How Service Operations Differ from Manufacturing Operations - Case Study Example

Discuss how service operations are different from manufacturing operations and explain how service operations can benefit from implementing manufacturing approaches and system I. Introduction Operations in the service industry are different from manufacturing operations because service oriented company produce goods that are intangible compared to manufacturing companies whose products can easily be described by its specifications (Wienclaw 2008). Such instituting mechanisms and methodologies to improve service delivery can be difficult due to their intangibility, heterogeneity and inseparability (Smith 2011). Unlike in manufacturing companies where there are several points to institute control that can rectify the process or test the quality of the product so that substandard products can be rejected before it reaches the customer, instituting control to improve and control the quality of service in service oriented companies can be very difficult and costly. Waste in the process or fail points are not obvious in service operations that efforts to reduce cost and control quality before they reach the customer can be very difficult (Wienclaw 2008). This makes the operations of many service oriented companies costly with many customers dissatisfied with the service they received. The need to align service delivery in accordance to customer expectations and the market imperative to reduce cost to remain competitive in the market, however, compels the operations of service oriented industry to adopt and implement manufacturing approaches and systems. By implementing manufacturing approaches and systems, the cost of operations in service oriented companies are being reduced such as the case of McDonalds as stated in this paper. The implementation of quality control system such as Six Sigma also enabled Bank of America not only to increase the level of its customer’s satisfaction but also saved the company $2 billion in expenditures related to areas where Six Sigma was implemented. II. How service operations are different from manufacturing operations.  The most obvious difference between a service operations and manufacturing operations are the products they produce. Service operations sell service that has no physical presence while manufacturing operations produces concrete products that has a physical existence. Unlike manufacturing operations that produces concrete products whose quality can easily determined by its specifications, service operations differs from manufacturing operations because its output is often evaluated in terms of customer experience. Activities of a service operation are often based on the quality, speed, competence and courtesy of its delivery that is not easily quantifiable that could be subjected to the relativity of customer’s experience (Wienclaw 2008). The factors that determine a good service cannot be easily quantified because of the difficulty of operationally defining what makes a good service delivery. Unlike in manufacturing where fail points in its process can be easily determined and substandard products can be readily rejected before reaching the customer, service operations outputs are subjected to perceptions and expectations of the customer which are relative (Wienclaw 2008). For example, walking through a novice customer in a step by step computer troubleshooting procedure may be very helpful that would constitute a good customer service but the same could also be annoying to a technically proficient customer that could affect the overall customer satisfaction. The differences of service operations from manufacturing operations can be categorized in the factors of intangibility, heterogeneity, inseparability and perishability that make services difficult to control and improve. Intangibility – plainly, service cannot be recognized by any of the five senses. Unlike in manufacturing operations whose outputs are concrete, services rendered by a service oriented company cannot be seen, touched, smelled, heard, or tasted (Kotler et al. 2004). It can only be experienced. Service does not have a physical presence where it can be easily subjected to statistical quantification to make control easier. A certain product that is produced by a manufacturing operation can easily determined if it meets the quality specification by merely subjecting it to the quality test. In the same vein, it would be difficult to determine what constitutes a good hairstyle in a beauty salon business because the dimensions of what make a good hairstyle are difficult to define. Heterogeneity – the variability of the interaction between the customer and service provider makes the quality of service dependent on a “number of factors, including the personalities and expectations of each of the parties involved” (Wienclaw 2008:2). Heterogeneity can be best described as the relativity of customer perception of a certain service rendered. A certain degree of customer service rendered on one customer may tend to be helpful that will construe customer satisfaction while the same may be an annoyance to another customer that could result in customer dissatisfaction. To illustrate, a certain customer who is a novice in computer may appreciate a step by step assistance in walking through the troubleshooting procedure while an expert may find the same type of service annoying. Inseperability – meant that customer does not separate production and consumption and most customers do not “differentiate between the quality of the product and the quality of the service” (Wienclaw 2008:2). This is common in the software industry where customers end up dissatisfied with the product when the accompanying technical support did not meet customer’s expectation. The opposite could also be true when a certain product does not meet the customer’s expectation that the customer service accompanying it suffers no matter how high the quality of the service rendered. Unlike in sole manufacturing operations, the company is gauge solely by the quality of the product it sells to its consumers. Perishability – meant that service cannot be stored and inventories where it can be sold at a future date. In the service industry, unused service can be considered as perishable because it can no longer be sold in the future dates (Kotler et al 2004). This is particularly true among airline and cruise companies where unsold seats and cabins are already considered waste because the opportunity to sell the seats and cabins for that particular trip is already forgone. Compared to manufacturing operations, products that are unsold can still be stored and warehoused that can be sold at a future date. III. How service operations can benefit from implementing manufacturing  approaches and systems.  Just-In-Time (JIT) Just in Time is a business approach that companies use to reduce waste and increase efficiency by having the goods available for the operation of the business when they are needed (Zipkin 91). JIT is also known as Toyota Production System or TPS (Amasaka and Sakai 2010). JIT is commonly thought of as a system for reducing inventory that is only applicable to manufacturing operations but its application also works for services industry too (Lee 1990). JIT consists of more than low inventory levels. It eliminates waste, streamlines operations, promotes fast changeovers and close supplier relations, and adjusts quickly to changes in demand” resulting to the quick delivery of products and services (Gupta 2011). McDonalds, one of the service oriented companies that adopted JIT was able to benefit not only in terms of reducing its waste and spoilage but also improved the quality of its service. The quality of its burgers also improved because JIT enabled McDonalds to serve its food fresher due to the shorter storage time (Raffio 1998). In addition, JIT enabled McDonalds to hasten the production of its burger allowing it to save not only on direct cost associated with the efficient production of the burger but also improved its peripheral service afforded by the saved time in the burger production. Under the old system, McDonalds kept a high level of inventory to make its food readily available. A large batch of burgers were pre-cooked and kept in shelf until they were sold. The portion that was left unsold has to be discarded and this high level of inventory costs McDonalds high spoilage rate because the foods that were unsold for a certain period of time has to be thrown away. In turn, the spoilage cost associated with the unsold burgers has to be passed on to the selling price of its burgers to cover the costs of the foods that were discarded. With the adoption of JIT, McDonalds reduced the level of its inventory that instead of storing patties, cheese, fries, buns and other materials of their burgers for weeks and even months, the burgers has instead to be sold in 15 minutes or so and only assembled when a customer actually buys them (Atinson2005). This translated to a lower holding cost and the reduction of spoilage rate. The adoption of JIT also improved the quality of McDonald’s products and services. The reduction of the holding time of McDonalds’ burgers translated into the higher quality of their servings because their products can now be served fresher (Raffio 1998). The labour that was saved in the preparation of discarded food also allowed its staff to do other things that could improve its customer relations. McDonalds was able to solve its high inventory and spoilage problem by adopting JIT that reduces its total ordering cost and holding cost. Where it used to order in bulk that was susceptible to waste, JIT provided McDonalds the solution of ordering in very small batches that does not stack up inventory in unusually high level. Ordering in small batches eliminated the waste associated with storing above the safety stock level (Atkinson 2005). Quality Management: Six Sigma One of the manufacturing methodologies used in quality management in manufacturing that is adopted by the service industry to elevate the quality of its service delivery that would ultimately enhance its competitiveness is Six Sigma (Bhalla 2012). Six Sigma was first developed by Motorola in the 1980s (Zailani 2011). While it was originally developed to improve manufacturing processes, it has also been used by many organizations to improve other areas of their business” (Guarraia 2009). “Six Sigma is primarily a methodology for improving the capability of business processes by using statistical methods to identify and decrease or eliminate process variation. Its goal is reduction of defects and improvements in profits, employee morale and product quality” (Fu-Kwun 2010:301). It is now being adopted by the service industry not only to elevate the level of quality its service delivery but also ensure the consistency that ultimately to redound to customer satisfaction. In the banking industry, Six Sigma was first used by Bank of America to improve the level of its customer’s satisfaction. Its implementation in the Bank of America did not only increase the level of its customer’s satisfaction but also the overall value of the company. The initial stage was merely confined to the use of “mystery shoppers” and extensive support of a call center that saw marked improvement in it’s the level of its customer satisfaction (Lin et al 2009). It was later expanded to other facets of the business as “the overarching goal of reaching customer satisfaction through process improvement methodologies would spread to the other parts of Bank of America’s business” (Lin et al 2009:112). The use of Six Sigma quality management in the Bank of America was later applied to all facets of the company’s business. The expanded application of Six Sigma was to create a more efficient process in all sphere of Bank of America’s business operation. The process was standardized throughout the company which did not only saved them time and resources but also enabled work collaboration and cross functional participation possible. The savings related to Six Sigma translated to $2 billion in 2005 and its continued application contributed to the growth of its retail accounts business (Lin et al 2009). More importantly, Six Sigma improved the overall performance of the Bank of America relative to its competitor of the same size. In a study conducted by Lin et al, a comparative ratio analysis was made to illustrate how Six Sigma benefits a company by comparing Bank of America with its competitor Wells Fargo (that does not use Six Sigma) in terms of current ratio, debt-equity ratio, profit margin, price earnings ratio and Tobins Q ratio. This ratio summarizes a company’s liquidity, financial leverage, profit margin and market value. In their report, it showed that in terms of short-term liquidity, Bank of America had a higher ratio of .3024 compared to Wells Fargo’s .0829 indicating that Bank of America is a better performer between the two. In the debt equity ratio, “Bank of America had a debt to equity ratio of 9.7911” (2009:115) well under Wells Fargo’s 10.095 indicating that Bank of America has a better financial leverage. With regard to profitability, Bank of America outperformed Wells Fargo with a ratio of .1806 to .1767 respectively. With regard to market value, Bank of America again outperformed Wells Fargo it having a better price to earnings ratio of 10.4921 and 12.8371 respectively and a better Tobin Q with 1.01 for Bank of America compared to 1.12 for Wells Fargo. “After computing these ratios, it seems that Bank of America is in a better position in terms of liquidity, financial leverage, and profitability than a major competitor who does not use Six Sigma” (2009:116). IV. Conclusion 200-300 Considering the intense competition in the service industry, it is imperative that service organizations should deliver services in accordance to the customer’s s expectations. It is also equally important that such services are provided at a lower cost with a better quality (Shanmugaraja et al 2010). Any methodology that would enhance a company’s competitiveness must be adopted to survive competition and remain profitable (Colledani and Tolio 2011). The adoption of manufacturing methodologies, such as Just-In-Time and Six Sigma, benefits a service company in myriad of ways. In the cases stated, the application of Just-In-Time enabled McDonalds to reduce its waste by reducing the level of its inventory and holding time. Bank of America was able to elevate the level of its customer satisfaction while saving $2 billion in the application of Six Sigma in all facets of its business operations and made it more competitive compared to its competitor of like size, such as Wells Fargo. It may be difficult to implement JIT and Six Sigma in the service industry due to the intangibility of its products which cannot be easily measured. But the benefits that can be derived from adopting these manufacturing methodologies in terms of savings and over-all competitiveness of a service company far outweighs the difficulty of implementing these methodologies. The advantages that can be derived from its implementation is not only beneficial to the company but to the consumer as well because services can be a lower cost and better quality. Bibliography Amasaka, K. & Sakai, H. (2010). Evolution of TPS Fundamentals Utilising New JIT Strategy: Proposal and Validity of Advanced TPS at Toyota. Journal of Advanced Manufacturing Systems 9(2): 85-99. Atkinson, C. (2005). McDonalds, a guide to the benefits of JIT. Inventory Management Review. [Online] Available at http://www.inventorymanagementreview.org/justintime/ [Accessed 01 March 2012]. Bhalla, K. (2012). Why a Quality Management System in Service Industries? iSixSigma. [Online] Available at http://www.isixsigma.com/methodology/business-process-management-bpm/why-quality-management-system-service-industries/ [Accessed 01 March 2012]. Colledani, M. & Tolio, T. (2011). Integrated analysis of quality and production logistics performance in manufacturing lines. 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