ISM 270 Service Engineering and Management Lecture 3: Technology in Services
Mar 30, 2015
ISM 270
Service Engineering and Management
Lecture 3: Technology in Services
Announcements
Homework 1 due next week Homework 2 due following week
Today’s Lecture
Role of Technology in Services New Service Development Facility location problems Inventory Management Statistics and Probability Review
Technology in Service
Discussion
Name an Internet site you believe will be successful in the long run - explain why.
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.
Strategic Roles of Information Systems
Specific Examples: Lower Costs Differentiate Innovate Promote Growth Develop Alliances Improve Quality and Efficiency Build an IT Platform Support (enable) other
Strategies
Role of Technology in the Service Encounter
Technology Technology Technology
Technology Technology
Customer Customer ServerServer
Server
Server
Server
CustomerCustomer
Customer
D. Technology-MediatedService Encounter
E. Technology-GeneratedService Encounter
A. Technology-FreeService Encounter
B. Technology-AssistedService Encounter
C. Technology-FacilitatedService Encounter
Technology has led to the Evolution of Self-service
Service Industry Human Contact
Machine Assisted Service
Electronic Service
Banking Teller ATM Online banking
Grocery Checkout clerk Self-checkout station Online order/ pickup
Airlines Ticket agent Check-in kiosk Print boarding pass
Restaurants Wait person Vending machine Online order/ delivery
Movie theater Ticket sale Kiosk ticketing Pay-for-view
Book store Information clerk
Stock-availability terminal
Online shopping
Education Teacher Computer tutorial Distance learning
Gambling Poker dealer Computer poker Online poker
Self-service Technologies (SST)
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)?
What is the optimal mix of SST and personal service for a service delivery system?
How do we achieve continuous improvement when using SST?
What are the limits of self-service given the loss of human interaction?
Self-Service examples
Airline industry Banking
Technology has led to service automation
Fixed-sequence (F) - parking lot gate Variable-sequence (V) - ATM Playback (P) - answering machine Numerical controlled (N) - animation Intelligent (I) - autopilot Expert system (E) - medical diagnosis Totally automated system (T) - EFT
Technology has led to a variety of services available via the web
A retail channel (Amazon.com) Supplemental channel (Barnes & Nobel) Technical support (Dell Computer) Embellish existing service (HBS Press) Order processing (Delta Airline) Convey information (Kelly Blue Book) Organization membership (POMS.org) Games (Treeloot.com)
Several technologies needed to converge to bring E-Business
Internet Global telephone system Communications standard TCP/IP
(Transfer Control Protocol/Internet Protocol)
Addressing system of URLs Personal computers and cable TV Customer databases Sound and graphics User-friendly free browser
E-Business has led to multiple business models
(Weill & Vitale, Place to Space, HBS Press, 2001)
Content Provider: Reuters Direct to Customer: Dell Full-Service Provider: GE Supply Co. Intermediary: eBay Shared Infrastructure: SABRE Value Net Integrator: 7-Eleven Japan Virtual Community: Monster.com Whole-of-Enterprise: Government
Economics of E-Business
Sources of Revenue:- Transaction fees- Information and advice- Fees for services and commissions- Advertising and listing fees
Ownership- Customer relationship- Customer data- Customer transaction
Electronic vs. Traditional Services
Features Electronic Traditional
Encounter Screen-to-face Face-to-face
Availability Anytime Working hours
Access From anywhere Travel to location
Market Area Worldwide Local
Ambiance Electronic interface
Physical environment
Payment Credit card Cash or check
Differentiation Convenience Personalization
Privacy Anonymity Social interaction
Grocery Shopping Comparison
On-lineShopping
TraditionalShopping
Advantages ConvenienceSaves timeLess impulsebuying
See new itemsMemory triggerProduct samplingSocial interaction
Disadvantages Forget itemsLess controlNeed computerDelivery fee
Time consumingWaiting linesCarry groceriesImpulse buying
Economics of ScalabilityDimensions High Scalability Low
E-commerce continuum
Sellinginformation(E-service)
Selling value-added service
Sellingservices 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-service Call center backup Call center support Call center order processing
Standardization vs. Customization
Mass distribution Some personalization
Limited customization
Fill individual orders
Shipping and Handling Costs
Digital asset Mailing Shipping Shipping, order fulfillment, and warehousing
After-sales service None Answer questions Remote maintenance Returns possible
Example Service Used car prices Online travel agent Computer support Online retailer
Example Firm Kbb.com Biztravel.com Everdream.com Amazon.com
E-Business Supply Chain (Network) Elements
Major entities including firm of interest and its customers, suppliers, and allies
Major flows of product, information, and money Revenues and other benefits each participant
receives Critical aspects: participants, relationships, and
flows
Example: 7-Eleven Japan
Japanese 7-Eleven
Read case in text (p 109, 7th edition, p103, 6th edition, p122 5th
edition)
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?
Video
New Service Development
Service innovation
How do I come up with a ‘new’ idea? Do I start with a customer need?
A technology?
Levels of Service InnovationRadical Innovations
Major Innovation: new service driven by information and computer based technology
Start-up Business: new service for existing market 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 Improvements: changes in features of currently
offered service Style Changes: modest visible changes in appearances
Technology Driven Service Innovation
Power/energy - International flights with jet aircraft
Physical design - Enclosed sports stadiums Materials - Astroturf Methods - JIT and TQM Information - E-commerce using the Internet
Service Design Elements
Structural- Delivery system- Facility design- Location- Capacity planning
Managerial- Service encounter- Quality- Managing capacity and demand- Information
New Service Development Cycle
People
Technology Systems
Product
Full Launch Development
Design Analysis
Org
aniz
atio
nal
Con
text Team
s
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
Service Blueprint of Luxury Hotel
Video
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.
Structural Alternatives for a Restaurant
No Reservations
Self-seating. Menu on BlackboardEliminate
Customer Fills Out Form
Pre-prepared: No Choice
Limit to Four Choices
Sundae Bar: Self-service
Coffee, Tea, Milk onlyServe Salad & Entree Together:
Bill and Beverage Together
Cash only: Pay when Leaving
TAKE RESERVATIONSEAT GUESTS, GIVE MENUSSERVE WATER AND BREAD
TAKE ORDERSPREPARE ORDERS
Salad (4 choices)
Entree (15 choices)
Dessert (6 choices)
Beverage (6 choices)SERVE ORDERS
COLLECT PAYMENT
Specific Table SelectionRecite Menu: Describe Entrees & SpecialsAssortment of Hot Breads and Hors D’oeuvresAt table. Taken Personally by Maltre d’
Individually Prepared at table
Expand to 20 Choices: Add Flaming Dishes;Bone Fish at Table; Prepare Sauces at TableExpand to 12 Choices
Add Exotic Coffees; Sherbet betweenCourses; Hand Grind Pepper
Choice of Payment. Including House Accounts:Serve Mints
LOWER COMPLEXITY/DIVERGENCE CURRENT PROCESS HIGHER COMPLEXITY/DIVERGENCE
Taxonomy of Service Processes Low divergence High divergence (standardized service) (customized service)
Processing Processing Processing Processing Processing Processing of goods Information of people of goods Information of people
Dry Check Auto repair Computer No Cleaning processing Tailoring a programming Customer Restocking Billing for a suit Designing a Contact a vending credit card building machine
Ordering Supervision Indirect groceries of a landing customer from a home by an air contact computer controller No Operating Withdrawing Operating Sampling Documenting Driving a customer- a vending cash from an elevator food at a medical rental car service machine an ATM Riding an buffet dinner history Using a worker Assembling escalator Bagging of health club interaction premade groceries Searching for facility (self- furniture information
service) in a libraryDirectCustomer Food Giving a Providing Home Portrait HaircuttingContact service service in a lecture public carpet painting Performing worker restaurant Handling transport- cleaning Counseling a surgical interaction Hand car routine bank ation Landscaping operation washing transactions Providing service mass vaccination
Generic Approaches to Service Design
Production-line• Limit Discretion of Personnel• Division of Labor• Substitute Technology for People• Standardize the Service
Customer as Coproducer• Self Service• Smoothing Service Demand
Customer Contact• Degree of Customer Contact• Separation of High and Low Contact Operations
Information Empowerment• Employee• Customer
Customer Value Equation
erviceuiringtheSCostsofAcqPrice
lityProcessQuaducedResultsPro
Value
Amazon.com
Discussion: What were / are the key drivers of success? What role has technology played?
Discussion
Name1. 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 hasn’t yet converged to a service
Transportation and Location Problems
Appear frequently in service design
Homework 2 has an example
Clarke-Wright for homework 2
Traveling Salesman-type problems very common in services
Delivery of goods Mail routes Sales tour
Standard problem: Given the distance between each city pair, visit all N
cities in some order, ending back at the base• Objective: Minimize total distance traveled
Traveling salesman Standard problem is very difficult to solve (NP –
complete) We will use the Clarke-Wright Algorithm (page 499 of
text) C-W algorithm intuition:
Start with the path that returns to base between every node Add links between nodes instead of returning in order of
distance gained Stop when no gain can be made
Note: This is a good heuristic Performs well in practice, but not guaranteed to find the best
solution.
Clark-Wright Algorithm
Objective: Find the shortest-path sequence for visiting N locationsYou 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 bottom3. Create the schedule by
1. Starting with a schedule that goes from base to each location and back2. 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
Managing Service Inventory
Factory Wholesaler Distributor Retailer Customer
Replenishment order
Replenishment order
Replenishment order
Customer order
Production Delay
WholesalerInventory
Shipping Delay
Shipping Delay
DistributorInventory
RetailerInventory
Item Withdrawn
McGraw-Hill/Irwin
Role of Inventory in Services Decoupling inventories Seasonal inventories Speculative inventories Cyclical inventories In-transit inventories Safety stocks
18-45
Considerations in Inventory Systems
Type of customer demand
Planning time horizon
Replenishment lead time
Constraints and relevant costs
18-46
Relevant Inventory Costs Ordering costs
Receiving and inspections costs
Holding or carrying costs
Shortage costs
18-47
Inventory Management Questions
What should be the order quantity (Q)? When should an order be placed, called a
reorder point (ROP)? How much safety stock (SS) should be
maintained?
18-48
Inventory Models Economic Order Quantity (EOQ) Special Inventory Models
With Quantity DiscountsPlanned Shortages
Demand Uncertainty - Safety Stocks Inventory Control Systems
Continuous-Review (Q,r)Periodic-Review (order-up-to)
Single Period Inventory Model
18-49
Inventory Levels For EOQ Model
0
Un
its o
n H
an
d
Q
Q
D
Time
18-50
Annual Costs For EOQ Model
18-51
EOQ Formula Notation
D = demand in units per yearH = holding cost in dollars/unit/yearS = cost of placing an order in dollarsQ = order quantity in units
Total Annual Cost for Purchase Lots
EOQ TCp S D Q H Q ( / ) ( / )2
EOQDS
H
2
18-52
Annual Costs for Quantity Discount Model
0 100 200 300 400 500 600 700
22,000
21000
20000
2000
1000
C = $20.00 C = $19.50 C = $18.75
Order quantity, Q
Ann
ual C
ost,
$
18-53
Inventory Levels For Planned Shortages Model
Q
Q-K
0
-KT1 T2
TIME
T
18-54
Formulas for Special Models Quantity Discount Total Cost Model Model with Planned Shortages
TC CD S D Q I CQqd ( / ) ( / )2
TC SD
QH
Q K
QBK
Qb
( )2 2
2 2
QDS
H
H B
B*
2
K QH
H B* *
18-55
Values for Q* and K* as AFunction of Backorder Cost
B Q* K* Inventory Levels
B
0 B
B 0
2DS
H
2DS
H
H B
B
undefined
QH
H B*
Q*
00
0
0
18-56
Safety Stock (SS) Demand During Lead Time (LT) has
Normal Distribution with
SS with r% service level
Reorder Point
Mean d LTL( ) ( )
Std Dev LTL. .( )
SS z LTr
ROP SS dL
18-57
Continuous Review System (Q,r)
Average lead time usage, dL
Reorder point, ROP
Safety stock, SS
Inventory on hand
Ord
er q
uant
ity, E
OQ
EOQ
EOQ
d1 d2
d3
Amount used during first lead time
First leadtime, LT1
Order 1 placed
LT2 LT3
Order 2 placed Order 3 placed
Shipment 1 received Shipment 2 received Shipment 3 received
Time
18-58
Periodic Review System(order-up-to)
RP RP RP
Review period
First order quantity, Q1
d1
Q2Q3
d2
d3
Target inventory level, TIL
Amount used duringfirst lead time
Safety stock, SS First lead time, LT1 LT2 LT3
Order 1 placed Order 2 placed Order 3 placed
Shipment 1 received Shipment 2 received Shipment 3 received
Time
Inventory on Hand
18-59
Inventory Control Systems Continuous Review System
Periodic Review System
EOQDS
HROP SS LT
SS z LTr
2
RP EOQ
TIL SS RP LT
SS z RP LTr
/
( )
18-60
ABC Classification of Inventory Items
0102030405060708090
100110
Percentage of inventory items (SKUs)
Per
cen
tag
e o
f d
oll
ar v
olu
me
A B C
18-61
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 AComputers 2500 30 75,000
Television sets 400 60 24,000Refrigerators 1000 15 15,000 16 30 BDisplays 250 40 10,000
Speakers 150 60 9,000Cameras 200 40 8,000Software 50 100 5,000 10 50 CThumb drives 5 1000 5,000CDs 10 400 4,000
Totals 305,000 100 100
18-62
Single Period Inventory ModelNewsvendor 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
Cu = unit contribution: P-C = $6
Co = unit loss: C-S = $2
18-63
Single Period Inventory Model Expected Value Analysis
Stock Qp(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
Single Period Inventory Model Incremental Analysis
E (revenue on last sale) E (loss on last sale)
P ( revenue) (unit revenue) P (loss) (unit loss)
P D Q C P D Q Cu o( ) ( )
1 P D Q C P D Q Cu o( ) ( )
P D QC
C Cu
u o
( )
(Critical Fractile)
where: Cu = unit contribution from newspaper sale ( opportunity cost of underestimating demand) Co = unit loss from not selling newspaper (cost of overestimating demand) D = demand Q = newspaper stocked
18-65
Critical Fractile for the Newsvendor Problem
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Newspaper demand, Q
Pro
bab
ilit
y
P(D<Q)(Co applies)
P(D>Q)(Cu applies)
0.722
18-66
Retail Discounting Model
S = current selling price D = discount price P = profit margin on cost (% markup as decimal) Y = average number of years to sell entire stock of “dogs” at
current price (total years to clear stock divided by 2) N = inventory turns (number of times stock turns in one year)
Loss per item = Gain from revenueS – D = D(PNY)
)1( PNY
SD
18-67
Statistics Review
Statistics Review
Probability and Random Events
Distribution Functions
Central Limit Theorem
Probability
In a random event problem where all events are equally likely
P [condition A] = # Events satisfying A / # possible events
Density functions
PDF = probability density function= probability of random variable equal to each
value CDF = cumulative distribution function
= probability of random variable being less than or equal to each value
= integral of PDF up to that value
Conditional Probability
P [Event1|Event2] = Prob[Both Events]/Prob[Event2]
Conditional PDF f(x|y) = f(x,y) / f(y)
Next Week
Service Quality
Geoff Ryder