OPERATIONS MANAGEMENT 2

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 SYLLABUS

• Service Operations
• Work Design/Work Measurement
• Quality Management and Statistical Quality Control
• Scheduling
• Theory of Constraints
• JIT/ Lean Manufacturing
• Purchasing and Supply Chain Management

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 EVALUATION

• 3 Quizzes 25 Marks each (Best 2 out of 3)

Syllabus
Quiz 1
• Service Operations
• Work Design/Work Measurement
Quiz 2
• Quality Management
• Scheduling
Quiz 3
• Theory of Constraints
• JIT/ Lean Manufacturing
• Purchasing and Supply Chain Management
• P.S.: All examinations will comprise both short answer type questions and numerical questions 3
SERVICE OPERATIONS
MANAGEMENT

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 INTRODUCTION TO SERVICE
OPERATIONS MANAGEMENT

• Introduction to Services
• Definition of Service and Service Operations
• Distinctive Characteristics of Service Operations
• Service Package
• Service Process Matrix
• Strategic Issues in Service Operations
• Location Planning for Service Facilities
• Service Layout
• Electronic Interface of Services: Intermediaries 5
WHAT IS A SERVICE?

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 WHAT IS SERVICE?

“Service is an economic activity offered by one entity to

another”
Service = Experience + Outcome

It is provided by or dispensed through a service delivery

system that includes facilities, processes, individual’s skills

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 UNIQUE CHARACTERISTICS OF
SERVICES

• Customer Participation
• High degree of producer-consumer interaction while producing the service
• Fast food restaurants, self-service gas stations, ATMs, etc. are common examples
• Simultaneity
• Services cannot be inventoried and have to be consumed as soon as they are produced
• Perishability
• A service cannot be stored and it is lost forever if not used

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 CHARACTERISTICS OF SERVICES

• Inseparability
• Services cannot be transported and hence either the customers will have to be
brought to the point of service delivery or the service delivery system will have to
be brought closer to the customer
• Intangibility
• Difficult to judge the quality before the service delivery
• Difficult to patent the service offerings
• Heterogeneity
• Increased customer participation leads to variation in the delivery of service
• Non Transferable Ownership 9
CHARACTERISTICS OF SERVICES

Demand Volatility: The

mentioned factors contribute
towards higher volatility of
demand in service capacity than
that of manufacturing

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 DIFFERENCES BETWEEN GOODS AND
SERVICES
Characteristics Goods Services
Degree of Customer Contact Low High
Uniformity of Input High Low
Labour Intensity Mostly Low High
Uniformity of Output High Low
Output Tangible Intangible
Measurement of Productivity Easy Difficult
Handling Quality Issues before delivery High Low
Inventory Yes No
Evaluations Easier Difficult
Whether Patentable? Usually Unusually
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SERVICE OPERATIONS

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 WHAT IS SERVICE OPERATIONS?

• It stands for “the activities, decisions, and

responsibilities of operations managers in the
Service Strategy
delivery of services”
• A critical role being played by service operations is
depicted through the ‘service triangle’ where the
Customer
customer occupies the central role
• The service strategy should focus on serving the
customers while the support systems and the employees Support Systems Employees
must facilitate the service process
• In short, to strategize on the delivery of the ‘service
package’

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 SERVICE PACKAGE

“a bundle of goods and

services with information
that is provided in some
environment”

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 FEATURES OF SERVICE PACKAGE

Implicit Service
Services Facility

Service Package
Explicit Facilitating
Services Goods

Information
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 SUPPORTING FACILITY

• The physical resources that must be in place before a service

can be offered
• Important Characteristics include
• Location
• Architecture
• Internal Design
• Layout
• Supporting Equipment

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 FACILITATING GOODS

• The material purchased or consumed by the customers or even

provided by the customers
• Important Characteristics include
• Quality
• Consistency
• Quantity
• Variety

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 INFORMATION

• Data is available from the customer or provider to enable

efficient and customized service
• Important Characteristics include
• Accurate
• Timely
• Useful

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 EXPLICIT SERVICES

• The benefits that are readily observable by our senses and consist of
the essential or intrinsic features of the service
• Important Characteristic include
• Consistency
• Comprehensiveness
• Availability
• Skill or Training of Service Personnel
•

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 IMPLICIT SERVICES

• Psychological benefits that the customer may sense only vaguely, or

the extrinsic features of the service
• Important Characteristics include
• Convenience
• Waiting
• Sense of well-being

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SERVICE PACKAGE: EXAMPLE OF
A BUDGET HOTEL

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 SERVICE PACKAGE

Hotel
Safe
Room

Budget Hotel
Comfortable
Meals,
bed, Clean
Newspaper
rooms, etc.

Laundry, Restaurant, etc.

Contact No. 22
SERVICE GOODS CONTINUUM

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 SERVICE GOODS CONTINUUM

• The existence of pure service or pure goods at the two extremes is often a
rarity
• Most products fall between these two extremes
• The importance of the ‘facilitating goods’ in the service can be used to classify
the services across a continuum from pure service to pure good
• Sometimes a service can be the core product with goods supporting it like a
consultant’s report or distribution
• In some other cases a good can be the core product with services supporting it like a
car

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 SERVICE GOODS CONTINUUM

Pure Good Pure Service

Soap Car with Repairing Restaurant Airlines Trip with Diagnostic Check ups
Services refreshments

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SERVICE GOODS CONTINUUM

Infrastructure
Consumer Goods
Banking
Automobile
Financial Services
Telecommunication
Energy - Oil & Gas
Pharmaceuticals
Energy & Mining
Cement
Information Technology
Metals
Construction
Food Processing
Energy - Power
Chemicals
Media & Entertainment

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CLASSIFICATION OF SERVICES

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 CLASSIFICATION OF SERVICES

• Service Process Design (Volume-Variety)

• By van Johnston & Clark
• Delivery Process (Service Process Matrix)
• By Roger Schmenner

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 SERVICE PROCESS

• Service process design is driven by two parameters

• Volume of transactions to be performed per period per unit
• Variety of the tasks to be carried out

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 SERVICE PROCESS: VOLUME VS.
VARIETY

Decreasing Unit Costs

High

Capability Complexity
(Consultancy) (Specialized
Education)

Process Variety Increasing

Process Definition

Simplicity Commodity
(Retail, call centres)
Low
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Low Volume per unit High
 SERVICE PROCESS MATRIX

• The matrix was derived by Roger Schmenner in 1986

• It is the service industry version of Wheelwright and Hayes'
‘Product-Process Matrix’ for the case of manufacturing
• It is a framework of grouping services based on the delivery
process
• It depends on two dimensions:
• The degree of labor intensity (the ratio of labor cost to plant and equipment, i.e.,
capital costs)
• A jointly measured degree of customer interaction and customization (i.e., the ability
of the customer to affect the nature of the service delivered)
Reference: https://sloanreview.mit.edu/article/how-can-service-businesses-survive-and-prosper/ 31
 SERVICE PROCESS MATRIX

Degree of Interaction and Customization

(High or Low on service standardization)

SERVICE PROCESS MATRIX

Low High

Service Factory Service Shop

Low • Restaurants • Hospitals
Degree of • Airlines • Any repair services
Labour Intensity
(High or low on Mass Service Professional Service
capital intensive) High • Retailing • Physicians
• Schools • Lawyers

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 MANAGERIAL CHALLENGES W.R.T.
DEGREE OF LABOUR INTENSITY

LOW HIGH
• Capital-intensive leading to high cost of • Training and Hiring Costs
capital
• Monitoring Mechanisms
• Up keeping with Technological changes
• Workforce Scheduling
• Managing peak demands and promoting
• Coordination between distant locations
during off peak hours

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 MANAGERIAL CHALLENGES W.R.T.
DEGREE OF CUSTOMER INTERACTION

LOW HIGH
• Marketing costs • Demand prediction
• Managing competition • Maintaining quality standards
• Ensuring the follow-up of standard
operating procedures

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 CAPACITY PLANNING IN SERVICES

Manpower

Capacity in services

Support Systems

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 ISSUES IN CAPACITY PLANNING FOR
SERVICE

• Addition of wrong kind of capacity

• Not focusing on all-round capacity addition
• Ignoring Competitors’ reaction
• Undercutting one’s own service

Source: Match Supply and Demand in Service Industries by W. Earl Sasser (Harvard Business Review) (Link to the article:
https://hbr.org/1976/11/match-supply-and-demand-in-service-industries) 36
 CHASE DEMAND VS. LEVEL CAPACITY

Chase Demand Level Capacity

Labour Skill level Low High
Job Discretion Low High
Compensation Rate Low High
Working Conditions Sweatshop Pleasant
Training Required per Low High
employee
Labour Turnover High Low
Hire-Fire Costs High Low
Error Rate High Low
Amount of supervision required High Low
Type-of budgeting and Short-run Long-run
forecasting required 37
 MANAGING DEMAND AND SUPPLY

ALTERING DEMAND
ALTERING SUPPLY
• Contingent workers
• Pricing
• Maximizing efficiency (managing
• Advertisements the bottleneck operation)
• Developing nonpeak demand • Increasing customer participation
• Creating reservation systems through self-service
• Developing complementary • Outsourcing
services • Sharing capacity

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LOCATION AND COMPETITIVE
ADVANTAGE

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 LOCATION PLANNING IN SERVICES

• Competitive positioning: prime location can be a barrier to entry

• In the case of manufacturing the location, decisions are cost-oriented
whereas in services decisions are revenue-oriented
• Focus is normally on the demographics like age, income, and other
characteristics of individuals in any location (use of Geographic
Information System or GIS)
• Competition in any location
• Other factors like customer access including parking
 HOW HOTEL CHAIN SELECT SITES?

• Hotels take into consideration a list of variables

classified as:
 Competitive (Price, total rooms, competitors’ prices)
 Demand Generators (College Enrolment, Annual Tourists)
 Demographic (Unemployment %, Income)
 Market Awareness (Age of the hotel, distance to nearest Hotel)
 Physical (Access, Sign Visibility)

Source: Operations and Supply Management by Chase et al., McGraw Hill, (12 SiE)
LOCATION PLANNING

Euclidean Distance

Destination
(xj, yj)

Origin (xi, yi)

Metropolitan or Rectilinear Distance

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 LOCATION PLANNING: OPTIMIZATION
CRITERIA

• Minimize Cost
• Maximize Utilization
• Minimize Distance per Capita
• Minimize Distance per Visit

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 FACILITY LOCATION PROBLEMS

• Single facility location on a straight line

• Consider a straight highway and the problem deals with locating a
restaurant on the highway. Suppose consumers are Uniformly distributed
on this highway with the length of the highway being L km. The
objective is to minimize the total distance travelled by the consumers.

0 s L

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 FACILITY LOCATION PROBLEMS

• Total Distance Covered by the Consumers

• i.e.,

• Minimize Z implies

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 FACILITY LOCATION PROBLEMS

• Alternatively, the consumers can be concentrated at a few

places. The following data pertains to the density of
consumers on the highway:
Location from x1 x2 …… xk
the origin O

Density of w1 w2 …… wk
consumers

• Objective is Minimize
• This yields a solution
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 FACILITY LOCATION PROBLEMS
(CROSS-MEDIAN APPROACH)

• Single Facility Location on a plane

• Consider a fast-food restaurant willing to open its operations in a
locality. It has identified the presence of a few office buildings in the
same locality which can form the major portion of the customers
availing their service. Let the geographical coordinates of these offices
are: (x1, y1), (x2, y2), …, (xk, yk) respectively with the weights assigned
in terms of potential customers be w1, w2, …., wk respectively.
• The objective is Minimization of all distances.

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 FACILITY LOCATION PROBLEMS
(CROSS-MEDIAN APPROACH)

• Locating a single facility on a plane to minimize the total

distance travelled
• Objective Function
• Minimize
• where wi is the weight for the ith location having coordinates
(xi, yi) and (xs, ys) being the coordinates for the location of the
service facility

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 FACILITY LOCATION PROBLEMS
(CROSS-MEDIAN APPROACH)

• Example: In the same fast-food restaurant example, consider

the coordinates of the 5 office building as follows: A (7,3),
B(4,8), C(2,9), D(5,3), E(7,2) with populations 300, 500, 400,
200 and 300 respectively. Find the location of the restaurant so
that the sum of rectilinear distance is minimized.

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 FACILITY LOCATION PROBLEMS
(CROSS-MEDIAN APPROACH)

• Total population is 1700

• Median of the total population in the 00s is 8.5
• Arrange all the x-coordinates
Coordinates in their increasing order as
Population follows: 2,4,5,7,7
Cumulative Population
C(2,9) 400 400
B(4,8) 500 900
D(5,3) 200 1100
E(7,2) 300 1400
A (7,3) 300 1700

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 LOCATION SET COVERING
PROBLEMS FOR PUBLIC UTILITIES

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 LOCATION SET COVERING PROBLEMS

• State government wants to open health clinics in a block having 10 villages. The villages are being depicted in the
following network where the orange line indicates whether there exists any road connectivity between the villages.
The numbers indicate the distance between the villages.
•

2 21
20
1 14 13 10 3

12 13 4 13
23 16
8
14
8 7 6
15
5
9
8
9 25
9
10 52
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 LOCATION SET COVERING PROBLEMS

• The government’s objective is to open the least number of

health centres and also ensure that each of the villages gets
the access to the health care services within a distance of
15 units
• First we need to construct the connectivity matrix

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 LOCATION SET COVERING PROBLEMS

• Connectivity Matrix

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 GREEDY ALGORITHM

• Step 1: Select the set with the maximum number of elements i.e. {1,2,7,8,9}
• If the health centre is kept in the village {7}, then it takes care of the other villages
{1}, {2}, {8} and {9}
• Step 2: Recalculate the sets as follows:
• {4},{3,4,5},{3,4,6},{3,5,6},{4,5,6,10},{5,6,10}
• Step 3: Go back to step 1 and select {4,5,6,10}
• If the health centre is kept in the village {6}, then it takes care of the other villages
{4}, {5} and {10}
• Recalculate the sets as follows: {3}
• Hence we require only 3 health centres to be stationed at the villages {7}, {6} and
{3}
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 LOCATION SET COVERING PROBLEMS

• Connectivity Matrix Sets

{1,7,8}
{2,4,7}
{3,4,5}
{2,3,4,6}
{3,5,6}
{4,5,6,10}
{1,2,7,8,9}
{1,7,8,9}
{7,8,9}
{5,6,9,10}
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 MILP FORMULATION OF LOCATION
SET COVERING PROBLEMS

( )
1 0 0 0 0 0 1 1 0 0
0 1 0 1 0 0 1 0 0S 0
Let [aij] denote the 0 0 1 1 1 0 0 0 0e 0
matrix 0 1 1 1 0 1 0 0 0t 0
representing 0 0 1 0 1 1 0 0 0s 0
[ th 𝑖𝑗 ] =
𝑎
whether the i set 0 0 0 1 1 1 0 0 0 1
covers the j th
1 1 0 0 0 0 1 1 1 0
village 1 0 0 0 0 0 1 1 1 0
0 0 0 0 0 0 1 1 1 0
0 0 0 0 1 1 0 0 1 1
Villages

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 LOCATION SET COVERING PROBLEMS

• Let us take the binary variable denoting whether the set ‘i’ be considered for
opening
• Here
• Now, denotes the number of health centres accessible from the village ‘j’
• We need to ensure that each of these villages get the access to at least one health
centre
• The objective is to minimize the number of health centres to be opened due to
budget constraints

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 LOCATION SET COVERING PROBLEMS

• The optimization problem thus can be written as:

S.T. for each j

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LAYOUT IN SERVICES

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 WAREHOUSE LAYOUT

• Deciding on aisles space and arrangement of aisles

• Deciding on stock placement pattern (both horizontally as
well as vertically)
• Objective can be to minimize overall warehouse costs
(primarily picking costs) or to maximize service level or to
maximize cube utilization
 RETAIL LAYOUT

• Arrangement of shelves, fixing of aisles and aisle

space & deciding on the breadth, length & depth of
SKU’s along with their respective adjacencies
• Objective is to maximize revenue
 OFFICE LAYOUT

• A systematic arrangement of office equipment, machines and furniture within an office,

aiming to ensuring comfort, improve functionality and hence efficiency and to improve
employees’ morale
• Objectives include
• Efficient utilization of available floor space
• Facilitate supervision
• Ensuring better ergonomics
• Improve efficiency by placing common resources within reach
• Ensuring better communication as well as coordination between various
departments
• Ensuring safety to the employees
• Facilitating discussion between cross functional teams thereby preparing
groundwork for innovation
ELECTRONIC INTERFACE OF
SERVICES: INTERMEDIARIES

• Network Effects
• Two-Sided Markets

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 INTERMEDIARIES

Platform Trusted 3rd

Dealers Infomediary
Operators Party

Most products/services are not sold directly from the suppliers to the customers as they pass through multiple intermediaries

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 NETWORK EFFECT

• When a network effect is present, the value of a product or service increases

according to the number of others using it
• Network effects become significant after a certain subscription percentage has
been achieved, called “critical mass”
• At the critical mass point, the value obtained from the good or service is greater
than or equal to the price paid for the good or service
• As the value of the good is determined by the user base, this implies that after a
certain number of people have subscribed to the service or purchased the good,
additional people will subscribe to the service or purchase the good due to the
value exceeding the price
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 TWO-SIDED MARKETS

• In the case of a two-sided market, the network effects can be same-

sided network effects as well as cross-sided network effects
• Further, these network effects can be positive as well as negative
• Same-sided positive network effect: Facebook and Microsoft Xbox owners
valuing the fact that they can play games with friends
• Same-sided negative network effect: Too many apps on Android platform
that increases the competition among the app developers
• Cross-side positive network effect: Ola, Uber
• Cross-side negative network effect: Advertisements in Newspapers

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 TWO-SIDED MARKETS

• The platform incurs costs in serving both groups and can collect revenue from
each

Costs Costs

Users Platforms Users

Revenue Revenue

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