1.6 Service Operations

As economies mature, they evolve from agrarian to industrial to service societies. Today, service industries account for 80% of both GDP and employment in the U.S.1 Simply put, service operations are a huge part of the economy—and our lives. Why is this important to you? The answer is twofold.

1. You want to enjoy a higher standard of living—now and in the future. Better living standards depend on gains in productivity as well as innovation. Future prosperity thus depends on how well we manage and improve service operations.

2. Service operations are very different from—and, in many respects, more challenging to manage than—manufacturing operations.

Figure 1.11 highlights two distinguishing characteristics of service operations: Customer contact and tangibility.

• Customer Contact: Customers rarely, if ever, touch the assembly line that builds their cars or smart phones. By contrast, customers play a key role in service delivery. For example, a doctor can't surgically repair your knee if you aren't there to participate in the process. You may, of course, be more familiar with bagging your own groceries, withdrawing money from an automated teller machine (ATM), or shopping virtually online. These last two examples show how technology is transforming how you interact with service delivery.

• Tangibility of Offering. You can't hold service offerings in your hand. They are intangible. But, you do experience them. Think, for example, about the last movie you saw in a cinema. Despite critical reviews and the ratings on Rotten Tomatoes, you really don't know if you like the movie until you "consume" it. By the time you take your seat in the theater, it's too late to return the ticket for a refund.

These two characteristics affect just about every aspect of operations management, including facility location, facility layout, inventory, scheduling, and quality management. Now, let's talk briefly about how high customer contact and intangibility make your job as an operations manager more challenging. Consider three realities of a service setting:

1. Services are consumed as they are produced.

2. Services cannot be inventoried.

3. Because customers are involved, each instance of service delivery is unique.

Services Can't Be Shipped

Customers consume services when and where they are produced; e.g., a dentist's office, a movie theater, a restaurant, or an airplane. Most of the time, customers come to the service. However, sometimes a service provider—e.g., a personal trainer, a plumber, or financial planner—comes to the customer, bringing know-how and equipment as needed.

Because services can't be shipped, you lose decision-making flexibility. Location and timing are everything. A few exceptions exist. For instance, if you can digitize a service, it can be done by anyone anywhere in the world. For example, a patient might have an MRI in Boston, which is transmitted via the Internet to Bangalore where it is analyzed, with the results being sent back the next day. Emerging technologies like additive manufacturing and autonomous vehicles may create more exceptions, increasing your decision-making flexibility. But, for now, we really don't know how new technologies will disrupt business models.

Services Can't Be Inventoried

You can't "make" services in advance and place them in inventory for future sale. Once again, customer contact and intangibility combine to constrain flexibility. What then are your options?

• Option #1: You can build for peak demand and live with excess capacity in off-peak hours—an expensive option.

• Option #2: You can build for average demand and lose sales during peak times—a brand-damaging option.

• Option #3: You can try to change consumer behavior to match demand to capacity—a great strategy if you can make it work.

The airline industry has a long history of pursuing Option #3. Airlines use "yield" management to change passenger behavior and put bodies in seats that would otherwise go unfilled. If a flight is empty, more seats are deeply discounted. As seats become scarce, fares rise. You can count on other service industries to use yield management to help them match supply to demand.

Service Delivery is Hard to Control

Customers actively interact with the service-delivery process, making each service experience unique. For instance, have you ever had to wait in line at the cinema for the customer in front of you to find a lost debit card? Or, have you been annoyed that you couldn't hear the movie because the people sitting behind you wouldn't stop talking? In either case, the customer experience is tarnished. Worse, the service provider can't do much to prevent the "defective" experience from occurring. Simply put, service providers can't control customer behavior the way a manufacturer can control the physical dimensions of a product. To the extent that you can standardize service delivery, you can improve control and productivity. But, many services resist standardization. The result: Service operations tend to be labor intensive and economies of scale are elusive.

So far, we have discussed how services and products are different. Let's pause for a moment to make a critical point: What you really need to know is that your customers want to buy solutions. Just like you, they are looking for value whenever they make a purchase decision and they want to feel good about the actual experience. Your challenge is to offer a value proposition that excites customers. Then you have to execute the design and control decision so well that you delight your customers!