Operations Management for Service Providers

1. The Service Industry

As the U.S. economy has changed from a goods producer to a service provider, the predominance of the manufacturing sector has declined substantially over the last 60 years. Today, only about 11 million U.S. workers are employed in manufacturing, in contrast to more than 90 million who hold jobs in the service sector. The top 10 employers are all service providers, led by Walmart and Amazon. Information technology, security, and delivery services occupy several spaces in the top 10 along with retailers. Only one in the top 30 is a manufacturer (PepsiCo).

Though the primary function of both manufacturers and service providers is to satisfy customer needs, there are several important differences between the two types of operations. Let’s focus on three of them:

• Tangibility. Manufacturers produce goods, tangible products that can be touched or handled, such as automobiles and appliances. Service companies provide intangible products, such as banking, entertainment, or education.
• Customization. Manufactured goods are generally standardized; one 12-ounce bottle of Pepsi is the same as any other 12-ounce bottle of Pepsi. Services, by contrast, are often customized to satisfy the specific needs of a customer. When you go to the barber or the hairdresser, you ask for a haircut that looks good on you because of the shape of your face and the texture of your hair. When you go to the dentist, you ask him or her to fill or pull the tooth that’s bothering you.
• Customer contact. You could spend your entire working life assembling cars in Detroit and never meet a customer who bought a car that you helped to make. But if you were a waitress, you’d interact with customers every day. In fact, their satisfaction with your product would be determined in part by the service that you provided. Unlike manufactured goods, many services are bought and consumed at the same time.

2. Service Planning

When starting or expanding operations, businesses in the service sector must make a number of decisions quite similar to those made by manufacturers:

• What services (and perhaps what goods) should they offer?
• How will they provide these services?
• Where will they locate their business, and what will their facilities look like?
• How will they forecast demand for their services?

2a. Operations Processes

Service organizations succeed by providing services that satisfy customers’ needs. Companies that provide transportation have to get customers to their destinations as quickly, comfortably, and safely as possible. Companies that deliver packages, such as FedEx, must pick up, sort, and deliver packages in a timely manner. Colleges must provide quality education. Companies that provide both services and goods, such as restaurants, have a dual challenge: They must produce a quality good and deliver it satisfactorily.

Service providers that produce goods can, like manufacturers, adopt either a make-to-order or a make-to-stock approach to manufacturing them.

IN CONTEXT: BURGER KING

Throughout its 60-year history, Burger King introduced several innovations that have helped make the company (and the fast-food industry itself) more efficient. For example, they were the first to offer drive-through service (which now accounts for 70% of its sales and is a must for any fast-food restaurant). Burger King’s processes are built around customization, such as preparing burgers when they are ordered and giving customers access to the soda fountain so they can mix flavors or help themselves to refills.

2b. Facilities

When starting or expanding a service business, owners and managers must invest a lot of time in selecting a location, determining its size and layout, and forecasting demand. A poor location or a badly designed facility can cost customers, and inaccurate estimates of demand for products can result in poor service, excessive costs, or both.

2c. Site Selection

People in the real estate industry often say that the three most important factors to consider when you’re buying a home are location, location, location. The same principle applies when you’re trying to locate a service business. To be successful in the service industry, you need to be accessible to your customers. Some service businesses, such as cable TV providers, package delivery services, food delivery services, and e-retailers, go to their customers. Many others, however—hotels, restaurants, stores, hospitals, and airports—have to attract customers to their facilities. These businesses must locate where there’s a high volume of available customers. In picking a location, businesses perform a detailed analysis of demographics and traffic patterns, yet the most important factor to service-oriented businesses is usually traffic count—the number of cars or people that pass by a specific location in the course of a day.

Once planners find a site with an acceptable traffic count, they apply other criteria. It must, for example, be easy for vehicles to enter and exit the site, which must also provide enough parking to handle projected dine-in business. Local zoning must permit standard signage, especially along interstate highways. Finally, expected business must be high enough to justify the cost of the land and building.

try it

Imagine you are the owner of a small candy store looking to expand to a larger location. You have three options. One is in a light industrial area, has ample parking, and is the cheapest of the three. One is in a small business district, a two-block stretch of other stores, and is both the smallest and most expensive of the three. A third is along a path used by cyclists, pedestrians, and dog-walkers, and is across the street from the school.

What considerations must you take into account?

The smallest, most expensive location is likely to provide the most walk-in traffic and be more profitable than an industrial area, unless your store is so popular people will go out of their way to shop there. The store along the path is less likely to have walk-in traffic because people are exercising or have their pet with them. There may also be some zoning considerations, or at least some issues with public perception, to place the store by a school, even if it is unintentional. Note that any of these sites may work, depending on more specifics to the store, the quality and cost of the candy, and the demographics of the community. What other considerations did you make?

2d. Size and Layout

Because manufacturers do business out of plants rarely visited by customers, they base the size and layout of their facilities solely on production needs. In the service sector, however, most businesses must design their facilities with the customer in mind: They must accommodate the needs of their customers while keeping costs as low as possible. Performing this twofold task isn’t easy for many reasons, including:

• Choice spots for development, such as areas near busy intersections or in airports, are often expensive and might involve a bidding war with other services. A small parcel of land can cost millions of dollars.
• Because the spots are sometimes small, the options for the company acquiring the property are more limited. For example, a restaurant cannot provide as much seating, and a gas station doesn’t have as much shelf space for snacks and other conveniences, which is where most of their revenue is made.

2e. Capacity Planning

A manufacturer can predict overall demand, produce the product, store it in inventory, and ship it to a customer when it’s ordered. Service providers, however, can’t store their products for later use: Hairdressers can’t “inventory” haircuts, hospitals can’t “inventory” operations, and amusement parks can’t “inventory” roller coaster rides. Service-oriented businesses have to build sufficient capacity to satisfy customers’ needs on an “as-demanded” basis. Like manufacturers, service providers must consider many variables when estimating demand and capacity:

• How many customers will we have?
• When will they want our services (which days of the week, which times of the day)?
• How long will it take to serve each customer?
• How will external factors, such as weather or holidays, affect the demand for our services?

2f. Managing Operations

Overseeing a service organization puts special demands on managers, especially those that have a high degree of contact with customers, such as hotels and restaurants. These companies must provide customers with personal attention and satisfy their needs in a timely manner. This task is complicated by the fact that demand can vary greatly over the course of any given day. Managers, therefore, must pay particular attention to employee work schedules and (in some cases) inventory management.

2g. Scheduling

In manufacturing, managers focus on scheduling the activities needed to transform raw materials into finished goods. In service organizations, they focus on scheduling workers so that they’re available to handle fluctuating customer demand. Store and restaurant managers have the challenge of meeting demand during peak hours and not overstaffing during slow hours. If the business is understaffed at a busy time, customers may leave in frustration. If they are overstaffed during slow hours, the business is losing money, and the staff are bored. As with other issues, it helps to have a business with a history and data that can inform these decisions.

2h. Inventory Control

Businesses that provide both goods and services, such as retail stores and auto repair shops, have the same inventory control problems as manufacturers: Keeping levels too high costs money, while running out of inventory costs sales. Technology, such as the point-of-sale registers used at restaurants, makes the job easier. But less sophisticated tracking methods can also be used, such as a good system of storing goods so it is easy to quickly calculate how much of a supply is on hand.

3. Control

As mentioned above, one of the biggest differences in terms of operations between the manufacturing and service industries is customer contact. While all businesses will monitor quality and customer satisfaction, the service industry is particularly interested not just in customer satisfaction with the service but the overall customer experience.

EXAMPLE

Diners are more likely to return to a restaurant that is clean and has prompt and friendly service than they are to a restaurant that feels unclean and has unreliable or rude service, even if the food is much better at the second restaurant! As is well known in the industry, people are paying more for the “dining out experience” than for the meal.

Many organizations attempt to improve service by job design, which is a type of control. Job design refers to establishing an employee’s roles and responsibilities but goes further by ensuring the individual positions and jobs are done as efficiently as possible. For example, time expectations can be written into a job description for a fast-food line cook, and customer courtesies such as offering condiments and cutlery can be written into the job description for a cashier. Many organizations collect data, such as through customer surveys, to help know where they are succeeding and where they need to do more work. You have probably had the experience of cashiers asking you to complete a survey as they hand you your receipt; these surveys have become a priority for most organizations as they use the best data to make decisions. Most organizations also monitor sites that review businesses, such as Yelp, to determine if there are any control issues or quality issues in terms of complaints and concerns from customers.

term to know

Job Design

The process of establishing an employee’s roles, responsibilities, and accountabilities, with the goal of making the job as efficient as possible.