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com/doc/793093 46/181/RETAIL-DISCOUNTINGMODEL

Service operation management

1. There has been an increase in demand for the services of professionally qualifiedtechnicians with establishment of technical institutes. 2. Communication services like entertainment, education and the right to informationby the public is more important. 3. Due to increasing standards in education there is an increasing demand foreducational services. Primary, secondary, higher secondary schools, junior degreecolleges are the institutes which are in great demand. As the number of studentsgoes up the demand for private classes, tuitions, etc. also increases. 4. Banking services have become necessary to meet financial requirements of thepublic and the national industrial sector. 5. Personal care services are essential to develop potentiality of an individual for aperfect personality and positive image.6. Electricity services are required for the benefit of society, industry and so on.

7. With the increasing amount of trade and business, done by road there has been ademand for transport services which benefits various automobile manufacturers.Large section of population prefers having their own vehicles, proving a goodbusiness propositions for automatic industry. 8. The tourism has geared itself to make the tourists enjoy the holiday seasons inthe places of their choice and take them away from monotonous existence of cities. 9. Adequate hospital services are essential for the well being of the society. 10. Hospitality services work on the strategies to satisfy the business class throughtheir service in terms of comfort and satisfaction. The above activities have left themanagement scientists, professionals and socioeconomic thinkers it analyses andunderstand that managing services need attention, to stay in business. 11. As the natural resources are depleting and need for conservation is increasing wesee the coming of service providers like pollution control agencies, car pools etc. 12. The development in information technology has given rise to services like pagerservice PCOs, world wide web etc.

Describing where our society has been, its current condition, and its most likelyfuture is the task of social historians. Daniel Bell, a professor of sociology at HarvardUniversity, has written extensively on this topic, and the material that follows isbased on his work. To place the concept of a postindustrial society in perspective, wemust compare its features with those of pre-industrial and industrial societies.

Pre-industrial Society The condition of most of the world's population today is one of subsistence, or a pre-industrial society. Life is characterized as a game against nature. Working with muscle power and tradition, the labor force is engaged in agriculture,, mining, and fishing. Life is conditioned by the elements, such as the weather, the quality of thesoil, and the availability of water. The rhythm of life is shaped by nature, and the pace of work varies with the seasons. Productivity is low and bears little evidence of technology. Social life revolves around the extended household, and this combination of low productivity and large population results in high rates of underemployment (workers not fully utilized). Many seek positions in services, but of the personal or household variety. Pre-industrial societies are agrarian and structured around tradition, routine, and authority

Industrial Society The predominant activity in an industrial society is the production of goods. Thefocus of attention is on making more with less. Energy and machines multiply theoutput per labor-hour and structure the nature of work. Division of labor is theoperational "law" that creates routine tasks and the notion of the semiskilled worker.Work is accomplished in the artificial environment of the factory, and people tend themachines. Life becomes a game that is played against a fabricated nature--a worldof cities, factories, and tenements. The rhythm of life is machine-paced anddominated by rigid working hours and time clocks.
An industrial society is a world of schedules and acute awareness of the value of time. The standard of living becomes measured by the quantity of goods, but notethat the complexity of coordinating the production and distribution of goods resultsin the creation of large bureaucratic and hierarchic organizations. Theseorganizations are designed with certain roles for their members, and their operationtends to be impersonal, with persons treated as things. The individual is the unit of social life in a society that is considered to be the sum total of all the individualdecisions being made in the marketplace. Of course, the unrelenting pressure of industrial life is softened by the countervailing force of labor unions

Postindustrial Society While an industrial society defines the standard of living by the quantity of goods,the postindustrial society is concerned with the quality of life, as measured byservices such as health, education, and recreation. The central figure is the pro-fessional person, because rather than energy or physical strength, information is thekey resource. Life now is a game played among persons. Social life becomes moredifficult, because political claims and social rights multiply. Society becomes awarethat the independent actions of individuals can combine to create havoc foreveryone, as seen in traffic congestion and environmental pollution. The communityrather than the individual becomes the social unit.Bell suggests that the transformation from an industrial to a postindustrial societyoccurs in many ways. First, there is a natural development of services, such astransportation and utilities, to support industrial development. As labor-savingdevices are introduced into the production process, more workers engage in nomanufacturing activities, such as maintenance and repair. Second, growth of thepopulation and mass consumption of goods increase wholesale and retail trade,along with banking, real estate, and insurance. Third, as income increases, theproportion spent on the necessities of food and home decreases, and the remaindercreates a demand for durables and then for services.

For many people, service is synonymous with servitude and brings to mind workersflipping hamburgers and waiting on tables. However, the service sector that hasgrown significantly over the past 30 years cannot be accurately described as

composed only of low-wage or low-skill jobs in department stores and fastfoodrestaurants. Instead, the fastest-growing jobs within the service sector are infinance, insurance, real estate, miscellaneous services (e.g., health, education,professional services), and retail trade. Note that job areas whose growth rates wereless than the rate of increase in total jobs (i.e., less than 31.8 percent) lost marketshare, even though they showed gains in their absolute numbers. The exceptions arein mining and manufacturing, which lost in absolute numbers and thus showednegative growth rates. This trend should accelerate with the end of the cold war andthe subsequent downsizing of the military and defense industry.Changes in the pattern of employment will have implications on where and howpeople live, on educational requirements, and, consequently, on the kinds of organizations that will be important to that society. Industrialization created theneed for the semiskilled worker who could be trained in a few weeks to perform theroutine machinetending tasks. The subsequent growth in the service sector hascaused a shift to -collar occupations. In the United States, the year 1956 was aturning point. For the first time in the history of industrial society, the number of -collar workers exceeded the number of blue-collar workers, and the gap has beenwidening since then. The most interesting growth has been in the managerial andprofessional-technical fields, which are jobs that require a college education. Shift inemployment from an industrial society of machine operators to a postindustrialsociety of professional and technical workers.

Today, service industries are the source of economic leadership. During the past30 years, more than 44 million new jobs have been created in the service sector to absorb the influx of women into the workforce and to provide an alternative to thelack of job opportunities in manufacturing. The service industries now account forapproximately 70 percent of the national income in the United States. Given thatthere is a limit to how many cars a consumer can use and how much one can eatand drink, this should not be surprising. The appetite for services, however,especially innovative ones, is insatiable. Among the services presently in demand arethose that reflect an aging population, such as geriatric health care, and others thatreflect a two-income family, such as day care.The growth of the service sector has produced a less cyclic national economy.During the past four recessions in the United States, employment by service in-dustries has actually increased, while jobs in manufacturing have been lost. Thissuggests that consumers are willing to postpone the purchase of products but willnot sacrifice essential services like education, telephone, banking, health care, andpublic services such as fire and police protection

Several reasons can explain the recession-resistant nature of services. First, bytheir nature, services cannot be inventoried, as is the case for products. Becauseconsumption and production occur simultaneously for services, the demand for themis more stable than that for manufactured goods. When the economy falters, manyservices continue to survive. Hospitals keep busy as usual, and, while commissionsmay drop in real estate, insurance, and security businesses, employees need not belaid off.Second, during a recession, both consumers and business firms defer capitalexpenditures and instead fix up and make do with existing equipment. Thus, service jobs in maintenance and repair are created.

Concepts of service management should be applicable to all service organizations.For example, hospital administrators could learn something about their own businessfrom the restaurant and hotel trade. Professional services such as consulting, law,and medicine have special problems, because the professional is trained to provide aspecific clinical service (to use a medical example) but is not knowledgeable inbusiness management. Thus, professional service firms offer attractive careeropportunities for many college graduates.A service classification scheme can help to organize our discussion of servicemanagement and break down the industry barriers to shared learning. As suggested,hospitals can learn about housekeeping from hotels. Less obviously, drycleaningestablishments can learn from banks-cleaners can adapt the convenience of nightdeposits enjoyed by banking customers by providing laundry bags and after-hoursdrop-off boxes. For professional firms, scheduling a consulting engagement is similarto planning a legal defense or preparing a medical team for open heart surgery.

TO demonstrate that management problems are common across service industries, Roger Schmenner proposed the service process matrix in Figure 2.1. In thismatrix, services are classified across two dimensions that significantly affect thecharacter of the service delivery process. The horizontal dimension measures thedegree of labor intensity, which is defined as the ratio of labor cost to capital costThus, capital-intensive services such as airlines and hospitals are found in the upperrow because of their considerable investment in plant and equipment relative tolabor costs. Labor-intensive services such as schools and legal assistance are foundin the bottom row because their labor costs are high relative to their capitalrequirements.The vertical dimension measures the degree of customer interaction andcustomization, which is a marketing variable that describes the ability of the cus-tomer to affect personally the nature of the service being delivered. Little interactionbetween customer and service provider is needed when the service is standardizedrather than customized. For example, a meal at McDonald's, which is assembledfrom prepared items, is low in customization and served with little interactionoccurring between the customer and the service providers. In contrast, a doctor andpatient must interact fully in the diagnostic and treatment phases to achievesatisfactory results. Patients also expect to be treated as individuals and wish toreceive medical care that is customized to their particular needs. It is important tonote, however, that the interaction resulting from high customization createspotential problems for management of the service delivery process.

The four quadrants of the service process matrix have been given names, as defined by the two dimensions, to describe the nature of the services illustrated. Service factories provide a standardized service with high capital investment, muchlike a line-flow manufacturing plant.1 Service shops permit more service cus-tomization, but they do so in a high-capital environment. Customers of a massservice will receive an undifferentiated service in a labor-intensive environment, butthose seeking a professional service will be given individual attention by highlytrained specialists.Managers of services in any category, whether service factory, service shop, massservice, or professional service, share similar challenges, as noted in Figure 2.2,Services with high capital requirements (i.e., low labor intensity), such as airlines

and hospitals, require close monitoring of technological advances to remain competitive. This high capital investment also requires managers to schedule demand to maintain utilization of the equipment. Alternatively, managers of highly labor-intensive services, such as medical or legal professionals, must concentrate on personnel matters. The degree of customization affects the ability to control the quality of the service being delivered and the perception of the service by the customer

Service managers have difficulty identifying their product. This problem ispartly a result of the intangible nature of services, but it is the presence of the customer in the process that creates a concern for the total serviceexperience. Consider the following examples. For a sit-down restaurant,atmosphere is just as important as the meal, because many diners regard theoccasion as a way to get together with friends. A customer's opinion of abank can be formed quickly on the basis of a teller's cheerfulness or length of the waiting line.

The service package is defined as a bundle of goods and services that is pro-vided in some environment. This bundle consists of the following four features 1. Supporting facility. The physical resources that must be in place before aservice can be offered. Examples are a golf course, a ski lift, a hospital, and anairplane. 2. Facilitating goods. The material purchased or consumed by the buyer, or theitems provided by the customer. Examples are golf clubs, skis, food items,replacement auto parts, legal documents, and medical supplies. 3. Explicating services. The benefits that are readily observable by the senses andthat consist of the essential or intrinsic features of the service. Examples arethe absence of pain after a tooth is repaired, a smooth-running automobileafter a tune-up, and the response time of a fire department. 4. Implicit services. Psychological benefits that the customer may sense only vaguely or the extrinsic features of the service. Examples are the statusof a degree from an Ivy League school, the privacy of a loan office, and worry-free auto repair

All these features are experienced by the customer and form the basis of his orher perception of the service. It is important that the service manager offer a totalexperience for the customer that is consistent with the desired service package.Take, for example, a budget hotel. The supporting facility is a concreteblockbuilding with austere furnishings. Facilitating goods are reduced to the minimum of soap and paper. The explicit service is a comfortable bed in a clean room, andimplicit services might include a friendly desk clerk and the security of a well-lightedparking area. Deviations from this service package, such as adding bellhops, woulddestroy the bargain image. Table 2.2 lists criteria (with examples) for evaluating theservice package

The importance of facilitating goods in the service package can be used to classify services across a continuum from pure services to various degrees of mixed services. For example, psychiatric counseling with no facilitating goods would be considered a "pure" service. Automobile maintenance usually requires more facilitating goods than a haircut does. Making general statements about service management is difficult when there aresuch variations in the nature of services. However, an appreciation of the uniquefeatures of the service environment is important for understanding the challengesfacing service managers

Consider a building, which begins in the mind's eye of the architect and istranslated onto paper in the form of engineering drawings for all the building'ssystems: foundation, structural, plumbing, and electrical. An analog to this designprocess is the strategic service concept with the system elements outlined here.These elements must be engineered to create a consistent service offering thatachieves the strategic objectives. The service concept becomes a blueprint thatcommunicates to customers and employees alike what service they should expectto give and to receive. These system elements are

Structural: Delivery system. Front and back office, automation, customer participation. Facilitydesign. Size, aesthetics, layout.location. Customer demographics, single or multiple sites, competition, sitecharacteristics.Capacity planning. Managing queues, number of servers, accommodating averageor peak demand.

Managerial: Service encounter. Service culture, motivation, selection and training, employmentempowerment.Quality. Measurement, monitoring, methods, expectations vs. perceptions, serviceguarantee.Managing capacity and demand. Strategies for altering demand and controllingsupply, queue management.Information. Competitive resource, data collection. A successful hospital located in Toronto, Canada, that performs only inguinalhernia operations will be used to illustrate how each element of the service conceptcontributes to the strategic mission. Shouldice Hospital is privately owned and uses a special operating procedure to correct inguinal hernias that has resulted in anexcellent reputation. Its success is measured by the recurrence rate, which istwelve times lower than that of its competitors. The structural elements of Shouldice's service concept that support its strategyto target customers suffering from inguinal hernias are:Delivery system. A hallmark of the Shouldice approach is patient participation in allaspects of the process. For example, patients shave themselves before theoperation, walk from the operating table to the recovery area, and are encouragedthe evening after surgery to discuss the experience with new patients to alleviatetheir preoperative fears

Facility design. The facility is intentionally designed to encourage exercise andrapid recovery within four days, which is approximately one-half the time attraditional hospitals. Hospital rooms are devoid of amenities, and patients mustwalk to lounges, showers, and the cafeteria. The extensive hospital grounds arelandscaped to encourage strolling, and the interior is carpeted and decorated toavoid any typical hospital "associations."Location. Being located in a large metropolitan community with excellent air servicegives Shouldice access to a worldwide market. The large local population alsoprovides a source of patients who can be scheduled on short notice to fill anycanceled bookings.

Capacity planning. Because hernia operations are elective procedures, patients canbe scheduled in batches to fill the operating time available; thus, capacity is utilizedt o its maximum. This ease in scheduling operations allows Shouldice to operate likea fully occupied hotel; thus, the supporting activities, such as housekeeping andfood service, also can be fully employed.The managerial elements of the Shouldice service concept also support thestrategy of delivering a quality medical procedure: Service encounter. All employees are trained to help counsel patients and encourage them to achieve a rapid recovery. A service culture fostering a family typeatmosphere is reinforced by communal dining for both workers and patients.

Quality. The most important quality feature is the adherence of all physicians tothe Shouldice method of hernia repair, which results in the low recurrence rate of inguinal hernias among these patients. In addition, patients with dif ficulties arereferred back to the doctor who performed the procedure. Perceived quality isenhanced by the Shouldice experience, which is more like a short holiday than atypical hospital stay. Managing capacity and demand. Patients are screened by means of a mailinquestionnaire and are admitted by reservation only. Thus, the patient demand interms of timing and appropriateness can be controlled effectively. As mentioned,walk-in patients or local residents on a waiting list are used to fill vacancies createdby canceled reservations; thus, full use of hospital capacity is ensured. Information. A unique feature of the Shouldice service is the annual alumnireunion, which represents a continuing relationship of the hospital with its patients.Keeping information on patients allows Shouldice to build a loyal customer base,which is an effective word-of-mouth advertising medium. Providing free annualcheck-ups also allows Shouldice to build a unique data base on its procedure

Internet Strategies

Better products and services

Internet Marketing and Operations Advantages

Interactive games and software; interactive maps

More intelligent products and services

Link past purchases with new products and alert potentially interested customers

Lower Prices
Presumed lower cost structure Ease of comparison shopping Unlimited retail space

Personnel The effect on personnel is similar to that of inventory stocking

Fewer people are required in a centralized system like a website or telephone bank than in decentralized systems
The math will be covered in Chapter 11

Utilization efficiencies lower the number of people required in a centralized environment

Distribution offers traditional retailers a cost advantage
Shipping costs on a per unit basis are much higher for an internet firm that ships individual orders directly to consumers
Traditional Systems
Central Warehouses Distribution Centers Retail Outlets Customers

Internet Systems

Reverse logistics is a far larger problem in an internet environment
Return rates can approach 30% for internet retailers Retailers have a product perception advantage as consumers are able to view and touch merchandise prior to the sale Items returned in an internet environment cannot easily be put back on the shelves, rather they are shipped back to the merchant and restocked in a vast warehouse

Strategies for Mixed Traditional & Internet Retailers

Integrating the back-office of traditional and retail businesses is challenging
Warehouse format: pallets/forklifts/wide aisles vs. pick-and-pack, narrow aisles Shipping: bulk vs. individual orders
Inventory and Shipping Strategies for Combined Internet/Traditional Retailers Bulk Integrated Segregated Cost Minimizer Transportation sharing Single Item

Professional Shopper
Dedicated Systems

Assessment of Strategies Dedicated Systems

Warehouse systems are separate for catalog/internet vs. retail side (examples include JCPenny) May include outsourcing Internet orders to a third party firm (examples include Wal-Mart, Macys and Bloomingdales)
Disadvantages of both strategies include excess inventory and excess distribution costs

Assessment of Strategies
Professional Shopper
A store employee walks the retail outlet to pick the order Disadvantages
Prices must be retail + shipping and handling Phantom stock-outs High cost of order fulfillment

Assessment of Strategies
Cost Minimizers
Orders are picked individually, but goods are combined and sent on dedicated trucks Transportation may be shared with other retailers Advantages
Cost effective

Time consuming for customer who may have to wait for order

Assessment of Strategies
Transportation Sharing
Internet orders are shipped to retail outlets with the retailers regular suppliers; customers pick them up in the retail outlet
Example: JCPenney and 7-Eleven of Japan

Eliminates problems of the last mile

Inconvenient for the customer

Level of integration in order picking and delivery

Inventory Segregation: Where Internet Order Picking Occurs High
Bulk distribution center Break-bulk distribution center Flagship retail store Retail stores Contiguous distribution center

Dedicated distribution center

Options for Delivering Internet Orders Bulk Shipments

Customer pickup at retail store/Retail store order pick Customer pickup at retail store/Delivery from distribution center

Individual Shipments
Bulk from distribution center to general area/individual delivery to home Shipping direct to customer home

Customer Service and the Internet

In the last 5 years customer satisfaction has declined
Companies have implemented cost-saving automated technologies without considering customer satisfaction

Internet customer service is terrible

37% never receive a response to e-mails 90% of consumers would prefer live support, 1% of retailers have live support 67% of all shoppers abandon shopping carts

Cost of Service Transactions

Traditional Means Letter Telephone Web Billing query-fully automated (occasional operator intervention) Billing query through customer on line account Query that requires agent response back to customer Operational update available through on line access Operational query that can have automated response (occasional operator intervention)

Unit Cost
$12.45 $ 2.76

% of Telephone Cost
451% 100%

$0.27 $0.14 $1.38 $0.14

10% 5% 50% 5%



Internet Service Design

Product characteristics
Customization level, complexity, customer knowledge, capacity

Process characteristics
Technology and task

Touch points
Interaction between customers, employees and systems

Service Design Model

Product Process Touch point Outcome

Technology Product Task

Customer Performance


The product dictates what type of activity will happen on the internet
E-commerce vs. e-service Customization
Is contact with a real person required? Can the internet facilitate service inquiries? Is loyalty the goal?

Product complexity and product knowledge

Example: technical support for novices vs. experienced users

Back-Office Processes
Transaction Systems Billing Shipping Receiving Distribution & Fulfillment Systems Inventory Distribution Tracking Knowledge Systems Capture Organization Access Use (Selling & Monitoring)

Information Systems Data Supporting Hardware Supporting Software

Front Office Processes

Interaction Systems Status Checking FAQ, FUP, Scripting, Keyword Search Wizards Bulletin Boards Monitored Discussion Forums Call-back Buttons Real-time chat VOIP Language Translation Voice Recognition

Touch Points
Match customer tasks with appropriate touch points.
Complaints: phone Sales: internet, live chats Balance inquiries: internet, automated phone system

Give customers options based on their preferences for contacting the company Customer Contact Centers (CCCs)

Measures of performance include the following:
Employee satisfaction Customer satisfaction Response times Form (greeting, language, offering additional help) Employee knowledge Customer regard Intention for repeat encounter

Environmental Strategy
Why Pursue Environmental Strategy?
Risk management (reduce potential losses)
Compliance assurance Contingency management and corrective action

Process management (reduce relative costs)

Cost control Improving yield