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ISM 270. Service Engineering and Management Lecture 4: Service Quality. Announcements. Homework 1 due today, H omework 2 due next week Homework 3 due in 2 weeks Geoff Ryder, SAP Labs, 2 nd half of today’s lecture Anne Robinson, Cisco next week. Service Quality. Key question.

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ism 270

ISM 270

Service Engineering and Management

Lecture 4: Service Quality

announcements
Announcements
  • Homework 1 due today,
  • Homework 2 due next week
  • Homework 3 due in 2 weeks
  • Geoff Ryder, SAP Labs, 2ndhalf of today’s lecture
  • Anne Robinson, Cisco next week
key question
Key question
  • How to we ensure that our customers are having a good experience?
customer feedback and word of mouth
Customer Feedback andWord-of-Mouth
  • The average business only hears from 4% of their customers who are dissatisfied with their products or services. Of the 96% who do not bother to complain, 25% of them have serious problems.
  • The 4% complainers are more likely to stay with the supplier than are the 96% non-complainers.
  • About 60% of the complainers would stay as customers if their problem was resolved and 95% would stay if the problem was resolved quickly.
  • A dissatisfied customer will tell between 10 and 20 other people about their problem.
  • A customer who has had a problem resolved by a company will tell about 5 people about their situation.
perceived service quality
Perceived Service Quality

Word of

mouth

Personal

needs

Past

experience

Service Quality

Dimensions

Reliability

Responsiveness

Assurance

Empathy

Tangibles

Service Quality Assessment

1. Expectations exceeded

ES<PS (Quality surprise)

2. Expectations met

ES~PS (Satisfactory quality)

3. Expectations not met

ES>PS (Unacceptable quality)

Expected

service

Perceived

service

dimensions of service quality
Dimensions of Service Quality
  • Reliability: Perform promised service dependably and accurately. Example: receive mail at same time each day.
  • Responsiveness: Willingness to help customers promptly. Example: avoid keeping customers waiting for no apparent reason.
  • Assurance: Ability to convey trust and confidence. Example: being polite and showing respect for customer.
  • Empathy: Ability to be approachable. Example: being a good listener.
  • Tangibles: Physical facilities and facilitating goods. Example: cleanliness.
role of surveys
Role of Surveys
  • More pervasive now than ever
  • Focus on expectations vs. impressions
quality service by design
Quality Service by Design
  • Taguchi Methods (Robustness)
    • How well does the service perform under adverse conditions?
    • Examples include proactive policies to take advantage of down time, such as notifying maids of rooms for cleaning
  • Poka-yoke (fail-safing) Height bar at amusement park
  • Quality Function Deployment (making measurable checks on quality House of Quality
classification of service failures
Server Errors

Task:

Doing work incorrectly

Treatment:

Failure to listen to customer

Tangible:

Failure to wear clean uniform

Customer Errors

Preparation:

Failure to bring necessary materials

Encounter:

Failure to follow system flow

Resolution:

Failure to signal service failure

Classification of Service Failures
achieving service quality
Achieving Service Quality
  • Cost of Quality (Juran)
    • Accounting system to value avoided failures
  • Statistical Process Control
    • Control Chart used to monitor performance over time
    • Use confidence interval and check for outliers
    • See p130 of text (7thedition)
  • Unconditional Service Guarantee
    • How can this be done in services?
unconditional service guarantee customer view
Unconditional Service Guarantee: Customer View
  • Unconditional (No Questions Asked)
  • Easy to understand and communicate (What do I do? What compensation will I get?)
  • Meaningful (Is it worthwhile?)
  • Easy to invoke (Is it accessible?)
  • Easy to collect (On the spot?)
unconditional service guarantee management view
Unconditional Service Guarantee: Management View
  • Focuses on customers (British Airways)
  • Sets clear standards (FedEx)
  • Guarantees feedback (Manpower)
  • Promotes an understanding of the service delivery system (Bug Killer)
  • Builds customer loyalty by making expectations explicit
service process control
Service Process Control

Customer

input

Service

concept

Customer

output

Resources

Service

process

Take

corrective

action

Monitor

conformance to

requirements

Establish

measure of

performance

Identify reason

for

nonconformance

control chart of departure delays
Control Chart of Departure Delays

expected

Lower Control Limit

1998

1999

customer satisfaction
Customer Satisfaction
  • All customers want to be satisfied.
  • Customer loyalty is only due to the lack of a better alternative
  • Giving customers some extra value will delight them by exceeding their expectationsand insure their return
walk through audit
Walk-Through-Audit
  • Service delivery system should conform to customer expectations.
  • Customer impression of service influenced by use of all senses.
  • Service managers lose sensitivity due to familiarity.
  • Need detailed service audit from a customer’s perspective.
approaches to service recovery
Approaches to Service Recovery
  • Case-by-caseaddresses each customer’s complaint individually but could lead to perception of unfairness.
  • Systematic response uses a protocol to handle complaints but needs prior identification of critical failure points and continuous updating.
  • Early intervention attempts to fix problem before the customer is affected.
  • Substitute service allows rival firm to provide service but could lead to loss of customer.
discussion
Discussion
  • What is the role of information systems in service quality?
common difficult interactions with customers
Common Difficult Interactions with Customers

Unrealistic customer expectations Unexpected service failure

1. Unreasonable demands 1. Unavailable service

2. Demands against policies 2. Slow performance

3. Unacceptable treatment of 3. Unacceptable service

employees

4. Drunkenness

5. Breaking of societal norms

6. Special-needs customers

Use scripts to train for proper response

employee perceptions of customer service at a branch bank
Employee Perceptions of Customer Service at a Branch Bank

Outstanding

Terrible

Terrible

Outstanding

slide25

Is attitude emphasized?

Are job previews utilized?

Are customers screened?

Are employees encouraged to

refer friends?

Are referrals from

the “best” employees given priority?

Careful Employee

and Customer Selection

(and Self-selection))

Is training for job and life?

Is it an important element of quality of work life?

Employee

Referrals of

Potential Job

Candidates

High-Quality Training

Is satisfaction

measured periodically?

Are measurements linked to other functions on

the cycle?

Do they reflect

needs of the

service encounter?

Are they designed to foster relationships?

  • Well-Designed
  • Support Systems
  • Information
  • Facilities

Cycle

of Capability

Satisfied

Employees

Appropriate

Rewards

and Frequent

Recognition

Greater Latitude to Meet

Customer’s Needs

Does it reflect top management “talk”?

Is it enough to allow delivery of results to customers?

Are they linked to

service objectives?

Are they balanced

between monetary

and non-monetary?

Clear Limits on, and Expectations of, Employees

Do they limit the “right” risks?

Are they logical to employees?

slide26

Service Profit Chain: Nothing is independent from the rest!

Internal

External

Service concept

Operating strategy and

service delivery system

Target market

Loyalty

Revenue

growth

Customers

Satisfaction

Productivity

&

Output

quality

Service

value

Employees

Satisfaction

Loyalty

Capability

Profitability

Service

quality

Customer orientation/quality emphasis

Allow decision-making latitude

Selection and development

Rewards and recognition

Information and communication

Provide support systems

Foster teamwork

Quality & productivity improvements yield higher service quality and lower cost

Attractive Value

Service designed

& delivered to

meet targeted

customers’ needs

Solicit customer

feedback

Lifetime value

Retention

Repeat Business

Referrals

managing service inventory

Managing Service Inventory

Replenishment

order

Replenishment

order

Replenishment

order

Customer

order

Factory

Wholesaler

Distributor

Retailer

Customer

Production

Delay

Shipping

Delay

Shipping

Delay

Item Withdrawn

Wholesaler

Inventory

Distributor

Inventory

Retailer

Inventory

McGraw-Hill/Irwin

role of inventory in services
Role of Inventory in Services
  • Decoupling inventories
  • Seasonal inventories
  • Speculative inventories
  • Cyclical inventories
  • In-transit inventories
  • Safety stocks

18-29

considerations in inventory systems
Considerations in Inventory Systems
  • Type of customer demand
  • Planning time horizon
  • Replenishment lead time
  • Constraints and relevant costs

18-30

relevant inventory costs
Relevant Inventory Costs
  • Ordering costs
  • Receiving and inspections costs
  • Holding or carrying costs
  • Shortage costs

18-31

inventory management questions
Inventory Management Questions
  • What should be the order quantity (Q)?
  • When should an order be placed, called a reorder point (ROP)?
  • How much safety stock (SS) should be maintained?

18-32

inventory models
Inventory Models
  • Economic Order Quantity (EOQ)
  • Special Inventory Models With Quantity Discounts Planned Shortages
  • Demand Uncertainty - Safety Stocks
  • Inventory Control Systems Continuous-Review (Q,r) Periodic-Review (order-up-to)
  • Single Period Inventory Model

18-33

inventory levels for eoq model
Inventory Levels For EOQ Model

Units on Hand

Q

0

Q

Time

D

18-34

eoq formula
EOQ Formula
  • NotationD = demand in units per yearH = holding cost in dollars/unit/yearS = cost of placing an order in dollarsQ = order quantity in units
  • Total Annual Cost for Purchase Lots
  • EOQ

18-36

annual costs for quantity discount model
Annual Costs for Quantity Discount Model

22,000

21000

20000

2000

1000

C = $20.00

C = $19.50

C = $18.75

Annual Cost, $

0 100 200 300 400 500 600 700

Order quantity, Q

18-37

formulas for special models
Formulas for Special Models
  • Quantity Discount Total Cost Model
  • Model with Planned Shortages

18-39

values for q and k as a function of backorder cost
Values for Q* and K* as AFunction of Backorder Cost

B Q* K* Inventory Levels

0

0

0

undefined

Q*

0

18-40

safety stock ss
Safety Stock (SS)
  • Demand During Lead Time (LT) has Normal Distribution with
  • SS with r% service level
  • Reorder Point

18-41

continuous review system q r
Continuous Review System (Q,r)

Amount used during first lead time

Inventory on hand

EOQ

Reorder point, ROP

Order quantity, EOQ

d3

Average lead time usage, dL

d1

d2

EOQ

Safety stock, SS

First lead

time, LT1

LT2

LT3

Time

Order 1 placed

Order 3 placed

Order 2 placed

Shipment 1 received

Shipment 2 received

Shipment 3 received

18-42

periodic review system order up to
Periodic Review System(order-up-to)

Inventory on Hand

Review period

RP

RP

RP

Target inventory level, TIL

First order quantity, Q1

Q3

Q2

d3

d1

Amount used during

first lead time

d2

Safety stock, SS

First lead time, LT1

LT2

LT3

Time

Order 3 placed

Order 2 placed

Order 1 placed

Shipment 3 received

Shipment 1 received

Shipment 2 received

18-43

inventory control systems
Inventory Control Systems
  • Continuous Review System
  • Periodic Review System

18-44

inventory items listed in descending order of dollar volume
Inventory Items Listed in Descending Order of Dollar Volume

Monthly Percent of

Unit cost Sales Dollar Dollar Percent of

Inventory Item ($) (units) Volume ($) Volume SKUs Class

Home Theater 5000 30 150,000 74 20 A

Computers 2500 30 75,000

Television sets 400 60 24,000

Refrigerators 1000 15 15,000 16 30 B

Displays 250 40 10,000

Speakers 150 60 9,000

Cameras 200 40 8,000

Software 50 100 5,000 10 50 C

Thumb drives 5 1000 5,000

CDs 10 400 4,000

Totals 305,000 100 100

18-46

single period inventory model newsvendor problem example
Single Period Inventory ModelNewsvendor Problem Example

D = newspapers demanded

p(D) = probability of demand

Q = newspapers stocked

P = selling price of newspaper, $10

C = cost of newspaper, $4

S = salvage value of newspaper, $2

Cu = unit contribution: P-C = $6

Co = unit loss: C-S = $2

18-47

single period inventory model expected value analysis
Single Period Inventory Model Expected Value Analysis

Stock Q

p(D) D 6 7 8 9 10

.028 2 4 2 0 -2 -4

.055 3 12 10 8 6 4

.083 4 20 18 16 14 12

.111 5 28 26 24 22 20

.139 6 36 34 32 30 28

.167 7 36 42 40 38 36

.139 8 36 42 48 46 44

.111 9 36 42 48 54 52

.083 10 36 42 48 54 60

.055 11 36 42 48 54 60

.028 12 36 42 48 54 60

Expected Profit $31.54 $34.43 $35.77 $35.99 $35.33

18-48

single period inventory model incremental analysis
Single Period Inventory Model Incremental Analysis

E (revenue on last sale) E (loss on last sale)

P ( revenue) (unit revenue) P (loss) (unit loss)

(Critical Fractile)

where:

Cu = unit contribution from newspaper sale ( opportunity cost of underestimating demand)

Co = unit loss from not selling newspaper (cost of overestimating demand)

D = demand

Q = newspaper stocked

18-49

critical fractile for the newsvendor problem
Critical Fractile for the Newsvendor Problem

P(D<Q)

(Co applies)

P(D>Q)

(Cu applies)

0.722

18-50

retail discounting model
Retail Discounting Model
  • S = current selling price
  • D = discount price
  • P = profit margin on cost (% markup as decimal)
  • Y = average number of years to sell entire stock of “dogs” at current price (total years to clear stock divided by 2)
  • N = inventory turns (number of times stock turns in one year)

Loss per item = Gain from revenue

S – D = D(PNY)

18-51

dr geoffrey ryder
Dr Geoffrey Ryder
  • Corporate Research Fellow at SAP Labs
  • Pioneering Ph.D. UCSC in Computer Engineering and Technology & Information Management
  • Former co-Instructor of ISM 270
  • Formerly a Senior Embedded Systems Engineer at Embedded Performance Inc.