Compared with a service operation, a manufacturing operations capacity is which of the following?

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  Inhaltsverzeichnis Show

  • Extent of Contact
  • Technical Core
  • Effect on Operations
  • Implications for Management
  • Policy Development
  • Applying the Concept
  • What is an important difference between capacity planning and services as contrasted to capacity planning in manufacturing operations?
  • When multiple usually similar products can be produced in a facility less expensively than a single product?
  • When a firms design capacity is less than the capacity required to meet its demand?
  • Is where the cost per unit of output drops as volume of output increases?

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While management skills can improve service systems, a manager is better off if he or she first has a clear understanding of the operating characteristics that set one service system apart from another. This author offers one view of services, which, if followed, results in a “rational approach to the rationalization” of services. His view, quite simply, is that the less direct contact the customer has with the service system, the greater the potential of the system to operate at peak efficiency. And, conversely, where the direct customer contact is high, the less the potential that exists to achieve high levels of efficiency. This distinction between high- and low-contact systems provides a basis for classifying service production systems that can enable the manager to develop a more effective service operation.

With the recently legislated increase in the minimum wage law in the United States and the current economic downswing in Europe, service system managers in Western economies can look forward to continued pressure to run their operations more efficiently. While most managers are aware of the success stories of companies in a few industries (notably fast foods), there is little in the way of theory to help them decide how far they should go in altering their products, technologies, work forces, and work methods in attempting to achieve the nebulous goal of an efficient production system for services.

To appreciate the nature of the problem, consider the following stereotypical comment from the operations vice president of a finance company.

“I just don’t understand it—the branch managers of our company never seem to run their offices in an efficient fashion. They rarely have the right match between lending personnel and clients demanding their services; they need more typists and clerks to do essentially the same amount of clerical duties that we perform in the home office. In my opinion, what we need is more work out of our methods department to get these branches as efficient as my home office operations. After all, we are in the same company providing the same general service to our customers.”

Much has been written about improving service company operations, and many useful distinctions have been drawn among different kinds of service operations. In this article, I wish to propose still another way of looking at service organizations, a method of analysis that can be very helpful to managers. The essential features of this method are a classification scheme for service systems and a list of leading questions to be used in developing a production policy for the service system at hand.

Extent of Contact

Service systems are generally classified according to the service they provide, as delineated in the Standard Industrial Classification (SIC) code. This classification, though useful in presenting aggregate economic data for comparative purposes, does not deal with the production activities through which the service is carried out. What the manager needs, it would seem, is a service classification system that indicates with greater precision the nature of the demands on his or her particular service system in terms of its operating requirements. In manufacturing, by contrast, there are fairly evocative terms to classify production activities (e.g., unit, batch, and mass production), which, when applied to a manufacturing setting, readily convey the essence of the process.

It is possible, of course, to describe certain service systems using manufacturing terms, but such terms, as in the case of the SIC code, are insufficient for diagnosing and thinking about how to improve the systems without one additional item of information. That item—which I believe operationally distinguishes one service system from another in terms of what they can and cannot achieve in the way of efficiency—is the extent of customer contact in the creation of the service.

To elaborate, customer contact refers to the physical presence of the customer in the system, and creation of the service refers to the work process that is entailed in providing the service itself. Extent of contact here may be roughly defined as the percentage of time the customer must be in the system relative to the total time it takes to serve him. Obviously, the greater the percentage of contact time between the service system and the customer, the greater the degree of interaction between the two during the production process.

From this conceptualization, it follows that service systems with high customer contact are more difficult to control and more difficult to rationalize than those with low customer contact. In high- contact systems, such as those listed in Exhibit I, the customer can affect the time of demand, the exact nature of the service, and the quality of service since he tends to become involved in the process itself. In low-contact systems, by definition, customer interaction with the system is infrequent or of short duration and hence has little impact on the system during the production process.

Exhibit I Classification of Service Systems by Extent of Required Customer Contact in Creation of the Service

Technical Core

One way to conceive of high- versus low-contact business is that the low-contact system has the capability of decoupling operations and sealing off the “technical core” from the environment, while the high-contact system does not. As one researcher has pointed out, “The technical core must be able to operate as if the market will absorb the single kind of product at a continuous rate, and as if inputs flowed continuously at a steady rate with specified quality.”1 Indeed, decoupling production from outside influences (for example, via inventory buffers) is a common objective in designing manufacturing systems.

Several industries provide examples of shifts in customer contact through two or more of the stages given in Exhibit I:

• Automatic banking tellers, with their 24-hour availability and their location for easy access, illustrate pure service; branch offices, with their provision of drive-in tellers, coordinated waiting lines, and often visible back offices, illustrate mixed service; and home offices, designed for efficient receipt, processing, and shipping of bank paper, illustrate quasimanufacturing.

• Airlines exhibit mixed service characteristics at their terminals (high-contact ticket counters and low-contact baggage handling), pure service characteristics within the planes, and quasimanufacturing characteristics in their billing and airplane maintenance operations.

• Blood collection stations provide an obvious example of pure service—they are (or should be) operated with the psychological and physiological needs of the donor in mind and, in fact, often take the “service” to the donor by using bloodmobiles. The blood itself is processed at specialized facilities (bloodbanks) following “manufacturing” procedures common to batch processing.

• Many consulting firms switch back and forth between pure service and quasimanufacturing. Pure service takes place when data are gathered at the client’s facility, while quasimanufacturing takes place when data are analyzed and reports are prepared at the firm’s home offices. Other firms, of course, have facilities designed for mixed service operations; their client waiting areas are planned in detail to convey a particular image, and back offices are arranged for efficient noncontact work.

Effect on Operations

Of course, the reason it is important to determine how much customer contact is required to provide a service is that it has an effect on every decision that production managers must make. Exhibit II is a list of some of the more interesting decisions relating to system design. The points made in this exhibit lead to four generalizations about the two classes of service systems.

Exhibit II Major Design Considerations in High- and Low-Contact Systems

First, high-contact systems have more uncertainty about their day-to-day operations since the customer can always make an input to (or cause a disruption in) the production process. Even in those high-contact systems that have relatively highly specified products and processes, the customer can “have it his way.” Burger King will fill special orders, TWA will (on occasion) delay a takeoff for a late arrival, a hospital operating room schedule will be disrupted for emergency surgery, and so on.

Second, unless the system operates on an appointments-only basis, it is only by happenstance that the capacity of a high-contact system will match the demand on that system at any given time.2 The manager of a supermarket, branch bank, or entertainment facility can predict only statistically the number of people that will be in line demanding service at, say, two o’clock on Tuesday afternoon. Hence employing the correct number of servers (neither too many nor too few) must also depend on probability.

Low-contact systems, on the other hand, have the potential to exactly match supply and demand for their services since the work to be done (e.g., forms to be completed, credit ratings analyzed, or household goods shipped) can be carried out following a resource-oriented schedule permitting a direct equivalency between producer and product.

Third, by definition, the required skills of the work force in high-contact systems are characterized by a significant public relations component. Any interaction with the customer makes the direct worker in fact part of the product and therefore his attitude can affect the customer’s view of the service provided.

Finally, high-contact systems are at the mercy of time far more than low-contact systems. Batching of orders for purposes of efficient production scheduling is rarely possible in high-contact operations since a few minutes’ delay or a violation of the law of the queue (first come, first served) has an immediate effect on the customer. Indeed, “unfair” preferential treatment in a line at a box office often gives rise to some of the darker human emotions, which are rarely evoked by the same unfair preferential treatment that is employed by a distant ticket agency whose machinations go unobserved by the customer.

Implications for Management

Several implications may be drawn from the foregoing discussion of differences between high-contact and low-contact systems.

To start with, rationalizing the operations of a high-contact system can be carried only so far. While technological devices can be substituted for some jobs performed by direct-contact workers, the worker’s attitude, the environment of the facility, and the attitude of the customer will determine the ultimate quality of the service experience.

Another point to keep in mind is that the often-drawn distinction between for-profit and not-for-profit services has little, if any, meaning from a production management standpoint. A not-for-profit home office can be operated as efficiently as a for-profit home office, and conversely, a high-contact for-profit branch is subject to the same inherent limitations on its efficiency as its not-for-profit counterpart.

Clearly, wherever possible, a distinction should be made between the high-contact and low-contact elements of a service system. This can be done by a separation of functions: all high-contact activities should be performed by one group of people, all low-contact activities by another. Such an adjustment minimizes the influence of the customer on the production process and provides opportunities to achieve efficiency where it is actually possible to do so.

Finally, it follows that separation of functions enhances the development of two contrasting classes of worker skills and orientations—public relations and interpersonal attributes for high-contact purposes and technical and analytical attributes for low-contact purposes. While some writers have urged mixing of duties under the general rubric of job enrichment, a careful analysis before doing so seems warranted when one recognizes the considerable differences in the skills required between high- and low-contact systems.

Policy Development

Applying the foregoing concepts for developing a production policy for services entails answering several questions:

What kind of operating system do you have?

Is it a pure service, mixed service, or quasimanufacturing? What percentage of your business activity in terms of labor hours is devoted to direct customer contact?

A good indication of where a production system falls along the contact continuum can be obtained by using the industrial engineering technique of work sampling. This approach involves taking a statistically determined random sample of work activities to find how much time is being spent in customer-contact work. The Pacific Finance Company has regularly used this method to determine if a branch office is properly staffed and if some of its paperwork activities should be shifted to the home office. Another industrial engineering technique, process charting, has been used successfully to help specify the proper balance between front office and back-office capacity in the mixed services operations of the Arizona Auto Licensing Bureau.

Are your operating procedures geared to your present structure?

Specifically, have you matched your compensation system to the nature of the service system—for example, high-contact systems based on time and low-contact systems on output? Are you appropriately allocating contact and no-contact tasks? Are you using cost or profit centers where these two measures are subject to control by the on-site manager?

Obviously, paying service workers according to the number of customers served tends to speed up service in the high-contact system. However, with the exception of extremely simple standardized operations, such as toll booths, mailing a package from a post office, and supermarket checkouts, speed of processing is not the most important element of service to the customer. Indeed, if the customer feels rushed in a hospital, bank, or restaurant, he is likely to be dissatisfied with the organization.

Further, it makes little sense for a seller of any service that can be at all customized to measure system effectiveness in terms of total number of customers served when in fact one should be giving more leisurely attention to a smaller number of “big spenders.” (The reader may verify this point by comparing the attention accorded the casino bettor at the $2 blackjack table with the amenities observed at the $25 table.)

Can you realign your operations to reduce unnecessary direct customer service?

Can tasks performed in the presence of the customer be shifted to the back office? Can you divide your labor force into high-contact and no-contact areas? Can you set up plants-within-plants to permit development of unique organizational structures for a narrower set of tasks for each subunit of the service organization?3

The idea of shifting operations to the back office has recently become popular among tax preparation companies that now take a client’s tax records and prepare a computer-processed return in his absence. Likewise, word-processing centers prepare documents in the absence of the customer, who provides original copy.

Managers have long recognized the desirability of having “attractive” personnel greet the public in such job classifications as receptionist, restaurant hostess, and stewardess, while being more concerned with technical skills on the part of those individuals removed from customer contact, such as typists, cooks, and those in maintenance positions. Plants-within-plants are typical in hospitals (e.g., labs, food service, and laundry), in insurance companies (e.g., underwriters, pool typists, and records), and in restaurants (e.g., cooking, table service, and bar).

Can you take advantage of the efficiencies offered by low-contact operations?

In particular, can you apply the production management concepts of batch scheduling, forecasting, inventory control, work measurement, and simplification to back-office operations? Can you now use the latest technologies in assembling, packaging, cooking, testing, and so on, to support front-office operations?

The production management literature offers numerous applications of the foregoing concepts to low-contact systems. One interesting example concerns the improvement of the forecasting procedure used to determine manpower requirements at the Chemical Bank of New York.4 Daily volume of transit checks (checks drawn on other banks and cashed at Chemical Bank) averages $2 billion a day, often with a $1 billion variation from day to day. The new forecasting method employs a two-stage approach using multiple regression followed by exponential smoothing to forecast daily loads in pounds of checks per day. This approach yields significant improvement in forecast accuracy over the previous intuitive methods and thereby provides a basis for effective production planning.

Can you enhance the customer contact you do provide?

With all nonessential customer-contact duties shifted, can you speed up operations, by adding part-time, more narrowly skilled workers at peak hours, keep longer business hours, or add personal touches to the contacts you do have?

The key to employing this step lies in recognizing the implications of Sasser’s and Pettway’s observation: “Although bank tellers, chambermaids, and short-order cooks may have little in common, they are all at the forefront of their employers’ public images.”5 If the low-contact portion of a worker’s job can be shifted to a different work force, then the opportunity exists to focus that worker’s efforts on critical interpersonal relations aspects.

For example, store sales personnel are frequently called on to engage in stock clerk activities, which often must take precedence over waiting on customers. However, since the salesperson’s central function is as a company representative within the store, it may be better to hire more stock clerks and free the salesperson to fulfill that personal function.

Can you relocate parts of your service operations to lower your facility costs?

Can you shift back-room operations to lower rent districts, limit your contact facilities to small drop-off facilities (a la Fotomat), or get out of the contact facilities business entirely through the use of jobbers or vending machines?

Unless it is an essential feature of the service package, or an absolute necessity for coordination purposes, managers should carefully scrutinize back-office operations before appending them to customer-contact facilities. As advocated throughout this article, high- and low-contact operations are inherently different and should be located and staffed to maximize their individual as well as joint contribution to the organization. The notion of decentralizing service depots as indicated by my examples is, of course, a well-understood marketing strategy, but it deserves additional consideration as an alternative use of service “production” capacity.

Applying the Concept

Going through the process of answering these policy questions should trigger other questions about the service organization’s operation and mission. In particular, it should lead management to question whether its strength lies in high contact or low contact, and it should encourage reflection on what constitutes an optimal balance between the two types of operations relative to resource allocation and market emphasis.

Also, the process should lead to an analysis of the organization structure that is required to effectively administer the individual departments as well as the overall organization of the service business. For example, it is quite probable that separate managements and internally differentiated structures will be in order if tight coordination between high-contact and low-contact units is not necessary. Where tight coordination is necessary, particular attention must be paid to boundary-spanning activities of both labor and management to assure a smooth exchange of material and information among departments.

References

1. James D. Thompson, Organizations in Action (New York: McGraw-Hill, 1967), p.20.

2. For a detailed discussion of capacity planning in services, see W. Earl Sasser, “Match Supply and Demand in Service Industries,” HBR November–December 1976, p. 132.

3. See Wickham Skinner, “The Focused Factory,” HBR May–June 1974, p. 113.

4. Kevin Boyd and Vincent A Mabert, “Two Stage Forecasting Approach at Chemical Bank of New York for Check Processing,” Journal of Bank Research, Summer 1977, p. 101.

5. W. Earl Sasser and Samuel H. Pettway, “Case of Big Mac’s Pay Plans,” HBR July–August 1974, p. 30.

A version of this article appeared in the November 1978 issue of Harvard Business Review.

What is an important difference between capacity planning and services as contrasted to capacity planning in manufacturing operations?

When multiple usually similar products can be produced in a facility less expensively than a single product?

When a firms design capacity is less than the capacity required to meet its demand?

Is where the cost per unit of output drops as volume of output increases?