OVERVIEW OF

SERVICE OPERATIONS MANAGEMENT

 Introduction
• Traditionally, the field of operations management has close
ties to manufacturing management
• However, the growing importance of Service sector has given
a new perspective to operations management
• Even traditional manufacturers such as Ford and General
Motors now derive large portions of their revenue from their
service businesses, rather than from their physical products
• Many traditional tools and techniques with manufacturing
examples are also valuable in service firms
• However, even with these traditional tools, the context and
emphasis of application in service differs radically from a
manufacturer
• Other tools are used nearly exclusively in services
Role of Services in an Economy
 Key Statistics
•Indian service sector enjoyed foreign direct investment
(FDI) inflows amounting to US$ 547 million during April-
May 2013-14
•The segment grew by 8.6 per cent in 2012-13.
•Community social and personal services expanded by
4%.
•Trade, hotels, transport and communications segment
grew at 6.4 per cent in 2012-13.
Development in recent times with
regard to services
•E-commerce and internet are the fastest
growing service sub-segments.
•Tourism and travel has been another important
segment when it come to services.
•Telecom , and allied sectors have been
developing and spreading their wings .
•Railways with the use of IRCTC has launched
tourism and catering etc.
Growth of the services sector
 Growth of the services sector
•The modern services that are growing most rapidly
are now large enough where their future
performance could have a significant
macroeconomic impact.
•Hotel, restaurant, communication, banking and
business services, accounting research and
development have been the drivers of growth.
 Services in Indian Economy
• Service sector’s contribution to the Indian
economy is increasing
• Growing attention paid to service quality and
customer satisfaction has stirred the managers
of many service organizations into action
• The changes in the demographic characteristics
have given rise to increase in the demand for
support services
• Customers expect better services from even
physical goods manufacturing companies
• What is Service?
– There are many organizations that extract raw
materials, add value through processing them and
transform into components and finished products
– There are, however other organizations that
facilitate production and distribution of goods and
organizations that add value to our lives through a
variety of intangibles they provide
– The outputs of this latter group are “services”
– One distinguishing feature about any service is that
it is not tangible like physical goods
– service is mostly ‘felt’ i.e. it is a characteristic
connected with the mind or psychology of the
persons
– Services can be defined as economic activities that
produce time, place, form, or psychological
utilities
– Service is created and consumed simultaneously
– However, the distinction between goods and
services is not always clear-cut
– In reality, almost all purchases of goods are
accompanied by facilitating services
– Almost every service purchase is accompanied by
facilitating goods
– The key to understanding the difference lies in the
realization that these items are not completely
distinct, but rather are two poles on a continuum
• Thus, the service product consists of
– Physical items or facilitating goods
– Sensual benefits or explicit services and
– And psychological benefits or implicit services
• Customer’s view
• The following may be some of the ways in
which customers think about service attributes:
– One overpowering attribute:
• e.g. Dombivli to CST fast local should transport you in
55 minutes flat with just one stop at Kurla. The other
attributes of local train service carry little or no
weight
– Single attribute with threshold minimums:
• e.g. Middle Class NRIs visiting India availing of the
cheap economy fares offered by one of the airlines of
the Middle East region
• It saves 1000 USD per trip per person
• They have just have one primary attribute under
consideration i.e. price of the ticket.
• Other attributes are expected to meet just the
threshold values
• Weighted average of attributes:
– e.g. In this case all attributes are important.
– Some may be little more important than others.
– So the customer evaluates a “weighted average”
regarding “goodness” of the service.
– Deficiency in one service attribute can be made up
by more service in another attribute.
– For instance, the lack of politeness in a restaurant
can be made up by fast service or good taste and
aroma of the food
• Comparison of Services and Goods
Characteristi Service Goods
c
A Physical
Entity Intangible Tangible
Storage Not Possible Possible
Quality Varies with time & More standardized
person
Producer Inseparable from Can be separate
service from goods
Labour Tends to be high lower
intensity
Life Short Longer
• Comparison of Services and Goods
Characteristic Service Goods
B Production
Production Spontaneous Time-spread
Customer High Can be low
involvement
Physical presence Essential May not be
of customer necessary
Physical Very important May not be
surrounding important
Standardization Only for routine Possible all over
services
Facility location Close to customer Near supply
• Comparison of Services and Goods
Characteristic Service Goods
B Production
Facility design To accommodate To enhance
needs of customer production
Product design Environment has Only physical
vital role product
Process design Immediate effect on Customer not
customer involved
Scheduling As per customer Completion dates
interest
Production Smoothing results in possible
planning losses
Inventory Personnel Raw material
• Comparison of Services and Goods
Characteristic Service Goods
B Production
Quality control Varied quality Fixed
standards
Quality objective Zero defect Zero defect
Worker skill Interaction Technical
Time standard Loose Tight
Capacity planning Fluctuating Average
Wage payment Time-based Unit-based
Type of technology Generally soft Generally hard
• Comparison of Services and Goods
Characteristic Service Goods
C Marketing
Delivery Along with Separate from
production production
Demand Fluctuating Stabilized
Supply Constrained Flexible
Title No ownership Ownership
possible
Seasonality May be there May be there
Consumer reaction Spontaneous Delayed
Pricing Labour-based Material-based
Basis of Personalization Technology
competition
• Comparison of Services and Goods

Characteristic Service Goods

C Marketing
Channels Shorter Usually longer
Repairs Impossible Possible
Need satisfied More emotional More physical
Replacement Rare Common
Forecasting Short-run Long-run
Image Corporate Brand
Physical movement Of the provider Of the goods
Cost allocation Difficult Easier
• Comparison of Services and Goods
Characteristic Service Goods
D Strategy
Orientation External & internal External
Focus Customer Customer needs
expectations
Approach Focused Can be diffused
E Organization
Structure Flatter Taller
Role of higher Supportive Demanding
levels of mgmt
Communication Criss-cross Vertical, mainly
Desired design Organic Rational
 Introduction
• Why study service operations?
• Service firms form a large percentage of the economy of every
nation. The size will further increase
• There is lack of attention given to services. This provides
competitive advantage to those who pursue its study
• Many services have characteristics that are strongly different
from goods. Hence, specialized and different managerial
techniques are employed in services
• Knowledge and experience gained from studying
manufacturing settings does not always transfer to services
 Importance of service sector
• The term “services” is often defined not by what it is, but by
what it is not
• Historically, economic reports identify activities as “service
producing” that are not “goods producing”, which include
manufacturing and construction, and are not “extraction”
such as agriculture, fishing, forestry, and mining
• As per this definition, “service producing” encompasses
industries such as retailing, wholesaling, transportation,
financial services, education, government, entertainment, etc.
• In the US economy, services account for nearly 80% in both
the employment and GDP. In India also, the contribution of
service sector to the economy is growing rapidly
 Importance of service sector
• The figure below shows the growth of service sector
 Importance of service sector
• The various economic stages can be described as under:

• 1. Preindustrial stage:
– In this stage, the labor force was mostly engaged in extraction
industries, agriculture being the most prominent.
– The prominent service occupations were domestic servants
– Family relationships and traditions were important, while education
and innovation were not important
– Quality of life depended largely upon nature, and upward mobility was
difficult
 Importance of service sector

• 2. Industrial stage
– Quality of life is measured by accumulation of goods
– Industry focus is on maximizing productivity of labor, leading to
assembly line production
– The individual worker is viewed merely as a cog in a machine
– Getting more output from less input is the only way to increase
profitability
– This gave rise to strong labor unions as a counterweight to
dehumanizing jobs
 Importance of service sector
• 3. Postindustrial stage
– Service producing industries increased, roughly to 80% of the
workforce in the U.S.
– Services such as health, education, and recreation predominate
– “experiences”, a small subset of the service economy will be a
dominant economic force
– Information becomes the central figure in this economy, and
organizations value workers more for their judgment, creativity, and
theoretical reasoning, than as mere executors of a plan. Today, there
are about twice as many white collar workers as manual laborers.
– Today’s economy consists of a far higher percentage of service
producing activity than in previous times. This has resulted in far more
jobs in the service sector than in any other
– The postindustrial service economy requires different managerial
skills, different ways of thinking, and a break with the traditions of
industrial society
 Characteristics of Services
• Services, in general, have different characteristics than goods
• Some of the ways in which services differ from goods include:
– Services are intangible while goods are tangible
– Services are simultaneously consumed as they are produced, while
goods can be stored
– Services often require closer proximity to customer
– Services cannot be inventoried
• These characteristics make management more challenging
and require a different mindset from traditional managerial
practices
• However, these differences are only partially true
 Characteristics of Services
• Intangibility of Services
• The results from a service may be an emotion from hearing a
song or seeing a tennis match, but frequently, no thing is left
behind
• However, most services come with “facilitating goods”
• For example, a photograph of a friend on a roller coaster at
the amusement park can serve as a physical reminder of a
service
• Conversely, physical goods have intangible aspects. An
intangible feeling can be derived from owning a premium car
• Just as services have “facilitating goods”, nearly every good
has a “facilitating service”. Goods often must be transported
to the customer, and transportation is a service
 Characteristics of Services
• Simultaneous Production and Consumption
• Many services are “produced” by the seller and “consumed”
by the buyer at the same time. Examples are live
performances of plays, music etc.
• This simultaneity of production and consumption makes
quality control and matching capacity to demand very difficult
• However, some services such as computer system upgrading
and janitorial work, are produced while the customer is not
there
• Also, many manufacturers face similar managerial difficulties
with rush orders that must be done immediately and to
customer’s specification
 Characteristics of Services
• Proximity to the Customer
• Many services must be physically close to the customer. For
this reason, many service firms operate several units, while
manufacturers operate only a few.
• Even, choosing where to locate a service requires totally
different criteria than a manufacturing facility
• However, proximity is not always essential in services. For
example, internet based services employ radically different
strategies than services that are location-dependent
• Many back office services are performed far away from the
customer
 Characteristics of Services
• Services cannot be Inventoried
• Lack of ability to build inventory or use back orders seriously
influences managerial choices
• Consequently, many services manage waiting time rather than
inventory. However, there are exceptions like restaurant
reservations where the service can be back ordered
• For many service industries, such as retailing, managing
physical inventory is a highly strategic endeavor. For other
service firms, like hotels and airlines, effectively managing
their “inventory” of hotel rooms or airline seats, is essential
• On the other hand, some manufacturers, like those producing
customized goods, face similar problems like traditional
services
 Characteristics of Services

• The foregoing discussion does not imply that goods-producing

and service-producing industries do not differ. There are clear
differences in the management problems of both.
• Some service firms and manufacturers may share many
similarities, while at the same time, firms lumped together
under the “services” umbrella, exhibit extreme differences
• A customer of a grocery store mainly buys goods, though a
grocer is a service industry
• On the other hand, a customer of a salon is purchasing nearly
100% service
• Naturally, such firms face different managerial challenges
 Sector based classification
• Distributive services: services with a distribution nature
provided to other sectors, producers or service providers.
• Production services: services provided to other sectors or to
other producers, service providers, which are connected to
production and providing services, facilitate and support the
operational process.
• Social services: services aimed at satisfying individual or social
needs (medical and health care services, hospitals, education,
welfare and religious services, non-for-profit organizations,
postal services, government, consultancy and social services).
• Personal services: services provided to individuals
 Classification based on services process
1. Degree of tangibility:
2. Skills of the service provider:
3. Goals of the service provider:
4. Degree of regulation:
5. Degree of labor intensiveness:
6. Place and time:
7. Customization:
8. Demand and supply
9. Facilities, equipment and people:
10.Degree of discretion:
11.Value addition:
12.Product and process:
13.Utility creation perspective:
14.Market segment:
15.Degree of customer contact:
 Classification of Services
• It is useful to classify service firms to gain a perspective about
which industries share certain characteristics

• Classification schemes enable us to view the commonalities

between businesses that may also demonstrate vast
differences

• A well known classification scheme is called the “Customer

Contact Model” proposed by Chase (1978)

• The model is shown in the figure below:

 Classification of Services
Customer Contact Model of Services
• High Contact Low Contact
• --------------------------------------------------------------------------------
• Pure Services Mixed Services Quasi-Manufacturing Mfg.
• -------------------------------------------------------------------------------------------------

• Medical Branch offices Home offices

• Restaurants Distribution centers
• Transportation
 Classification of Services
• High contact services or “pure services” include hospitals and
restaurants. A high percentage of their activities must take
place in the presence of the customer
• Low contact services—called “quasi-manufacturing” firms --
include distribution centers, wholesalers, and back-office
facilities, which require virtually no face-to-face contact with
customers
• Services with elements of both are called “mixed services”, and
include branch offices of banks, insurance firms etc.
• Customer as the dominant force to be considered in designing
service systems represents the central guiding principle in this
view. This can be formulated as:
• Potential Efficiency = f(1 – [Customer Contact Time/Service Creation Time])
 Classification of Services
• This equation indicates that “potential” efficiency of a service is
limited by the amount of time the customer is involved in the
system. However, it is not necessarily desirable, always, to maximize
the efficiency
• As per this model, firms with similar levels of customer contact may
encounter similar problems, and could benefit from sharing “best
practices” across industry boundaries
• Further, high contact and low contact areas within a company
should be managed differently
• In high contact areas, it would be useful to hire people-oriented
workers.
• Low contact areas should be located away from the customer’s
view. Here, traditional manufacturing techniques could be
effectively used to increase efficiency
 Classification of Services
• Another view of services is provided by the “Service Process
Matrix” proposed by Schmenner (1986) shown below:
 Classification of Services
• In this model, service processes are differentiated according
to two major factors: “the degree of interaction and
customization”, and the “degree of labor intensity”.

• Service Factory
• The Service Factory, has both low interaction and low labor
intensity, for example, a traditional commercial airline. Here,
customization is quite low. If flights are scheduled for specific
timings, they won’t accommodate a customer at any other
time. The capital cost is enormous
 Classification of Services
• Service Shop
• Service shops such as hospitals also experience high capital
costs. Here, the degree of customization is high but the
degree of labor intensity is low
• Professional Services
• Professional services, such as lawyers, consultants,
accountants, combine high customized service with a high
labor intensity
• Mass Services
• Finally, Mass Services, like retailers and wholesalers, show
higher ratio of labor to capital costs than service factory firms,
but do not offer highly customized services
 Classification of Services
• As per this model, each quadrant faces managerial challenges unique to
the processes within that quadrant
• Both Service Factory and Service Shop processes are capital intensive ,
hence, capital purchases and technology choices are highly important and
capital assets must be highly utilized. Here, the challenge is to smooth out
demand peaks that cannot be served
• Mass Service and Professional Service firms are more labor intensive .
Here, hiring and training of labor is more important.
• Similarly, Service Factory and Mass Service firms, with low interaction and
customization, are challenged to make their services feel “warm” to the
customer.
• Service Shop and Professional Service Firms’ challenges are associated with
high interaction and customization issues, such as quality control
• When service businesses are categorized according to problem similarities,
techniques and solutions adapted from entirely different industries within
the same quadrant, may be effective in addressing these problems.
Classification of Services
 Challenges confronted by services
sector
• Infrastructure
• Technology
• Employees
• Consumer
• Competition
• Supplier
 Critical factors for success

• Focus on customer
• Caring for employees
• Identification of Value drivers
• Developing technology to a firm’s advantage
• Demand management
• Adequate systems