1 The implementation of Operations Management Techniques in Service Organisations An Australian Perspective

Daniel I. Prajogo Bowater School of Management & Marketing, Deakin University, Australia Email: dprajogo@deakin.edu.au

2 The implementation of Operations Management Techniques in Service Organisations An Australian Perspective

ABSTRACT
The research presented in this paper examines the application of operations management (OM) techniques and methods in Australian service firms and how it links to their performance. The rationale of this research is based on the fact that the role of operations management has become more important in service firms, but its application is limited by the nature of services which are inherently different from manufacturers in some respects. Four major issues are addressed in this study, namely the nature or characteristics of services, the level of importance of OM techniques, the level of importance of performance indicators, and the challenges encountered by the management of service firms. The result indicates that most services are characterised by high customer contact and low degree of differentiation. Furthermore, service delivery, customer service and quality control receive the highest priorities among the OM techniques incorporated in this study. This result is then confirmed with customer retention, on time delivery, and quality which receive the highest priorities of performance measures. Innovation, on the other hand, surprisingly receives the least attention by the surveyed firms. Finally, building service culture appears to be the most challenging issues encountered by management in dealing with service operations as opposed to managing facilities which raise only little concern from managements point of view. By and large, the result supports the importance of human factors in determining the performance of the operations of service organisations. Keywords: Operations management, service industry

INTRODUCTION
Service industry has shown a phenomenal growth in the last decade and has surpassed the rate of manufacturing sectors. In terms of employment, service has absorbed a larger portion of the workforce than has manufacturing (see for example, the statistical abstract of the United States cited in Murdick (1990)). Given this fact, service has attracted many scholars from various disciplines to focus their study on this area, including the Operations Management (OM) field. The need to study the application of OM techniques and methods in service industry is driven by the assumption that service firms - by nature - operate in a similar way in many respects to their manufacturing counterparts. The core of service operations is similar to manufacturing; that is to transform input into outputs through a set of processes (Johnston and Clark, 2001). This includes processes of designing the products, producing and delivering them to customers. On the other hand, the importance of studying OM in service firms is also augmented by the arguments held by scholars that apart from the transformation processes, services are inherently different from manufacturers with respect to a number of key

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aspects. Nie and Kellogg (1999) articulate the basic assumptions that underlie the arguments that services are different from manufacturing in the sense that services have unique characteristics that are not found in manufacturing. The most notable characteristics are customer contact, intangibility, inseparability of production and consumption, heterogeneity, perishability, and labour intensity. Each of these characteristics is discussed below.
The presence of customer, commonly termed as contact, interaction, encounters, participation, and

involvement, brings complexity to the management of the service operations. This is because the customers presence could, to certain degree, influence the outcome of the operations. In addition, it also makes the firms pay attention not only in the end services but also in the process in rendering and delivering the services.
Intangibility is another key characteristic that differentiates services from manufacturing goods,

which makes quality of services are more difficult to be monitored and controlled.
In conjunction with intangibility, heterogeneity also increases the complexity of services since

there is a high chance of idiosyncrasy of customer expectations and evaluations/perceptions. At the same token, the out of the services can vary from one service provider to another.
Unlike manufacturing goods that can be produced, sold, and consumed by customers in a separate

place and time, these three stages of processes commonly occur simultaneously at the same place and time. In other words, management cannot prepare a buffer between the production and the consumption stage.
In conjunction with simultaneity, services are also perishable, meaning that unused capacity is lost

and cannot be stored for a later use. This leads to difficulty in managing demand, capacity, and scheduling in service operations.
Finally, many services are more labour intensive than manufacturing. In many cases, high-touch

cannot be replaced by high-tech as in the case of manufacturing. This makes managing people is likely to be more prominent in service than manufacturing. The above characteristics pose major challenges to service operations managers in which the extent of the application of several OM methods could be limited, if not nil, in the operations of service firms.

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Therefore, it can be postulated that due to these fundamental differences, managing operations in service organisations could be different from those in manufacturing firms. The need to study the application of OM techniques in service firms is further supported by the fact that service industry itself is fragmented. This fragmentation is characterised by several key factors that distinguish the nature of the services offered which are important for positioning the service firms in terms of their strategies and operations (Heskett et al., 1990). These characteristics have been identified in the literature on the management of service firms. Schmenner (1986), for example, identify three major factors that explain the diversity of services, namely the degree of labour intensity, the degree of interaction, and the degree of customisation. Armistead (1990) develops a framework to categorise and match the service operations task and the service delivery system which include volume of the output, variety and flexibility of services offered. Silvestro et al. (1991) propose six dimensions as typologies of services, namely technology / people focus, the length of customer contact time, the extent of customisation, the extent to which customer contact personnel exercise judgement in meeting individual needs, the source of value added (between front office and back office), and product / process focus. Understanding these characteristics of services is important to not only appreciate the difference between manufacturing and services but also to comprehend the applicability of the OM techniques in each of these diversified sectors of the service industry.

The objectives and the scope of the study

The primary objective of this research is to identify the key characteristics of the services and the degree of importance of the selected OM techniques in the service industry. This objective is congruent with that held in few earlier studies in this area. Wright and Mechling (2002), for example, indicate that only few studies have attempted to examine the importance of the operations methods applied in the service sectors. In their study among U.S. service firms, Vargas and Manoochehri (1995, p .25) underscore the critical aspects of operations that need to be studied empirically and resolved to enhance the competitiveness and profitability of all service firms, including the assessment of operational success, the usage of pertinent operational concepts and techniques, the proper incorporation and use of technology, and the types of difficulties encountered. The scope and structure

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of this study captures four major areas. The first area examines the major characteristics of services offered by the organisations, such as the degree of customer contacts, labour intensity, and customisation. These characteristics were derived from the earlier works as mentioned in the previous section, including Schmenner (1986), Armistead (1990) and Silvestro et al. (1991). The second part is focused on the degree of importance of several OM methods or techniques that have been widely applied in the manufacturing sector, including capacity planning, inventory, and scheduling. The content of this part follows what is commonly covered in the Operations Management textbooks, such as Schroeder (2004) and Slack et al. (2001), as well several earlier OM studies, including Johnston (1999), Nie and Kellogg (1999), Wright and Mechling (2002), and Vargas and Manoochehri (1995). The third section of the study investigates the emphasis the service firms place on several key operational performance criteria, such quality, delivery, and responsiveness. This will reflect the strategic emphasis adopted by service firms in their operations. The criteria incorporated in this study derives from the work by Vargas and Manoochehri (1995). The final part of the study is focused on a number of key challenges in operations faced by management. This part is based on the model developed by Schmenner (1986) which include such issues as integrating marketing and operations, managing technological advances, and maintaining staff loyalty.

DATA COLLECTION
The empirical data for this study was drawn from managers of the Australian service organisations whose primary responsibilities are related to the daily operations of the firms. The targeted service organisations encompass various sectors including transportation, communication, banking, insurance, health care, education, wholesaler, retailer, and professional services. The list of the respondents was purchased from a mailing list company. In total, 1,200 surveys were mailed out, and 216 responses were received with 190 of them being usable.

KEY FINDINGS OF THE STUDY

The data analyses presented in this paper are mainly descriptive as the primary purpose of this paper is to present an overview of the application of OM techniques in service organisations. The first section presents the key demographic variables, including service sectors, the area/region of the operational

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site, organisational size in terms of the number of employees, and gross revenue of the firm. The second part of data analysis is focused on the four major elements of operations management in the service industry, namely the nature of services, the level of importance of OM techniques, the level of importance of performance indicators, and the challenges encountered by the management of service firms. For the second part, only aggregate data is reported. Demographic description The first demographic data details the service sectors of the firms involved in the study, as presented in Table 1. It is important to note here that our data distribution does not necessarily reflect the true population of service firms in Australia. In terms of the area of operations, Table 2 indicates that around 50% of the firms operate in more than one state (multi-states). Table 1 Service sectors of the respondents
Service sectors Wholesale / Distribution Transportation Retail Professional Services Banking / Finance Utilities Health Care Hospitality Property Entertainment / Leisure / Tourism Repair / maintenance Communications Construction Education Information Technology Insurance Non-profit (including government) Research services Broadcast Building supply and equipment Others Total Number of firms 31 26 13 12 11 11 10 8 8 7 7 6 5 4 4 3 3 2 2 2 15 190

In terms of organisational size, Table 3 indicates that more than 50% of the respondents employ more than 100 people, which, from an Australian perspective, can be categorised as large firms. This could confirm that services are

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commonly labour intensive. Table 4 presents the gross revenue of the respondents during the financial year of 2001 2002. Table 2 Area of operations of the firms
Area of operations Australia Capital Territory (ACT) South Australia (SA) New South Wales (NSW) Tasmania (TAS) Northern Territory (NT) Victoria (VIC) Queensland (QLD) Western Australia (WA) Multi-states Total Number of firms 2 2 30 2 2 41 10 7 92 188

Table 3 Organisational size based on the number of employees

Number of employees less than 10 10 19 20 99 100 199 200 or more Total Number of firms 2 14 62 32 79 189

Table 4 Gross revenue during 2001 2002

Gross revenue in 2001-2002 (in $millions) under 1 19 10 49 50 99 100 or more Total Number of firms 2 38 66 20 56 182

Table 5 Position of the respondents

Area of operations Operations Manager / Director General Manager Finance Manager Customer Service Manager Divisional / site / plant / area Manager Others Total Number of firms 126 26 6 3 12 17 187

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In terms of the position of the respondents, Table 5 indicates that nearly 70% of the respondents have a position as Operations Managers or Operations Directors. This result is important to support the validity of the information provided by respondents. The others positions include the managerial areas of finance, administration, business development, and engineering. The nature of services Eleven characteristics of services are examined in this study, and the result is presented in Table 6. Based on the mean scores, the result indicates that customer contact obtains the highest ranking, meaning that most services have this particular characteristic. This result is important because, as argued by Chase (1981) high customer contact makes difficult for service providers to manage their production efficiency (and the associated OM techniques) due to individual differences in customers behaviours. This score, however, is not matched with the degree of customers involvement which only ranks around medium level. This indicates that high customer contact does not necessarily result in a situation where customers are highly involved in the service creation and delivery processes. Table 6 The nature of services
The nature of services The overall amount of customer contact The degree of labour intensity The amount of product variety The level of tangibility (physical elements) The degree of technology intensity The extent of customisation The degree of customer involvement during the process The production volume The length of contract (transaction) The degree of differentiation against competitors services The rate at which services become outdated 1 = low, 3 = medium, 5 = high 1 3 11 16 17 4 16 19 40 17 29 52 2 13 23 24 11 27 33 37 13 43 53 70 3 34 38 39 59 71 56 50 52 79 73 49 4 46 60 48 41 40 45 44 40 26 23 15 5 94 58 62 58 48 38 40 39 22 11 3 Mean 4.13 3.69 3.61 3.60 3.53 3.30 3.26 3.14 2.96 2.65 2.19

The result in Table 6 also indicates that labour intensity shows a relatively higher ranking than technology intensity, hence, confirming that most services are more high-touch than high-tech. It is interesting to see that the level of tangibility of services still reaches above medium level. This could indicate that most services comprise both physical and non-physical components. Such sectors as wholesaler and retails are among the examples. In addition, it is possible that the respondents also

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consider the physical facilities surrounding the service as part of the service itself, and this has been supported by scholars in service management, such as Zeithaml et al. (1990). Another interesting point is the low degree of differentiation. This result is noteworthy because although, as pointed earlier, services are heterogenous, the respondents perceive that it is not easy to differentiate their products from competitors. This result can be explained in two ways. First, it could be true that despite their heterogeneity, services are primarily standardised in their state of the art. Secondly, whilst service could be truly heterogeneous, however, it is easy for competitors to match any point of differentiation and therefore offset its competitive value. Finally, the rate at which services become outdated sits in the lowest ranking which indicates that most services have a long product life cycle. One important point to make here is that several characteristics that fall at the medium score (around 3), such as customer involvement and production volume, exhibit equal frequency distribution among the scores (1 to 5) and does not indicate any mode of the frequency. This suggests the fragmentation of service sectors with respect to these characteristics. Operations management activities Table 7 presents the perception of the respondents on the importance of selected operations management activities in the firm. The top three ranks are delivery, customer services, and quality control. This result is important to note since it indicates that from firms point of view, the most important part of operations is those which have direct impact on customers. Data processing and communication follows immediately after this group, hence, signifying its importance in managing operations of the service firms. The activities associated to planning and scheduling (i.e. from work scheduling to resource and capacity planning) interestingly show nearly equal scores, indicating that these activities are closely interrelated to each other as part of day-to-day operations. Although, as noted earlier, services by nature are more high touch than high tech, it is still somewhat surprising that technology management only falls in the middle ranking. However, this concurs with what Hackett (1990) suggests that many service firms have found the benefits of

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technology in improving their operational performance as elusive. He argues that this problem is rooted in the fact that many of these firms do not realise that technology alone is not sufficient to determine organisational performance if it is not integrated with the other critical resources, such as peoples skills and the structure of day-to-day operations (including policies and procedures) in the organisations. Table 7 The level of importance of the operations management activities
Operations Management Activities Delivery Customer services Quality control Data processing and communication Work scheduling Forecasting demands and trends Project planning and control Staff scheduling Resource capacity planning Process control Back office Technology management Service Design Maintenance Inventory Work measurement Procurement and purchasing Customer waiting line (queue) Job design Facility layout Facility location Mean Score 4.47 4.41 4.14 4.05 4.01 3.87 3.83 3.82 3.82 3.79 3.74 3.66 3.65 3.57 3.56 3.56 3.55 3.38 3.31 3.25 3.16

Service design also only receives a medium level of attention and this could be related to the result in the previous section that services have a long life cycle and therefore design activities are only conducted at a rare basis. Work measurement seems not to receive considerable attention and this could be partly because the process in delivering services cannot be mechanised using the principle of motion and time study as in the case of manufacturing. This issue could be associated with the low score of job design that indicates that jobs in service firms (particularly in professional services) are less prescribed and less standardised compared to those in the manufacturing firms. It is also possible that the respondents (who mostly are operations managers) perceive that job design falls outside the boundary of their responsibilities. Both inventory and purchasing fall in the lower ranked group and this confirms the low level of physical elements contained in the services. Surprisingly, location is not

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important although theoretically it is important due to the non-transportability of services. However, managers could think in the way that once the location and layout are established they will be difficult to change, hence, they are not considered as the main part of daily operations of the firms. Operational performance Table 8 presents the level of importance of the performance indicators of the surveyed companies. Customer retention is ranked first and this delivers a strong message that customer loyalty is pursued as one of the key performance indicators for most service firms. Whilst the importance of customer retention is recognised in any business sectors, it draws a higher attention in the service industry due to, at least, a couple of reasons. First, customer retention boosts profit (Reichheld and Sasser Jr, 1990). Secondly, with perceived risks inherent in buying services compared to manufacturing, customers will likely to repeat the purchase at the same provider rather than trying the new one (Zeithaml et al., 1990). Table 8 The level of importance of the performance indicators
Operational Performance Customer retention On time delivery Responsiveness Quality (conformance to specification) Productivity Processing time / speed Cost reduction Brand image Service recovery Innovation (novelty) Mean Score 4.41 4.31 4.26 4.25 4.10 3.91 3.82 3.81 3.81 3.27

Following customer retention are on time delivery, responsiveness and quality. This result is also important since it shows consistency with the previous section (i.e. operations management activities) which also place delivery, customer service, and quality as the highest priority. The following indicators are productivity, speed, and cost reduction, which are related more closely to the internal performance of the organisations, hence, suggesting that firms place a higher emphasis on the aspects of performance that have an external effect (i.e. direct effects on customers) rather than those related to the internal aspects of operations. It is somewhat surprising that brand image and service recovery fall in the relatively lower ranks. This is because these two aspects of performance are also directly related to customers perceptions on services. The most striking result of this section is that innovation

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falls at the bottom of the list with a significant gap of score against the next lowest indicators (i.e. recovery). What makes innovation only receives a relatively little attention in service industry? From a theoretical point of view, Gallouj and Weinstein (1997) argue that the fuzzy nature of services outputs make it particularly difficult to measure and detect improvement or change. In a more fundamental way, Gadrey et al. (1995) suggests that innovation in service has not received a great deal of attention because service itself is slow to be considered as an industry. One implication of this notion is that services not only fall behind manufacturing in innovating but also likely to innovate in a less radical degree. The challenges encountered by management The final issue addressed in this study is the key challenges in managing service operations. As indicated in Table 9, building service culture is the most challenging issue encountered by management. This, again, highlights the critical role of human factors in determining the operational performance of service organisations. In their study, Schneider and Bowen (1993) suggest that the role of people or human resource management (HRM) is critical in determining the quality of services delivered to the customers. In particular, they emphasise the importance of building service culture or climate which creates organisational settings to meet customers needs as well as promoting employee well-being. Table 9 Challenges encountered by management
Challenges Building service culture Understanding customer needs Gaining customer loyalty Marketing the services Streamlining and standardising processes Hiring staff Gaining staff loyalty Integrating marketing and operations Severe price competition Managing technological advancement Predicting actions of competitors Managing seasonality of demands Managing service facilities Mean Score 3.94 3.79 3.72 3.68 3.63 3.54 3.52 3.51 3.40 3.35 3.18 3.09 3.05

The difficulty in understanding customer needs follows at the second ranking which can be traced back to the characteristics of the services which are intangible and heterogeneous. The next two issues,

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gaining customer loyalty and marketing the services, can be linked to the result in the previous section where customer retention receives a high priority as the operational performance indicator. Hiring staff and gaining staff loyalty do not appear to be a major challenge for management, and this result is interesting since the findings in the previous sections have repeatedly underscored the important role of people in the operations of service firms. Severe price competition does not seem cause serious concerns for management. This result is also interesting given the other result suggesting that it is difficult for service firms (within one sector) to differentiate their products to each other. From a theoretical point of view, when products are difficult to be differentiated, competition in the industry will be drawn into price war. However, this is not the case with our result, and we believe that this could be mainly because the market for services is still growing and has not reached a maturity. Finally, the relatively low ranking of technological advancement confirms the low ranking in the level of importance of technology management.

CONCLUSION
Most findings of this study have accentuated the important role of people in the operations of service organisations. The high amount of contact with customers coupled with high degree of labour intensity characterised most services. Customer service is regarded as one of the most important operations activities, and this can be linked to the high emphasis placed on customer retention. This provides management with the foremost challenge of building service culture in the organisations. It is important to re-affirm that the findings are presented on aggregate (cross-sectoral) basis, and therefore the result can only be interpreted as an overview rather than reflecting the nature of each service sector. As pointed in the literature review, services are fragmented and therefore we can expect different result when the data is disaggregated into these sectors. As such, we plan to conduct further analyses on the data set. First, we plan to conduct MANOVA test to validate the categorisation of service processes as proposed by Schmenner (1986) - in terms of the nature of the services, the importance of OM techniques, the importance of the performance indicators, and the challenges encountered by management. This analysis is important for understanding the differences of the issues related to managing service operations in different sectors. Secondly, we also plan to examine the

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relationship between the extent of the implementation of OM techniques and the operational performance. This analysis is important in understanding the unique impact of OM techniques on different types of performance. This relationship analysis can also be expanded further by incorporating several factors that could affect the significance and the direction of the relationship, such as the nature of services as moderating factors or the service category as a control variable.

REFERENCES
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Silvestro, R., Fitzgerald, L., Johnston, R. and Voss, C. (1991), "Towards a classification of service processes", International Journal of Service Industry Management, 3, 3, 62-75. Slack, N., Chambers, S. and Johnston, R. (2001), Operations Management, Pearson Education Ltd., Essex. Vargas, G. A. and Manoochehri, G. H. (1995), "An assessment of operations in US service firms", International Journal of Operations and Production Management, 15, 1, 24-37. Wright, C. and Mechling, G. (2002), "The importance of operations management problems in service organizations", Omega, 30, 77-87. Zeithaml, V. A., Parasuraman, A. and Berry, L. L. (1990), Delivering quality service : balancing customer perceptions and expectations, Free Press, New York.