Dr. Scott E. Sampson

Dr. Scott Sampson

Thorsell Professor

of Service Operations

Brigham Young University

Provo, Utah, USA

Managing Across the

Regions

Managing Across the Regions 1

rev 2/16, 3/19/2013,10/6/2012

Dr. Scott E. Sampson

Managing across the regions

Managing Across the Regions 2

Provider Customer

generic beneficiary specific beneficiary

Independent

processing

Region 1

Surrogate

interaction

Region 2

Direct interaction

Region 3

Surrogate

interaction

Region 4

Independent

processing

Region 5

Customer Intensity

Characterized by

efficiency and

accomplishing

tasks according

to engineered

specifications.

Characterized

by quick and

accurate

response to

customer

requirements.

Characterized by

empathetic understanding

of and adaption to

customer needs.

Characterized

by robustness

and clear

dissemination

of customer

roles.

Characterized

by an effective

match between

customer

capabilities and

resource

features.

Dr. Scott E. Sampson

Customer Intensity“Supplier” “Customer”

Pizza Restaurant Pizza Consumer

Independent

processing

Surrogate

interaction

Direct

interaction

Direct

interaction

Surrogate

interaction

Independent

processing

develop

appetite

cook

pizza

eat

pizza

return

home

maintain

supplies

serve

pizza

wait to be

seatedseat customer

preheat

ovensreview menu

present

check

prepare

check

pay

check

eat

leftovers

wait for

pizza

create order

develop

recipes

“Customer

Intensity”

“service” process steps have

high Customer Intensity

inde-

pendent

process

steps

have low

Customer

Intensity

inde-

pendent

process

steps

have low

Customer

Intensity

Managing Across the Regions 3

Dr. Scott E. Sampson

What is Customer Intensity?

Low Customer Intensity

Customer variation has little impact

on variation in the process step.

e.g. baking bread

High Customer Intensity

Customer variation has big impact on

variation in the process step.

e.g. selling bakery items

“The degree to which variation coming from customers causes variation

in the firm’s processes.” (Sampson 2010)

The degree of influence individual customers have on the design

and execution of firm processes.

Managing Across the Regions 4

Dr. Scott E. Sampson

Why do we care about Customer Intensity?Design Factor Low Customer Intensity High Customer Intensity

Facility layoutOrganized to enhance process flow. Accommodate customer needs and

expectations.

Worker skillsFocus on efficiency and

consistency. Trained.

Focus on interaction skills and

responsiveness.

Job designTightly defined with precise steps

and cycle time.

Broadly defined.

Sales

opportunity

Mass marketing. Personal selling.

Quality controlBased on formal specifications. Based on variable standards from

customers.

Asset utilizationSchedule assets for maximum

utilization (ROI).

Balance asset utilization with

customer responsiveness.

Use of

technology

Cost/productivity issues dominate. Customer acceptance issues

dominate.

Economies of

scale

Key to cost effectiveness. Limited by variation in customer

requirements/resources.

Managing Across the Regions 5

Dr. Scott E. Sampson

Why do we care about Customer Intensity?Design Factor Low Customer Intensity High Customer Intensity

Facility layoutOrganized to enhance process flow. Accommodate customer needs and

expectations.

Worker skillsFocus on efficiency and

consistency. Trained.

Focus on interaction skills and

responsiveness.

Job designTightly defined with precise steps

and cycle time.

Broadly defined.

Sales

opportunity

Mass marketing. Personal selling.

Quality controlBased on formal specifications. Based on variable standards from

customers.

Asset utilizationSchedule assets for maximum

utilization (ROI).

Balance asset utilization with

customer responsiveness.

Use of

technology

Cost/productivity issues dominate. Customer acceptance issues

dominate.

Economies of

scale

Key to cost effectiveness. Limited by variation in customer

requirements/resources.

Managing Across the Regions 6

Dr. Scott E. Sampson

Buying furniture at Ethan Allen

•Facility layout: aesthetic.

•Worker skills: domain experts.

•Job design: broad.

•Sales opportunity: personal.

•Quality control: experiential.

•Asset utilization: low.

•Use of technology: limited.

•Economies of scale: low.

Supplier Customer

Ethan Allen furniture purchaser

Independent

processing

Surrogate

interaction

Direct

interaction

Direct

interaction

Surrogate

interaction

Independent

processing

trash old

furniture

browse

showroom

fabricate

furniture

ship to retail

stores

make

selection

purchase

item

transport

home

use item

in stock?

backorder

item

fill

backorder

get/give

advicedesign

furniture

offerings

yes

no

Ethan Allen

sales process has

high Customer

Intensity

Managing Across the Regions 7

Dr. Scott E. Sampson

Buying furniture at IKEASupplier Customer

IKEA furniture purchaser

Independent

processing

Surrogate

interaction

Direct

interaction

Direct

interaction

Surrogate

interaction

Independent

processing

trash old

furniture

browse

store

fabricate

furniture

kits

ship to

retail

stores

make

selection

transport

item to

register

purchase

item

transport

home

use item

assemble

item

design

furniture

offerings

Facility layout: functional.

Worker skills: trained.

Job design: tight.

Sales opportunity: mass marketing.

Quality control: engineered.

Asset utilization: high.

Use of technology: extensive.

Economies of scale: high.

IKEA sales

process has low

Customer Intensity

Managing Across the Regions 8

Dr. Scott E. Sampson

Capacity Management

Managing Across the Regions 9

Dr. Scott E. Sampson

The two great entities

Provider

• generic beneficiary

• has capability

• what can do

• has capacity

• how much can do

Customer

• specific beneficiary

• has needs

• provides “demand”

Managing Across the Regions 10

Dr. Scott E. Sampson

Capacity and demand

Provider Capacity

• determined by resources

• labor

• equipment

• facilities

• availability of components

• specified as units / time

• generally pretty stable

Customer Demand

• determined by needs

• variable needs

• variable timing

• generally not very stable

Managing Across the Regions 11

Utilization = Demand / Capacity

Dr. Scott E. Sampson

Calculating utilization

Capacity

• 3 minutes per sandwich

• 20 sandwiches per hour

• store open 7am-10pm

• 15 hours

• x20 sandwiches per hour

• 300 sandwiches per day

Demand

customers arrive per hour

• 7am-noon: 8 x 5 = 40

• noon-2pm: 20 x 2 = 40

• 2pm-5pm: 10 x 3 = 30

• 5pm-7pm: 15 x 2 = 30

• 7pm-10pm: 10 x 3 = 30

• Total for day = 170

Managing Across the Regions 12

Utilization = Demand / Capacity

170 / 300 = 57% utilization

Dr. Scott E. Sampson

Team activityEstimate annual capacity utilization for…

1. a ski resort

2. the classroom we meet in

3. a college sports arena

4. a bicycle factory

When does idleness occur?

How do they manage utilization?

Managing Across the Regions 13

Utilization = Demand / Capacity

Dr. Scott E. Sampson

Matching capacity to demand

• forecast demand

• capacity planning strategies

• peak demand strategy

• level production strategy

• chase strategy

• The mismatch between demand and capacity?

Managing Across the Regions 14

Dr. Scott E. Sampson

Dealing with the mismatch

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Capacity

Demand

Managing Across the Regions 15

Dr. Scott E. Sampson

Bike rider

process domain

interaction Independent processing

Bike manufacturer

process domain

Independent processing interaction

Dealing with the mismatch?

Managing Across the Regions 16

produce

bikesell bike ride bike

Dr. Scott E. Sampson

Driver

process domain

interaction Independent processing

Toyota

process domain

Independent processing interaction

Dealing with the mismatch?

Managing Across the Regions 17

produce

carsell car drive car

Dr. Scott E. Sampson

Utilization of interactive capacity

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Demand

Managing Across the Regions 18

Dr. Scott E. Sampson

Matching interactive capacity to demand

• capacity planning strategies

• level production strategy – customers wait ()

• peak demand strategy – provider waits ($$$)

• chase strategy – part-time resources

• shared capacity strategy

• demand management strategies

• shifting demand to low utilization times

Managing Across the Regions 19

Dr. Scott E. Sampson

Inactivity Based Costing

Activity Based Costing

• Cost of each item of

production depends on

use of capacity.

• Capacity generally a fixed

cost.

• Assumes capacity fully

utilized.

Inactivity Based Costing

• Capacity generally a fixed

cost.

• IF capacity far from fully

utilized?

• Required contribution

required of each item

depends on utilization.

• E.g., MRI machine,

airplane, Seven Peaks

water park.

Managing Across the Regions 20

Dr. Scott E. Sampson

Dealing with the mismatch?

Independent Processing

• When to produce?

• How much to produce?

• Considering costs…

• cost to produce

• holding cost of inventory

• cost of running out

Interactive Process

• How much capacity?

• to meet customer demand

• not have excessive idle

capacity

• not have excessive idle

customers

Managing Across the Regions 21

Inventory Theory Queuing Theory

Dr. Scott E. Sampson

Reducing cost of waiting“Psychology of Queuing”

see SM-slides/Sampson Psychology of Queuing

Managing Across the Regions 22

Dr. Scott E. Sampson

Summary

• Interactive processes are governed by different

management principles than independent

processing…

• customer intensity

• inability to inventory

• customer waiting

• Customer inventory is costly…

• costs difficult to measure

• but costs can be reduced

Managing Across the Regions 23

Dr. Scott E. Sampson

Interactive Marketing:

Marketing through Operations

see SM-slides/Sampson Service Marketing

Managing Across the Regions 24

Dr. Scott E. Sampson

Service Provider’s Process Domain Customer’s Process Domain

Independent

processing

Surrogate

interaction

Direct

interaction

Direct

interaction

Surrogate

interaction

Independent

processing

Three types of marketing

marketing

to

customers

marketing

for

customers

marketing with customers

source: Steve Vargo

“With services, the most

influential marketing

employees are production

employees. The focus of

marketing departments is

to attract new customers,

but production employees

often have the primary

responsibility of retaining

current customers.”(SBP 9b: The Who's Who of Marketing)

Managing Across the Regions 25