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(originally published by Booz & Company)

Operations & Manufacturing: The Essentials from Booz & Company

Service Operations as a Secret Weapon

Effectively managing service operations is crucial to controlling labor costs and improving customer satisfaction. By addressing six drivers of performance, executives can go a step further — turning their service operations into a key source of competitive advantage.

Many companies have successfully transformed their manufacturing, R&D, and other business functions, improving their performance while stripping out cost. Yet far fewer have optimized their service operations, even though they can have an outsized effect on customer acquisition and retention. When service levels and costs are properly balanced and optimized, they can deliver a substantial and sustainable competitive advantage that competitors will find hard to match.

By their nature, service operations are often labor intensive and complex to manage. Repetition and consistency, typical hallmarks of excellence in service operations, can work against a company that is trying to achieve step-change improvements in processes and behaviors. Additionally, executives across many industries are finding it increasingly challenging to keep service costs in check (especially labor costs, the single largest cost component of any service operation) while maintaining service levels. Recent technological advances — for example, self-service kiosks commonly found in airports, banks, and hotels — have helped improve overall productivity, but technology is only one part of the solution.

Designing a tailored set of service models based on customer segments is a prerequisite for providing the desired services without overspending. Whether the business is a retailer trying to optimize sales floor coverage, a hospital seeking to improve care delivery by better allocating nurses and beds, a hotel working to speed up check-in times, or a manufacturer delivering technical support in global markets, the leaders of the organization must rigorously and holistically manage the factors that affect service delivery and costs.

Six Principal Drivers of Service Quality and Cost

Service operations leaders must be in a position to identify and capture opportunities for improvement. To help, Booz & Company has developed a framework that encompasses the main factors determining the quality and cost of service.

1. Product and process design. The foundation for high-quality, cost-effective service operations is established far upstream of the point of service delivery — during product design or, in the case of services companies, process design. Design affects quality and total service costs in significant ways. In particular, it can reduce service costs early in product life cycles by reducing defects, and it can reduce total service costs by shrinking the time it takes for a product to move from infancy to a stable, mature stage.

Streamlining product architectures and configurations, for example, can have a beneficial effect on service. One computer equipment company saved on repair, order processing, and technical support costs simply by installing its largest hard drive in every unit sold.

Analyzing quality at the product level can also help discern problems that can lead to higher service costs. By uncovering notable differences in mean time between failures (how often a product breaks) and mean time to repair (how long it takes to fix it) between products developed internally and those developed by a third party, another computer manufacturer was able to take steps to close the gap by improving design and technician training for the inferior products.

Embedding remote diagnosis and repair capabilities in products and processes can simultaneously reduce service costs (right part, right place) and enhance customer satisfaction and loyalty.

2. Service-level labor requirements. Typically, labor is the largest cost in service operations and a key driver of customer satisfaction. Matching service requirements to customer needs, desires, and expectations is job number one. Some customers may want a lot of hand-holding, whereas others may be content with self-service options, for example, bank ATMs, grocery self-checkouts, and automated tech support online or via phone. Matching customer expectations with the service delivery method increases revenue and simultaneously lowers the cost-to-serve.

Service operations leaders analyze usage patterns and consider them in light of corporate targets, such as market share and revenue goals, to ensure the proper service coverage. One company with a large and active mail room undertook such an analysis and discovered that misalignments in its service coverage resulted in unnecessary idle time at some times of the day and backlogs at other times. By realigning coverage with demand, the company was able to process incoming demand within the agreed-upon service level, as well as reduce labor costs by decreasing coverage during slow periods. This change enabled the company to increase overall productivity, and improved customer satisfaction — resulting in increased revenues.

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