1. ISM 270 Service Engineering and Management Lecture 4: Service Quality

2. Announcements   Homework 1 due today,   Homework 2 due next week   Homework 3 will be posted early next week, due in 2 weeks

3. Today   Service Quality   Service Inventory Management

4. Service Quality

5. Key question   How to we ensure that our customers are having a good experience?

6. Customer Feedback and Word-of-Mouth   The average business only hears from 4% of their customers who are dissatisfied with their products or services. Of the 96% who do not bother to complain, 25% of them have serious problems.   The 4% complainers are more likely to stay with the supplier than are the 96% non-complainers.   About 60% of the complainers would stay as customers if their problem was resolved and 95% would stay if the problem was resolved quickly.   A dissatisfied customer will tell between 10 and 20 other people about their problem.   A customer who has had a problem resolved by a company will tell about 5 people about their situation.

7. Perceived Service Quality Word of mouth Personal needs Past experience Expected service Perceived service Service Quality Dimensions Reliability Responsiveness Assurance Empathy Tangibles Service Quality Assessment 1. Expectations exceeded ES<PS (Quality surprise) 2. Expectations met ES~PS (Satisfactory quality) 3. Expectations not met ES>PS (Unacceptable quality)

8. Service Quality Gap Model

9. Dimensions of Service Quality   Reliability: Perform promised service dependably and accurately. Example: receive mail at same time each day.   Responsiveness: Willingness to help customers promptly. Example: avoid keeping customers waiting for no apparent reason.   Assurance: Ability to convey trust and confidence. Example: being polite and showing respect for customer.   Empathy: Ability to be approachable. Example: being a good listener.   Tangibles: Physical facilities and facilitating goods. Example: cleanliness.

10. Role of Surveys   More pervasive now than ever   Focus on expectations vs. impressions

11. Quality Service by Design   T aguchi Methods (Robustness) How well does the service perform under adverse conditions? Examples include proactive policies to take advantage of down time, such as notifying maids of rooms for cleaning   Poka-yoke (fail-safing) Height bar at amusement park   Quality Function Deployment (making measurable checks on quality House of Quality

12. Classification of Service Failures Server Errors Task: Doing work incorrectly Treatment: Failure to listen to customer Tangible: Failure to wear clean uniform Customer Errors Preparation: Failure to bring necessary materials Encounter: Failure to follow system flow Resolution: Failure to signal service failure

13. Achieving Service Quality   Cost of Quality Accounting system to value avoided failures   Statistical Process Control Control Chart used to monitor performance over time Use confidence interval and check for outliers   Unconditional Service Guarantee How can this be done in services?

14. Unconditional Service Guarantee: Customer View   Unconditional (No Questions Asked)   Easy to understand and communicate (What do I do? What compensation will I get?)   Meaningful (Is it worthwhile?)   Easy to invoke (Is it accessible?)   Easy to collect (On the spot?)

15. Unconditional Service Guarantee: Management View   Focuses on customers (British Airways)   Sets clear standards (FedEx)   Guarantees feedback (Manpower)   Promotes an understanding of the service delivery system (Bug Killer)   Builds customer loyalty by making expectations explicit

16. Service Process Control Resources Identify reason for nonconformance Establish measure of performance Monitor conformance to requirements Take corrective action Service concept Customer input Customer output Service process

17. Control Chart of Departure Delays expected Lower Control Limit 19981999

18. Customer Satisfaction   All customers want to be satisfied.   Customer loyalty is only due to the lack of a better alternative   Giving customers some extra value will delight them by exceeding their expectations and insure their return

19. Walk-Through-Audit   Service delivery system should conform to customer expectations.   Customer impression of service influenced by use of all senses.   Service managers lose sensitivity due to familiarity.   Need detailed service audit from a customer’s perspective.

21. Approaches to Service Recovery   Case-by-case addresses each customer’s complaint individually but could lead to perception of unfairness.   Systematic response uses a protocol to handle complaints but needs prior identification of critical failure points and continuous updating.   Early intervention attempts to fix problem before the customer is affected.   Substitute service allows rival firm to provide service but could lead to loss of customer.

22. Discussion   What is the role of information systems in service quality?

23. Common Difficult Interactions with Customers Unrealistic customer expectations Unexpected service failure 1. Unreasonable demands 1. Unavailable service 2. Demands against policies 2. Slow performance 3. Unacceptable treatment of 3. Unacceptable service employees 4. Drunkenness 5. Breaking of societal norms 6. Special-needs customers Use scripts to train for proper response

24. Service Encounter Success Factors

25. Employee Perceptions of Customer Service at a Branch Bank Terrible Outstanding

26. Is attitude emphasized? Are job previews utilized? Are customers screened? Are employees encouraged to refer friends? Are referrals from the “best” employees given priority? Is satisfaction measured periodically? Are measurements linked to other functions on the cycle? High-Quality Training Well-Designed Support Systems  Information  Facilities Greater Latitude to Meet Customer’s Needs Clear Limits on, and Expectations of, Employees Appropriate Rewards and Frequent Recognition Satisfied Employees Employee Referrals of Potential Job Candidates Is training for job and life? Is it an important element of quality of work life? Do they reflect needs of the service encounter? Are they designed to foster relationships? Does it reflect top management “talk”? Is it enough to allow delivery of results to customers? Do they limit the “right” risks? Are they logical to employees? Cycle of Capability Are they linked to service objectives? Are they balanced between monetary and non-monetary? Careful Employee and Customer Selection (and Self-selection))

27. Service Profit Chain: Nothing is independent from the rest! Internal Operating strategy and service delivery system Service concept Target market Service value Customers Loyalty Productivity & Output quality Service quality Capability Satisfaction Employees SatisfactionLoyalty Revenue growth External Profitability Customer orientation/quality emphasis Allow decision-making latitude Selection and development Rewards and recognition Information and communication Provide support systems Foster teamwork Quality & productivity improvements yield higher service quality and lower cost Attractive Value Service designed & delivered to meet targeted customers’ needs Solicit customer feedback Lifetime value Retention Repeat Business Referrals

28. Service Inventory Management

29. Managing Service Inventory FactoryWholesalerDistributorRetailerCustomer Replenishment order Replenishment order Replenishment order Customer order Production Delay Wholesaler Inventory Shipping Delay Shipping Delay Distributor Inventory Retailer Inventory Item Withdrawn McGraw-Hill/Irwin

30. Role of Inventory in Services   Decoupling inventories   Seasonal inventories   Speculative inventories   Cyclical inventories   In-transit inventories   Safety stocks 18-30

31. Considerations in Inventory Systems   Type of customer demand   Planning time horizon   Replenishment lead time   Constraints and relevant costs 18-31

32. Relevant Inventory Costs   Ordering costs   Receiving and inspections costs   Holding or carrying costs   Shortage costs 18-32

33. Inventory Management Questions   What should be the order quantity (Q)?   When should an order be placed, called a reorder point (ROP)?   How much safety stock (SS) should be maintained? 18-33

34. Inventory Models   Economic Order Quantity (EOQ)   Special Inventory Models With Quantity Discounts Planned Shortages   Demand Uncertainty - Safety Stocks   Inventory Control Systems Continuous-Review (Q,r) Periodic-Review (order-up-to)   Single Period Inventory Model 18-34

35. Inventory Levels For EOQ Model 0 Units on Hand Q Q D Time 18-35

36. Annual Costs For EOQ Model 18-36

37. EOQ Formula   Notation D = demand in units per year H = holding cost in dollars/unit/year S = cost of placing an order in dollars Q = order quantity in units   Total Annual Cost for Purchase Lots   EOQ 18-37

38. Annual Costs for Quantity Discount Model 0 100 200 300 400 500 600 700 22,000 21000 20000 2000 1000 C = $20.00C = $19.50C = $18.75 Order quantity, Q Annual Cost, $ 18-38

39. Inventory Levels For Planned Shortages Model Q Q-K 0 -K T1T2 TIME T 18-39

40. Formulas for Special Models   Quantity Discount Total Cost Model   Model with Planned Shortages 18-40

41. Values for Q* and K* as A Function of Backorder Cost B Q* K* Inventory Levels undefined Q* 0 0 0 0 18-41

42. Safety Stock (SS)   Demand During Lead Time (LT) has Normal Distribution with   SS with r% service level   Reorder Point 18-42

43. Continuous Review System (Q,r) Average lead time usage, d L Reorder point, ROP Safety stock, SS Inventory on hand Order quantity, EOQ EOQ d1d1 d 2 d3d3 Amount used during first lead time First lead time, LT 1 Order 1 placed LT 2 LT 3 Order 2 placed Order 3 placed Shipment 1 received Shipment 2 receivedShipment 3 received Time 18-43

44. Periodic Review System (order-up-to) RP Review period First order quantity, Q1 d1d1 Q2Q2 Q3Q3 d2d2 d3d3 Target inventory level, TIL Amount used during first lead time Safety stock, SS First lead time, LT 1 LT 2 LT 3 Order 1 placed Order 2 placed Order 3 placed Shipment 1 received Shipment 2 received Shipment 3 received Time Inventory on Hand 18-44

45. Inventory Control Systems   Continuous Review System   Periodic Review System 18-45

46. ABC Classification of Inventory Items AB C 18-46

47. Inventory Items Listed in Descending Order of Dollar Volume Monthly Percent of Unit cost Sales Dollar Dollar Percent of Inventory Item ($) (units) Volume ($) Volume SKUs Class Home Theater 5000 30 150,000 74 20 A Computers 2500 30 75,000 Television sets 400 60 24,000 Refrigerators 1000 15 15,000 16 30 B Displays 250 40 10,000 Speakers 150 60 9,000 Cameras 200 40 8,000 Software 50 100 5,000 10 50 C Thumb drives 5 1000 5,000 CDs 10 400 4,000 Totals 305,000 100 100 18-47

48. Single Period Inventory Model Newsvendor Problem Example D = newspapers demanded p(D) = probability of demand Q = newspapers stocked P = selling price of newspaper, $10 C = cost of newspaper, $4 S = salvage value of newspaper, $2 C u = unit contribution: P-C = $6 C o = unit loss: C-S = $2 18-48

49. Single Period Inventory Model Expected Value Analysis Stock Q p(D) D 6 7 8 9 10.028 2 4 2 0 -2 -4.055 3 12 10 8 6 4.083 4 20 18 16 14 12.111 5 28 26 24 22 20.139 6 36 34 32 30 28.167 7 36 42 40 38 36.139 8 36 42 48 46 44.111 9 36 42 48 54 52.083 10 36 42 48 54 60.055 11 36 42 48 54 60.028 12 36 42 48 54 60 Expected Profit $31.54 $34.43 $35.77 $35.99 $35.33 18-49

50. Single Period Inventory Model Incremental Analysis E (revenue on last sale) E (loss on last sale) P ( revenue) (unit revenue) P (loss) (unit loss) (Critical Fractile) where: C u = unit contribution from newspaper sale ( opportunity cost of underestimating demand) C o = unit loss from not selling newspaper (cost of overestimating demand) D = demand Q = newspaper stocked 18-50

51. Critical Fractile for the Newsvendor Problem P(D<Q) (C o applies) P(D>Q) (C u applies ) 0.722 18-51

52. Retail Discounting Model   S = current selling price   D = discount price   P = profit margin on cost (% markup as decimal)   Y = average number of years to sell entire stock of “dogs” at current price (total years to clear stock divided by 2)   N = inventory turns (number of times stock turns in one year) Loss per item = Gain from revenue S – D = D(PNY) 18-52