YIELD MANAGEMENT

1
 Services Versus Manufacturing

• Capacity planning task more difficult

– Inventory
– Timing
• Capacity planning mistakes (stock-outs)
more expensive

2
Services Versus Manufacturing

Known Demand
5 5 5 5 5 50 30
Manufacturing capacity needed: 105/7=15
Service capacity needed?
Depends on General Service Capacity Strategy
–Provide: sufficient capacity at all times
–Match: change capacity as needed
–Influence: change demand pattern
–Control: maximize capacity utilization

3
CAPACITY STRATEGY

4
 Strategic Capacity (cont)
The article reports on Boeing, in light of the Paris air show. The popularity of its
new 787 twin-aisle airliner has helped Boeing open up a big lead over Airbus in
orders this year, with 245 planes sold vs. 145. Less noticed is that Boeing……
has maneuvered Airbus into a strategic cul-de-sac that could handicap the
European consortium for years. Boeing's rise represents the latest phase of an
epic dispute between the two companies about what airline customers want.
Boeing is betting passengers will opt for more frequent trips in smaller planes that
fly direct between less-traveled city pairs like Seattle--Seoul. Both Boeing and
Airbus forecast sales of some 2,600 planes, with capacity between 300 and 450
passengers, over the next 20 years

Fortune 13th June 2005

 Output Capacity Measures

Organization Measure Of Capacity

Automobile Plant Number Of Autos/Hour

Law Firm Number Of Cases
Handled/Week
Oil Refinery Barrels Of Oil/Day
Electric Company Megawatts Of Electricity/Hour
Paper Producer Tons Of Paper/Week
Input Measures

Organization Measure Of Capacity

Jet Engine Plant Machine Hours/Month; Labour Hours/Month

Airline Number Of Seats/Flight
Hotel Number Of Rooms, Number Of Beds
Grocery Store Number Of Checkout Lines
Warehouse Cubic Feet Of Space
Tennis Club Number Of Courts
Department Store Number Of Square Feet
 Capacity Strategies

• Capacity issues in services are:

– More complex than in manufacturing
• Timing may be important, for example if there are
peaks in demand at different times of day
– More critical than in manufacturing
• Often no backorders can occur
• Excess capacity may be perishable
– An imbalance in supply and demand can result
in lost sales or idle employees

7
 Managerial Options

• Supply Management
– Capacity
– Work-shift scheduling
– Increasing customer participation
– Adjustable (surge) capacity
– Sharing Capacity
– Personnel – cross training, part-
timers

8
 Managerial Options

• Demand Management
– Partitioning demand
– Price incentives
– Promoting off-peak demand
– Develop complementary
services
• Yield Management

9
 Yield Management

• “Selling the right capacity

to the right customer at the right
price”
• Business Requirements
– Limited Fixed Capacity
– Business environment where YM can
help
• Ability to segment markets
• Perishable inventory
• Advance sales
• Fluctuating demand
• Accurate, detailed information systems

10
 What is a
Yield?

■ Yield is the Income minus the

Expenses and also called the
“Profit Margin”
 Where didYield Management
originated?

■ “Deregulation” is generally regarded as

the “catalyst” for yield management in
the airline industry, to overlook the
role of global distribution systems. In
short, it originated from the Airline
Industry.
 What doYield Management
includes ?
Mainly:
■ Variable PricingStrategies
■ Inventory Strategies
■ Several aspects of Management Control
■ Multidisciplinary HandlingStrategies
 What is the connection of
Yield Management to Revenue
Management?

■ As a stated before,Yield
Management is an
Inventory-Focused branch of Revenue
Management
 Whatis Revenue
Management?

■ The essence of this discipline is

in understanding customers'
perception of product value and
accurately aligning product prices,
placement and availability with
each customer segment.
Industries that Fully
Use YM Techniques
• Transportation-oriented
industries
– Airlines
– Railroads
– Car rental agencies
– Shipping
• Vacation-oriented industries
– Tour operators
– Cruise ships
– Resorts
• Hotels, medical, broadcasting

16
 Elements of a Yield
Management System
• Overbooking
• Pricing
• Capacity Allocation
– Distinct versus
nested
– Static versus
dynamic

17
 Overbooking

• Two basic costs:

– Stock outs
• customers have a reservation and
there are no rooms left
– Overage
• customers denied advance
reservation and rooms are
unoccupied

18
Example: Hotel
California
Stock outs: 0.8 x $150 = $120
Overage: $50

19
Hotel California No-Show
Experience

20
Overbooking Approach 2:
Spreadsheet Analysis

21
 Example 3 : Hotel California
 Co/(Cs + Co) = P(Overbook  No
Shows)
Hotel Data
• Cs = $120, Co = $50.00
• Co/(Cs + Co) = 29.%
– Overbook 2 rooms

Table 9.1: Hotel California No-Show Experience

No-Shows % of Cumulative % of
Experiences Experiences
0 5 5 29
1 10 15 %
2 20 35

22
Capacity Allocation with
Exogenous Prices
• Methods
– Nested vs.
Distinct
– Static vs.
Dynamic

2148

23
Capacity Allocation with
Exogenous Prices
Example (Chancey Travel)
Business capacity = 100
Demand forecast: premium profit ($10,000/seat)
demand: uniformly distributed (51, 100)
[meaning: 2% chance demand = 51, 2% chance
demand = 52,…, 2% chance demand = 100, average
demand = 75]

Discount price ($2,500/seat) demand: unlimited

demand at this price – infinite discounters book
earlier than premium

24
 Static Methods

• Fixed Number, Fixed Time Rules

• Fixed Time Rule
– Accept discount bookings until a specific
date
– Motivation
– Distinct, Static System – Fixed Number
Rule
– Average of 75 premium bookings, so
reserve
» exactly 75 slots for premium customers
» exactly 25 slots for discount customers

25
 Static Methods

• Fixed Number, Fixed Time Rules

– Nested, Static system – Fixed Number Rule Average
of 75 premium bookings, so reserve 75 slots for
premium customers
remaining 25 go FCFS
– Example:
85 premium and 15 passengers wish to book
– Distinct, Static system: 75 premium,15 discount
Nested, Static system: 85 premium,15 discount

21

26
 Nested, Static System – Fixed
Number Rule
• EMSR heuristic (Expected Marginal Seat
Revenue)
– Allocating first through 51st seats revenue per seat:
100% certain of $10,000 premium vs. $2,500 discount
Allocating 52nd seat 98% certain of $10,000
= $9,800 expected revenue vs. $2,500 discount
Allocating 53nd seat 96% certain of $10,000
= $9,600 expected revenue vs. $2,500 discount

27
 Pricing and Capacity
Allocation – Event
• Uncapacitate
d
Possible unit prices $100 110 90
Associated demand 100 80 120
• Total Revenue With$10,000
Capacitated Two 8,800 10,800
Classes
Capacity of 100
Discount class unlimited demand at $50

Premium price $100 110 90

Premium demand 100 80 100

Premium revenue 10,000 8,800 9,000

Discount revenue 0 1,000 0
Total revenue $10,000 9,800 9,000
28
Pricing and Capacity Allocation – Event
• Capacitated with Two Classes
Capacity of 100
Discount class unlimited demand at $75

Premium price $100 110 90

Premium demand 100 80 100

Premium revenue 10,000 8,800 9,000

Discount revenue 0 1,500 0

Total revenue 10,000 10,300 9,000

Lesson:
in the capacitated environment pricing depends on the
relative demand/capacity relationships

Chapter 9 - Yield Management 27

Yield Management –
Implementation
• Alienating Customers
• Difficulty of customer understanding
• Customer cheating
• Employee Issues
• Limiting decision power
• Sabotage: add, not subtract responsibility
• Reward system: in-synch with managerial
goals
- Consistency across personnel and units
• Exception processing
• Monitoring
• Cost/Time of Implementation

30
 Essence of Yield Mangement in
the Hotel Industry
■ Hotels use this system in largely the
same way, to calculate the rates, rooms
and restrictions on sales in order to best
maximize their return.
■ Yield management teams in the hotel
industry have evolved tremendously
over the last 10 years and in this global
economy selling rooms and services at
the right price, at the right time, to the
right people.
The Supporting Facility
Creating the Right Environment
 Learning Objectives
 Discuss the impact of the “servicescape” on the
behavior of customers and employees.
 Describe the critical facility design features.
 Draw a process flow diagram.
 Identify the bottleneck operation in a product
layout and rebalance for increased capacity.
 Use operations sequence analysis to minimize
flow-distance in a process layout.
 Recommend facility design features to remove
anxiety of disorientation.
Servicescapes
Designing Physical Surroundings to Affect
Employee and Customer Behavior
 Ambient Conditions: background
characteristics such as noise level, music,
lighting, temperature, and scent.
 Spatial Layout and Functionality: reception
area, circulation paths of employees and
customers, and focal points.
 Signs, Symbols, and Artifacts: selection,
orientation, location, and size of objects.
Typology of Servicescapes
Who Performs in Physical Complexity of the Servicescape
Servicescape Elaborate Lean
Self-service Golf course Post office kiosk
(customer only) Water slide park E-commerce
Interpersonal Luxury hotel Budget hotel
(both) Airline terminal Bus station
Remote service Research lab Telemarketing
(employee only) L.L. Bean Online tech support
Facility Design Considerations
 Nature and Objectives of Service
Organization
 Land Availability and Space
Requirements
 Flexibility
 Security
 Aesthetic Factors
 The Community and Environment
 Process Flow Diagram of Mortgage Services

Property Survey
CT=90 min.

Yes
Final Approval
Mortgage CT=15 min.
Applications Completed Approved
Applications Mortgages

Credit Report Title Search

CT=45 min. CT=30 min. No

Unapproved
Mortgages
 Product Layout
Work Allocation Problem
Automobile Driver’s License Office

Review Payment Violations Eye Test Photograph Issue

1 2 3 4 5 6
240 120 60 90 180 120
In 30
15 60 40 20 30
Out

Activity
Number(s)
Capacity
per hour
Cycle Time
in seconds
 Automobile Driver’s License Office
(Improved Layout)

1,4 3
In 65 60
55 60
2 5 6 Out
120 180 120
30 20 30

1,4 3
In 65 60
55 60
 Process Layout
Relative Location Problem
 Ocean World Theme Park Daily Flows

A B C D E F A B C D E F
A 7 20 0 5 6 15 30 0 15 6
B 8 6 10 0 2 12 40 10 8
Net
C 10 6 15 7 8 flow 20 8 8
D 0 30 5 10 3 30 6
E 10 10 1 20 6 10
F 0 6 0 3 4

Flow matrix Triangularized matrix

Description of attractions: A=killer whale, B=sea lions, C=dolphins, D=water skiing,
E=aquarium, F=water rides.
Environmental Orientation
Considerations
 Need for spatial cues to orient visitors
 Formula facilities draw on previous
experience
 Entrance atrium allows visitors to gain a
quick orientation and observe others for
behavioral cues
 Orientation aids and signage such as “You
Are Here” maps reduce anxiety
Classification of
services
 Consumer
services
• Pure services : Activities performed that do not
include a tangible product.
• Non-good services - Personal/professional service for a
fee.
• Example: tax preparation.
• Owned-good services - Activities that alter, improve,
or repair products already owned.
• Example: dry cleaning, appliance repair service.
• Rented good services - Provide a product to use for a
brief period for a fee. Example: carpet cleaners,
movie rental.
 Classification on the basis of
involvement of customer

• People processing

• Level of involvement can vary.

• Managers must think about processes / outputs in

terms of what happens to customers or what
benefits are created.
• Identify non-financial costs, time, mental and
physical effort, fear, and pain etc.
• Example : healthcare, beauty saloon, dentist,
spa, tourism, transportation, restaurant, lodging
Possession
processing
• Working to tight deadlines to restore customer’s
possessions to good working order.

• People are less physically involved and usually, no

real need for them to enter the service; often
limited to requesting the service; explaining the
problem or paying the bill only.

• Eg : post office /currier, laundry, ATM, warehousing,

landscaping, gardening, office cleaning, repair and
maintenance, freight transportation
Mental stimulus
processing
• Services that interact with people’s mind.
• Anything touching people’s mind has power to
shape attitudes and influence behaviour.
• Information based content can be converted to
digital bits, recorded or transformed into
manufactured products viz. CD’s, Video’s, which
can be packed and sold like any physical product.
• Eg education , news , entertainment , Advertising/
PR , video games, music concerts, broadcasting
Information
processing
• Most intangible form of service output.
• Customer involvement determined more by tradition
or personal desire to meet face to face and not by
the needs of the operational process.
• Customer / Supplier learn each other’s needs,
capabilities and personalities by personal meetings,
however this relationship can also be build /
sustained on trust or telephonic contact.
• financial services, accounting , banking,
Insurance, legal services, , MR, software
consulting
 Classification based on
service tangibility

• Services linked to tangible goods.

• In order to experience the service customers
should first purchase the product.
• Eg alterations, warranties
Tangible goods linked
to services
• Service provider offer tangible goods for use
along with the services.
• Eg. Theaters offer 3d glasses along with movie
 Classification on the business
orientation

• Non profit organisation: govt schools a social

service.

• Commercial organization.
Classification on the basis of
requirement of skill and expertise

• Professional services
• Requires a set of qualificaion skills
adequate training etc.eg lawyer,pilot

• Non professional services

• Do not require any set of skills training.
• Eg house keeping, babysitting etc
Classification on the
basis of end user
• Consumer services: beauty case hair case
• Business to business services: market research
and consultancy
• Industrial services: machine installations
Transportation, Assignment, and
Transshipment Problems
 Each of the three models of this (transportation, assignment,
and transshipment models) can be formulated as linear
programs and solved by general purpose linear programming
Algorithms (simplex method).
 For each of the three models, if the right-hand side of the
linear programming formulations are all integers, the optimal
solution will be in terms of integer values for the decision
variables.
 However, there are many computer packages (including The
Management Scientist, DS, QSB) which contain separate
computer codes for these models which take advantage of
their network structure.
 Delivered Services Facility
Location
• Criteria:
– Minimize costs of multiple sites that meet a
service goal (e.g., everyone within a city
boundary should be reached by ambulance
within 15 minutes)
– OR, serve a maximum number of customers
• "Set Covering" Problem
• Managerial Decisions:
– How many facilities
– Location of facilities

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Chapter 16 – Site Selection Management, 2006, Thomson 58
 Delivered Services Facility
Location
• Procedure:
– Establish service goal
– List potential sites or mathematically
represent service area
– Determine demand from service area
– Determine relationship of sites to demand
• (yes or no decision, can site i meet demand at
point j considering established service goal)

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Chapter 16 – Site Selection Management, 2006, Thomson 59
 Figure 16.9: Example Problem for
Delivered Services

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Chapter 16 – Site Selection Management, 2006, Thomson 60
 Delivered Services: Greedy
Algorithm Versus Best Solution

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Chapter 16 – Site Selection Management, 2006, Thomson 61
 Assignment Problem

 An assignment problem seeks to minimize the total cost

assignment of m workers to m jobs, given that the cost of
worker i performing job j is cij.
 It assumes all workers are assigned and each job is
performed.
 An assignment problem is a special case of a
transportation problem in which all supplies and all
demands are equal to 1; hence assignment problems may
be solved as linear programs.
 The network representation of an assignment problem
with three workers and three jobs is shown on the next
slide.
Assignment Problem
 Network Representation
c11
1 1
c12
c13

c21
2
c22 2
c23

c32
c31
3 c33 3

WORKERS JOBS
Assignment Method
 Many methods can be used to solve the facility layout
problem. Here we discuss assignment method to minimize
material handling costs.
 Suppose that some machines 1, 2, 3, 4 are required to be
located in A, B, C, D. The cost of locating machines to
locations are known and shown below. For example, if
Machine 2 is located to location C, the cost is 7 (say,
hundred dollars per month).
Location

Machine A B C D
1 10 7 6 11
2 6 4 7 9
3 8 6 5 6
4 9 5 3 12
Assignment Method
 The problem is to locate the machines to minimize total
material handling costs.
 One solution can be (not necessarily and optimal solution)
to assign 1, 2, 3, 4 to respectively C, B, A, D. In such a
case total cost is 6+4+8+12=30 hundred dollars per
month.

Location

Machine A B C D
1 10 7 6 11
2 6 4 7 9
3 8 6 5 6
4 9 5 3 12
Assignment Method
 Notice in this solution that every machine is assigned to
one location and every location is assigned to one
machine. So, there is a single box in each row and each
column. Every solution will must this property.
 If there are more locations than machines, dummy
machines must be added with the same cost for all
locations. Assignment method finds an optimal solution.

Location

Machine A B C D
1 10 7 6 11
2 6 4 7 9
3 8 6 5 6
4 9 5 3 12
Assignment Method
1. Perform row reductions
◦ Subtract minimum value in each row from all other row
values
2. Perform column reductions
◦ Subtract minimum value in each column from all other
column values
3. Line Test
◦ Cross out all zeros in matrix using minimum number of
horizontal & vertical lines. If number of lines equals
number of rows in matrix, optimum solution has been
found, stop.
4. Matrix Modification
◦ Subtract minimum uncrossed value from all uncrossed
values & add it to all cells where two lines intersect. Go
to Step 3.
The Problem

 Three air conditioners

need to be installed in Bldg1 Bldg2 Bldg3
the same week by A 53 96 37
three different
companies B 47 87 41
 Bids for each job are C 60 92 36
solicited from each
company
 To which company
should each job be
assigned?
Naïve Solution
 There are only 6
possible assignments
of companies to jobs
 Check them and
compare
Naïve Solution—Completion

1 2 3 1 2 3 1 2 3
A 53 96 37 A 53 96 37 A 53 96 37
B 47 87 41 B 47 87 41 B 47 87 41
C 60 92 36 C 60 92 36 C 60 92 36

1 2 3 1 2 3 1 2 3
A 53 96 37 A 53 96 37 A 53 96 37
B 47 87 41 B 47 87 41 B 47 87 41
C 60 92 36 C 60 92 36 C 60 92 36
 Example 2
Customer
 A cab company gets four
calls from four customers 1 2 3 4
simultaneously
 Four cabs are out in the A 9 7.5 7.5 8
field at varying distance
from each customer C B 3.5 8.5 5.5 6.5

 Which cab should be sent a C 12.5 9.5 9.0 10.5

where to minimize total b
(or average) waiting time? D 4.5 11.0 9.5 11.5
Example: Hungry Owner
A contractor pays his subcontractors a fixed fee plus
mileage for work performed. On a given day the contractor
is faced with three electrical jobs associated with various
projects. Given below are the distances between the
subcontractors and the projects.
Project
A B C
Westside 50 36 16
Subcontractors Federated 28 30 18
Goliath 35 32 20
Universal 25 25 14
How should the contractors be assigned to minimize total
distance (and total cost)?
Load Distance Analysis
 Each department is 10 feet by 10 feet,
distances are rectilinear, which of the
following two layouts is better?
Layout A Layout B
3 8 4 7
7 4 10 1
1 10 2 9
9 2 5 6
6 5 8 3

73
 Routing/Travel Distances
Product Department Quantity Processed
Processing Sequence Per Month
A 1→ 5→ 4→10 1,000 units
B 2→ 6→ 3→ 9 2,000
C 2→10→ 1→ 9 3,000
D 1→ 7→ 8→10 1,000
E 2→ 5→ 6→ 9 2,000
F 1→ 7→ 4→10 4,000

74
 Routing/Travel Distances

Distance Between Distance Between

Departments (feet) Departments (feet)
Flow Layout A Layout B Flow Layout A Layout B
1 →5 30 30 3→9 30 20
1 →7 10 10 4→5 30 30
1 →9 10 10 4→7 10 10
1 →1 0 10 10 4→10 10 10
2 →5 10 10 5→6 10 10
2 →6 20 20 6→9 10 10
2 →1 0 10 10 7→8 20 50
3 →6 40 10 8→10 20 30

75
 Optimal Solution
(linear programming)
• Minimize Loc1 + Loc2 + Loc3 +…
{minimize the number of locations}
subject to:
– Loc1 + Loc2 + Loc3 + Loc4 >=1 {Customer
group 1 can only be served within the time
frame by locations 1-4.}
– Loc1 + Loc2 + Loc3 >=1 {Customer group
2 can only be served by locations 1-3.}
–…

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Chapter 16 – Site Selection Management, 2006, Thomson 76
 Travel Matrix for Figure 16.9

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Chapter 16 – Site Selection Management, 2006, Thomson 77
 Mathematical Programming
Formulation for Figure 16.9

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Chapter 16 – Site Selection Management, 2006, Thomson 78
 Mathematical Programming
Solution for Figure 16.9

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Chapter 16 – Site Selection Management, 2006, Thomson 79
 Delivered Services - What Marketing Can
Expect of Operations
• Problems discussed:
– Covering area with a set of locations
• Ex.: Rural ambulance problem
– Need for a plan
• Ex.: Upscale service in Atlanta, locate in
Buckhead or Preston Hollow?
• Advanced Problems:
– Planning Backup
• primary service in 5 min., backup in 10
• Mobile Services - continuous dispatching

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Chapter 16 – Site Selection Management, 2006, Thomson 80
 Quasi-Manufacturing Service
Facility Location
Criteria: logistics cost minimization of multi-echelon
system
Example: Stuff Products, Inc.
– Stuff Products has customers across the country and warehouses in
New York, Chicago and Los Angeles. Below is a table of the costs of shipping
a truck of Stuff from each warehouse to each demand point and the total
demand at each point.

Philadelphia Buffalo Baltimore Minneapolis Cleveland S.F.

New York 50 70 70 200 150 500

Chicago 200 200 250 100 50 300
L.A. 350 350 350 300 300 100
Demand 10 15 15 15 15 30

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Chapter 16 – Site Selection Management, 2006, Thomson 81
 Quasi-Manufacturing Service
Facility Location
Formulate a linear program for Stuff
Products, Inc. to determine the least cost
solution to satisfy demand. Also,
determine the best solution by hand (where
“solution” means who should be served from
which warehouse, not the total cost of the
solution).

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Chapter 16 – Site Selection Management, 2006, Thomson 82
 Quasi-Manufacturing Service
Facility Location
• Example: Stuff Products, Inc.: The Sequel
– Stuff Products has customers across the country and wants to
know where to build warehouses. They have
identified sites in New York, Chicago and Los Angeles. Each
warehouse costs
$X to maintain per year.
Phil Buffalo Baltimore Minn Cleve S.F. Capacity

New York 50 70 70 200 150 500 50

Chicago 200 200 250 100 50 300 50
L.A. 350 350 350 300 300 100 50
Demand 10 15 15 15 15 30

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Chapter 16 – Site Selection Management, 2006, Thomson 83
 Quasi-Manufacturing Service
Facility Location
• Meta-problem of "Transportation"
linear programming problem
• Managerial Decisions:
– How many facilities
– Location of facilities
– Customer assignment to facilities
– Staffing/Capacity of each facility
– Location decisions reviewed frequently

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Chapter 16 – Site Selection Management, 2006, Thomson 84
 Quasi-Manufacturing Service
Facility Location
 Commercial Software
◦ At least 16 vendors with prices from $5,000 -
$80,000
◦ Solution Techniques
 Heuristics
 Deterministic simulation
 Mixed integer linear programming
◦ Limitations
 Models handle small list of potential sites
 No model provides optimal solutions
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Chapter 16 – Site Selection Management, 2006, Thomson 85
 Quasi-Manufacturing Service
Facility Location
• Mixed Integer Linear Programming
– Some variables must be integers, others can
be fractions
– Constants
C - cost of serving demand point j with facility i K - cost
of building/maintaining facility i

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Chapter 16 – Site Selection Management, 2006, Thomson 86
 Quasi-Manufacturing Facility
Location
Variables:
X = how much from each facility i to each demand
point j
Y = 1 if build facility, 0 if not
Minimize Costs: Σi Σj Cij Xij + ΣKiYk
Subject to:
Σi Xij > Demand at point j
Σj Xij < Capacity at point i x Yj Yj C {0,1}

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Chapter 16 – Site Selection Management, 2006, Thomson 87
 Quasi-Manufacturing Facility
Location
• Example: AT&T 800 Service Location
Decisions for Call Centers
– Criteria: minimization of telephone, labor, and
real estate costs
– Old days: Omaha – the 800 capital of the world
– Today: Multiple sites, unusual telephone rate
structures (e.g., site in Tennessee may not take
calls from within Tennessee)

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Chapter 16 – Site Selection Management, 2006, Thomson 88
 Quasi-Manufacturing Facility
Location
• Example: AT&T 800 Service
• Model: Mixed integer linear program
• Client Range
– 46 clients in 1988 – retail catalogue,
banking, consumer products, etc.
– 1-20 sites
– Sites with 30-500 personnel

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Chapter 16 – Site Selection Management, 2006, Thomson 89
SERVICE DELIVERY SYSTEM
 Learning Objectives

 Discuss the new service development process.

 Prepare a blueprint for a service operation.
 Describe a service process using the dimensions
of divergence and complexity.
 Use the taxonomy of service processes to classify
a service operation.
 Compare and contrast the generic approaches to
service system design.
Levels of Service Innovation
Radical 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
 New Service Development Cycle
• Full-scale launch
• Post-launch
review
Full Launch Enablers Development
• Formulation
of new services
objective / strateg
People
• Idea generation
• Service design
and screening
and testing
• Concept
• Process and system
development and
design and testing Product testing
• Marketing program
design and testing
• Personnel training Technology Systems
• Service testing and
pilot run
• Test marketing Tools

Design Analysis
• Business analysis
• Project authorization
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
Classification of Service Automation
 Fixed-sequence (F)
 Variable-sequence (V)
 Playback (P)
 Numerical controlled (N)
 Intelligent (I)
 Expert system (E)
 Totally automated system (T)
Adoption of New Technology in
Services
 Challenges of Adopting New Technology
The Process is the Product
Back Office vs Front Office Changes
Need for Standardization
 Managing the New Technology Adoption
Process
Ten step process with concern for
employees and customers
New Service Development
Planning the Service
Delivery System
includes all aspects of the service
experience -- service product, service
setting, and service delivery
To have a smooth work process, these are
some of the things to be considered;

• Developing a service product that meet

guests' needs
• Well-trained staffs, motivated and
enthusiastic employees
Richard Metters & Ann
Marucheck maintain that;

“ the urgency for rigorous study to guide

service managers in improving the
design, competitiveness, efficiency and
effectiveness of service delivery, both at
the firm and the industry levels, has never
been greater.”
The Total Quality
Movement
- which emphasized that everyone is
responsible for quality

THE GOAL: Fail No Guest, Delight

Every Guest
Developing the Service Delivery
Sysytem
- after almost 50 years of research,
Joseph Juran
published the Juran Trilogy in 1986

3 Management Processes according

to Juran
1. Quality Planning
2. Quality Control
3. Quality Improvement
 PHASE I: PHASE II: PHASE III:
PLANNING MONITORIN ASSESSIN
THE G THE G THE
SERVICE SERVICE EXPERIEN
DELIVERY EXPERIENC CE TO
SYSTEM E IMPROVE
THE
SYSTEM
before the during the after the
When: guest arrives, guest's guest's
and while is experience experien
waiting for the ce
service
experience
experience experience experi
what: expected realized ence
reme
mber
ed
target customers actual past, current, and
Who: potentialfuture
cstomers
setting service applying service Guest
How: standards; standards and assessment:
 Planning the System

“ any good delivery system begins with

careful analysis”
 Service standards - they are company's
expectations for how the different aspects of
the service experience should be delivered
everytime to every guests
Self-Healing System - as noted by
Horst Schulze, even if you have all the
characteristics and features of a high -
quality hotel, its service delivery system can
still fail
from time to time.
 PLANNING
TECHNIQUES
in Service Delivery System
Blueprinting

The most commonly discussed type of

service diagramming is blueprinting. The
entire service delivery process and its
subprocesses are described in blueprint
format as if one were building a house and
needed a plan of what went where.
The blueprint should attach times to the
activities and processes involved in providing
the service and the time for the entire
guest experience.
The purpose of blueprinting is not only to
satisfy the guest but also to enable the
organization to achieve its profit
The Five Parts of Blueprinting:

Physical evidence.

Customer actions.
Onstage/visible contact-employee actions.
Backstage/nonvisible contact-employee actions.
Support processes.
The Universal Service Map

The Line of Internal Interactions

The Line of Visibility
The Line of Guest Interaction
Service Blueprint of Luxury Hotel
Fish Bone Analysis (Cause- and-
Effect Analysis)

It provides a way to concentrate on the

problem areas to avoid or recover from
faulty service outcomes. The results of
fishbone analysis are often used to make
major changes in the delivery system.
The prioritizing technique, known as Pareto
analysis, calls for arranging the potential
causes of the problem based on the
frequency in which they occur.
 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

LOWER COMPLEXITY/DIVERGENCE CURRENT PROCESS HIGHER

COMPLEXITY/DIVERGENCE
No Reservations TAKE RESERVATION Specific Table Selection
Self-seating. Menu on Blackboard SEAT GUESTS, GIVE MENUS Recite Menu: Describe Entrees & Specials
Eliminate SERVE WATER AND BREAD Assortment of Hot Breads and Hors D’oeuvres
Customer Fills Out Form TAKE ORDERS At table. Taken Personally by Maltre d’
PREPARE ORDERS

Pre-prepared: No Choice Salad (4 choices) Individually Prepared at table

Limit to Four Choices Entree (15 choices) Expand to 20 Choices: Add Flaming Dishes;
Bone Fish at Table; Prepare Sauces at Table
Sundae Bar: Self-service Dessert (6 choices) Expand to 12 Choices

Coffee, Tea, Milk only Beverage (6 choices) Add Exotic Coffees; Sherbet between
Serve Salad & Entree Together: SERVE ORDERS Courses; Hand Grind Pepper
Bill and Beverage Together

Cash only: Pay when Leaving COLLECT PAYMENT Choice of Payment. Including House Accounts:
Serve Mints
 Customer Value Equation

Value =
(Re sults Pr oduced ) + (Pr ocessQuality )
(Pr ice) + (CostsofAcquiringtheService)
TECHNOLOGY IN
SERVICE
 Role of Technology in the Service Encounter

Technolog Technolog Technolog

y y y

Custome Serve Custome Serve Custome Serve

r r r r r r

A. Technology-Free B. Technology-Assisted C. Technology-Facilitated

Service Encounter Service Encounter Service Encounter

Technolog Technolog
y y

Custome Serve Custome Serve

r r r r

D. Technology-Mediated E. Technology-Generated
Service Encounter Service Encounter
 Electronic and 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 Physical
interface environment
Payment Credit card Cash or check
Differentiation Convenience Personalization
Privacy Anonymity Social interaction
Grocery Shopping Comparison
On-line Traditional
Shopping Shopping

Advantages Convenience See new items

Saves time Memory trigger
Less impulse Product sampling
buying Social interaction
Disadvantages Forget items Time consuming
Less control Waiting lines
Need computer Carry groceries
Delivery fee Impulse buying
 TARGETING
SPECIFIC PROBLEM
AREAS IN SERVICE
DELIVERY SYSTEM
1. FORECASTING DEMAND TO
PREVENT PROBLEMS
2. TRAINING
- Adequate trainings of employees before they ever get
the chance to serve
a customer can prevent failures.

3. QUALITY TEAMS
4. POKA-YOKE
- failue-preventing
device/procedure
“mistake-proofing”/ “avoidmistakes” in Japanese
Shigeo Shingo, Japanese quality expert
 A. TYPES OF INSPECTION
1) Source Inspection
 - potential mistakes are located at their
source and fixed before they can get into the
delivery system.
2) Self-inspection
 – people check their own work
3) Successive Inspection
 – the person next in the delivery system checks
the quality
 B. WARNINGS AND CONTROL POKA- YOKE
WARNING POKA-YOKE CONTROL POKA-YOKE
- Before error is made - Keeps a process from beginning and
continuing after error is made.

• 3 TYPES OF WARNING AND CONTROL POKA-YOKE:

1. CONTACT POKA-YOKE
- monitor the items physical characteristics to
determine if they meet predefined specifications.
2. FIXED VALUES
- used when a certain step is repeated.
3. MOTION STEP/ Sequence Method
- used when more than one step is involved.
C. POKA-YOKES FOR CUSTOMER
• To prevent customers from their own
problems.
• Customers can be prepared to do their part
even before the service experience begins.

D. SPEED PARKING
5. CROSS-FUNCTIONAL PROJECT
AND MATRIX ORGANIZATION

- Organizing people and groups to enable them to

focus on the guest’s needs, wants, and expectations
across the boundaries of functional organizational
unit.
“Being nice to people is just 20% of the
customer service. The important part is
designing systems that allow you to do
.”
the job right the first time

– Carl Sewell,
Customers forLife
FACILITY LOCATION
ANALYTIC TECHNIQUES 1
Analytical techniques

 There are many analytical techniques that can be

used in facility location decision.
 Some of these are:
1) Factor Rating
2) Cost-Profit-Volume analysis
3) Center of Gravity Method, and
4) Transportation and Simulation Models.
Demand Sensitive Service Facility
Location
• Use location to generate demand
• Managerial Challenge: Forecasting demand
for specific locations
• General Marketing/Operations Strategies
• Site Specific Considerations

131
 Demand Sensitive Services

• Solution Techniques:
– Informal judgment
– Factor Rating
– Regression
• Case:
– La Quinta Hotels - Regression based site
selection

132
 Characteristics of a Good
Location
• Proximity to target market
– Residences, hospitals, schools, offices,
airports, military bases
• Proximity to destination points
– Malls tourist attractions, anchor stores
• Ease of access
• Proximity to competition
• Proximity to other units of the same type
Problem: accurate identification and trade-
offs
133
Demand Sensitive Service Facility
Location
Factor Rating
example
Item Range
Income of neighborhood 0-40
Proximity to shopping 0-25
centers Accessibility 0-15
Visibility Traffic 0-10
0-10

OR
…

134
Demand Sensitive Service Facility
Location
Factor Rating
example
Item Scale Multiplier
Income of neighborhood 0-1 .40
Proximity to shopping centers 0-1 .25
Accessibility 0-1 .15
Visibility 0-1 .10
Traffic 0-1 .10

135
Demand Sensitive Service
Facility Location
Factor Rating Example
Tyson's
Springfield Corner Gaithersburg Alexandria
Income 4 8 10 6
Shopping 2 7 10 4
Access 1 9 8 4
Visibility 6 9 7 6
Traffic 3 8 8 5

Score

136
Factor-Rating Method
 Popular because a wide variety of factors can be included in the
analysis
 Six steps in the method
◦ Develop a list of relevant factors called critical success factors
◦ Assign a weight to each factor
◦ Develop a scale for each factor
◦ Score each location for each factor
◦ Multiply score by weights for each factor for each location
◦ Recommend the location with the highest point score
Factor Rating Example
 Factor-Rating Example
Critical Scores
Success (out of 100) Weighted Scores
Factor Weight France Denmark France Denmark
Labor
availability
and attitude .25 70 60
People-to
car ratio .05 50 60
Per capita
income .10 85 80
Tax structure .39 75 70
Education
and health .21 60 70
Totals 1.00
 Break-Even Analysis

 Remember the break even equations used for calculation total cost
of each location and for calculating the breakeven quantity Q.
◦ Total cost = F + cQ
◦ Total revenue = pQ
◦ Break-even is where Total Revenue = Total Cost

Q = F/(p-c)
Q = break-even quantity
p = price/unit
c = variable cost/unit
F = fixed cost
 Break-Even Analysis

 Remember the break even equations used for calculation total cost
of each location and for calculating the breakeven quantity Q.
◦ Total cost = F + cQ
◦ Total revenue = pQ
◦ Break-even is where Total Revenue = Total Cost

Q = F/(p-c)
Q = break-even quantity
p = price/unit
c = variable cost/unit
F = fixed cost
Locational Break-Even Analysis Example
Three locations:
Fixed Variable Total
City Cost Cost Cost
Akron $30,000 $75 $180,000
Bowling Green $60,000 $45 $150,000
Chicago $110,000 $25 $160,000
Selling price = $120
Expected volume = 2,000 units

Total Cost = Fixed Cost + Variable Cost x Volume

Locational Break-Even Analysis Example
–
$180,000 –
–
$160,000 –
$150,000 –
–
$130,000 –
–
Annual cost

$110,000 –
–
–
$80,000 –
–
$60,000 –
–
–
Akron Chicago
$30,000 – lowest
Bowling Green
lowest
– cost
lowest cost
cost
$10,000 –
| | | | | | |
–
0 500 1,000 1,500 2,000 2,500 3,000
Volume
 Example using Break-even Analysis: Clean-
Clothes Cleaners is considering four possible sites for its new
operation. They expect to clean 10,000 garments. The table and
graph below are used for the analysis.

Example 9.6 Using Break-Even Analysis

Location Fixed Cost Variable Cost Total Cost
A $350,000 $ 5(10,000) $400,000
B $170,000 $25(10,000) $420,000
C $100,000 $40(10,000) $500,000
D $250,000 $20(10,000) $450,000
 From the graph you can see that the two lowest cost intersections occur between C & B (4667
units) and B & A (9000 units)
 The best alternative up to 4667 units is C, between 4667 and 9000 units the best is B, and above
9000 units the best site is A
 Geographic Information Systems
(GIS)
• Purpose:
– Predict demand based on geographic
databases
• Other uses
– Sales territory partitioning
– Vehicle routing
– Politics
– Geography
– Biologists
– Environmentalists
Successful Service Operations
Chapter 16 – Site Selection Management, 2006, Thomson 145
GIS Example:
Map of Area Within ¼
Mile

146
Demographic Information
of Area Within ¼ Mile

147
Map of Area
within Three
Minute Drive

148
Demographic Information of Area
Within Three Minute Drive

149
FACILITY LOCATION
Importance of Facility Location
 Facility Location decisions are part of the
company’s strategy. Infrequent but expensive.

 Once a firm has decided to open a new facility

or relocate an existing facility, it must decide
where that facility should be located.

 Facility location problem involves the evaluation

of various sites for a new facility.
Reasons for the importance of
Facility Location
◦ Facility Location requires large investment that can not be
recovered.
◦ Facility Location decisions affect the competitive capacity of the
company.
 All areas of the company are affected by Facility Location:
Operations, but also Business Development, Human
Resources, Finance, etc.
◦ The facility location decisions affect not only costs but the
company’s income:
 For a service business, market proximity is critical to
determine the capacity to attract customers.
 For a manufacturing business, facility location affects product
delivery time and level of customer service, which affects
sales.
Facilities Planning
 How much long range capacity is needed?
 When additional capacity is needed?
 Where the production facilities should be
located?
 What the layout and characteristics of the
facilities should be?
Levels of Decisions.
Market Potential
Market Region Market Share
Operating Cost

Transport Cost (RM)

Taxes
Subregion
Raw material costs
Labor Cost and Availability
Access to market/materials
Material Cost
Labor Cost and Availability
Community Taxes
Availability of public services
Availabilty of sites
Community amenities

Access to transport Network

Site Characterics
Taxes
Sites Availability of public services
Land and acquisition costs
Construction Costs
A Framework for
Global Site Location
Competitive STRATEGY GLOBAL COMPETITION
PHASE I
Supply Chain
INTERNAL CONSTRAINTS
Capital, growth strategy,
Strategy TARIFFS AND TAX
existing network INCENTIVES

PRODUCTION TECHNOLOGIES REGIONAL DEMAND

Cost, Scale/Scope impact, support PHASE II Size, growth, homogeneity,
required, flexibility
Regional Facility local specifications
Configuration
COMPETITIVE
ENVIRONMENT POLITICAL, EXCHANGE
RATE AND DEMAND RISK

PHASE III
Desirable Sites AVAILABLE
INFRASTRUCTURE
PRODUCTION METHODS
Skill needs, response time

FACTOR COSTS PHASE IV LOGISTICS COSTS

Labor, materials, site specific Location Choices Transport, inventory, coordination
 Conventional Network
Materials Customer
Vendor Finished Customer
DC Store
DC Goods DC DC

Customer
Component Store
Vendor Manufacturin
DC g Plant Customer Customer
Warehouse DC Store
Components
DC Customer
Vendor Store
DC Finished
Customer
Goods DC
Final DC Customer
Assembly Store
Locating service facilities
 Because of the variety of service firms and the relatively low cost
of establishing a service facility compared to one for manufacturing,
new service facilities are far more common than new factories and
warehouses.
 Services typically have multiple sites to maintain close contact with
customers. The location decision is closely tied to the market
selection decision.
 Market affects the number of sites to be built and the size and
characteristics of the sites.
 Whereas manufacturing location decisions are often made by
minimizing costs, many service location decision techniques
maximize the profit potential of various sites.
Response Time 1 week-> 1 Distribution Center

Clientes
Centro
distribución
Response Time 5 days-> 2 Distribution Center

Clientes
Centro
distribución
Response Time 3 days-> 5 Distribution Center

Clientes
Centro
distribución
Response Time 1 day-> 13 Distribution Center

Clientes
Centro
distribución
Same Day Response --> 26 Distribution
Centers

Customer
DC
Analytical techniques

 There are many analytical techniques that can be

used in facility location decision.
 Some of these are:
1) Factor Rating
2) Cost-Profit-Volume analysis
3) Center of Gravity Method, and
4) Transportation and Simulation Models.

GIVEN ON ANALYTIC TECHNIQUE PPT

Capacity Planning and Facility Location
Across the Organization
 Capacity planning and location analysis
affect operations management and are
important to many others
◦ Finance provides input to finalize capacity
decisions
◦ Marketing impacted by the organizational
capacity and location to customers
 Type of Service

• Quasi-Manufacturing
– Goal - minimize logistics cost of a network
– Examples - warehouses, call centers
• Delivered
– Goal - covering a geographic area
– Examples -
• Public Sector - fire protection, emergency
medicine
• Private Sector - food delivery, saturation strategy

Successful Service Operations

Chapter 16 – Site Selection Management, 2006, Thomson 165
 Type of Service

• Demand Sensitive
– Goal - attract customers through
location
– Examples - banks, restaurants

• Academic Challenge:
– Turn “gut feel” into science

Successful Service Operations

Chapter 16 – Site Selection Management, 2006, Thomson 166
Types of Service Firms and the
Main Goal of Facility Location

Successful Service Operations

Chapter 16 – Site Selection Management, 2006, Thomson 167
THANKS
FACILITY LOCATION
TECHNIQUE
CENTRE OF GRAVITY PROBLEM
 Center of Gravity Method
Figure 8.1

a) Map showing destinations b) Coordinate system added c) Center of gravity

Instructor Slides 8-170

 Center of Gravity Method
 If quantities to be shipped to every location are equal, you can
obtain the coordinates of the center of gravity by finding the average of
the x-coordinates and the average of the y-coordinates

x=
 x i

y=
 y i

n
where
xi = x coordinate of destination i
yi = y coordinate of destination i
n = Number of destinations

Instructor Slides 8-171

 Example: Center of Gravity Method
Suppose you are attempting to find the center of
gravity for the problem depicted in Figure 8.1c.

Destination
D1
x
2
y
2 x=
 x i 18
= = 4.5
n 4
D2 3 5
D3 5 4
D4 8 5
y=
 y i
=
16
=4
18 16 n 4

Here, the center of gravity is (4.5,4). This is

slightly west of D3 from Figure 8.1

Instructor Slides 8-172

 Center of Gravity Method
Figure 8.1

a) Map showing destinations b) Coordinate system added c) Center of gravity

Instructor Slides 8-173

 Center of Gravity Method
 When thequantities to be shipped to
every location are unequal, you can obtain the
coordinates of the center of gravity by finding the weighted average of
the x-coordinates and the average of the y-coordinates
x=
 xi Qi
 Qi
y=
 yQ i i

Q i

where
Qi = Quantity to be shipped to destination i
xi = x coordinate of destination i
yi = y coordinate of destination i
Instructor Slides 8-174
Plant Location Methodology: Center
of Gravity Method Formulas
d V ix i
Cy =
d V iy i

V
Cx =
V i i

Cx = X coordinate of center of gravity

Cy = X coordinate of center of gravity

dix = X coordinate of the ith location

diy = Y coordinate of the ith location

Vi = volume of goods moved to or from ith

location
Plant Location Methodology:
Example of Center of Gravity
Method
 Center of gravity method example
◦ Several automobile showrooms are located according to the following
grid which represents coordinate locations for each showroom.

Y S ho wro o m No o f Z-Mo b ile s

Q s o ld p e r mo nth
(790,900)

D A 1250
(250,580)

D 1900
A
(100,200)
Q 2300
(0,0) X

Question: What is the best location for a new Z-Mobile

warehouse/temporary storage facility considering only distances
and quantities sold per month?
Plant Location Methodology: Example of Center of Gravity
Method: Determining Existing Facility Coordinates
Y
To begin, you must identify the Q
existing facilities on a two- (790,900)

dimensional plane or grid and D

(250,580)
determine their coordinates.
A
(100,200)

(0,0) X

S ho wro o m No o f Z-Mo b ile s

You must also have the s o ld p e r mo nth
volume information on the
business activity at the A 1250
existing facilities.
D 1900

Q 2300
 Example: Center of Gravity
 Suppose the shipments for the problem depicted in Figure 8.1a are not all
equal. Determine the center of gravity based on the following
information.
Weekly
Destination x y Quantity
D1 2 2 800
D2 3 5 900
D3 5 4 200
D4 8 5 100
18 16 2,000

Instructor Slides 8-178

 Example: Center of Gravity

Instructor Slides 8-179

QUESTION
 Let’s suppose your company wants to
expand its logistics network and locate a
facility within a network of three existing
facilities. Given the following assumptions
below, what are the coordinates for the
new potential location?
 Let’s assume the following:
 Warehouse 1 has a daily outbound goods
volume of 2,500 units
 Warehouse 2 has a daily outbound goods
QUESTION