Operations Management for Service Providers
As the Canadian economy has changed from a goods producer to a service provider over the last sixty years, the dominance of the manufacturing sector has declined substantially. Today, only about 10 percent of Canadian workers are employed in manufacturing, in contrast to 30 percent in 1950. Most of us now hold jobs in the service sector, which accounts for approximately 80 percent of Canadian jobs. In 2013, Wal-Mart was America’s largest employer, followed by McDonald’s, United Parcel Service (UPS), Target and Kroger. Not until we drop down to the ninth-largest employer—Hewlett Packard—do we find a company with a manufacturing component.
Though the primary function of both manufacturers and service providers is to satisfy customer needs, there are several important differences between the two types of operations. Let’s focus on three of them:
- Intangibility. Manufacturers produce tangible products—things that can be touched or handled, such as automobiles and appliances. Service companies provide intangible products, such as banking, entertainment, or education.
- Customization. Most manufactured goods are standardized. Services, by contrast, are often customized to satisfy the specific needs of a customer. For example, when you go to the hairdresser, you ask for a haircut that looks good on you because of the shape of your face and the texture of your hair.
- Customer contact. You could spend your entire working life assembling cars in Detroit and never meet a customer who bought a car that you helped to make. But if you were a restaurant server, you’d interact with customers every day. In fact, their satisfaction with your product would be determined in part by the service that you provided. Unlike manufactured goods, many services are bought and consumed at the same time.
Here is just one of the over twelve thousand Burger King restaurants across the globe. Not surprisingly, operational efficiency is just as important in service industries as it is in manufacturing. To get a better idea of the role of operations management in the service sector, we’ll look closely at Burger King (BK). BK has grown substantially since selling the first Whopper (for $0.37) almost half a century ago. The instant success of the fire-grilled burger encouraged the Miami founders of the company to expand by selling franchises.
Today, there are BK company- and independently-owned franchised restaurants in 100 countries, and they employ over 34,000 people. More than eleven million customers visit BK each day. Burger King even purchased Tim Hortons in December of 2014. The acquisition was made for $12 billion making Burger King the third largest fast food service restaurant chain in the world. The company even moved its headquarters to Canada to assume a new tax nationality in order to reduce the corporate taxes the organization pays in the U.S.
When starting or expanding operations, businesses in the service sector must make a number of decisions quite similar to those made by manufacturers:
- What services (and perhaps what goods) should they offer?
- Where will they locate their business, and what will their facilities look like?
- How will they forecast demand for their services?
Let’s see how service firms like BK answer questions such as these.
Service organizations succeed by providing services that satisfy customers’ needs. Companies that provide transportation, such as airlines, have to get customers to their destinations as quickly and safely as possible. Companies that deliver packages, such as FedEx, must pick up, sort, and deliver packages in a timely manner. Companies that provide both services and goods, such as Domino’s Pizza, have a dual challenge: they must produce a quality good and deliver it satisfactorily.
Service providers that produce goods can adopt either a make-to-order or a make-to-stock approach to producing them. BK, which encourages patrons to customize burgers and other menu items, uses a make-to-order approach, building sandwiches one at a time. Meat patties, for example, go from the grill to a steamer for holding until an order comes in. Although many fast food restaurants have adopted the make-to-order model, a few continue to make-to-stock. For example, Dunkin’ Donuts does not customize doughnuts, and so they do not have to wait for customer orders before making them.
Like manufacturers, service providers must continuously look for ways to improve operational efficiency. Throughout its sixty-year history, BK has introduced a number of innovations that have helped make the company (as well as the fast-food industry itself) more efficient. BK, for example, was the first to offer drive-through service (which now accounts for over 50 percent of its sales).
It was also BK Vice President David Sell, who came up with the idea of moving the drink station from behind the counter so that customers could take over the time-consuming task of filling cups with ice and beverages. BK was able to cut back one employee per day at every one of its more than eleven thousand restaurants. Material costs also went down because customers usually fill cups with more ice, which is cheaper than a beverage. Moreover, there were savings on supply costs because most customers don’t bother with lids, and many don’t use straws. On top of everything else, most customers liked the system (for one thing, it allowed them to customize their own drinks by mixing beverages), and as a result, customer satisfaction went up. Overall, the new process was a major success and quickly became the industry standard.
When starting or expanding a service business, owners and managers must invest a lot of time in selecting a location, determining its size and layout, and forecasting demand. A poor location or a badly designed facility can cost customers, and inaccurate estimates of demand for products can result in poor service, excessive costs, or both.
Site selection is also critical in the service industry, but not for the same reasons as in the manufacturing industry. Service businesses need to be accessible to customers. Some service businesses, such as cable-TV providers, package-delivery services, and e-retailers, go to their customers. Many others, however—hotels, restaurants, stores, hospitals, and airports—have to attract customers to their facilities. These businesses must locate where there’s a high volume of available customers. In picking a location, BK planners perform a detailed analysis of demographics and traffic patterns; the most important factor is usually traffic count—the number of cars or people that pass by a specific location in the course of a day. In Canada, where we travel almost everywhere by car, BK looks for busy intersections, highway interchanges with easy off and on ramps, or such “primary destinations” as shopping malls, tourist attractions, downtown business areas, or movie theaters. In Europe, where public transportation is much more common, planners focus on subway, train, bus, and trolley stops.
Once planners find a site with an acceptable traffic count, they apply other criteria. It must, for example, be easy for vehicles to enter and exit the site, which must also provide enough parking to handle projected dine-in business. Local zoning must permit standard signage, especially along major highways. Finally, expected business must be high enough to justify the cost of the land and building.
Size and Layout
In the service sector, most businesses must design their facilities with the customer in mind: they must accommodate the needs of their customers while keeping costs as low as possible. Let’s see how BK has met this challenge.
For its first three decades, almost all BK restaurants were pretty much the same. They all sat on one acre of land (located “through the light and to the right”), had about four thousand square feet of space, and held seating for seventy customers. All kitchens were roughly the same size. As long as land was cheap and sites were readily available, this system worked well. By the early 1990s, however, most of the prime sites had been taken, if not by BK itself, then by one of its fast-food competitors or other businesses needing a choice spot, including gas stations and convenience stores. With everyone bidding on the same sites, the cost of a prime acre of land had increased from $100,000 to over $1 million in a few short years.
To continue growing, BK needed to change the way it found and developed its locations. Planners decided that they had to find ways to reduce the size of a typical BK restaurant. For one thing, they could reduce the number of seats, because the business at a typical outlet had shifted over time from 90 percent inside dining to a 50-50 split between drive through and eat-in service.
David Sell (the same executive who had recommended letting customers fill their own drink cups) proposed to save space by wrapping Whoppers in paper instead of serving them in the cardboard boxes that took up more space. So BK switched to a single paper wrapper with the label “Whopper” on one side and “Cheese Whopper” on the other. To show which product was inside, employees just folded the wrapper in the right direction. Ultimately, BK replaced pallets piled high with boxes with just a few boxes of wrappers.
Ideas like these helped BK trim the size of a restaurant from four thousand square feet to as little as one thousand. In turn, smaller facilities enabled the company to enter markets that were once cost prohibitive. Now BK could locate profitably in airports, food courts, strip malls, centre-city areas, and even schools.
Estimating capacity needs for a service business isn’t the same thing as estimating those of a manufacturer. Service providers can’t store their products for later use: hairdressers can’t “inventory” haircuts, and amusement parks can’t “inventory” roller-coaster rides. Service firms have to build sufficient capacity to satisfy customers’ needs on an “as-demanded” basis. Like manufacturers, service providers must consider many variables when estimating demand and capacity:
- How many customers will I have?
- When will they want my services (which days of the week, which times of the day)?
- How long will it take to serve each customer?
- How will external factors, such as weather or holidays, affect the demand for my services?
Forecasting demand is easier for companies like BK, which has a long history of planning facilities, than for brand-new service businesses. BK can predict sales for a new restaurant by combining its knowledge of customer-service patterns at existing restaurants with information collected about each new location, including the number of cars or people passing the proposed site and the effect of nearby competition.
Overseeing a service organization puts special demands on managers, especially those running firms, such as hotels, retail stores, and restaurants, who have a high degree of contact with customers. Service firms provide customers with personal attention and must satisfy their needs in a timely manner. This task is complicated by the fact that demand can vary greatly over the course of any given day. Managers, therefore, must pay particular attention to employee work schedules and, in many cases, inventory management.
Managing service operations is about more than efficiency of service. It is about finding a balance between profitability, innovation, customer satisfaction and associate satisfaction, sometimes referred to as the balanced scorecard. The balance scorecard model utilizes 360 degree feedback, a process of collecting feedback from all of a businesses stakeholders, in order to improve operational efficiency.
In his book titled Moments of Truth, Jan Carlzon, former Chief Executive Office of SAS Group, refers to those moments when an employee interacts with a customer. Moments can range from calling a help line, checking in at an airline counter, the greeting from a hostess in a restaurant to having a maintenance problem resolved in a hotel guest room. The quality of staff a company hires, how they train their employees, and the focus management places on creating a culture of service will determine how successful the company is in service delivery and maximizing the impact of these moments of truth.
The Ritz-Carlton hotel company maximizes their moments of truth by living their motto, “We are Ladies and Gentleman serving Ladies and Gentleman”. Ritz-Carlton Three Steps of Service are:
- A warm and sincere greeting. Use the guest’s name.
- Anticipation and fulfillment of each of the needs of each guest.
- Fond farewell. Give a warm good-bye and use the guest’s name.
Ritz-Carlton reinforces this service culture daily in short meetings with all staff at the beginning of each shift.
Chick-fil-A is recognized as an industry leader in service for the fast food industry in the United States. Chick-fil-A uses the term “my pleasure” which founder S. Truett Cathy credits to Ritz-Carlton. The company follows customer-centred leadership. Staff focus on being swift and attentive to customer needs. Chick-fil-A uses this YouTube video as part of their employee orientation and training: “Every life has a story”.
Well-known blogger and marketing consultant Marcus Sheridan explains his view of the success of Chick-Fil-A in this blog post:
Dang I love it when I see great people and great businesses kicking butt at what they do. Such was the case recently when the fam and I stopped into a local Chick-fil-A restaurant here in Virginia and I was treated to a free course entitled, “This is How To Run a Business that Kicks Butt and Takes Names….”, or at least that something like that …..
As the kids were all eating their food and I was busy being blown away by this perfect company and business model, I decided to ask my 9 year old daughter a simple question:
Me: Danielle, what do you notice about this restaurant that’s different than others?
Danielle (by now used to weird business questions from her father): Well, first of all everyone that works here is happy.
Me: Yes, they are, aren’t they? How’s that make you feel to see them smiling?
Danielle: It makes me feel good inside.
Me: I agree…What else do you notice?
Danielle: There are pictures everywhere. And writings on the walls. And it’s really clean.
Me: Good observations dear. Danielle, you’re looking at the most well run business in America.
For any of you that have been to Chick-fil-A before, you may already understand and appreciate what I’m talking about. If you haven’t gone to one and would like 4 years’ worth of business school wrapped up in 45 minutes, then take a stroll on over to one of their restaurants for lunch and just sit, watch, and observe.
But to make what could be a long blog much shorter, allow me to quickly list the 8 reasons why Chick-fil-A has the best business model in America.
Happy Employees/Service: It’s unbelievable what type of employees this company has. Heck, while we were eating our meal the other day, an employee with a big smile came over and asked us if we’d like refills on our drinks. For a fast food company, this is utterly unheard of in our society these days. It’s obvious that Chick-fil-A doesn’t go cheap on their people nor their way of doing things. I’m sure they pay decent wages but they also create an atmosphere that attracts great people. What a wonderful model this is for any business.
They’re Clean!: Somewhere along the lines sanitation and cleanliness became a lost art in the fast food industry. Notwithstanding this trend, Chick-fil-A has bucked the system and their restaurants, as well as their bathrooms, are almost always immaculate. I don’t know about you, but I’ll pay more for clean any day of the week.
They Know What They’re GREAT At: Most businesses try to be a jack of all trades, which ends up causing them to be master of none. That’s why Chick-fil-A will never have a burger on their menu. Why? Because they don’t care. They know they’ll never be the best at beef but they sure as heck have created a culture around the chicken sandwich. Wow, what a lesson this is for those businesses out there with no identity, niche, or individual greatness.
They Ain’t Cheap: Yep, having high prices is actually a GOOD business model. I don’t know about you, but the idea of having to sell a lot to make a little stinks. Chick-fil-A has prices a good bit higher than most of their fast food competitors, notwithstanding they are always full of smiling customers, just waiting to spend the extra green stamps. These higher prices lead to better employees, service, food quality, customers, etc. I’m sure never once has their management even asked, “How can we be the cheapest?” But I’d bet my home they’ve asked, “How can we be the best, regardless of what it costs?”
Ambiance: The next time you go to Chick-fil-A check out all the little things they do to make their restaurants warm and attractive. They have photos of employees, quotes on the walls, paintings from local children, etc. Everywhere you look in one of their stores you’ll find something that makes you smile.
Community Involvement: Wow do they do this better than any fast food company. In fact, this one isn’t even close. They are constantly doing promos within the community for youth teams, causes, etc. In fact, it’s like they’ve taken social media to another level because for them it’s not just about using Facebook and the like, it’s about actually being involved and in the trenches. Huge props to Chick-fil-A for this.
Awesome Website: All of you that read this blog know how I feel about the importance of having a great website and web presence in order to be a successful business. If you want to see what a great business website looks like, head on over. Whether it’s bios of the employees, social media links, customers stories, etc—this site is spot-on.
The Food is Actually Good: Ahh yes, lest we forget this other forgotten trait of fast food restaurants—great food. Everybody likes Chick-fil-A. Nothing on their menu is poor quality. They’re proud of their food and they have every right to be.
So there you have it folks—the 8 qualities of the best business model in America. What’s great is that every business can copy the way Chick-fil-A has built their company. The qualities listed above are simply principles that can be applied to any business or any website for that matter. So if you’re lacking inspiration for your business, it might be time for a Chicken Sandwich and waffle fries.
**Author’s Note: It goes without saying that I have no affiliation with Chick-fil-A, I just happen to write about greatness when I see it.
In manufacturing, managers focus on scheduling the activities needed to transform raw materials into finished goods. In service organizations, they focus on scheduling workers so that they’re available to handle fluctuating customer demand. Each week, therefore, every BK store manager schedules employees to cover not only the peak periods of breakfast, lunch, and dinner, but also the slower periods in between. If he or she staffs too many people, labour cost per sales dollar will be too high. If there aren’t enough employees, customers have to wait in lines. Some get discouraged, and even leave, and many may never come back.
Scheduling is made easier by information provided by a point-of-sale device built into every BK cash register. The register sends data on every sandwich, beverage, and side order sold by the hour, every hour of the day, every day of the week to a computer system that helps managers set schedules. To determine how many people will be needed for next Thursday’s lunch hour, the manager reviews last Thursday’s data, using sales revenue and a specific BK formula to determine the appropriate staffing level. Each manager can adjust this forecast to account for other factors, such as current marketing promotions or a local sporting event that will increase customer traffic.
Businesses that provide both goods and services, such as retail stores and auto-repair shops, have the same inventory control problems as manufacturers: keeping levels too high costs money, while running out of inventory costs sales. Technology, such as the point-of-sale registers used at BK, makes the job easier. BK’s system tracks everything sold during a given time and lets each store manager know how much of everything should be kept in inventory. It also makes it possible to count the number of burgers and buns, bags and racks of fries, and boxes of beverage mixes at the beginning or end of each shift. Because there are fixed numbers of supplies—say, beef patties or bags of fries—in each box, employees simply count boxes and multiply. In just a few minutes, the manager knows whether the inventory is correct (and should be able to see if any theft has occurred on the shift).
1aHicks, B. (2007, November 22). Burger King in London [image]. CC BY-SA 4.0 Wikimedia. https://commons.wikimedia.org/wiki/File:Burger_King_in_London.jpg
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- Burger King (2016). “About Us.” Retrieved from: http://www.bk.com/about-bk ↵
- Information on Burger King was obtained from an interview with David Sell, former vice president of Central, Eastern, and Northern Europe divisions and president of Burger King France and Germany. ↵
- NPD (2012). “Drive-Thru Windows Still Put the Fast in Fast Food Restaurants, NPD Reports.” Retrieved from: https://www.npd.com/wps/portal/npd/us/news/press-releases/pr_120530a/ ↵
- Carlzon, J. (1987). Moments of Truth. Cambridge, MA: Ballinger Publishing Company. ↵
- Ritz-Carlton Hotels. Gold Standards. Retrieved from: http://www.ritzcarlton.com/en/about/gold-standards ↵
- Kelso, A. (2014). “Business lessons from the late founder of Chick-fil-A.” Retrieved from: http://www.qsrweb.com/articles/business-lessons-from-the-late-founder-of-chick-fil-a/ ↵
- Sheridan, M. (2010). “8 Reasons Why Chick-fil-A has the Best Business Model in America.” Retrieved from: https://www.thesaleslion.com/8-reasons-why-chick-fil-a-has-the-best-business-model-in-america/ ↵