Service

Management
Operations, Strategy,
Information Technology Seventh Edition

James A. Fitzsimmons
Seay Professor of Business Emeritus
University of Texas at Austin

Mona J. Fitzsimmons

Me
Grauu

Boston Burr Ridge, IL Dubuque, IA Madison, Wl New York San Francisco St. Louis
Bangkok Bogota Caracas Kuala Lumpur Lisbon London Madrid Mexico City
Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto
Table of Contents
PART ONE Nature of Demand and Capacity 28
Method of Service Delivery 28
UNDERSTANDING SERVICES 1
Service-Dominant Logic 30
Chapter 1 An Open-Systems View of Services 31
Service Benchmark: Outside the Box 32
The Role of Services in an Economy 3 Summary 32
Learning Objectives 3 Key Terms and Definitions 33
Chapter Preview 4 Topics for Discussion 33
Service Definitions 4 Interactive Exercise 33
Facilitating Role of Services in an Economy 4 Case 2.1: Village Volvo 33
Economic Evolution 5 Case 2.2: Xpresso Lube 34
Stages of Economic Development 6 Selected Bibliography 36
Preindustrial Society 1 Endnotes 36
Industrial Society 7
Postindustrial Society 8 Chapter 3
Nature of the Service Sector 9 Service Strategy 37
The 21st Century Career 10
New Experience Economy 11 Learning Objectives 37
Consumer Service Experience 11
Chapter Preview 37
Business Service Experience 12
The Strategic Service Vision 38
Sources of Service Sector Growth 13 Understanding the Competitive Environment
Information Technology 13
of Services 40
Innovation 14
Competitive Service Strategies 41
Overall Cost Leadership 41
Changing Demographics 14
Differentiation 42
Service Benchmark: Walmart Is Number One
Focus 43
on the Fortune 500 List 15
Summary 15 Strategic Analysis 43
Porter's Five Forces Analysis 43
Key Terms and Definitions 15,
SWOT Analysis: Strengths, Weaknesses, Opportunities,
Topics for Discussion 15
Threats 44
Interactive Exercise 16
Selected Bibliography 16 Winning Customers in the Marketplace 45
Endnotes 16 Qualifiers 46
Service Winners 46
Service Losers 46
Chapter 2
The Competitive Role of Information in Services 46
The Nature of Services 17 Creation of Barriers to Entry 46
Learning Objectives 17 Revenue Generation 48
Chapter Preview 18 Database Asset 49
Distinctive Characteristics of Service Operations 18 Productivity Enhancement 49
Customer Participation in the Service Process 18 The Virtual Value Chain 51
Simultaneity 19 First Stage (New Processes) 52
Perishability 20 Second Stage (New Knowledge) 52
Intangibility 20 Third Stage (New Products) 53
Heterogeneity 21 Fourth Stage (New Relationships) 53
Non-ownership Characteristic of Services 21 Limits in the Use of Information 53
The Service Package 22 Anticompetitive 53
Grouping Services by Delivery Process 23 Fairness 53
Classifying Services for Strategic Insights 26 Invasion of Privacy 53
Nature of the Service Act 26 Data Security 53
Relationship with Customers 27 Reliability 54
Customization and Judgment 27 Using Information to Categorize Customers 54

xii
 Table of Contents xiii

Stages in Service Firm Competitiveness 54 \ Chapter 5

Available for Service 54 Technology in Services 95
Journeyman 56
Distinctive Competence Achieved 56 *'
Learning Objectives 95
World-Class Service Delivery 56
Chapter Preview 96
Service Benchmark: Central Market Shuns Conventional Technology in the Service Encounter 96
Wisdom and Big-Name Products 57 The Emergence of Self-Service 97
Summary 57 Automation in Services 98
Key Terms and Definitions 58 The Internet as a Service Enabler 100
Interactive Exercise 58 E-Commerce 100
Virtual versus Physical Services 101
Topics for Discussion 59
Case 3.1: United Commercial Bank and El Banco 59 E-Business Models 103
Case 3.2: The Alamo Drafthouse 61 Economics of Scalability 103
Selected Bibliography 63 Technological Innovation in Services 104
Endnotes 63 Challenges of Adopting New Technology in Services 105
Readiness to Embrace New Technology 106
The Case of Radio Frequency Identification 106
PART TWO Service Benchmark: Best-in-Practice Is Just a
DESIGNING THE SERVICE Click Away 107
ENTERPRISE 65 Summary 107
Key Terms and Definitions 107
Chapter 4 Topics for Discussion 107
New Service Development 67 Interactive Exercise 108
Learning Objectives 67 Case 5.1: Amazon.com 108
Chapter Preview 68 Case 5.2: Evolution of B2C E-Commerce in Japan 109
Innovation in Services 68 Selected Bibliography 111
New Service Development 70 Endnotes 112
Service Design Elements, 72 ;
Customer Value Equation 73 Chapter 6
Strategic Positioning through Process Service Quality 115
Structure 74
Service Blueprinting 75 Learning Objectives 115
Taxonomy for Service Process Design 77 Chapter Preview 115
Degree of Divergence 78 Defining Service Quality 116
Object of the Service Process 78 Dimensions of Service Quality 116
Type of Customer Contact 78 Gaps in Service Quality 117
Generic Approaches to Service System Design 79 Measuring Service Quality 119
Production-Line Approach 79 SERVQUAL 119
Customer as Coproducer 81 Quality Service by Design 120
Customer Contact Approach 82 Incorporation of Quality in the Service Package 120
Information Empowerment 84 Taguchi Methods 120
Intellectual Property 85 Poka-Yoke (Failsafing) 121
Service Benchmark: Ten Things Google Has Found to Quality Function Deployment 123
Be True 86 Walk-Through Audit 124
Summary 86 Designing a Walk-Through Audit 125
Key Terms and Definitions 87 The Walk-Through Audit as a Diagnostic Instrument 128
Topics for Discussion 87 Achieving Service Quality 129
Interactive Exercise 87 Cost of Quality 129
Case 4.1: 100 Yen Sushi House 87 Statistical Process Control 130
Case 4.2: Commuter Cleaning—A New Venture Unconditional Service Guarantee 134
Proposal 88 Service Recovery 136
Case 4.3: Golfsmith 90 Approaches to Service Recovery 136
Selected Bibliography 91 Complaint Handling Policy 137
Endnotes 93 Stages in Quality Development 138
xiv Table of Contents

Service Benchmark: Bronson Methodist Chapter 8

Hospital 139 Process Improvement 181
Summary 139
Learning Objectives 181
Key Terms and Definitions 140
Chapter Preview 181
Topics for Discussion 140 Quality and Productivity Improvement Process 182
Interactive Exercise 140 Foundations of Continuous Improvement 182
Solved Problems 140 Plan-Do-Check-Act (PDCA) Cycle 182
Exercises 142 Problem Solving 183
Case 6.1: Clean Sweep, Inc. 144 Quality Tools for Analysis and Problem Solving 184
Case 6.2: The Complaint Letter 146 Check Sheet 184
Case 6.3: The Museum of Art and Design 148 Run Chart 184
Selected Bibliography 149 Histogram 184
Endnotes 152 Pareto Chart 185
Flowchart 185
Cause-and-Effect Diagram 186
Chapter 7 Scatter Diagram 187
Supporting Facility and Process Flows 153 Control Chart 187
Benchmarking 188
Learning Objectives 153
Improvement Programs 189
Chapter Preview 154 Personnel Programs for Quality Assurance 189
Environmental Psychology and Orientation 154 Deming's 14-Point Program 190
Servicescapes 154 Baldrige National Quality Award 191
Behaviors in Servicescapes 155 ISO 9000 192
Environmental Dimensions of Servicescapes 156 Six Sigma 192
Facility Design 158 Lean Service 195
Nature and Objectives of Service Organizations 158 Summary 196
Land Availability and Space Requirements 159 Service Benchmark: Service, Education, and
Flexibility 159 ' Health Care Winners of The Baldrige National
Security 159 Quality Award 197
Aesthetic Factors 160 Key Terms and Definitions 19 8
The Community and Environment^ 160 Topics for Discussion 198
Process Analysis 161 Interactive Exercise 198
Types of Processes 161 Case 8.1: Senora County Sheriff 198
Flowcharting 161 Case 8.2: Mega Bytes Restaurant 199
Gantt Chart 162 Chapter 8 Supplement: Data Envelopment
Process Terminology 163 Analysis (DEA) 203
Facility Layout 165 Measuring Service Productivity 203
Product Layout and the Work Allocation Problem 165 The DEA Model 203
Process Layout and the Relative Location Problem 166 DEA and Strategic Planning 209
Service Benchmark: Where, Oh Where Shall Exercises 210
We Go? 170 Case 8.3: Mid-Atlantic Bus Lines 210
Summary 170 Selected Bibliography 211
Key Terms and Definitions 171 Endnotes 211
Topics for Discussion 171
Interactive Exercise 171
Solved Problems 171 Chapter 9
Exercises 174 The Service Encounter 213
Case 7.1: Health Maintenance Organization (A) 177 Learning Objectives 213
Case 7.2: Health Maintenance Organization (B) 177 Chapter Preview 214
Case 7.3: Esquire Department Store 178 The Service Encounter Triad 214
Case 7.4: Central Market 179 Encounter Dominated by the Service Organization 215
Selected Bibliography 180 Contact Personnel-Dominated Encounter 215
Endnotes 180 Customer-Dominated Encounter 215
 Table of Contents xv

The Service Organization 215 \ Exercises 256

Culture 216 Case 10.1: Health Maintenance Organization (C) 258
Empowerment 217 '.-, Case 10.2: Athol Furniture, Inc. 259
Control Systems 217 \ Selected Bibliography 261
Contact Personnel 218 Endnotes 262
Selection 218
Training 219 PART THREE
Creating an Ethical Climate 220
MANAGING SERVICE OPERATIONS 263
The Customer 221
Expectations and Attitudes 221 Chapter 11
The Role of Scripts in Coproduction 222 Managing Capacity and Demand 265
Summary of Service Encounters 223
Creating a Customer Service Orientation 223 Learning Objectives 265
Service Profit Chain 224 Chapter Preview 265
Summary 226 Generic Strategies of Level Capacity or Chase
Service Benchmark: Miss Manners on Complaint Demand 266
Handling 227 Strategies for Managing Demand 266
Key Terms and Definitions 228 Customer-Induced Variability 266
Topics for Discussion 228 Segmenting Demand 267
Interactive Exercise 228 Offering Price Incentives 268
Case 9.1: Amy's Ice Cream 228 Promoting Off-Peak Demand 269
Case 9.2: Enterprise Rent-A-Car 229 Developing Complementary Services 270
Selected Bibliography 232 Reservation Systems and Overbooking 270
Endnotes 234 Strategies for Managing Capacity 272
Defining Service Capacity 272
Daily Workshift Scheduling 273
Chapter 10 Weekly Workshift Scheduling with Days-Off Constraint 275
Service Facility Location 235 Increasing Customer Participation 276
Learning Objectives 235 Creating Adjustable Capacity 276
Chapter Preview 236 Sharing Capacity 277
Strategic Location Considerations 236 Cross-Training Employees 277
Competitive Clustering .237 Using Part- Time Employees 277
Saturation Marketing 237 Scheduling Part-Time Tellers at a Drive-In Bank 277
Marketing Intermediaries 238 Yield Management 278
Substitution of Communication for Travel 238 Yield Management Applications . 283
Separation of Front from Back Office 238 Summary 284
Impact of the Internet on Service Location 239 Service Benchmark: Pay Up Front and Take Your
Site Considerations 239 • Chances 285
Regression Analysis in Location Decisions 240 Key Terms and Definitions 285
Geographic Information System 240 Topics for Discussion 285
Modeling Considerations 242 Interactive Exercise 285
Geographic Representation 242 Solved Problems 285
Number of Facilities 244 Exercises 288
Optimization Criteria 244 Case 11.1: River City National Bank 290
Facility Location Techniques 246 Case 11.2: Gateway International Airport 291
Cross Median Approach for a Single Facility 247 Case 11.3: The Yield Management Analyst 293
Huff Model for Retail Outlet 249 Case 11.4: Sequoia Airlines 295
Location Set Covering for Multiple Facilities 251 Selected Bibliography 296
Summary 252 Endnotes 298
Service Benchmark: Here a Bun, There a Bun,
Everywhere a Bun-Bun 253
Chapter 12
Key Terms and Definitions 253 Managing Waiting Lines 299
Topics for Discussion 254 . Learning Objectives 299
Interactive Exercise 254 Chapter Preview 300
Solved Problems 254 The Economics of Waiting 300
xvi Table of Contents

Queuing Systems 300 Summary 336

The Psychology of Waiting 301 Service Benchmark: Citizens Come First in
That Old Empty Feeling 302 Lynchburg 337
A Foot in the Door 302 Key Terms and Definitions 337
The Light at the End of the Tunnel 302 Topics for Discussion 337
Excuse Me, But I Was Next 303 Interactive Exercise 337
Principles of Waiting Line Management 303 Case 13.1: Boomer Consulting, Inc. 338
Animate 304 Case 13.2: Peapod—Smart Shopping for Busy
Discriminate 304 People 340
Automate 305 Case 13.3: Mortgage Service Game 342
Obfuscate 305 Selected Bibliography 344
Essential Features of Queuing Systems 306 Endnotes 344
Calling Population 306
Arrival Process 306 Chapter 14
Queue Configuration 310
Globalization of Services 345
Queue Discipline 312
Service Process 313 Learning Objectives 345
Summary 314 Chapter Preview 346
Service Benchmark: Five Minutes in Line Is Longer Domestic Growth and Expansion Strategies 346
than Five Minutes at Hard Labor 315 Focused Service 346
Key Terms and Definitions 315 Focused Network 347
Topics for Discussion 315 Clustered Service 348
Interactive Exercise 315 Diversified Network 348
Solved Problems 316 Franchising 348
Exercises 316 The Nature of Franchising 349
Case 12.1: Thrifty Car Rental 316 Benefits to the Franchisee 349
Case 12.2: Eye'll Be Seeing You 317 Issues for the Franchiser 350
Case 12.3: Field Study 318, Globalization of Services 351
Selected Bibliography 319 Generic International Strategies 352
Endnotes 320 The Nature of the Borderless World 353
Planning Transnational Operations 354
Chapter 13 Global Service Strategies 357
Multicountry Expansion 358
Service Supply Relationships 321 Importing Customers 358
Learning Objectives 321 Following Your Customer 359
Chapter Preview 321 Service Offshoring 359
Supply Chain Management 322 Beating the Clock 360
Network Model 322 Service Benchmark: Small World and Other
Managing Uncertainty 323 Myths 360
Service Supply Relationships 324 Summary 361
Customer-Supplier Duality 324 Key Terms and Definitions 361
Service Supply Relationships Are Hubs, Topics for Discussion 361
Not Chains 325 Interactive Exercise 361
Service Capacity Is Analogous to Inventory 326 Case 14.1: Goodwill Industries International, Inc. 362
Customer Supplied Inputs Can Vary in Quality 326 Case 14.2: Federal Express: Tiger International
Managing Service Relationships 326 Acquisition 364
Bidirectional Optimization 326 Selected Bibliography 366
Productive Capacity 328 Endnotes 367
Perishability 328
Professional Service Firms 329 Chapter 15
Attributes of Professional Services 329
Managing Service Projects 369
Operational Characteristics 329
Outsourcing Services 332 Learning Objectives 369
Benefits and Risks of Outsourcing Services 332 Chapter Preview 369
Classification of Business Services 334 The Nature of Project Management 370
Managerial Considerations with Service Outsourcing 334 Characteristics of Projects 3 70
 Table of Contents xvii

Project Management Process 370 \ Average Customer Waiting Time 420

Selecting the Project Manager 3 71 Probability of Excessive Waiting 421
Building the Project Team 371 \ Minimizing the Sum of Customer Waiting Costs
Principles of Effective Project Management 372 \ and Service Costs 422
Techniques for Project Management 372 Probability of Sales Lost Because of Inadequate Waiting
Gantt Project Charts 3 72 Area 423
A Critique of Gantt Charts 374 Summary 424
Constructing a Project Network 3 74 Service Benchmark: When More Is Better 425
Critical Path Method 3 75 Key Terms and Definitions 425
Microsoft Project Analysis 378 Topics for Discussion 425
Resource Constraints 381 Interactive Exercise 426
Activity Crashing 381 Solved Problems 426
Incorporating Uncertainty in Activity Times 386 Exercises 428
Estimating Activity Duration Distributions 386 Case 16.1: Houston Port Authority 430
Project Completion Time Distribution 387 Case 16.2: Freedom Express 431
A Critique of the Project Completion Time Analysis 388 Case 16.3: Renaissance Clinic (A) 431
Problems with Implementing Critical Path Chapter 16 Supplement: Computer
Analysis 390 Simulation 432
Monitoring Projects 390 Systems Simulation 433
Earned Value Chart 390 Simulation Methodology 433
Project Termination 392 Monte Carlo Simulation 435
Project History Report 392 Generating Random Variables 435
Summary 392 Discrete-Event Simulation 438
Service Benchmark: The House That Warren Built 393 ServiceModel Simulation Software 440
Key Terms and Definitions 393
Demonstration: Customer Service Call Center 442
Topics for Discussion 393
Process Analysis: Manufacturing Cell 443
Interactive Exercise 394
Solved Problems 445
Solved Problems 394 ,
Exercises 447
Exercises 395
Case 16.4: Pronto Pizza 451
Case 15.1: Info-Systems, Inc. 400
Case 16.5: Renaissance Clinic (B) 451
Case 15.2: Whittier County Hospital 401
Selected Bibliography 452
Selected Bibliography 402
Endnotes 452
Endnotes 403
Chapter 17
Forecasting Demand for Services 453
PART FOUR
QUANTITATIVE MODELS FOR Learning Objectives 453
Chapter Preview 453
SERVICE MANAGEMENT 405 The Choice of Forecasting Method 454
Subjective Models 454
Chapter 16 Delphi Method 455
Capacity Planning and Queuing Models 407 Cross-Impact Analysis 456
Historical Analogy 456
Learning Objectives 407 Causal Models 457
Chapter Preview 408 Regression Models 457
Capacity Planning 408 Econometric Models 458
Strategic Role of Capacity Decisions 409 Time Series Models 458
Analytical Queuing Models 410 N-Period Moving A verage 458
Relationships between System Characteristics 412 Simple Exponential Smoothing 459
Standard MM/1 Model 412 Relationship between a. and N 461
Standard M/M/c Model 414 Forecast Error 462
M/G/l Model 417 Exponential Smoothing with Trend Adjustment 463
General Self-Service M/G/«> Model 418 Exponential Smoothing with Seasonal Adjustment 464
Finite-Queue M/M/l Model 418 Exponential Smoothing with Trend and Seasonal
Finite-Queue M/M/c Model 419 Adjustments 466
Capacity Planning Criteria 420 Summary of Exponential Smoothing 469
xviii Table of Contents

Service Benchmark: Googling the Future 469 Single-Period Model for Perishable Goods 495
Summary 469 Expected Value Analysis 496
Key Terms and Definitions 470 Marginal Analysis 496
Topics for Discussion 470 Retail Discounting Model 498
Interactive Exercise 470 Service Benchmark: A Chip in Time Isn't Stale 499
Solved Problems 470 Summary 499
Exercises 473 Key Terms and Definitions 499
Case 17.1: Oak Hollow Medical Evaluation Topics for Discussion 500
Center 473 Interactive Exercise 500
Case 17.2: Gnomial Functions, Inc. 475 Solved Problems 500
Selected Bibliography 476 Exercises 502
Endnotes 476 Case 18.1: A.D. Small Consulting 507
Case 18.2: Last Resort Restaurant 508
Chapter 18 Case 18.3: Elysian Cycles 508
Managing Service Inventory 477 Selected Bibliography 509
Learning Objectives 477 Endnotes 509
Chapter Preview 478 Appendix A: Areas of Standard Normal
Inventory Theory 479 Distribution 510
Role of Inventory in Services 479 Appendix B: Uniformly Distributed Random
Characteristics of Inventory Systems 480 Numbers [0,1] 511
Relevant Costs of an Inventory System 481
Appendix C: Values of Lq for the MIMIc Queuing
Order Quantity Models 481
Model 512
Economic Order Quantity 482
Inventory Model with Quantity Discounts 485 Appendix D: Equations for Selected Queuing
Inventory Model with Planned Shortages 487 Models 514
Inventory Management under Uncertainty 490 Name Index 519
Inventory Control Systems 491 Subject Index 525
Continuous Review System 491
Periodic Review System 492
The ABCs of Inventory Control 494