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Breaking the Trade-Off Between Efficiency and Service

• Manufacturing Environment: Variability MUST be eliminated

• Services Environment: All variability CANNOT be eliminated– Customers measure quality of service by how

their variability is accommodated– Impossible since customers are an input

• Reality: Customers introduce variability but complain about inconsistency

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Five Types of Customer Induced Variability

1. Arrival Variability• Customers request service at different

times• Do not always want service when

convenient for company

2. Request Variability• Represented by

substitutions/customizations

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Five Types of Variability (Cont’d)

3. Capability Variability• Extent of customer knowledge, skill, etc.

4. Effort Variability• Degree of customer willingness

5. Subjective Preference Variability• Customers have different opinions or

preferences as to how they evaluate service

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Reduction Strategy• Classic reduction strategy: the restaurant menu

– By their nature are a way to constrain variability– For customers to order “off menu” is part of a premier

dining experience– When the restaurant does not accommodate special

orders:• They reduce the complexity of the operating environment• May diminish service quality

• Companies that use the reduction strategy tend to attract customers, who are willing to trade-off an excellent service experience for low prices

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Uncompromised Reduction• Companies can reduce the impact of variability

by targeting customers on the basis of variability type

• e.g., colleges choose students whose test scores fall within a narrow band, therefore the school does not have to support more than one curriculum

• Companies can benefit from reduced variability without requiring customers to adjust

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Accommodation Strategies• Involves experienced employees to compensate

for the variations among customers• Employees are making adaptations to “protect”

the customer from making their own adjustments• Costs more and force the company to bear the

brunt of the variability• Only high-end companies can command such a

premium• Success of the strategy hinges on the

company’s ability to persuade customers to pay more to cover the added expenses

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Low-Cost Accommodation• Companies are persuading customers to

serve themselves• The service experience varies with

customers’ capability and effort• Effective for high arrivals or request

variability• Customers need to feel compensated in

some way: low prices, greater customization

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Matrix of Classic Trade-Off• Managing customer –

introduced variability does not have to come down to a stark trade-off between cost and quality

• Other options exist – those above the diagonal which let companies offer a high level of accommodation at low cost or reduced variability without damaging the service experience

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Solutions in Practice

• Arrival and Request Variability– Dell

• New products would demand responsive service• Options: reduce variability or accommodate variability• Solution:

– Third Party Service– Risk– Successful

Strategy: low cost accommodation

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Solutions in Practice (Cont’d)• Capability Variability

– Starbucks• Customers have many options• Solution:

– Teach customers proper way to order– Successful

Strategy: uncompromised reduction• Effort Variability

• Instrumental Means– Zipcar, daycare center, video rentals

• Normative Means– Ebay

Strategy: Changing customers’ behavior

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Solutions in Practice (Cont’d)

• Subjective Preference Variability– Tiffany & Company

• Crowded stores• Solution:

– Beepers– Not successful

– Southwest Airlines• Chaotic boarding process• Solution:

– Experimental assigning seats– Not successful

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Steps in Managing Customer Behavior

• Diagnose the problem– Must understand the roof cause of the

problem• Design a mutually beneficial operating role

for customers• Test and Improve on the solution