1. ISM 270 Service Engineering and Management Lecture 3: Technology in Services

2. Announcements Homework 1 due next week Homework 1 due next week Homework 2 due following week Homework 2 due following week

3. Todays Lecture Role of Technology in Services Role of Technology in Services New Service Development New Service Development Facility location problems Facility location problems Inventory Management Inventory Management Statistics and Probability Review Statistics and Probability Review

4. Technology in Service

5. Discussion Name an Internet site you believe will be successful in the long run - explain why.

6. IT Significance Information Technology can change the way that an organization (business or public sector) competes. As the foundation for organizational renewal. As a necessary investment that should help achieve and sustain strategic objectives. As an increasingly important communication network among employees and with customers, suppliers, business partners and even competitors.

7. Strategic Roles of Information Systems Specific Examples: Lower Costs Lower Costs Differentiate Differentiate Innovate Innovate Promote Growth Promote Growth Develop Alliances Develop Alliances Improve Quality and Efficiency Improve Quality and Efficiency Build an IT Platform Build an IT Platform Support (enable) other Strategies Support (enable) other Strategies

8. Role of Technology in the Service Encounter Technology Customer Server Server Server Customer D. Technology-Mediated Service Encounter D. Technology-Mediated Service Encounter E. Technology-Generated Service Encounter E. Technology-Generated Service Encounter A. Technology-Free Service Encounter A. Technology-Free Service Encounter B. Technology-Assisted Service Encounter B. Technology-Assisted Service Encounter C. Technology-Facilitated Service Encounter C. Technology-Facilitated Service Encounter

9. Technology has led to the Evolution of Self-service Service Industry Human Contact Machine Assisted Service Electronic Service BankingTellerATMOnline banking GroceryCheckout clerkSelf-checkout stationOnline order/ pickup AirlinesTicket agentCheck-in kioskPrint boarding pass RestaurantsWait personVending machineOnline order/ delivery Movie theaterTicket saleKiosk ticketingPay-for-view Book storeInformation clerk Stock-availability terminal Online shopping EducationTeacherComputer tutorialDistance learning GamblingPoker dealerComputer pokerOnline poker

10. Self-service Technologies (SST) Does customer adoption of self-service follow a predictable pattern? Does customer adoption of self-service follow a predictable pattern? How do we measure self-service quality (e.g., ease of use, enjoyment, and/or control)? How do we measure self-service quality (e.g., ease of use, enjoyment, and/or control)? What is the optimal mix of SST and personal service for a service delivery system? What is the optimal mix of SST and personal service for a service delivery system? How do we achieve continuous improvement when using SST? How do we achieve continuous improvement when using SST? What are the limits of self-service given the loss of human interaction? What are the limits of self-service given the loss of human interaction?

11. Self-Service examples Airline industry Airline industry Banking Banking

12. Technology has led to service automation Fixed-sequence (F) - parking lot gate Fixed-sequence (F) - parking lot gate Variable-sequence (V) - ATM Variable-sequence (V) - ATM Playback (P) - answering machine Playback (P) - answering machine Numerical controlled (N) - animation Numerical controlled (N) - animation Intelligent (I) - autopilot Intelligent (I) - autopilot Expert system (E) - medical diagnosis Expert system (E) - medical diagnosis Totally automated system (T) - EFT Totally automated system (T) - EFT

13. Technology has led to a variety of services available via the web A retail channel (Amazon.com) A retail channel (Amazon.com) Supplemental channel (Barnes & Nobel) Supplemental channel (Barnes & Nobel) Technical support (Dell Computer) Technical support (Dell Computer) Embellish existing service (HBS Press) Embellish existing service (HBS Press) Order processing (Delta Airline) Order processing (Delta Airline) Convey information (Kelly Blue Book) Convey information (Kelly Blue Book) Organization membership (POMS.org) Organization membership (POMS.org) Games (Treeloot.com) Games (Treeloot.com)

14. Several technologies needed to converge to bring E-Business Internet Internet Global telephone system Global telephone system Communications standard TCP/IP (Transfer Control Protocol/Internet Protocol) Communications standard TCP/IP (Transfer Control Protocol/Internet Protocol) Addressing system of URLs Addressing system of URLs Personal computers and cable TV Personal computers and cable TV Customer databases Customer databases Sound and graphics Sound and graphics User-friendly free browser User-friendly free browser

15. E-Business has led to multiple business models ( Weill & Vitale, Place to Space, HBS Press, 2001) Content Provider: Reuters Content Provider: Reuters Direct to Customer: Dell Direct to Customer: Dell Full-Service Provider: GE Supply Co. Full-Service Provider: GE Supply Co. Intermediary: eBay Intermediary: eBay Shared Infrastructure: SABRE Shared Infrastructure: SABRE Value Net Integrator: 7-Eleven Japan Value Net Integrator: 7-Eleven Japan Virtual Community: Monster.com Virtual Community: Monster.com Whole-of-Enterprise: Government Whole-of-Enterprise: Government

16. Economics of E-Business Sources of Revenue: - Transaction fees - Information and advice - Fees for services and commissions - Advertising and listing fees Sources of Revenue: - Transaction fees - Information and advice - Fees for services and commissions - Advertising and listing fees Ownership - Customer relationship - Customer data - Customer transaction Ownership - Customer relationship - Customer data - Customer transaction

17. Electronic vs. Traditional Services

18. Grocery Shopping Comparison

19. Economics of Scalability Dimensions High Scalability Low E-commerce continuum Selling information (E-service) Selling value- added service Selling services with goods Selling goods (E-commerce) Information vs. Goods Content Information dominates Information with some service Goods with support services Goods dominate Degree of Customer Content Self-serviceCall center backupCall center supportCall center order processing Standardization vs. Customization Mass distributionSome personalization Limited customization Fill individual orders Shipping and Handling Costs Digital assetMailingShippingShipping, order fulfillment, and warehousing After-sales serviceNoneAnswer questionsRemote maintenanceReturns possible Example ServiceUsed car pricesOnline travel agentComputer supportOnline retailer Example FirmKbb.comBiztravel.comEverdream.comAmazon.com

20. E-Business Supply Chain (Network) Elements Major entities including firm of interest and its customers, suppliers, and allies Major entities including firm of interest and its customers, suppliers, and allies Major flows of product, information, and money Major flows of product, information, and money Revenues and other benefits each participant receives Revenues and other benefits each participant receives Critical aspects: participants, relationships, and flows Critical aspects: participants, relationships, and flows Example: 7-Eleven Japan

21. Japanese 7-Eleven Read case in text Read case in text (p 109, 7 th edition, p103, 6 th edition, p122 5 th edition) (p 109, 7 th edition, p103, 6 th edition, p122 5 th edition)

23. Evolution of B2C E-Commerce in Japan 1. Does the 7-Eleven Japan distribution system exhibit scalability economics? 2. How does the 7-Eleven example of B2C e- commerce in Japan illustrate the impact of culture on service system design? 3. Will the 7-Eleven Konbini and Mobile system be adopted in the United States?

24. Video

25. New Service Development

26. Service innovation How do I come up with a new idea? How do I come up with a new idea? Do I start with a customer need? Do I start with a customer need? A technology? A technology?

27. Levels of Service Innovation Radical Innovations Major Innovation: new service driven by information and computer based technology Major Innovation: new service driven by information and computer based technology Start-up Business: new service for existing market Start-up Business: new service for existing market New Services for the Market Presently Served: new services to customers of an organization New Services for the Market Presently Served: new services to customers of an organization Incremental Innovations Service Line Extensions: augmentation of existing service line (e.g. new menu items) Service Line Extensions: augmentation of existing service line (e.g. new menu items) Service Improvements: changes in features of currently offered service Service Improvements: changes in features of currently offered service Style Changes: modest visible changes in appearances Style Changes: modest visible changes in appearances

28. Technology Driven Service Innovation Power/energy - International flights with jet aircraft Power/energy - International flights with jet aircraft Physical design - Enclosed sports stadiums Physical design - Enclosed sports stadiums Materials - Astroturf Materials - Astroturf Methods - JIT and TQM Methods - JIT and TQM Information - E-commerce using the Internet Information - E-commerce using the Internet

29. Service Design Elements Structural - Delivery system - Facility design - Location - Capacity planning Structural - Delivery system - Facility design - Location - Capacity planning Managerial - Service encounter - Quality - Managing capacity and demand - Information Managerial - Service encounter - Quality - Managing capacity and demand - Information

30. New Service Development Cycle People Technology Systems Product Full Launch Development Design Analysis Organizational Context Teams Tools Enablers Formulation of new services objective / strategy Idea generation and screening Concept development and testing Business analysis Project authorization Full-scale launch Post-launch review Service design and testing Process and system design and testing Marketing program design and testing Personnel training Service testing and pilot run Test marketing

31. Service Blueprint of Luxury Hotel

32. Video

33. Strategic Positioning Through Process Structure Degree of Complexity: Measured by the number of steps in the service blueprint. For example a clinic is less complex than a general hospital. Degree of Divergence: Amount of discretion permitted the server to customize the service. For example the activities of an attorney contrasted with those of a paralegal.

34. Structural Alternatives for a Restaurant No Reservations Self-seating. Menu on Blackboard Eliminate Customer Fills Out Form Pre-prepared: No Choice Limit to Four Choices Sundae Bar: Self-service Coffee, Tea, Milk only Serve Salad & Entree Together: Bill and Beverage Together Cash only: Pay when Leaving TAKE RESERVATION SEAT GUESTS, GIVE MENUS SERVE WATER AND BREAD TAKE ORDERS PREPARE ORDERS Salad (4 choices) Entree (15 choices) Dessert (6 choices) Beverage (6 choices) SERVE ORDERS COLLECT PAYMENT Specific Table Selection Recite Menu: Describe Entrees & Specials Assortment of Hot Breads and Hors Doeuvres At table. Taken Personally by Maltre d Individually Prepared at table Expand to 20 Choices: Add Flaming Dishes; Bone Fish at Table; Prepare Sauces at Table Expand to 12 Choices Add Exotic Coffees; Sherbet between Courses; Hand Grind Pepper Choice of Payment. Including House Accounts: Serve Mints LOWER COMPLEXITY/DIVERGENCE CURRENT PROCESS HIGHER COMPLEXITY/DIVERGENCE

35. Taxonomy of Service Processes Low divergence High divergence Low divergence High divergence (standardized service) (customized service) (standardized service) (customized service) Processing Processing Processing Processing Processing Processing Processing Processing Processing Processing Processing Processing of goods Information of people of goods Information of people of goods Information of people of goods Information of people Dry Check Auto repair Computer Dry Check Auto repair Computer No Cleaning processing Tailoring a programming No Cleaning processing Tailoring a programming Customer Restocking Billing for a suit Designing a Customer Restocking Billing for a suit Designing a Contact a vending credit card building Contact a vending credit card building machine machine Ordering Supervision Ordering Supervision Indirect groceries of a landing Indirect groceries of a landing customer from a home by an air customer from a home by an air contact computer controller contact computer controller No Operating Withdrawing Operating Sampling Documenting Driving a No Operating Withdrawing Operating Sampling Documenting Driving a customer- a vending cash from an elevator food at a medical rental car customer- a vending cash from an elevator food at a medical rental car service machine an ATM Riding an buffet dinner history Using a service machine an ATM Riding an buffet dinner history Using a worker Assembling escalator Bagging of health club worker Assembling escalator Bagging of health club interaction premade groceries Searching for facility interaction premade groceries Searching for facility (self- furniture information (self- furniture information service) in a library Direct Customer Food Giving a Providing Home Portrait Haircutting Contact service service in a lecture public carpet painting Performing worker restaurant Handling transport- cleaning Counseling a surgical worker restaurant Handling transport- cleaning Counseling a surgical interaction Hand car routine bank ation Landscaping operation interaction Hand car routine bank ation Landscaping operation washing transactions Providing service washing transactions Providing service mass mass vaccination vaccination

36. Generic Approaches to Service Design Production-line Production-line Limit Discretion of Personnel Limit Discretion of Personnel Division of Labor Division of Labor Substitute Technology for People Substitute Technology for People Standardize the Service Standardize the Service Customer as Coproducer Self Service Smoothing Service Demand Customer as Coproducer Self Service Smoothing Service Demand Customer Contact Degree of Customer Contact Separation of High and Low Contact Operations Customer Contact Degree of Customer Contact Separation of High and Low Contact Operations Information Empowerment Employee Information Empowerment Employee Customer Customer

37. Customer Value Equation

38. Amazon.com Discussion: Discussion: What were / are the key drivers of success? What were / are the key drivers of success? What role has technology played? What role has technology played?

39. Discussion Name Name 1. An existing service that could be improved by new technology 2. A new service that could be introduced if new technology were developed 3. A technology that hasnt yet converged to a service

40. Transportation and Location Problems Appear frequently in service design Appear frequently in service design Homework 2 has an example Homework 2 has an example

41. Clarke-Wright for homework 2 Traveling Salesman-type problems very common in services Traveling Salesman-type problems very common in services Delivery of goods Delivery of goods Mail routes Mail routes Sales tour Sales tour Standard problem: Standard problem: Given the distance between each city pair, visit all N cities in some order, ending back at the base Given the distance between each city pair, visit all N cities in some order, ending back at the base Objective: Minimize total distance traveledObjective: Minimize total distance traveled

42. Traveling salesman Standard problem is very difficult to solve (NP – complete) Standard problem is very difficult to solve (NP – complete) We will use the Clarke-Wright Algorithm (page 499 of text) We will use the Clarke-Wright Algorithm (page 499 of text) C-W algorithm intuition: C-W algorithm intuition: Start with the path that returns to base between every node Start with the path that returns to base between every node Add links between nodes instead of returning in order of distance gained Add links between nodes instead of returning in order of distance gained Stop when no gain can be made Stop when no gain can be made Note: This is a good heuristic Note: This is a good heuristic Performs well in practice, but not guaranteed to find the best solution. Performs well in practice, but not guaranteed to find the best solution.

43. Clark-Wright Algorithm Objective: Find the shortest-path sequence for visiting N locations You are given the distance between any two locations 1. Calculate the savings from adding a link between two locations instead of returning to base in between 2. Order the savings links from to bottom 3. Create the schedule by 1.Starting with a schedule that goes from base to each location and back 2.Add feasible links from the savings list in order of savings 4. Stop when no savings can be made, or all links are on one cycle

44. 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

45. Role of Inventory in Services Decoupling inventories Decoupling inventories Seasonal inventories Seasonal inventories Speculative inventories Speculative inventories Cyclical inventories Cyclical inventories In-transit inventories In-transit inventories Safety stocks Safety stocks 18-45

46. Considerations in Inventory Systems Type of customer demand Type of customer demand Planning time horizon Planning time horizon Replenishment lead time Replenishment lead time Constraints and relevant costs Constraints and relevant costs 18-46

47. Relevant Inventory Costs Ordering costs Ordering costs Receiving and inspections costs Receiving and inspections costs Holding or carrying costs Holding or carrying costs Shortage costs Shortage costs 18-47

48. Inventory Management Questions What should be the order quantity (Q)? What should be the order quantity (Q)? When should an order be placed, called a reorder point (ROP)? When should an order be placed, called a reorder point (ROP)? How much safety stock (SS) should be maintained? How much safety stock (SS) should be maintained? 18-48

49. Inventory Models Economic Order Quantity (EOQ) Economic Order Quantity (EOQ) Special Inventory Models With Quantity Discounts Planned Shortages Special Inventory Models With Quantity Discounts Planned Shortages Demand Uncertainty - Safety Stocks Demand Uncertainty - Safety Stocks Inventory Control Systems Continuous-Review (Q,r) Periodic-Review (order-up-to) Inventory Control Systems Continuous-Review (Q,r) Periodic-Review (order-up-to) Single Period Inventory Model Single Period Inventory Model 18-49

50. Inventory Levels For EOQ Model 0 Units on Hand Q Q D Time 18-50

51. Annual Costs For EOQ Model Annual Costs For EOQ Model 18-51

52. 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 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 Total Annual Cost for Purchase Lots EOQ EOQ 18-52

53. 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, $ 18-53

54. Inventory Levels For Planned Shortages Model Q Q-K 0 -K T1T2 TIME T 18-54

55. Formulas for Special Models Quantity Discount Total Cost Model Quantity Discount Total Cost Model Model with Planned Shortages Model with Planned Shortages 18-55

56. Values for Q* and K* as A Function of Backorder Cost B Q* K* Inventory Levels undefined Q* 0 0 0 0 18-56

57. Safety Stock (SS) Demand During Lead Time (LT) has Normal Distribution with Demand During Lead Time (LT) has Normal Distribution with SS with r% service level SS with r% service level Reorder Point Reorder Point 18-57

58. 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 18-58

59. 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 18-59

60. Inventory Control Systems Continuous Review System Continuous Review System Periodic Review System Periodic Review System 18-60

61. ABC Classification of Inventory Items AB C 18-61

62. 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 18-62

63. 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 18-63

64. 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 18-64

65. 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 18-65

66. Critical Fractile for the Newsvendor Problem P(D<Q) (C o applies) P(D>Q) (C u applies ) 0.722 18-66

67. Retail Discounting Model S = current selling price S = current selling price D = discount price D = discount price P = profit margin on cost (% markup as decimal) 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) 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) N = inventory turns (number of times stock turns in one year) Loss per item = Gain from revenue S – D = D(PNY) 18-67

68. Statistics Review

69. Probability and Random Events Probability and Random Events Distribution Functions Distribution Functions Central Limit Theorem Central Limit Theorem

70. Probability In a random event problem where all events are equally likely In a random event problem where all events are equally likely P [condition A] = P [condition A] = # Events satisfying A / # possible events

71. Density functions PDF = probability density function PDF = probability density function = probability of random variable equal to each value CDF = cumulative distribution function CDF = cumulative distribution function = probability of random variable being less than or equal to each value = integral of PDF up to that value = integral of PDF up to that value

72. Conditional Probability P [Event1|Event2] = P [Event1|Event2] = Prob[Both Events]/Prob[Event2] Conditional PDF Conditional PDF f(x|y) = f(x,y) / f(y) f(x|y) = f(x,y) / f(y)

73. Next Week Service Quality Service Quality Geoff Ryder Geoff Ryder