Service

Management
Operations, Strategy,
Information Technology

Seventh Edition

James A. Fitzsimmons
Seay Professor of Business Emeritus
University of Texas at Austin

Mona J. Fitzsimmons

Me
Grauu
Boston Burr Ridge, IL Dubuque, IA Madison, Wl New York San Francisco St. Louis
Bangkok Bogota Caracas Kuala Lumpur Lisbon London Madrid Mexico City
Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto

Table of Contents
PART ONE
UNDERSTANDING SERVICES

Nature of Demand and Capacity

Method of Service Delivery 28

Chapter 1
The Role of Services in an Economy

Service-Dominant Logic 30
An Open-Systems View of Services 31
Service Benchmark: Outside the Box 32
Summary 32
Key Terms and Definitions 33
Topics for Discussion 33
Interactive Exercise 33
Case 2.1: Village Volvo 33
Case 2.2: Xpresso Lube 34
Selected Bibliography 36
Endnotes 36

Learning Objectives 3
Chapter Preview 4
Service Definitions 4
Facilitating Role of Services in an Economy 4
Economic Evolution 5
Stages of Economic Development 6
Preindustrial Society 1
Industrial Society 7
Postindustrial Society 8

Chapter 3
Service Strategy

Nature of the Service Sector 9

The 21st Century Career 10
Consumer Service Experience 11
Business Service Experience 12

Sources of Service Sector Growth 13

Information Technology 13
Innovation 14
Changing Demographics 14

Overall Cost Leadership

Differentiation 42
Focus 43

Service Benchmark: Walmart Is Number One

on the Fortune 500 List 15
Summary 15
Key Terms and Definitions 15,
Topics for Discussion 15
Interactive Exercise 16
Selected Bibliography 16
Endnotes 16

18

Non-ownership Characteristic of Services 21

The Service Package 22
Grouping Services by Delivery Process 23
Classifying Services for Strategic Insights 26

xii

Porter's Five Forces Analysis 43

SWOT Analysis: Strengths, Weaknesses, Opportunities,
Threats 44

Winning Customers in the Marketplace 45

Qualifiers 46
Service Winners 46
Service Losers 46

The Competitive Role of Information in Services 46

Learning Objectives 17
Chapter Preview 18
Distinctive Characteristics of Service Operations

Nature of the Service Act 26

Relationship with Customers 27
Customization and Judgment 27

41

Strategic Analysis 43

17

Customer Participation in the Service Process

Simultaneity 19
Perishability 20
Intangibility 20
Heterogeneity 21

37

Learning Objectives 37
Chapter Preview 37
The Strategic Service Vision 38
Understanding the Competitive Environment
of Services 40
Competitive Service Strategies 41

New Experience Economy 11

Chapter 2
The Nature of Services

28

18

Creation of Barriers to Entry 46

Revenue Generation 48
Database Asset 49
Productivity Enhancement 49

The Virtual Value Chain 51

First Stage (New Processes) 52
Second Stage (New Knowledge) 52
Third Stage (New Products) 53
Fourth Stage (New Relationships) 53

Limits in the Use of Information 53

Anticompetitive 53
Fairness 53
Invasion of Privacy 53
Data Security 53
Reliability 54

Using Information to Categorize Customers 54

Table of Contents

Chapter 5
Technology in Services 95

Stages in Service Firm Competitiveness 54 \

Available for Service 54
Journeyman 56
Distinctive Competence Achieved 56
World-Class Service Delivery 56

*'

Service Benchmark: Central Market Shuns Conventional

Wisdom and Big-Name Products 57
Summary 57
Key Terms and Definitions 58
Interactive Exercise 58
Topics for Discussion 59
Case 3.1: United Commercial Bank and El Banco 59
Case 3.2: The Alamo Drafthouse 61
Selected Bibliography 63
Endnotes 63

PART TWO
DESIGNING THE SERVICE
ENTERPRISE 65
Chapter 4
New Service Development 67
Learning Objectives 67
Chapter Preview 68
Innovation in Services 68
New Service Development 70
Service Design Elements, 72
Customer Value Equation

xiii

Learning Objectives 95
Chapter Preview 96
Technology in the Service Encounter 96
The Emergence of Self-Service 97
Automation in Services 98
The Internet as a Service Enabler 100
E-Commerce 100
Virtual versus Physical Services 101

E-Business Models 103

Economics of Scalability 103
Technological Innovation in Services 104
Challenges of Adopting New Technology in Services 105
Readiness to Embrace New Technology 106
The Case of Radio Frequency Identification 106

Service Benchmark: Best-in-Practice Is Just a

Click Away 107
Summary 107
Key Terms and Definitions 107
Topics for Discussion 107
Interactive Exercise 108
Case 5.1: Amazon.com 108
Case 5.2: Evolution of B2C E-Commerce in Japan 109
Selected Bibliography 111
Endnotes 112

73

Strategic Positioning through Process

Structure 74
Service Blueprinting 75
Taxonomy for Service Process Design 77
Degree of Divergence 78
Object of the Service Process 78
Type of Customer Contact 78

Generic Approaches to Service System Design 79

Production-Line Approach 79
Customer as Coproducer 81
Customer Contact Approach 82
Information Empowerment 84

Intellectual Property 85
Service Benchmark: Ten Things Google Has Found to
Be True 86
Summary 86
Key Terms and Definitions 87
Topics for Discussion 87
Interactive Exercise 87
Case 4.1: 100 Yen Sushi House 87
Case 4.2: Commuter CleaningA New Venture
Proposal 88
Case 4.3: Golfsmith 90
Selected Bibliography 91
Endnotes 93

Chapter 6
Service Quality

115

Learning Objectives 115

Chapter Preview 115
Defining Service Quality 116
Dimensions of Service Quality 116
Gaps in Service Quality 117

Measuring Service Quality 119

SERVQUAL

119

Quality Service by Design 120

Incorporation of Quality in the Service Package 120
Taguchi Methods 120
Poka-Yoke (Failsafing) 121
Quality Function Deployment 123

Walk-Through Audit 124

Designing a Walk-Through Audit 125
The Walk-Through Audit as a Diagnostic Instrument 128

Achieving Service Quality 129

Cost of Quality 129
Statistical Process Control 130
Unconditional Service Guarantee 134

Service Recovery 136

Approaches to Service Recovery 136
Complaint Handling Policy 137

Stages in Quality Development 138

xiv Table of Contents

Chapter 8
Process Improvement

Service Benchmark: Bronson Methodist

Hospital 139
Summary 139
Key Terms and Definitions 140
Topics for Discussion 140
Interactive Exercise 140
Solved Problems 140
Exercises 142
Case 6.1: Clean Sweep, Inc. 144
Case 6.2: The Complaint Letter 146
Case 6.3: The Museum of Art and Design
Selected Bibliography 149
Endnotes 152

Learning Objectives 181

Chapter Preview 181
Quality and Productivity Improvement Process
Foundations of Continuous Improvement
Plan-Do-Check-Act (PDCA) Cycle 182
Problem Solving 183

148

Learning Objectives 153

Chapter Preview 154
Environmental Psychology and Orientation
Servicescapes 154

Facility Design

153

154

156

158

161

189

Chapter 8 Supplement: Data Envelopment

Analysis (DEA) 203
Measuring Service Productivity 203

165

Product Layout and the Work Allocation Problem 165

Process Layout and the Relative Location Problem 166

Service Benchmark: Where, Oh Where Shall

We Go? 170
Summary 170
Key Terms and Definitions 171
Topics for Discussion 171
Interactive Exercise 171
Solved Problems 171
Exercises 174
Case 7.1: Health Maintenance Organization (A)
Case 7.2: Health Maintenance Organization (B)
Case 7.3: Esquire Department Store 178
Case 7.4: Central Market 179
Selected Bibliography 180
Endnotes 180

189

Summary 196
Service Benchmark: Service, Education, and
Health Care Winners of The Baldrige National
Quality Award 197
Key Terms and Definitions 19 8
Topics for Discussion 198
Interactive Exercise 198
Case 8.1: Senora County Sheriff 198
Case 8.2: Mega Bytes Restaurant 199

Types of Processes 161

Flowcharting 161
Gantt Chart 162
Process Terminology 163

Facility Layout

Benchmarking 188
Improvement Programs

184

186

Personnel Programs for Quality Assurance

Deming's 14-Point Program 190
Baldrige National Quality Award 191
ISO 9000 192
Six Sigma 192
Lean Service 195

Nature and Objectives of Service Organizations 158

Land Availability and Space Requirements 159
Flexibility 159
'
Security 159
Aesthetic Factors 160
The Community and Environment^ 160

Process Analysis

Check Sheet 184

Run Chart 184
Histogram 184
Pareto Chart 185
Flowchart 185
Cause-and-Effect Diagram
Scatter Diagram 187
Control Chart 187

182

182

Quality Tools for Analysis and Problem Solving

Chapter 7
Supporting Facility and Process Flows

Behaviors in Servicescapes 155

Environmental Dimensions of Servicescapes

181

The DEA Model 203

DEA and Strategic Planning

209

Exercises 210
Case 8.3: Mid-Atlantic Bus Lines
Selected Bibliography 211
Endnotes 211

Chapter 9
The Service Encounter
177
177

Learning Objectives 213

Chapter Preview 214
The Service Encounter Triad

210

213
214

Encounter Dominated by the Service Organization

Contact Personnel-Dominated Encounter 215
Customer-Dominated Encounter 215

215

Table of Contents

The Service Organization

215

Culture 216
Empowerment 217
Control Systems 217

Contact Personnel

218

Selection 218
Training 219
Creating an Ethical Climate

The Customer

'.-,
\

221
222

Summary of Service Encounters 223

Creating a Customer Service Orientation 223
Service Profit Chain 224
Summary 226
Service Benchmark: Miss Manners on Complaint
Handling 227
Key Terms and Definitions 228
Topics for Discussion 228
Interactive Exercise 228
Case 9.1: Amy's Ice Cream 228
Case 9.2: Enterprise Rent-A-Car 229
Selected Bibliography 232
Endnotes 234

Chapter 10
Service Facility Location

236

Competitive Clustering .237

Saturation Marketing 237
Marketing Intermediaries 238
Substitution of Communication for Travel 238
Separation of Front from Back Office 238
Impact of the Internet on Service Location 239
Site Considerations 239

Regression Analysis in Location Decisions

Geographic Information System 240
Modeling Considerations 242
Geographic Representation
Number of Facilities 244
Optimization Criteria 244

Facility Location Techniques

265

Learning Objectives 265

Chapter Preview 265
Generic Strategies of Level Capacity or Chase
Demand 266
Strategies for Managing Demand 266
Customer-Induced Variability 266
Segmenting Demand 267
Offering Price Incentives 268
Promoting Off-Peak Demand 269
Developing Complementary Services 270
Reservation Systems and Overbooking 270

Strategies for Managing Capacity

Yield Management

272

278

Yield Management Applications . 283

240

242

246

Cross Median Approach for a Single Facility

Huff Model for Retail Outlet 249
Location Set Covering for Multiple Facilities

Chapter 11
Managing Capacity and Demand

Defining Service Capacity 272

Daily Workshift Scheduling 273
Weekly Workshift Scheduling with Days-Off Constraint 275
Increasing Customer Participation 276
Creating Adjustable Capacity 276
Sharing Capacity 277
Cross-Training Employees 277
Using Part- Time Employees 277
Scheduling Part-Time Tellers at a Drive-In Bank 277

235

Learning Objectives 235

Chapter Preview 236
Strategic Location Considerations

258

PART THREE
MANAGING SERVICE OPERATIONS 263

220

Expectations and Attitudes 221

The Role of Scripts in Coproduction

Exercises 256
Case 10.1: Health Maintenance Organization (C)
Case 10.2: Athol Furniture, Inc. 259
Selected Bibliography 261
Endnotes 262

xv

247
251

Summary 252
Service Benchmark: Here a Bun, There a Bun,
Everywhere a Bun-Bun 253
Key Terms and Definitions 253
Topics for Discussion 254 .
Interactive Exercise 254
Solved Problems 254

Summary 284
Service Benchmark: Pay Up Front and Take Your
Chances 285
Key Terms and Definitions 285
Topics for Discussion 285
Interactive Exercise 285
Solved Problems 285
Exercises 288
Case 11.1: River City National Bank 290
Case 11.2: Gateway International Airport 291
Case 11.3: The Yield Management Analyst 293
Case 11.4: Sequoia Airlines 295
Selected Bibliography 296
Endnotes 298

Chapter 12
Managing Waiting Lines 299
Learning Objectives 299
Chapter Preview 300
The Economics of Waiting

300

xvi

Table of Contents

Queuing Systems 300

The Psychology of Waiting 301

Summary 336
Service Benchmark: Citizens Come First in
Lynchburg 337
Key Terms and Definitions 337
Topics for Discussion 337
Interactive Exercise 337
Case 13.1: Boomer Consulting, Inc. 338
Case 13.2: PeapodSmart Shopping for Busy
People 340
Case 13.3: Mortgage Service Game 342
Selected Bibliography 344
Endnotes 344

That Old Empty Feeling 302

A Foot in the Door 302
The Light at the End of the Tunnel 302
Excuse Me, But I Was Next 303

Principles of Waiting Line Management

303

Animate 304
Discriminate 304
Automate 305
Obfuscate 305

Essential Features of Queuing Systems 306

Calling Population 306
Arrival Process 306
Queue Configuration 310
Queue Discipline 312
Service Process 313

Chapter 14
Globalization of Services 345

Summary 314
Service Benchmark: Five Minutes in Line Is Longer
than Five Minutes at Hard Labor 315
Key Terms and Definitions 315
Topics for Discussion 315
Interactive Exercise 315
Solved Problems 316
Exercises 316
Case 12.1: Thrifty Car Rental 316
Case 12.2: Eye'll Be Seeing You 317
Case 12.3: Field Study 318,
Selected Bibliography 319
Endnotes 320

321

322

Bidirectional Optimization
Productive Capacity 328
Perishability 328

324

326

326

Professional Service Firms 329

Attributes of Professional Services
Operational Characteristics 329

348

The Nature of Franchising 349

Benefits to the Franchisee 349
Issues for the Franchiser 350

Globalization of Services

357

Chapter 15
Managing Service Projects 369

329

Learning Objectives 369

Chapter Preview 369
The Nature of Project Management

Outsourcing Services 332

Benefits and Risks of Outsourcing Services 332
Classification of Business Services 334
Managerial Considerations with Service Outsourcing

351

Generic International Strategies 352

The Nature of the Borderless World 353
Planning Transnational Operations 354

Service Benchmark: Small World and Other

Myths 360
Summary 361
Key Terms and Definitions 361
Topics for Discussion 361
Interactive Exercise 361
Case 14.1: Goodwill Industries International, Inc. 362
Case 14.2: Federal Express: Tiger International
Acquisition 364
Selected Bibliography 366
Endnotes 367

Customer-Supplier Duality 324

Service Supply Relationships Are Hubs,
Not Chains 325
Service Capacity Is Analogous to Inventory 326
Customer Supplied Inputs Can Vary in Quality 326

Managing Service Relationships

Franchising

Multicountry Expansion 358

Importing Customers 358
Following Your Customer 359
Service Offshoring 359
Beating the Clock 360

Network Model 322

Managing Uncertainty 323

Service Supply Relationships

Focused Service 346

Focused Network 347
Clustered Service 348
Diversified Network 348

Global Service Strategies

Chapter 13
Service Supply Relationships
Learning Objectives 321
Chapter Preview 321
Supply Chain Management

Learning Objectives 345

Chapter Preview 346
Domestic Growth and Expansion Strategies 346

334

Characteristics of Projects

3 70

370

Table of Contents

Project Management Process 370

Selecting the Project Manager 3 71
Building the Project Team 371
Principles of Effective Project Management

Techniques for Project Management

372

Average Customer Waiting Time 420

Probability of Excessive Waiting 421
Minimizing the Sum of Customer Waiting Costs
and Service Costs 422
Probability of Sales Lost Because of Inadequate Waiting
Area 423

\
\

372

Gantt Project Charts 3 72

A Critique of Gantt Charts 374
Constructing a Project Network 3 74
Critical Path Method 3 75
Microsoft Project Analysis 378

Resource Constraints 381

Activity Crashing 381
Incorporating Uncertainty in Activity Times 386
Estimating Activity Duration Distributions 386
Project Completion Time Distribution 387
A Critique of the Project Completion Time Analysis

388

Problems with Implementing Critical Path

Analysis 390
Monitoring Projects 390
Earned Value Chart 390
Project Termination 392
Project History Report 392

Summary 392
Service Benchmark: The House That Warren Built 393
Key Terms and Definitions 393
Topics for Discussion 393
Interactive Exercise 394
Solved Problems 394 ,
Exercises 395
Case 15.1: Info-Systems, Inc. 400
Case 15.2: Whittier County Hospital 401
Selected Bibliography 402
Endnotes 403

ServiceModel Simulation Software

440

Demonstration: Customer Service Call Center 442

Process Analysis: Manufacturing Cell 443

Solved Problems 445

Exercises 447
Case 16.4: Pronto Pizza 451
Case 16.5: Renaissance Clinic (B) 451
Selected Bibliography 452
Endnotes 452

453

Learning Objectives 453

Chapter Preview 453
The Choice of Forecasting Method 454
Subjective Models 454

Chapter 16
Capacity Planning and Queuing Models 407
Learning Objectives 407
Chapter Preview 408
Capacity Planning 408

Delphi Method 455

Cross-Impact Analysis 456
Historical Analogy 456

Causal Models 457

Regression Models 457
Econometric Models 458
409

Time Series Models 458

Analytical Queuing Models 410

Relationships between System Characteristics
Standard MM/1 Model 412
Standard M/M/c Model 414
M/G/l Model 417
General Self-Service M/G/> Model 418
Finite-Queue M/M/l Model 418
Finite-Queue M/M/c Model 419

Capacity Planning Criteria 420

Simulation Methodology 433

Monte Carlo Simulation 435
Generating Random Variables 435
Discrete-Event Simulation 438

Chapter 17
Forecasting Demand for Services

PART FOUR
QUANTITATIVE MODELS FOR
SERVICE MANAGEMENT 405

Strategic Role of Capacity Decisions

Summary 424
Service Benchmark: When More Is Better 425
Key Terms and Definitions 425
Topics for Discussion 425
Interactive Exercise 426
Solved Problems 426
Exercises 428
Case 16.1: Houston Port Authority 430
Case 16.2: Freedom Express 431
Case 16.3: Renaissance Clinic (A) 431
Chapter 16 Supplement: Computer
Simulation 432
Systems Simulation 433

412

N-Period Moving A verage 458

Simple Exponential Smoothing 459
Relationship between a. and N 461
Forecast Error 462
Exponential Smoothing with Trend Adjustment 463
Exponential Smoothing with Seasonal Adjustment 464
Exponential Smoothing with Trend and Seasonal
Adjustments 466
Summary of Exponential Smoothing 469

xvii

xviii Table of Contents

Service Benchmark: Googling the Future 469

Summary 469
Key Terms and Definitions 470
Topics for Discussion 470
Interactive Exercise 470
Solved Problems 470
Exercises 473
Case 17.1: Oak Hollow Medical Evaluation
Center 473
Case 17.2: Gnomial Functions, Inc. 475
Selected Bibliography 476
Endnotes 476

Chapter 18
Managing Service Inventory

477

Learning Objectives 477

Chapter Preview 478
Inventory Theory 479
Role of Inventory in Services 479
Characteristics of Inventory Systems 480
Relevant Costs of an Inventory System 481

Order Quantity Models 481

Economic Order Quantity 482
Inventory Model with Quantity Discounts 485
Inventory Model with Planned Shortages 487

Inventory Management under Uncertainty 490

Inventory Control Systems 491
Continuous Review System 491
Periodic Review System 492
The ABCs of Inventory Control 494

Single-Period Model for Perishable Goods 495

Expected Value Analysis
Marginal Analysis 496

496

Retail Discounting Model 498

Service Benchmark: A Chip in Time Isn't Stale 499
Summary 499
Key Terms and Definitions 499
Topics for Discussion 500
Interactive Exercise 500
Solved Problems 500
Exercises 502
Case 18.1: A.D. Small Consulting 507
Case 18.2: Last Resort Restaurant 508
Case 18.3: Elysian Cycles 508
Selected Bibliography 509
Endnotes 509
Appendix A: Areas of Standard Normal
Distribution 510
Appendix B: Uniformly Distributed Random
Numbers [0,1] 511
Appendix C: Values of Lq for the MIMIc Queuing
Model 512
Appendix D: Equations for Selected Queuing
Models 514
Name Index 519
Subject Index 525