EPGP10 and EPGCOM10

Service Operations
Management (SOM)
Session 11 and 12

Service Recovery and Guarantee

Managing Capacity and Demand

Dr. G. Anand
QM & OM Area
1
IIM Kozhikode

SERVICE GUARANTEE

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 The success of "Bugs" Burger Bug Killer
(BBBK),
• BBBK, a Miami-based pest-extermination
company, is an example of how a company
can turn its situation around by analyzing the
elements of its service-delivery process. By
asking, "What obstacles stand in the way of
our guaranteeing pest elimination?"
• BBBK's service guarantee to hotel and
restaurant clients promises several things:
– You don't owe one penny until all pests on your
premises have been eradicated.
– If you are ever dissatisfied with BBBK's service, you
will receive a refund for up to 12 months of the
company's services - plus fees for another
exterminator of your choice for the next year.
– if a guest spots a pest on your premises, BBBK will
pay for the guest's meal or room, send a letter of
apology, and pay for a future meal or stay.
– If your facility is closed down due to the presence of
roaches or rodents, BBBK will pay any fines, as well
Image obtained from:
as all lost profits, plus $5,000. http://www.vyaspesttreatment.com/images/pestcontrol_banner.png
http://safehomepestochem.com/wp-content/uploads/2015/10/1420176432756.jpg

How successful is this BBBK’s guarantee?

The company, which operates
throughout the United States:
– charges up to 10 times more than
its competitors
– yet has a disproportionately high
market share in its operating
areas.
– Its service is so outstanding that
the company rarely needs to make
good on its guarantee.
• In 1986 it paid out only $120 000 on
sales of $33 million - just enough to
prove that its promises are not empty
ones.
Image obtained from:
http://bugsburger.com/images/guarantee.png

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 Unconditional Service Guarantee:
Customer View
With a good guarantee, you tell your customers where and how
to complaint, and that complaining is worth time and effort.
• Unconditional: Customers satisfaction is unconditional and
without exception

• Easy to understand and communicate: Customers should

understand what to expect from a guarantee in measurable terms

• Meaningful: Guarantee should be important to the customer in

financial as well as service terms. Example: Domino’s Pizza

• Easy to invoke: A dissatisfied customer should not be hassled

with filling out forms or writing letters to invoke guarantee.

• Easy to collect: “Best guarantees are resolved on spot”

What a guarantee does?

Management View

– Forces firm to focus on customers: knowing what customers want

is essential to offering service guarantee

– Sets clear standards: Tells employees what the company stands for
and it forces the company to define each employee’s role responsibility
in delivering the service.

– Generates feedback: A guarantee forces company to create a

system for discovering errors through feedback.

– Promotes understanding of service delivery system: Forces

you to demand why you fail? What failure points exists in the system? If
failure can be identified can their origin be traced and avoided.

– Builds customer loyalty: Guarantee reduces customers risk of

purchase decision and enhances loyalty thereby increasing sales.

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 How can I set up my own unconditional
guarantee?

• Start with a vision of error-free service.

• Review every step of your delivery system to
identify obstacles preventing you from offering
an unconditional guarantee
• Design your entire organization to support your
guarantee.

SERVICE RECOVERY

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 Introduction
A service recovery is satisfying a previously dissatisfied
customer and making them a loyal customer.
• Measure the costs
• Break the silence and listen closely for complaints
• Anticipate the needs for recovery
• Act fast
• Train employees
• Empower the front line
• Close the loop
• Behavioral Science (Chase and Dasu, 2001, HBR)
Many types of service recovery exist such as case by
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case, Systematic response, Early intervention, etc.

Managing Capacity and

Demand
Chapter 12

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 Defining Capacity
• Capacity is a measure of the capability of
a manufacturing or service resource such
as a
– facility,
– process,
– human labor, or
– piece of equipment
• to accomplish its purpose over a specified
time period.
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Examples of Short- and Long-Term

Capacity Decisions in Services

Short term capacity decisions Long term capacity decisions

Amount of over time scheduled for Expanding the size and number of
next week beds in hospital

Number of pizza delivery workers to Number of bank branches to

hire for festival period establish in a new market

Number of emergency nurses for Adding/closing of a distribution

each shift center

Amount of warehouse space to rent Additional flight between cities with

new aircraft

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 Demand/Capacity Management
Issues/challenges in Services
• Service is perishable commodity
– No inventory or backordering possible
– A plane with empty flying seats has lost forever the revenue opportunity

• Maximum capacity of some service system is not flexible

– Ex. Hospitals, hotels

• Demand fluctuations are difficult to predict

– Even our culture and habit contributes to this.
• Eating at fixed times – breakfast, lunch and dinner – Other times the seats in
a restaurant are empty
• Vacations in April, May – Demand for hotels, travel tickets increase, but on
other days decrease
– Results in idle service at sometimes and in other cases, consumer has
to wait for the same

• Variability in service time makes managing capacity difficult

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Strategies for Shifting Demand to Match

Capacity

Demand Too High Shift Demand Demand Too Low

• Use signage to communicate • Use sales and advertising to

busy days and times increase business from current
• Offer incentives to customers for market segments
usage during non-peak times • Modify the service offering to
• Take care of loyal or regular appeal to new market segments
customers first • Offer discounts or price
• Advertise peak usage times and reductions
benefits of non-peak use • Modify hours of operation
• Charge full price for the service-- • Bring the service to the
no discounts customer
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 Strategies for Flexing Capacity to
Match Demand
• Demand Too High
– Cross-train employees
• Demand Too Low
– Request overtime work – Perform maintenance
from employees Flex Capacity renovations
– Rent or share capacity – Schedule vacations
• Rent or share – Schedule employee
equipment training
– Subcontract or
– Lay off employees
outsource activities
– Increasing customer
participation
– Work shift scheduling
– Hire part-time
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employees

Managing Demand through

Operations Management
• Design multi-stage production process
• Managing queues and waiting times
• Use of advance orders/reservations
• Overbooking & no show

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Inventory Demand through Waiting Lines and
Reservations:
Why Do Waiting Lines Occur?

• Because the number of arrivals at a facility exceeds

capacity of system to process them at a specific point
in the process
• Queues are basically a symptom of unresolved
capacity management problems

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Alternative Queuing Configurations

Single line, single server, single stage

Single line, single servers, sequential stages

Parallel lines to multiple servers

Designated lines to designated servers

Single line to multiple servers (“snake”)

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“Take a number” (single or multiple servers) 28
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20
30
26 24
31 27
32 23 18

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 Managing Demand in Waiting Lines
(Minimize Perceptions of Waiting Time)
• Unoccupied times feels longer than occupied time
• Preprocess wait feel longer than process wait.
• Anxiety makes wait seem longer
• Uncertain waits are longer than known, finite waits
• Unexplained waits are much longer than explained waits
• Unfair waits are much longer than equitable waits
• More valuable the service longer the customer will wait
• Solo wait feels longer than group waits.

• https://www.youtube.com/watch?v=6OJIy-
PzCgs
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Create An Effective Reservation System

Characteristics of Well-Designed Reservations System

• Fast and user-friendly for customers and staff
• Answers customer questions
• Offers options for self service (e.g., the Web)
• Accommodates preferences (e.g., room with view)
• Deflects demand from unavailable first choices to alternative times
and locations
• Includes strategies for no-shows and overbooking
– Requiring deposits to discourage no-shows
– Canceling unpaid bookings after designated time
– Compensating victims of over-booking
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 Yield Management Systems

An Overview

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Introduction
• The concept used in service operations with high-fixed
costs and low-variable costs that attempts to match
supply and demand (a chase strategy) to maximize
capacity utilization.

• Most appropriate for firms with:

– Fluctuating demand

– Perishable inventory

– Relatively fixed capacity

– Ability to segment markets

– Product sold in advance 22

– Low marginal sales cost and High capacity change cost

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 YM Issue:
To Overbook or Not
• Hotel Overbooking Problem
– Each No-Show Cost: $40
– Each Dishonored Overbooking
Cost: $100
• Probability of No-Shows

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Image obtained from:
http://globe-views.com/dcim/dreams/hotel/hotel-01.jpg

Hotel Overbooking Problem – contd.

This is also called as Expected value method. Since the

focus is on minimizing loss (cost of overbooking or losing),
it is better to overbook by 2 rooms.
Also, this result in a saving of about $33.80 per room in 24
comparison to no overbooking case OVER A LONG RUN.

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Hotel Overbooking Problem –
contd.
Cu 40
P(d  x)  P(d  x)   0.286
Cu Co 40  100

d = the number of no shows based on past experience

X =the number of rooms over booked

Cu = cost of under estimation of no show

Co= cost of overestimation of no show.
This is called as CRITICAL FRACTILE METHOD
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Yield Management: Example

Hotel should be overbooked by two rooms

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 Yield Management - applications

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In a nut shell
MANAGING MANAGING
DEMAND CAPACITY

Partitioning Increasing
demand customer
Developing participation
Sharing
complementary
capacity
services
Establishing
Scheduling
price
Developing Cross- work shifts
incentives
reservation training
systems employees
Promoting Creating
off-peak adjustable
Using
demand capacity
part-time
employees

Yield
management
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 Service supply relationships

Chapter 13

Definition of Supply-Chain
• All the activities involved in delivering a product from raw material
through to the customer including
 Sourcing raw materials and parts
 Manufacturing and assembly
 Warehousing and inventory tracking
 Order entry and order management
 Distribution across all channels
 Delivery to the customer
 Information systems necessary to monitor all activities
Suppliers
Disposal
Recycling/Remanufacturing

Product and Manufacturing Distribution Retailing After-sales

Consumer
Process Service
Design

Material Transfer
Information Transfer

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 Service Supply Relationships
• Service can be considered as acting on
– people’s minds (e.g. education, entertainment),
– bodies ( e.g. lodging, health care),
– belongings ( e.g. auto repair, dry cleaning), and
– information ( e.g. insurance, legal)
– Thus most of the services act on something provided by
the customer.

• Therefore, customers are acting as suppliers in the service

exchange – called the customer-supplier duality
– There is a bidirectional relationship between the service delivery firm, its
supplier, and the customer
Service Customer >Input Service
Category -Supplier Output> Provider
Minds Student >Mind Professor
Knowledge>
Bodies Patient >Tooth Dentist
Filling>

Customer-Supplier Duality in
Service Supply Relationships

Supplier

Service Service
Provider Customer
Design

Material transfer Information transfer

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 Service Supply Relationships – contd.
• Examples of two-level service supply chains.
– In each case, the service provider requires the assistance of a third
party supplier to complete the service.

Service Customer >Input Service >Input Provider’s

Category -Supplier Output> Provider Output> Supplier

Minds Patient >Disturbed Therapist >Prescription Pharmacy

Treated> Drugs>

Bodies Patient >Blood Physician >Sample Lab

Diagnosis> Test Result>

Belongings Driver >Car Garage >Engine Machine

Repaired> Rebuilt> Shop

Information Home >Property Mortgage >Location Title

Buyer Loan> Company Clear Title> Search

Managerial Implications of
Bidirectional Relationships
• Service supply relationships are hubs, not
chains
– Simultaneous consumption and production
makes services more like hubs than chains (in
sequence)
– In the previous table, supply chain can be
extended to include a supplier to the service
provider, where service provider acts as an
agent for the customer when dealing with
outside supplier

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Managerial Implications – contd.
• Service capacity is analogous to inventory
– For goods supply chains, inventory is used to
buffer the variations in final customer demand
– Services cannot be inventoried, excess
capacity must be held in reserve

• Customer supplied inputs can vary in

quality
– Thus impacting delivery performance of
service provider
– Effective communication is therefore, very
important

Can we outsource
services?

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 Outsourcing Services
• Benefits
– allows the firm to focus on its core
competence
– service is cheaper to outsource than perform
in-house
– provides access to latest technology
– leverage benefits of supplier economy of
scale

• Risks
– loss of direct control of quality
– jeopardizes employee loyalty
– exposure to data security and customer
privacy
– dependence on one supplier compromises
future negotiation leverage
– additional coordination expense and delays
– Etc.
Images obtained from:
http://www.standardmarketing.com/wp-content/uploads/2012/11/outsourcing-cartoon1.jpg

Outsourcing Process

Need Identification Information Search Vendor Selection

Problem Definition References Experience Cost
"Do-versus-Buy" Analysis Personal Contact Reputation Location
Involve Interested Parties Recommendations References Size
Specification Development Trade Directory

Performance Evaluation
Identify Evaluator Meet Deadlines
Quality of Work Flexibility
Communication Dependability

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 Taxonomy for Outsourcing
Business Services
Importance of Service
Low High

Facility Support: Equipment Support:

Property -Laundry -Repairs
-Janitorial -Maintenance
Focus -Waste disposal -Product testing

of People Employee Support: Employee Development:

Service -Food service -Training
-Plant security -Education
-Temporary personnel -Medical care

Facilitator: Professional:
-Bookkeeping -Advertising
Process -Travel booking -Public relations
-Call centre -Legal

Outsourcing considerations
• Focus on Property
– Facility Support Service
• Can be treated like the purchase of goods
• Specifications can be written easily
• Vendor selection is based on low bid
• Identify responsible party to evaluate performance
• It is easy to measure and track performance as it
is more visible and tangible
• Mostly non critical

– Equipment Support Service

• Experience and reputation of vendor matters most
– Should have good technical knowledge and experience
• Availability of vendor for emergency response and
hence should be close enough
• Designate person to make service call and to
check that service is satisfactory
• Mostly critical and performance evaluation would
be based on communication, dependability,
Images obtained from:
tangibility etc. http://www.pennenterprises.com/IMAGES/College-Bundle-Image.jpg
http://www.itsolnserv.com/images/3%20(6).jpg

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 Outsourcing considerations
• Focus on People
– Employee Support Service
• Less important as in transportation or canteen
services
• Specifications prepared with end user input –
typically the department that requires it
• Contact vendor clients for references
• Evaluate performance on a periodic basis
– Employee Development Service
• Highly important as in training, health insurance,
etc.
• Specifications prepared with end user input –
typically the department that requires it and
personnel department is involved
• Experience with particular industry important
• Involve higher levels of management in vendor
identification and selection
Images obtained from:
• Contact vendor clients for references http://livewellomaha.org/wp-content/uploads/2011/09/125556199.jpg
https://today.duke.edu/sites/default/files/stories/OpenEnrollment2012_web_H.jpg?1349706244

• Use employees to evaluate vendor performance

Outsourcing considerations
• Focus on Process
– Facilitator Service
• Least tangible and deals with activities of
information processing
• Routine activities such as book keeping, travel
booking, etc.
• If more such vendors are available, role of ancillary
services play a major role
• References or third party evaluations useful
• Performance evaluation by end user

– Professional Service
• Has significant impact on strategic future of the
organization
• Involve high level management in vendor
identification and selection
– Eg. Choosing advertising agencies
• Trust in the supplier, reputation and experience are
very important Images obtained from:
http://9tonine.com/oc-content/uploads/2/511.jpg
• Performance evaluation by top management http://www.blogilvy.co.za/wp-content/uploads/2012/10/Ogilvy-Mather-Logo.png

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