DSE7100 Managing Service Operations

Discussion of
Shouldice Hospital Limited Case
Assignment #2:
Questions for Shouldice Hospital Limited

1. How Successful is the Shouldice Hospital?

2. How do you account for the success of the hospital?
3. What is the strategic service concept of Shoudice
Hospital? How are the elements in the service systems
designed and managed to support the strategic service
concept?
4. As Dr. Shouldice, what actions, if any, would you take to
expand the hospital’s capacity?
5. How would you implement changes you propose?
 How Successful is Shouldice
Hospital?
• 140,000 highly satisfied “Alumni”(past
patients)
• 1,200 backlog of scheduled operations
• Demand appears to expand with supply
• Superior quality Shouldice Method of
Hernia operation imitated by competitor
• Low recurrence rate, 0.80% vs 10%
• High degree of employee satisfaction
Cost Comparison:
Shouldices vs. Other Hospitals
Shouldice Others
Costs of typical operations $954 (p9) $2000-4000
Transportation $200-600 $0
Time Lost from work in Hospital 4 days 5 days
Time lost from work while
recovering 5 days 10 days
Value of time lost
(ranging from $50 to 500 per day)$450-4500 $750-7500
Total before Allowance
for recurrence $1604-6054 $2750-11500
Probability of Recurrence 0.80% 10.00%
Expected Cost of Recurrence $13-48 $275-1150
Total cost to patient, employee
and insurer $1,617-6,102 $3,025-12,650
How About the Profitability of
Shouldice Hospital?
Hospital:
Revenues
(4 days X $111/day x 6,850 patients/year) 3,041,400
Cost 2,800,000
Profit: 241,400

Clinic:
Revenues (($450+ 60 + 75 X 0.20) X6,850) 3,596,250
Cost 2,000,000
Profit 1,596,250
Total Profit 1,837,650
Return on equity
• Total Depreciated Assets: $5 mil
• Return on Asset:
– 1,837,650/5,000,000 = 37%
• What is the return on Asset if they
expand the capacity by 50% at the cost
of $2 mil?
– 1,837,650 x 1.50 / 7,000,000 = 40%
“The Dream World ”

• Shoudice is offering:
– high quality service at low price
• Shodice is having
– Highly satisfied customers
– Happy Employees
• Shouldice is also
– making high profit
How is all of this achieved?
What are the major reasons for the
success?

• Maximizing the difference between

perceived quality and value to the
patient on one hand and the cost of
supplying services on the other.
What is the Unique Service Concept?
• What does Shouldice hospital offer to its
customers?
• The hernia surgery (the Shouldice method)
• Peace of mind/low risk/Low Recurrence
• Independence/Dignity/Control
• Social experience, fraternity
• Excused absence from work without guilt
• A vocation
 A Focus Strategy
• Market Focus
– focus on a narrow segment of potential patients who
have hernia and
– they are predominantly male, older in age, essentially
in good health
– large market potential: 600,000 operations in U.S. in
1979
• Internal Focus
– Doctors: Dedicated to quality of shoudice method,
tolerance for boredom, family oriented
– Nurses: people oriented, assist patients
– Staff: flexible, team oriented
Operating Concept
• Shouldicce achieves outstanding results as
a low price and at a high profit because:
– Everything done by the hospital is designed to
maximize the difference between perceived
quality and the value of the service provided
patients on one hand and
– the cost of providing the service on the other.
 How did they do that?
• Patients are carefully screened
• Patients are active participants in the service
delivery process
• The avoidance of general anesthestics allows a
wide range of involvement of patients
• Staff is freed from much disagreeable work
• Reducing the cost of nursing, housekeeping and
laundry
• Structure hospital jobs that involves more
counseling and positive interaction with the
patients
How did they do that?
– The Clinic is a focused factory resulting in:
– Highly productive surgeon:
• 300 hernia/yr Vs. 30 by less focused surgeon
– Sharing of expensive services such as anesthetist
– Short and relatively regular hours for surgeon
– high compensation ($50,000 + $40,000)
– Opportunities for surgeons to observe and and advise
one another
– Peer group pressure that leads to higher level of self-
control of quality
– A conscious effort is made to make Shouldice a
“family”experience
The elements in the service system to support
the service Concept (managerial elements)
• Service encounter
– Doctors and nurses are carefully recruited
– Employees trained to help / counsel patients
– Communal dinning for doctors, nurses , staff and
patients
• Quality
– adherence to Shouldice method
– opportunity for surgeon to observe & advise one
another
 The elements in the service system to support the
service Concept (managerial elements)
• Managing capacity & demand
– Admission by appointment: scheduled service
– Screening patients: easier to estimate the service time
– walk-in patients or local residents on waiting list to
make up cancelled reservation
• Information
– Medical Information questionnaire
– Free annual check-up -> unique data base on the result
of the surgery
– Annual reunion to keep alumni informed and gather
customer feedbacks-> loyal customer base -> effective
word-of-mouth
 The elements in the service system to support the
service Concept (structural elements)
• Delivery system
– Maximum degree of customer participation
– Efficient and low cost
– Avoid a typical hospital atmosphere
• Facility design
– Acres of gardens to encourage exercise & rapid recovery
– minimize hospital feeling (carpeting and odorless disinfectant
etc)
– Stairways are designed for patients to use right after operations
– No TVs and Telephones in rooms to encourage walking
– Operating rooms are located in semicircle to encourage doctors
to help each other and use the same anesthetist
The elements in the service system to support the
service Concept (structural elements)

• Location
– large city near air port -> access to worldwide
market
– large local population to fill up cancelled bookings
• Capacity planning
– Elective procedures -> scheduled operations
– Balancing Capacity and improving capacity
utilization
– Needs to increase capacity
 The Capacity Decision
• Where is the bottle neck?
• How should they increase the
capacity?
• How should they implement that
change?
 Shoudice Hospital Limited: Analysis of Capacity
Current Throughput
• 6,850 Operations/50 weeks = 137 operations/week
• ( with a peak of 165/week)
Capabilities
• Examination Rooms:
• (6 rooms x 3 hrs (1-4 PM) x 5 days x 60 min/hr) / (20 min / exam) = 270
patients /week
• Admitting Procedure:
• (2 people x 4 hrs (1-5 PM) x 5 days/week x 60 min/hr) / (10min/patient) = 240
patients/week
• Nursing Station:
• (2 stations x 4 hrs (1-5 PM) x 5 days/week x 60min/hr)/(10 min/patient)=240
patients /week
 Shoudice Hospital Limited: Analysis of Capacity
Capabilities
Operating Rooms:
• (5 rooms x 8.5 hrs/room/day x 1.1 hrs/patient x 5 days/week)/ =
188 patients /week
• Surgeons:
• 11 surgeons x 3.5 operations /day x 5 days = 178 patients/week
• Hospital rooms: (see transparency)
• 89 rooms = 134 patients per week (assuming use of weekends for
convalescence and 3.5 days average stay)
• 103 rooms = 148 patients (assuming use of weekend for
convalescence, 3.5 days average stay, and use of 14 “hostel”
rooms for two nights each week)
 How to expand the capacity?
• Aim : increase capacity & maintain control
of service quality
• Alternatives:
– Add Saturday operations
– Add a new floor (45 more hospital beds)
– Establish a new facility for hernia
– Expand to other types of operations
– Others?
Please Help Shoudice to make the
Decisions

• Which alternative do you recommend?

• Why?
• How do you implement the solution that you
are recommending?
 Add in a new floor (45 beds)
• Total Number of Rooms: 89 +45= 134
• Total number of patents per week = 193
• 137 current throughput/148 theoretical
• = x / 193 theoretical
• New throughput = 193 x (137/148)= 179 patients / week
• Additional patients per year=(179-137) x 50=2100
• additional revenue for the clinic
• = 2100 x (450+0.20 x 75) = $976,500
• Less cost 176,500
• Return on investment = 800,000/2,000,000=40%
 Add in a new floor (45 beds)
• Disadvantages
– Require to schedule doctors to the full capacity of
five days per week
– Increase work load on admissions, kitchen,
laundry, housekeeping and accounting
– Further staggering of meal hours for patients (100
seat dinning room)
– Disruption during construction
• Advantages
– Easy to control and maintain quality
– Retain the culture and environment
 Schedule Saturday as an Operating Day
• Use 89 + 14 rooms, 3.5 average stay
• Total number of patents per week = 180
• 137 current throughput/148 theoretical
• = x / 180 theoretical
• New throughput = 180 x (137/148)= 167 patients / week
• Additional patients per year=(167-137) x 50= 1450
• additional revenue for the clinic
• = 1450 x (450+0.20 x 75) = $674,250
• Less cost 124,250
• Net increase in profit: 550,000 for no additional investment
 Schedule Saturday as an Operating Day
• Disadvantages
– Require to schedule 23-25 operations on Saturday
– Six surgeons and a supervising surgeon have to work on
Saturdays
– Additional other personnel
– Violates the implied contract that Shouldice has with its
surgeons, strong opposition by the senior doctors
– Operating close the the theoretical capacity of the facility
• Advantages
– No investment is needed
– Can still maintain quality
 A Second Facility for Treating Hernia
• Advantages
– New location close to the customers, say USA
– Improve its competitive position and increase its profits
– Operate in a less restrictive environment
– New Opportunities for existing personnel
– Transfer of knowledge and expertise to the new facilities
• Disadvantages
– Requires a significant investment and Dr. Shoudice’s time
– Control of quality
– It is difficult to create the same culture and atmosphere
– Potential competition with the existing facility
 Discussion Questions

1. Describe Shoudice Hospital’s service package.

2. How are the distinctive characteristics of a service
firm illustrated by Shoudice Hospital?
 Shoudice Hospital’s Service Package
• Supporting Facility
– Acres of gardens to encourage exercise & rapid recovery
– Carpeting and odorless disinfectant etc to minimize
hospital feeling
– Stairways are designed for patients to use right after
operations
– No TVs and Telephones in rooms to encourage walking
– Operating rooms are located in semicircle to encourage
doctors to help each other and use the same anesthetist
– Located to a large city: Toronto, access to worldwide
market, large local population to fill up cancelled
bookings
.
 Shoudice Hospital’s Service Package

• Facilitating Goods:
– Medical supplies
– Food, medicine etc.

• Explicit Services
– Quality hernia surgery using the Shouldice method,
low recurrence
– Very experienced doctors
Shoudice Hospital’s Service Package
• Implicit Services
– Peace of mind/low risk
– Independence/Dignity/Control
– Social experience, fraternity
– Excused absence from work without guilt
– A vocation
Shoudice Hospital’s Distinctive
Characteristics
• Customer Participation in the Service
Process
• Simultaneity
• Intangibility
• Perishability
• Heterogeneity
END

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