home buyers who require affordable housing. The problem with custom home building is that it can be extremely inefficient. This inefficiency is largely caused by preferences and change orders of customers. Customers who insist on this feature and that feature, and who change the specifications during construction make it difficult to achieve any close approximation to mass production efficiencies. There are two ways home builders get around this. One is to give the home purchaser a set of pre-drawn plans from which to choose, allowing only minor modifications (without a lot of additional expense). In this manner, the need for customer interaction and information exchange is kept under control, allowing the builder to schedule subcontractors in a more efficient manner. The second way to reduce home-building inefficiencies caused by customer inputs will be described in the next Service Business Principle. ===== My airline example ===== A manifestation of this Service Business Principle in the airline industry is in the typical "passenger load factor," which is the percent of available flight-seats which are occupied. (Load factor is a measure of utilization.) A normal load factor might be around perhaps 65-70 percent. Wouldn't it be better to have 80 or 90 percent utilization? Wouldn't that result in more production output with roughly the same resource inputs--thus increasing efficiency? Well, a big reason why a higher passenger load factor is not attainable is because //customers are involved in the production process//! And, those customers just refuse to cooperate fully. For example, if the desired 8:00 a.m. flight is full, and the closest available flight is the evening before, many passengers will try another air carrier rather than improve the utilization of the prior evening's flight. Of course, the reason for this is that passengers want what they want, which may or may not be exactly what the airline planned to offer. Without more "cooperation" from customers, 65-70 percent passenger load factors is probably the limit of what can be generally achieved. ===== How manufacturing differs ===== With manufacturing, the manufactured goods do not mind being treated impersonally. Inanimate objects are not affected if they are mass produced in an impersonal manner. ===== Analysis questions ===== - What are evidences of efficiency in this industry? - What are evidences of inefficiency in this industry? - How do customers react to increases in efficiency? ===== Application exercise ===== Revisit your service process flowchart constructed in the first unit. Where do the most intense customer inputs occur? <U>Redraw</U> the flowchart, indicating procedures that could be put in place to control the types, intensities (amounts), or varieties of customer inputs accepted. How does that affect the potential for operating efficiently? Why? What are disadvantages of such a manipulation of the process, such as how it affects the customer? ===== Navigation ===== <HTML><CENTER></HTML> [[usb:unit7:sbp7a|SBP 7a: The Costs of Utilization]]<=Prior ---[in [[usb:unit7|Unit 7: Cost Issues]]]--- Next=>[[usb:unit7:sbp7c|SBP 7c: Cost Savings by Service-Manufacturing]]\\ (c) 1998-2008 [[http://marriottschool.byu.edu/emp/employee.cfm?emp=ses3|Dr. Scott Sampson]] (get a copy of **//[[usb:toc|Understanding Services Businesses]]//** at [[http://www.amazon.com/gp/product/0471210501/qid=1151528743/sr=11-1/ref=sr_11_1/002-2164421-9276812?s=books&v=glance&n=283155|Amazon]] or [[http://search.barnesandnoble.com/booksearch/isbnInquiry.asp?z=y&isbn=0471210501&TXT=Y&itm=1|Barnes & Noble]]) <HTML></CENTER></HTML>
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