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 hospitals 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 Costs of typical operations $954 (p9) Transportation $200-600 Time Lost from work in Hospital 4 days Time lost from work while recovering 5 days Value of time lost (ranging from $50 to 500 per day)$450-4500 Total before Allowance for recurrence $1604-6054 Probability of Recurrence 0.80% Expected Cost of Recurrence $13-48 Total cost to patient, employee and insurer $1,617-6,102 Others $2000-4000 $0 5 days 10 days

$750-7500 $2750-11500 10.00% $275-1150 $3,025-12,650

How About the Profitability of Shouldice Hospital?

Hospital: Revenues

(4 days X $111/day x 6,850 patients/year)

Cost Profit: Clinic: Revenues (($450+ 60 + 75 X 0.20) X6,850) Cost Profit Total Profit

3,041,400
2,800,000 241,400

3,596,250 2,000,000 1,596,250 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 selfcontrol of quality A conscious effort is made to make Shouldice a familyexperience

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
Requires a significant investment and Dr. Shoudices time Control of quality It is difficult to create the same culture and atmosphere Potential competition with the existing facility

Disadvantages

Discussion Questions
1. 2. Describe Shoudice Hospitals service package. How are the distinctive characteristics of a service firm illustrated by Shoudice Hospital?

Shoudice Hospitals 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 Hospitals Service Package Facilitating Goods:

Medical supplies Food, medicine etc.

Explicit Services
Quality hernia surgery using the Shouldice method, low recurrence Very experienced doctors

Shoudice Hospitals Service Package

Implicit Services
Peace of mind/low risk Independence/Dignity/Control Social experience, fraternity Excused absence from work without guilt A vocation

Shoudice Hospitals Distinctive

Characteristics
Customer Participation in the Service

Process Simultaneity Intangibility Perishability Heterogeneity

END

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