MKT3125 - Services Marketing Management Lecture 10 Resource utilization (Chapter 11)

Where are we?

Objectives Explain how service operations can get the most out of their fixed resources – capacity management Explain how operations try to ensure that each customer gets what they want, when they want it – operations planning and control Describe how to manage bottlenecks and queues Show how operations can deal with capacity peaks – when they enter the “coping zone” Suggest ways in which operations can improve their resource utilization

CAPACITY - a definition "the ability to deliver product outputs, generally measured in units of output per unit of time" barrels of oil per day patients treated per month can also refer to the ability to receive or accommodate resource inputs cubic meters of gravel stored consultant hours available

Service Capacity Service capacity is the maximum level of value added activity over a period of time that the service process can consistently achieve. Examples: The number of calls a customer service agent can handle in the course of a shift The number of meals served by a restaurant during the lunch time period The number of repair calls made by a computer service engineer in a day

Measuring Capacity To manage capacity we must be able to measure it. Demand in a specified time period is a simple measure of capacity though not most accurate e.g. Courier company. A number of factors make capacity determination difficult: Service product mix – call centre Impact of the location –repair services in rural/cities The extent of intangibility in the service product Ease of identification of resource constraints.

Capacity and Demand "the ability to deliver product outputs, generally measured in units of output per unit of time” Excess demand: too much demand relative to capacity at a given time Excess capacity: too much capacity relative to demand at a given time Maximum capacity: upper limit to a firm’s ability to meet demand at a given time Optimum capacity: point beyond which service quality declines as more customers are serviced

Long-Term Capacity Management Location decisions Supply-side factors Land; labour; energy; transportation; government costs; social factors; working environment Demand-side factors Convenience to customers; labour skills; characteristics of the site; image Capacity decisions: how big should the facility be? Capability Resilience or flexibility

Short- to medium-term capacity strategies Level capacity Chase capacity Smooth demand

Capacity Management Strategies Level capacity (fixed level at all times) Scarce or expensive resource are maintained at constant level The objective is to maximize utilisation of expensive fixed resources. Ex. Airline ‘load factor’ target of 80% (to be profitable) Chase demand (adjust capacity to match demand) schedule downtime in low demand periods employee flexibility rent or share extra facilities and equipment cross-train employees buy-in or contract-out Stretch and shrink Demand (Demand Management) Varying pricing Offer inferior extra capacity at peaks (e.g. standing in train) Vary seated space per customer (e.g. elbow room, leg room) Extend/cut hours of service

Daily demand profile Number of customers Time Staff scheduling 6.00 8.00 10.00 12.00 14.00 16.00 18.00 20.00 22.00 Time Staff scheduling Split shift Split shift Part- time Core shift team 1 Core shift team 2 Figure 8.2 Chase capacity strategy for a fast-food restaurant

Demand Management Strategies Take no action let customers sort it out Reduce demand higher prices communication promoting alternative times Increase demand lower prices communication, including promotional incentives vary product features to increase desirability more convenient delivery times and places Inventory demand by reservation system by formalized queuing

Operations planning and control Capacity must be allocated to specific tasks for specific customers, using appropriate rules or algorithms e.g. FIFO; LIFO; most valuable customer; most critical first; least work content first; most work content Control systems range from expensive ERP (enterprise resource planning) systems to simple appointment lists. The operations manager must choose the most appropriate mechanism. Capacity may lie managed more effectively by ensuring that resources flow to meet the schedule e.g. clear customer flow; ensuring support resources are available

Objectives for Capacity Planning 1. CUSTOMERS SERVED IN TIME 2. HIGH UTILIZATION OF RESOURCES 3. NO QUALITY PROBLEMS 4. LOW UNIT PRODUCTION COSTS 5. NO EMPLOYEE PROBLEMS

Capacity - limiting factors bottlenecks product mix changeovers downtime & maintenance use of inventories employee effectiveness facilities and equipment

The Coping Zone: A point at which service managers find it difficult to cope with increasing demand At these levels of resource utilisation things are just too busy – staff stressed, everything a problem, and perceived customer satisfaction declines along with revenues per customer (Clark and James, 1997, Armistead and Clark, 1994).

The Coping Zone: Break point generally before 100% for two reasons Often not possible to run any resource at full capacity for any period of time e.g. staff in restaurant working “flat out” Several resources may be involved and while staff might be working “flat out”, only 80% of the tables might be in use

Customer perceived quality High Break point Coping zone Customer perceived quality Low 80% 100% Resource utilisation Figure 8.5 The coping zone in a high-quality restaurant Johnston & Clark, Service Operations Management, 2nd edition © Pearson Education Limited 2005

Customer perceived quality High Break point Customer perceived quality Coping zone Low 80% Resource utilisation Figure 8.6 The coping zone in a nightclub Johnston & Clark, Service Operations Management, 2nd edition © Pearson Education Limited 2005

Managing the coping zone Almost all service operations experience a point where demand outstrips supply: customers may perceive a fall in quality, and staff feel under increased pressure. Organizations should develop coping strategies, given that all operations will be there sometimes. It is important to develop actions to avoid being in the coping zone too much. This usually requires organization-wide approaches.

Managing the coping zone: Contd Identify the service concept Determine how resource utilization will be measured Draw the outline profile (to establish relationship between cust. perceived quality and capacity utilisation) Understand the nature and impact of the coping zone Determine the ideal operating area Understand why coping happens Develop coping strategies

Coping Strategies Proactive customer management Build employee flexibility Communicate to staff and customers Understand the difference between ‘Must do’s’ and ‘Nice to do’s’ Recruit ‘resilient’ staff for high stress situations Manage end-to-end processes

Managing bottlenecks and queues Key constraints (bottlenecks) define the capacity of the service process. It is critical to devote management attention to these aspects of operations. It is important for service managers to understand where the bottlenecks are in the service process Queues are inevitable in service operations. Developing 'waiting line' strategy will reduce potential customer dissatisfaction. Queuing theory and computer simulations provide valuable means of understanding complex queuing situations.

Risk analysis – actuary (15/hr) Inform customer of decision (30/hr) Proposal input (25/hr) Risk analysis – actuary (15/hr) Inform customer of decision (30/hr) Figure 8.3a Original flow (Johnston et. al., 2012, p.300)

Proposal input and credit score (22/hr) Needs analysis (50%) Definite yes/no (50%) Risk analysis – actuary (15/hr) Inform customer of decision (30/hr) Figure 8.3b Revised flow (Johnston et. al., 2012, p.300)

Queue Management Queues may be lines of people visible/invisible to both employees and customers Queuing theory is used to calculate the number of servers required to meet forecast demand, identify resource constraints and forecast inaccuracy in the demand forecast.

Queuing Psychology 1. Unoccupied time feels longer 2. Preprocess/post-process waiting feel longer than in-process 3. Anxiety makes waiting seem longer 4. Uncertain waiting is longer than known, finite waiting 5. Unexplained waiting seems longer 6. Unfair waiting is longer than equitable waiting 7. People will wait longer for more valuable services 8. Waiting alone feels longer than in groups 9. Physically uncomfortable waiting feels longer 10. Waiting seems longer to new or occasional users

Queues: Useful Terminology Customer calling population – describes the customer base Arrival process – arrival pattern of customers Balking – customers don’t join the queue as they perceive the wait to be too long Queue configuration – no. of queues and their location Queue discipline – rules of queueing e.g. FIFO Reneging - customers who join the queue, wait for a while then leave Jockeying – customers who switch from one queue to another hoping to be served more quickly

Improving resource utilization Four additional ways of improving resource utilization Yield utilization Building flexibility Reducing capacity leakage Getting organizational support for resource utilization.

Yield Management A variable pricing strategy, based on understanding, anticipating and influencing consumer behaviour in order to maximize revenue or profits from a fixed, perishable resource (such as airline seats or hotel room reservations or advertising inventory). “A set of demand-forecasting techniques used to determine whether prices should be raised or lowered and a reservation request should be accepted or rejected in order to maximise revenue" (American Hotel & Motel Association 1994). Usually results in 3 to 5% revenue increase (Smith, 1992)

Building Flexibility New service flexibility – introduce new services into an existing mix (ex. New house loan ‘products’ with different payment schemes) Service mix flexibility – deliver more than one service (ex. A hotel for different types of guest profiles…business people, holiday travellers, etc.) Delivery flexibility – change the timing of the activity (ex. Courier options for different speeds of delivery) Volume flexibility – change level of output to meet demand

Reducing Capacity Leakage Labour sickness and absenteeism Labour underperformance Scheduling losses – idle times Costs of complexity – the broader the services, the more complex and higher risk of inefficiencies and rework Quality failures

Organizational Support for Capacity Utilization How is the service concept changing? Visibility of future strategic direction to operations managers. How well are the internal interfaces managed? Successful organisations are often those that manage their internal relationships well. How important is resource management in the culture of the company? Resource mgt needs a “hero” to plan for the long-term and persuade the organisation to think differently about resource mgt

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