Operations management for services

Introduction

Operations Management as an academic field has gone through several iterations. Early in the Twentieth Century it started as Production Management that focused on manufacturing. An early writing in the U.S. about production management is the Principles of Scientific Management published in 1911 by Frederick Winslow Taylor. Many more publications about manufacturing operations management were made before the 1940s. In the 1950's attention turned to management of service operations as distinct and separate from managing manufacturing. Bell, for example, wrote about the coming of the "Post-Industrial Society." The initial emphasis in Service Operations was on defining services and explaining how they differed from manufacturing. To reflect the new addition of service, the name of the field was changed from Production Management to Production and Operations Management or just Operations Management; two names that are retained to date. Because of significant changes in all modern industrial economies toward services, Operations Management is no longer primarily manufacturing oriented.

The field of Operations Management is typically taught in Business Schools as a functional area of business along with marketing, finance, management, accounting and information systems. Many business schools have departments of Operations Management. Operations Management, with a technical orientation, is also taught in Engineering Schools as Industrial Engineering or Operations Research/Management Science.

This article provides a broad discussion of the management of service operations, starting with a definition of service operations. Then the history and evolution of the service industries is discussed beginning with elementary services from the early twentieth century and progressing to a current taxonomy of the vast array of service industries. Next, we describe the many different tasks of managing services that spread across the different types of service industries. A framework of decision making is used for design and management of service products, service processes, quality, capacity, inventory and service supply chains. These are the key decisions made by operations managers in all services. This page is completed by summarizing key aspects of managing a service operation.

Definition of Services

There have been many different definitions of service. One of the most pervasive, and earliest definitions, is “services are intangible products.”. According to this definition, service is something that cannot be manufactured. It can be added after manufacturing (e.g. product repair) or it can stand alone as a service (e.g. dentistry) delivered directly to the customer. This definition leaves much to be desired and has been expanded to include such ideas as “service is a customer experience.” In this case the customer is brought into the definition as the experience the customer receives while “consuming” the service. Under this definition a service is more than an intangible product, it’s about what the customer actually experiences.

Service is a customer experience

A third definition of service concerns the perceived service as consisting of physical facilitating goods, explicit service and implicit service. In this case the facilitating goods are the buildings and inventory used to provide the service. For example in a restaurant the facilitating goods are the building and the food. The explicit service is what is perceived as the observable part of the service (the sights, sounds and look of the service). In a restaurant the explicit service is the time spent waiting to get a table and the food, the appearance of the facility and the employees, and the ambience of sounds and light and the decor. The implicit service is the feeling of safety, psychological well-being and happiness associated with the service. As a result of this definition a service is more than what you can feel, see or touch.

There is no universal or accepted definition of service, but recent definitions lean more toward the customer experience or the explicit and implicit service. These definitions help not only to define a service but provide insight into how to measure and manage service. Using the customer experience approach, a questionnaire called SERVQUAL has been developed to measure the customer’s perception of the service. The dimensions of SERVQUAL include tangibles, reliability, responsiveness, assurance and empathy. These dimensions are designed to measure the customer experience in both explicit and implicit measures.

A debate about SERVQUAL has ensued about whether customer service should be measured in absolute terms or relative to expectations. The debate goes as follows: We delivered high service on all SERVQUAL dimensions and therefore the service is high quality. Others argue that ultimately the service result is judged by the customer relative to expectations and not by the service provider. If customer expectations are low, even a low level of service is high quality.

Comparison of Manufacturing and Services

Common comparisons of manufactured goods and services are as follows:

• Simultaneous production and consumption. High contact services (e.g. haircuts) must be produced in the prescience of the customer, since they are consumed as produced. As a result services cannot be produced in one location and transported to another like goods. Service operations are therefore highly dispersed geographically close to the customers. Furthermore simultaneous production and consumption allows the possibility of self-service involving the customer at the point of consumption (e.g. gas stations). Only low-contact services produced in the "backroom" (e.g., check clearing) can be provided away from the customer.
• Perishable. Since services are perishable, they cannot be stored for later use. In manufacturing inventory can be used to buffer supply and demand. Since buffering is not possible in services, highly variable demand must be met by operations or demand modified to meet supply.
• Ownership. In manufacturing, ownership is transferred to the customer. Ownership is not transferred for service. As a result, services cannot be owned or resold.
• Tangibility. A service is intangible making it difficult for a customer to evaluate the service in advance. In the case of a good, they can see it and evaluate it. Assurance of quality service is often done by licensing, government regulation, and branding to assure customers they will receive the quality service.

These four comparisons are important since they indicate how management of service operations are quite different from manufacturing regarding such issues as capacity requirements (highly variable), quality assurance (hard to quantify), location of facilities (dispersed), and interaction with the customer during delivery of the service (product and process design).

Service Industries

Generally speaking, industries have been defined by economists as consisting of four parts:Agriculture,Mining and Construction, Manufacturing and Services

In this definition services are anything that is not agriculture, mining, construction or manufacturing. This leaves a very wide range of possible service industries.

Services have existed for centuries. The earliest form of service was slaves that performed services for their masters. Aside from slavery, early service was associated with servants. Servants were hired to do tasks that the wealthy did not want to do for themselves (e.g. cleaning the house, repairs, construction, cooking, and washing clothes). Later, services became more organized and were provided to the general public. By the early twentieth century the following services were commonly available to the public.

Travel and shipping via the railroad Purchasing goods at a general store (the early retail industry) Professional services (lawyers, doctors, bookkeepers and accountants) Hotels and restaurants Entertainment (orchestras, and plays) Personal services (haircuts, and housekeeping) Communications (Mail and telegraph) Banking Government services

In 1900 the service industry was fragmented, except for the railroads. Services were largely local in nature and owned by entrepreneurs and families. At that time 31% of people were employed in services, 31% in mfg and 38% in agriculture.

Services have now evolved to become the dominant form of employment in industrialized economies. Much of the world has progressed, or is progressing, from agricultural to industrial and now post-industrial economies. This does not imply that agriculture and manufacturing are not important, merely that these industries have taken a lesser role in employment. A table of employment by industry in the U.S. for 2014 is shown below.

Industry	% employment
Agriculture and Mining	2
Construction	5
Manufacturing	10
Federal Government	2
State Governments	13
Leisure & Hospitality	9
Health Care and Social	10
Education Private	2
Professional and Business	11
Financial Services	6
Information Services	2
Transportation & Utilities	3
Retail and Wholesale	14
Other services	4
Self Employed	7
Totals	100

Source:

The table shows that service industries now constitute 83% of employment in the U.S., while agriculture, mining, construction and manufacturing are only 17% of the total employment. Service industries are very diversified ranging from those that are highly capital intensive (e.g. utilities, airlines,and hospitals) to those that are highly people intensive (retail, wholesale, banking, and professional services}. In capital intensive services the focus is more on technology and automation. while in people intensive services, the focus is more on managing service employees that deliver the service.

Service Design

Service design must begin with a business strategy and service strategy. The business strategy defines what business the firm is in, for example The Walt Disney Company defines its business strategy "as making people happy." A business strategy also defines the target market, competitors, financial goals, product development, and perhaps some aspects of operations.

Following from the business strategy is the service concept. It must provide the rationale for why the customer should buy the service offered. It defines what the customer is receiving and what the service organization is providing. The service concept includes:

1. Organizing Idea. The vision and essence of the service.
2. Service Provided. The process and results designed by the provider.
3. Service Received. The customer experience and outcomes expected.

Managers can use the service concept to create organizational alignment and develop new services. It provides a means for describing the service business from an operations point of view.

After defining the service concept, operations can proceed to define the service-product bundle (or service package) for the organization. It consists of five parts: service facility, facilitating goods, information, explicit service and implicit services. It is important to carefully define each of these elements so that operations can subsequently design and manage a service process, capacity, quality, inventory and the service supply chain. The service-product bundle must come first.

An example of a service-product bundle follows:

• Service Facility: Accessible by public transportation, sufficient parking, interior decorating, architecture, facility layout and traffic flow
• Facilitating goods: sufficient inventory, quality and selection
• Information: Is it accurate, up-to-date, timely, and useful to the customer
• Explicit service: Availability when needed, training and appearance of personnel and consistency
• Implicit service: Sense of well-being, privacy and security, atmosphere, attitude of service providers.

Once the service package is specified, operations is ready to make decisions concerning the process, quality, capacity, inventory and supply chain. These are the five responsibilities of service operations. Other responsibilities such as market choice, product positioning, pricing, advertising and channels belong to the marketing function.

Operations Decisions

Process Decisions

Process decisions include the physical processes and the people that deliver the services to the customer. A service process consists of all the routines, tasks and steps that are used to deliver service to customers along with the jobs and training that service employees perform. There are many ways to organize a process to provide customer service in an effective and efficient manner consistent with the service-product bundle. Several ideas have been advanced on how to design a service process.

  Customer Contact

File:Service-1660848.jpg

Call center service has high contact and no facilitating goods.

Design of a service system must consider the degree of customer contact. The importance of customer contact was first noted by Chase in xxx <ref>. He argued that high customer contact processes should be designed and managed differently from low-contact processes. High contact processes have the customer in the system while providing the service. This can lead to difficulties in standardizing the service or inefficiencies when the customer makes demands or expects unique services. On the other hand, it also provides the possibility of self-service where customers provide part of the service themselves (e.g. filing your own gas tank, or packing your own groceries). Low contact services are performed away from the customer in what is often called "the back room." In this case, the service process can be more standardized and efficient (e.g. check clearing in a bank, filling orders in a warehouse) since the customer is not in the system to request preferences, customization or changes. Low contact services can be managed more like manufacturing, high contact services cannot.

  Production line approach

McDonalds uses the production-line approach to service

In xxx Levitt introduced the "production line approach to service". He argued that service processes could be made more efficient by standardizing them and automating them like manufacturing. He gave the example of McDonalds that has standardized both the services at the front counter and the backroom for producing the food. They have limited the menu, simplified the jobs, trained the managers (at "Hamburger U"), automated production and instituted standards for courtesy, cleanliness, and quality. As a result, McDonalds has become a model for other service processes which have been designed for high efficiency, not only in fast food, but in many other services. At the same time this leaves open the option for more customized and flexible services for customers who are willing to pay more for "better" or more personalized service. While these services are less efficient, they cater more to unique customer's needs.

  Service process matrices

Many different service process matrices have been proposed for explaining the relationship between service products that are selected and corresponding processes. One of these was published by Collier and Meyer <> below.

The service delivery system matrix shows the various types of routings used for service process depending on the amount of customization and customer involvement in the process. With high levels of customization and customer involvement, there are many pathways and jumbled flows for service. As a result the service delivery of Customer-Routed services is less efficient than Co-routed or Provider-Routed processes that have less customization and less customer involvement. Process that should be used for each combination of customization and customer involvement are shown on the diagonal of this matrix.

  Self-Service

Self service is commonly used almost everywhere today. In the 1960's gas station attendants actually came out and pumped your gas, cleaned your windshield and even checked your oil. Fast food is famous for self-service, since customers have been trained to order their own food, pay immediately, find a table, and clean up the trash. This was never done before MacDonald's initiated these practices. ATM's have replaced traditional tellers and online banking provides even more self-service.

When self-service is accepted by the customer, it can reduce costs and even provide better service in the customer's eyes -- faster service with less hassle. Self-service falls in the Provider-routed or co-routed part of the Service delivery matrix. Services that were previously customer-routed have been moved down the diagonal to be more efficient and accepted by customers.

  Service Blueprint

The service blueprint is a way to describe the flow of a customer through a service operation from the start to the finish, along with the actions provided by the service provider both in interaction with the customer and in the "back room" out of sight of the customer. For example, if a customer wishes to purchase a suit, the service blueprint starts with entry to the store, next the customer is greeted by a sales representative, the customer then provides information on his/her needs, the sales representative searches for appropriate suits, one or more suits are selected and tried-on for a fitting, a suit is selected and then alterations are ordered (which take place away from the customer), the customer pays for the suit and returns later to pick it up. A blueprint flowchart shows every step in the process and can be used to illustrate the process and improve it.

  Lean Thinking

If lean thinking is applied, the time taken for each step in a service blueprint flowchart can be recorded, or a separate value-stream map can be constructed. Then the process can be analyzed for time reductions to reduce waiting and non-value added steps. Finally, changes are made to reduce time and waste in the process. Waste is anything that does not add value to the process including waiting time in line, possibility of more self-service, customer hassle, and defects in service. But, lean thinking also requires attention to the customer and the people providing the service. It is important to apply important principles such as completely solve the customer's problem, don't waste time and provide exactly what the customer requires.

Service managers must realize that the customer will be happy if the service provided meets or exceeds expectations. Also the interaction between the customer and the people providing the service is essential to achieve satisfied customers. Employee involvement is often emphasized as part of lean thinking to achieve high levels of commitment by service employees.

  Queuing

Post office queue. Operations management studies both manufacturing and services.

Queuing is an analytic method for determining waiting time when customers must wait in line to get service. The length of the queue and waiting time can be calculated based on the arrival rate, service rate, number of servers and type of lines. There are many formulas for various types of queuing theory problems. The formulas generally predict that the average service time must be significantly less than the average time between arrivals when there is randomness in arrivals and/or service time. The reason for this is that a long line will build up when randomness of arrivals occurs faster than the average and service times are longer than the average. Generally, average service time should be less than 0.8 times the average time between arrivals. This prevents a long line and long waiting times from occurring. As a general rule, if arrivals occur once every 5 minutes on average, than service time should be less than 4 minutes on average to insure the queue does not build up to long lines. If the distributions of arrival times and service times are known, formulas are available for calculating the exact waiting times and line lengths for many different queuing configurations of servers, types of lines, server distributions and arrival distributions.

 Service-Profit chain

This section is completed by describing the service-profit chain as a way to design service processes. The service-profit chain links various aspects and tasks required to deliver superior service and profits. It starts with a high level of internal quality leading to employee satisfaction and productivity to deliver superior external customer service leading to customer satisfaction, customer loyalty and finally high revenues and profits.

a description of the service-profit chain

Every link in this chain is important and it clearly shows the linkage between the service providers and the customer that is essential in service operations. The service manager must be careful not to break any of the links in order to receive the results of high profitability.

Quality Management

Quality management practices for services have much in common with manufacturing, despite the fact that the product is intangible. One of the biggest differences, however, is measurement of service quality which is primarily perceptual (e.g. use of SERVQUAL). Also, service quality is frequently measured relative to expectations, while manufacturing quality is not.

The following approaches are widely used for quality improvement in both manufacturing and services.

• Total Quality Management (TQM: Quality Improvement Teams
• The W. Edwards Deming Management Method: Fourteen Points for Management
• Joseph Juran's Approach: Planning, Improvement and Control
• Six Sigma: DMAIC (Design, Measurement, Analysis, Improvement and Control)

These approaches have several things in common. They begin with defining and measuring the customer's needs. Any service that does not meet a customer's need is considered a defect. Then they seek to reduce defects through statistical methods, cause-and-effect analysis, problem solving teams, and involvement of employees. They focus on improving the processes that underlie production of the service.

There are two approaches about quality that are unique to service Operations Management

  Service Recovery

For manufactured products, quality problems are handled through warranties, returns and repair after the product is delivered. In high contact services there is no time to fix quality problems later; they must be handled by Service Recovery as the service is delivered. For example, if soup is spilled on the customer in a restaurant, the waiter might offer to pay to have the suit cleaned and provide a free meal. If a hotel room is not ready when promised, the staff could offer to store the customer's luggage or provide an upgraded room. Service recovery is intended to fix the problem on the spot and go even further to offer the customer some form of compensation. The objective is to make the customer happy with the situation, even though there was a service failure.

  Service Guarantee

A service guarantee is similar to a manufacturing guarantee, except the service product cannot be returned. A service guarantee provides a specific monetary reward in advance of service delivery. Here are some examples:

• We will deliver your package by the time promised or you will not pay.
• We will fix your automobile or give you $100 if you must bring it back for repair.
• Customer's that are not satisfied with their haircut, get the next haircut free.

Service guarantees serve to assure the customer of quality and they provide a way for the employees to know the cost of service failure.

Capacity and Scheduling

  Forecasting

Forecasting demand is critical for managing capacity and scheduling. Forecasting is similar for manufacturing and services. Today, forecasting for goods in retail, manufacturing and supply chain management is using big data. The data comes from scanners at retail locations or wholesale warehouses. Since many services (excluding retail and wholesale) are localized and fragmented they do not use big data for forecasting. But, many of the time-series and econometric statistical methods for forecasting are similar, with the exception of the amount of data used.

  Capacity Planning

Capacity planning is quite different between manufacturing and services given that service cannot be stored or shipped to another location. As a result, location of services is very dispersed to be near the customer. Customer's are only willing to travel short distances to receive most services. Exceptions are health care when the problem requires a specialist, airline transportation when the service is to move the customer and other services where local expertise is not available. Aside from these exceptions, location analysis depends on the "drawing power" based on the distance a customer is willing to travel to a service site relative to competitive offerings and locations. The drawing power of a site for a particular customer is high if the site is close by and provides the required service. This is much different than manufacturing locations which depend on the cost of building a factory plus the cost of transporting the goods to the customers.

A second difference from manufacturing is planning for capacity utilization once a facility is built. Since the product cannot be stored in inventory and sold later, service capacity is perishable and must meet peak demand at any point in time. There are two ways to deal with this problem. First, management can attempt to reduce peak demand and level it over time by the following actions.

• Higher prices during peak-demand times
• A reservation system to limit peak demand
• Advertising and promotion to shift peak demand

Management can also use methods to manage the supply of services including:

• Part-time labor
• Hiring and Layoff of Employees
• Using Overtime
• Subcontracting

While some of these same mechanisms are used in manufacturing, they are much more crucial in service operations.

  Revenue Management

Revenue management is unique to services, since capacity is perishable. This applies to the airline industry. When the plane leaves the runway, empty seats generate no revenue, but the cost of the flight is almost the same. As a result, mathematical models have been formulated to allocate capacity at various prices and times as the flight is booked in advance. Initially, a certain number of seats are reserved for first class, coach, premium coach and various other categories. Based on the elasticity of demand, at the last minute seats prices are lowered in order to fill empty seats. Similar models have also been developed for revenue management in hotels, where the capacity is also perishable.

  Scheduling

Scheduling has some differences between manufacturing and service. In manufacturing, jobs are scheduled through a factory to sequence them in the best order to meet due dates and reduce costs. In services, it is customers who are being scheduled. As a result, waiting time becomes much more critical. While manufacturing orders don't mind waiting in line or waiting in inventory, real customer's do mind. Some of the scheduling applications for services are: scheduling of patients to operating rooms in hospitals, scheduling and routing of commercial aircraft to airports, and scheduling students to classes. Many scheduling problems have been solved by using Operations Research methods to optimize the schedule.

Inventory

File:Fashion-1031469 1920.jpg

Inventory in retail is the facilitating good, not the product -- it's a product-service bundle

Inventory management and control is needed in service operations with facilitating goods. Almost every service uses some amount of facilitating goods. The presence of facilitating goods is critical in retail and wholesale operations but they don't manufacture anything, rather they distribute goods and provide services while doing it. One difference from manufacturing is that services use only finished goods inventories, while manufacturing has finished goods, work-in-process and raw-materials inventories. As a result, manufacturing uses a Materials Requirements Planning System, while services do not. Services use Replenishment inventory control systems such as order-point and periodic-review systems.

  Management Science and Operations Research (MSOR)

Analysis using MSOR methods has been extensive in services. Areas where they have been heavily applied are in inventory, capacity, revenue management, scheduling, queuing and forecasting. With the advent of big data and analytics, there are many opportunities to make improvements in decision making for services. We do not go into detail about these methods, but rather refer the reader to separate Wikipedia pages for Management Science and Operations Research.

Service Supply Chains

Supply chains for service operations are critical to supply facilitating goods. Let's take the typical hospital supply chain as an example. A hospital will use many goods from suppliers to construct and furnish the building. During day-to-day operation of the hospital, inventories of supplies will be held for the operating rooms and throughout the building. The pharmacy will hold drugs and the kitchen will need supplies of food. The supply chain of facilitating goods in hospitals is extensive.

Purchasing controls a large part of costs in retail and wholesale operations, approximately 75% of all costs. In other services, purchased facilitating goods are a much smaller part of total costs reaching a low of 10% for most professional services. Purchasing is not much different between manufacturing and services. Both types of organizations purchase goods and must deal with outsourcing and offshoring, as well as, domestic products.

Summary

Only a very brief summary of service operations management has been given. The focus has been on showing the importance of services in a post-industrial economy, not to deny the importance of manufacturing and agriculture, but rather to emphasize the interconnections of these various economic sectors.

A wide-range of decisions made by operations managers in service organizations were covered. Rather than discussing each decision type in detail we provide references and links to other Wikipedia sources. Emphasis was placed on how decision making in services is different from manufacturing primarily because the customer may be in the system during the production of a service, the service is perishable, it is intangible, and consumption and production are simultaneous. This has implications across the spectrum, for design of the service package, measures of services, process design, quality, capacity, scheduling, inventory management and supply chain management. These decisions are all part of service operations responsibilities in organizations.