Service Management. Operations, Strategy, James A. Fitzsimmons. Mona J. Fitzsimmons. Me Grauu

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1 Service Management Operations, Strategy, Information Technology Seventh Edition James A. Fitzsimmons Seay Professor of Business Emeritus University of Texas at Austin Mona J. Fitzsimmons Me Grauu Boston Burr Ridge, IL Dubuque, IA Madison, Wl New York San Francisco St. Louis Bangkok Bogota Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto

2 Table of Contents PART ONE UNDERSTANDING SERVICES 1 Chapter 1 The Role of Services in an Economy 3 Learning Objectives 3 Chapter Preview 4 Service Definitions 4 Facilitating Role of Services in an Economy 4 Economic Evolution 5 Stages of Economic Development 6 Preindustrial Society 1 Industrial Society 7 Postindustrial Society 8 Nature of the Service Sector 9 The 21st Century Career 10 New Experience Economy 11 Consumer Service Experience 11 Business Service Experience 12 Sources of Service Sector Growth 13 Information Technology 13 Innovation 14 Changing Demographics 14 Service Benchmark: Walmart Is Number One on the Fortune 500 List 15 Summary 15 Key Terms and Definitions 15, Topics for Discussion 15 Interactive Exercise 16 Selected Bibliography 16 Endnotes 16 Chapter 2 The Nature of Services 17 Learning Objectives 17 Chapter Preview 18 Distinctive Characteristics of Service Operations 18 Customer Participation in the Service Process 18 Simultaneity 19 Perishability 20 Intangibility 20 Heterogeneity 21 Non-ownership Characteristic of Services 21 The Service Package 22 Grouping Services by Delivery Process 23 Classifying Services for Strategic Insights 26 Nature of the Service Act 26 Relationship with Customers 27 Customization and Judgment 27 Nature of Demand and Capacity 28 Method of Service Delivery 28 Service-Dominant Logic 30 An Open-Systems View of Services 31 Service Benchmark: Outside the Box 32 Summary 32 Key Terms and Definitions 33 Topics for Discussion 33 Interactive Exercise 33 Case 2.1: Village Volvo 33 Case 2.2: Xpresso Lube 34 Selected Bibliography 36 Endnotes 36 Chapter 3 Service Strategy 37 Learning Objectives 37 Chapter Preview 37 The Strategic Service Vision 38 Understanding the Competitive Environment of Services 40 Competitive Service Strategies 41 Overall Cost Leadership 41 Differentiation 42 Focus 43 Strategic Analysis 43 Porter's Five Forces Analysis 43 SWOT Analysis: Strengths, Weaknesses, Opportunities, Threats 44 Winning Customers in the Marketplace 45 Qualifiers 46 Service Winners 46 Service Losers 46 The Competitive Role of Information in Services 46 Creation of Barriers to Entry 46 Revenue Generation 48 Database Asset 49 Productivity Enhancement 49 The Virtual Value Chain 51 First Stage (New Processes) 52 Second Stage (New Knowledge) 52 Third Stage (New Products) 53 Fourth Stage (New Relationships) 53 Limits in the Use of Information 53 Anticompetitive 53 Fairness 53 Invasion of Privacy 53 Data Security 53 Reliability 54 Using Information to Categorize Customers 54 xii

3 Table of Contents xiii Stages in Service Firm Competitiveness 54 \ Available for Service 54 Journeyman 56 Distinctive Competence Achieved 56 *' World-Class Service Delivery 56 Service Benchmark: Central Market Shuns Conventional Wisdom and Big-Name Products 57 Summary 57 Key Terms and Definitions 58 Interactive Exercise 58 Topics for Discussion 59 Case 3.1: United Commercial Bank and El Banco 59 Case 3.2: The Alamo Drafthouse 61 Selected Bibliography 63 Endnotes 63 PART TWO DESIGNING THE SERVICE ENTERPRISE 65 Chapter 4 New Service Development 67 Learning Objectives 67 Chapter Preview 68 Innovation in Services 68 New Service Development 70 Service Design Elements, 72 ; Customer Value Equation 73 Strategic Positioning through Process Structure 74 Service Blueprinting 75 Taxonomy for Service Process Design 77 Degree of Divergence 78 Object of the Service Process 78 Type of Customer Contact 78 Generic Approaches to Service System Design 79 Production-Line Approach 79 Customer as Coproducer 81 Customer Contact Approach 82 Information Empowerment 84 Intellectual Property 85 Service Benchmark: Ten Things Google Has Found to Be True 86 Summary 86 Key Terms and Definitions 87 Topics for Discussion 87 Interactive Exercise 87 Case 4.1: 100 Yen Sushi House 87 Case 4.2: Commuter Cleaning A New Venture Proposal 88 Case 4.3: Golfsmith 90 Selected Bibliography 91 Endnotes 93 Chapter 5 Technology in Services 95 Learning Objectives 95 Chapter Preview 96 Technology in the Service Encounter 96 The Emergence of Self-Service 97 Automation in Services 98 The Internet as a Service Enabler 100 E-Commerce 100 Virtual versus Physical Services 101 E-Business Models 103 Economics of Scalability 103 Technological Innovation in Services 104 Challenges of Adopting New Technology in Services 105 Readiness to Embrace New Technology 106 The Case of Radio Frequency Identification 106 Service Benchmark: Best-in-Practice Is Just a Click Away 107 Summary 107 Key Terms and Definitions 107 Topics for Discussion 107 Interactive Exercise 108 Case 5.1: Amazon.com 108 Case 5.2: Evolution of B2C E-Commerce in Japan 109 Selected Bibliography 111 Endnotes 112 Chapter 6 Service Quality 115 Learning Objectives 115 Chapter Preview 115 Defining Service Quality 116 Dimensions of Service Quality 116 Gaps in Service Quality 117 Measuring Service Quality 119 SERVQUAL 119 Quality Service by Design 120 Incorporation of Quality in the Service Package 120 Taguchi Methods 120 Poka-Yoke (Failsafing) 121 Quality Function Deployment 123 Walk-Through Audit 124 Designing a Walk-Through Audit 125 The Walk-Through Audit as a Diagnostic Instrument 128 Achieving Service Quality 129 Cost of Quality 129 Statistical Process Control 130 Unconditional Service Guarantee 134 Service Recovery 136 Approaches to Service Recovery 136 Complaint Handling Policy 137 Stages in Quality Development 138

4 xiv Table of Contents Service Benchmark: Bronson Methodist Hospital 139 Summary 139 Key Terms and Definitions 140 Topics for Discussion 140 Interactive Exercise 140 Solved Problems 140 Exercises 142 Case 6.1: Clean Sweep, Inc. 144 Case 6.2: The Complaint Letter 146 Case 6.3: The Museum of Art and Design 148 Selected Bibliography 149 Endnotes 152 Chapter 7 Supporting Facility and Process Flows 153 Learning Objectives 153 Chapter Preview 154 Environmental Psychology and Orientation 154 Servicescapes 154 Behaviors in Servicescapes 155 Environmental Dimensions of Servicescapes 156 Facility Design 158 Nature and Objectives of Service Organizations 158 Land Availability and Space Requirements 159 Flexibility 159 ' Security 159 Aesthetic Factors 160 The Community and Environment^ 160 Process Analysis 161 Types of Processes 161 Flowcharting 161 Gantt Chart 162 Process Terminology 163 Facility Layout 165 Product Layout and the Work Allocation Problem 165 Process Layout and the Relative Location Problem 166 Service Benchmark: Where, Oh Where Shall We Go? 170 Summary 170 Key Terms and Definitions 171 Topics for Discussion 171 Interactive Exercise 171 Solved Problems 171 Exercises 174 Case 7.1: Health Maintenance Organization (A) 177 Case 7.2: Health Maintenance Organization (B) 177 Case 7.3: Esquire Department Store 178 Case 7.4: Central Market 179 Selected Bibliography 180 Endnotes 180 Chapter 8 Process Improvement 181 Learning Objectives 181 Chapter Preview 181 Quality and Productivity Improvement Process 182 Foundations of Continuous Improvement 182 Plan-Do-Check-Act (PDCA) Cycle 182 Problem Solving 183 Quality Tools for Analysis and Problem Solving 184 Check Sheet 184 Run Chart 184 Histogram 184 Pareto Chart 185 Flowchart 185 Cause-and-Effect Diagram 186 Scatter Diagram 187 Control Chart 187 Benchmarking 188 Improvement Programs 189 Personnel Programs for Quality Assurance 189 Deming's 14-Point Program 190 Baldrige National Quality Award 191 ISO Six Sigma 192 Lean Service 195 Summary 196 Service Benchmark: Service, Education, and Health Care Winners of The Baldrige National Quality Award 197 Key Terms and Definitions 198 Topics for Discussion 198 Interactive Exercise 198 Case 8.1: Senora County Sheriff 198 Case 8.2: Mega Bytes Restaurant 199 Chapter 8 Supplement: Data Envelopment Analysis (DEA) 203 Measuring Service Productivity 203 The DEA Model 203 DEA and Strategic Planning 209 Exercises 210 Case 8.3: Mid-Atlantic Bus Lines 210 Selected Bibliography 211 Endnotes 211 Chapter 9 The Service Encounter 213 Learning Objectives 213 Chapter Preview 214 The Service Encounter Triad 214 Encounter Dominated by the Service Organization 215 Contact Personnel-Dominated Encounter 215 Customer-Dominated Encounter 215

5 Table of Contents xv The Service Organization 215 \ Culture 216 Empowerment 217 '.-, Control Systems 217 \ Contact Personnel 218 Selection 218 Training 219 Creating an Ethical Climate 220 The Customer 221 Expectations and Attitudes 221 The Role of Scripts in Coproduction 222 Summary of Service Encounters 223 Creating a Customer Service Orientation 223 Service Profit Chain 224 Summary 226 Service Benchmark: Miss Manners on Complaint Handling 227 Key Terms and Definitions 228 Topics for Discussion 228 Interactive Exercise 228 Case 9.1: Amy's Ice Cream 228 Case 9.2: Enterprise Rent-A-Car 229 Selected Bibliography 232 Endnotes 234 Chapter 10 Service Facility Location 235 Learning Objectives 235 Chapter Preview 236 Strategic Location Considerations 236 Competitive Clustering.237 Saturation Marketing 237 Marketing Intermediaries 238 Substitution of Communication for Travel 238 Separation of Front from Back Office 238 Impact of the Internet on Service Location 239 Site Considerations 239 Regression Analysis in Location Decisions 240 Geographic Information System 240 Modeling Considerations 242 Geographic Representation 242 Number of Facilities 244 Optimization Criteria 244 Facility Location Techniques 246 Cross Median Approach for a Single Facility 247 Huff Model for Retail Outlet 249 Location Set Covering for Multiple Facilities 251 Summary 252 Service Benchmark: Here a Bun, There a Bun, Everywhere a Bun-Bun 253 Key Terms and Definitions 253 Topics for Discussion 254. Interactive Exercise 254 Solved Problems 254 Exercises 256 Case 10.1: Health Maintenance Organization (C) 258 Case 10.2: Athol Furniture, Inc. 259 Selected Bibliography 261 Endnotes 262 PART THREE MANAGING SERVICE OPERATIONS 263 Chapter 11 Managing Capacity and Demand 265 Learning Objectives 265 Chapter Preview 265 Generic Strategies of Level Capacity or Chase Demand 266 Strategies for Managing Demand 266 Customer-Induced Variability 266 Segmenting Demand 267 Offering Price Incentives 268 Promoting Off-Peak Demand 269 Developing Complementary Services 270 Reservation Systems and Overbooking 270 Strategies for Managing Capacity 272 Defining Service Capacity 272 Daily Workshift Scheduling 273 Weekly Workshift Scheduling with Days-Off Constraint 275 Increasing Customer Participation 276 Creating Adjustable Capacity 276 Sharing Capacity 277 Cross-Training Employees 277 Using Part- Time Employees 277 Scheduling Part-Time Tellers at a Drive-In Bank 277 Yield Management 278 Yield Management Applications. 283 Summary 284 Service Benchmark: Pay Up Front and Take Your Chances 285 Key Terms and Definitions 285 Topics for Discussion 285 Interactive Exercise 285 Solved Problems 285 Exercises 288 Case 11.1: River City National Bank 290 Case 11.2: Gateway International Airport 291 Case 11.3: The Yield Management Analyst 293 Case 11.4: Sequoia Airlines 295 Selected Bibliography 296 Endnotes 298 Chapter 12 Managing Waiting Lines 299 Learning Objectives 299 Chapter Preview 300 The Economics of Waiting 300

6 xvi Table of Contents Queuing Systems 300 The Psychology of Waiting 301 That Old Empty Feeling 302 A Foot in the Door 302 The Light at the End of the Tunnel 302 Excuse Me, But I Was Next 303 Principles of Waiting Line Management 303 Animate 304 Discriminate 304 Automate 305 Obfuscate 305 Essential Features of Queuing Systems 306 Calling Population 306 Arrival Process 306 Queue Configuration 310 Queue Discipline 312 Service Process 313 Summary 314 Service Benchmark: Five Minutes in Line Is Longer than Five Minutes at Hard Labor 315 Key Terms and Definitions 315 Topics for Discussion 315 Interactive Exercise 315 Solved Problems 316 Exercises 316 Case 12.1: Thrifty Car Rental 316 Case 12.2: Eye'll Be Seeing You 317 Case 12.3: Field Study 318, Selected Bibliography 319 Endnotes 320 Chapter 13 Service Supply Relationships 321 Learning Objectives 321 Chapter Preview 321 Supply Chain Management 322 Network Model 322 Managing Uncertainty 323 Service Supply Relationships 324 Customer-Supplier Duality 324 Service Supply Relationships Are Hubs, Not Chains 325 Service Capacity Is Analogous to Inventory 326 Customer Supplied Inputs Can Vary in Quality 326 Managing Service Relationships 326 Bidirectional Optimization 326 Productive Capacity 328 Perishability 328 Professional Service Firms 329 Attributes of Professional Services 329 Operational Characteristics 329 Outsourcing Services 332 Benefits and Risks of Outsourcing Services 332 Classification of Business Services 334 Managerial Considerations with Service Outsourcing 334 Summary 336 Service Benchmark: Citizens Come First in Lynchburg 337 Key Terms and Definitions 337 Topics for Discussion 337 Interactive Exercise 337 Case 13.1: Boomer Consulting, Inc. 338 Case 13.2: Peapod Smart Shopping for Busy People 340 Case 13.3: Mortgage Service Game 342 Selected Bibliography 344 Endnotes 344 Chapter 14 Globalization of Services 345 Learning Objectives 345 Chapter Preview 346 Domestic Growth and Expansion Strategies 346 Focused Service 346 Focused Network 347 Clustered Service 348 Diversified Network 348 Franchising 348 The Nature of Franchising 349 Benefits to the Franchisee 349 Issues for the Franchiser 350 Globalization of Services 351 Generic International Strategies 352 The Nature of the Borderless World 353 Planning Transnational Operations 354 Global Service Strategies 357 Multicountry Expansion 358 Importing Customers 358 Following Your Customer 359 Service Offshoring 359 Beating the Clock 360 Service Benchmark: Small World and Other Myths 360 Summary 361 Key Terms and Definitions 361 Topics for Discussion 361 Interactive Exercise 361 Case 14.1: Goodwill Industries International, Inc. 362 Case 14.2: Federal Express: Tiger International Acquisition 364 Selected Bibliography 366 Endnotes 367 Chapter 15 Managing Service Projects 369 Learning Objectives 369 Chapter Preview 369 The Nature of Project Management Characteristics of Projects

7 Table of Contents xvii Project Management Process 370 \ Selecting the Project Manager 3 71 Building the Project Team 371 \ Principles of Effective Project Management 372 \ Techniques for Project Management 372 Gantt Project Charts 3 72 A Critique of Gantt Charts 374 Constructing a Project Network 3 74 Critical Path Method 3 75 Microsoft Project Analysis 378 Resource Constraints 381 Activity Crashing 381 Incorporating Uncertainty in Activity Times 386 Estimating Activity Duration Distributions 386 Project Completion Time Distribution 387 A Critique of the Project Completion Time Analysis 388 Problems with Implementing Critical Path Analysis 390 Monitoring Projects 390 Earned Value Chart 390 Project Termination 392 Project History Report 392 Summary 392 Service Benchmark: The House That Warren Built 393 Key Terms and Definitions 393 Topics for Discussion 393 Interactive Exercise 394 Solved Problems 394, Exercises 395 Case 15.1: Info-Systems, Inc. 400 Case 15.2: Whittier County Hospital 401 Selected Bibliography 402 Endnotes 403 PART FOUR QUANTITATIVE MODELS FOR SERVICE MANAGEMENT 405 Chapter 16 Capacity Planning and Queuing Models Learning Objectives 407 Chapter Preview 408 Capacity Planning 408 Strategic Role of Capacity Decisions 409 Analytical Queuing Models 410 Relationships between System Characteristics 412 Standard MM/1 Model 412 Standard M/M/c Model 414 M/G/l Model 417 General Self-Service M/G/«> Model 418 Finite-Queue M/M/l Model 418 Finite-Queue M/M/c Model 419 Capacity Planning Criteria Average Customer Waiting Time 420 Probability of Excessive Waiting 421 Minimizing the Sum of Customer Waiting Costs and Service Costs 422 Probability of Sales Lost Because of Inadequate Waiting Area 423 Summary 424 Service Benchmark: When More Is Better 425 Key Terms and Definitions 425 Topics for Discussion 425 Interactive Exercise 426 Solved Problems 426 Exercises 428 Case 16.1: Houston Port Authority 430 Case 16.2: Freedom Express 431 Case 16.3: Renaissance Clinic (A) 431 Chapter 16 Supplement: Computer Simulation 432 Systems Simulation 433 Simulation Methodology 433 Monte Carlo Simulation 435 Generating Random Variables 435 Discrete-Event Simulation 438 ServiceModel Simulation Software 440 Demonstration: Customer Service Call Center 442 Process Analysis: Manufacturing Cell 443 Solved Problems 445 Exercises 447 Case 16.4: Pronto Pizza 451 Case 16.5: Renaissance Clinic (B) 451 Selected Bibliography 452 Endnotes 452 Chapter 17 Forecasting Demand for Services 453 Learning Objectives 453 Chapter Preview 453 The Choice of Forecasting Method 454 Subjective Models 454 Delphi Method 455 Cross-Impact Analysis 456 Historical Analogy 456 Causal Models 457 Regression Models 457 Econometric Models 458 Time Series Models 458 N-Period Moving A verage 458 Simple Exponential Smoothing 459 Relationship between a. and N 461 Forecast Error 462 Exponential Smoothing with Trend Adjustment 463 Exponential Smoothing with Seasonal Adjustment 464 Exponential Smoothing with Trend and Seasonal Adjustments 466 Summary of Exponential Smoothing 469

8 xviii Table of Contents Service Benchmark: Googling the Future 469 Summary 469 Key Terms and Definitions 470 Topics for Discussion 470 Interactive Exercise 470 Solved Problems 470 Exercises 473 Case 17.1: Oak Hollow Medical Evaluation Center 473 Case 17.2: Gnomial Functions, Inc. 475 Selected Bibliography 476 Endnotes 476 Chapter 18 Managing Service Inventory 477 Learning Objectives 477 Chapter Preview 478 Inventory Theory 479 Role of Inventory in Services 479 Characteristics of Inventory Systems 480 Relevant Costs of an Inventory System 481 Order Quantity Models 481 Economic Order Quantity 482 Inventory Model with Quantity Discounts 485 Inventory Model with Planned Shortages 487 Inventory Management under Uncertainty 490 Inventory Control Systems 491 Continuous Review System 491 Periodic Review System 492 The ABCs of Inventory Control 494 Single-Period Model for Perishable Goods 495 Expected Value Analysis 496 Marginal Analysis 496 Retail Discounting Model 498 Service Benchmark: A Chip in Time Isn't Stale 499 Summary 499 Key Terms and Definitions 499 Topics for Discussion 500 Interactive Exercise 500 Solved Problems 500 Exercises 502 Case 18.1: A.D. Small Consulting 507 Case 18.2: Last Resort Restaurant 508 Case 18.3: Elysian Cycles 508 Selected Bibliography 509 Endnotes 509 Appendix A: Areas of Standard Normal Distribution 510 Appendix B: Uniformly Distributed Random Numbers [0,1] 511 Appendix C: Values of L q for the MIMIc Queuing Model 512 Appendix D: Equations for Selected Queuing Models 514 Name Index 519 Subject Index 525

Service. Management. Operations, Strategy, james A. Fitzsimmons Seay Professor of Business Emeritus University of Texas at Austin. Mona j.

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