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Service Delivery System Design

Chapter outline

5.1 Defining service

5.2 Service-product bundle

5.3 Service delivery system matrix

5.4 Customer contact

5.5 Service recovery and guarantees

5.6 Globalization of services

5.7 Employees and service

5.8 Key points and terms

The service economy accounts for more than 80 percent of jobs in the United State:: and in most industrialized economies in Europe and Asia today. Yet service pnr duction often receives little emphasis in many business and operations manage- ment courses. Increased emphasis on service process design is needed to reflec: the importance of services in modern economies.

Unlike manufacturing processes, we see service processes every day. As custom- ers, we participate in the process and immediately know whether we are receivin. good or bad service. When was the last time you enjoyed really superior service~ Unfortunately, world-class service is rare. For example, were you happy with you:- last service encounter for automobile repair? Do you enjoy waiting in the doctor 's: office? And what do you think of most airline service?

Services are delivered by a wide variety of organizations-from businesses: selling services to consumers (restaurants, appliance repair), to other businesses: (consulting, accounting), to nonprofit services (health care, education), and to goY- ernment services (licensing, police protection) . The operations function in the organizations varies widely, but there are common elements that allow us to stud~­ the processes used in service organizations.

What can be done to improve services? Service process design is an essentia:. ingredient of better service delivery. We take the ideas of process selection ana extend them to services. We expand the discussion into the domains of service product offerings, service system designs, globalization of services, service

Chapter 5 Service Delivery System Design 87

Operations Leader Montgomery County Public Schools

The Montgomery County Public Schools in Maryland re- ceived the 2010 Malcolm Baldrige National Quality

ward. Since 1999, when the education category was created, only five other school districts in the United States have been recognized with this claim of excellence.

With over 11,500 teachers and 22,000 employees .vorking to educate more than 144,000 students from 164 countries speaking 184 different languages across 200 schools during the 2010-2011 school year, he Montgomery County Public Schools was the 16th

largest school system in the United States and had a iscal year 2011 operating budget of approximately

52. 1 billion. Its mission-"To provide a high-quality, w o rld-class education that ensures success for ev- ery student through excellence in teaching and learning"-is reflected in various outcome-based metrics of service excellence:

o A June 10, 2010, report titled Diplomas Count 2010 by Education Week ranked the Montgomery County Public Schools first among the 50 largest school districts in the U.S.A. based on a gradua- tion rate of 83.1 percent, a graduation rate that is substantially higher than the 68.8 percent gradua- tion rate for the entire country. In 2009, with a graduation rate of 80.7 percent, the Montgomery County Public Schools tied a Texas school district for the first-place ranking.

o The graduating class of 2010 saw an increasing number of students participating successfully in advanced placement coursework. Advanced placement courses are equivalent to undergradu- ate course offerings for which a student can re- ceive college credit contingent on excellent examination scores. More than 5000 students from the class of 2010 passed at least one ad- vanced placement exam with a score of 3 or higher (out of 5 maximum). This translates into a passing rate of 50 percent, compared to the 16.9 per- cent passing rate for the entire country.

o The class of 2010 reported an average total SAT score of 1653. The SAT is a standardized test for college admissions. Not only did the 1653 average SAT score surpass previously documented SAT scores in the history of the Montgomery County Public Schools, it also surpassed the national aver- age SAT score by 144 points.

Photograph available from baldrige/award_recipients/mcps_profile.cfm

• Because of scholastic excellence, graduates of the class of 2010 had qualified for more than $230 mil- lion in college scholarships-a 28 percent increase from the class of 2009 in college scholarships.

Besides these student-centered, outcome-based metrics of service excellence, the Montgomery County Public Schools also tracked and improved performance metrics for resources and operational activities such as availability and delivery of school supplies, mainte- nance and repair of equipment, satisfaction and reten- tion of employees, and reduction in energy waste. For example, whereas the 2009 national turnover rate for teachers was 16.9 percent, the turnover rate for teach- ers employed by the Montgomery County Public Schools was merely 4.6 percent.

Excellence in the service delivery system for educa- tion in the Montgomery County Public Schools did not occur overnight. The effort began in 1999 when the Our Call to Action: Pursuit of Excellence strategic plan was created. This strategic plan, with its periodic updates, became the guidance behind comprehensive reforms and continual improvements of all aspects of education delivery within the Montgomery County Public Schools. In July 2011, the Montgomery County Board of Educa- tion approved an updated Our Call to Action: Pursuit of Excellence strategic plan to guide policies and decisions for the 2011 through 2016 time periods.

Source: Adapted from "Climb to the Top," Quality Progress 44, no. 1 (April 2011 ), pp. 39-47; baldrige/baldrige_recipients201 O.cfm; http://www.,2012; http://www.;2012.

88 Part Two Process Design

guarantees, and the important role played by employees in service organizations. For an example of world-class service, see the Operations Leader box on Mont- gomery County Public Schools.


Most definitions of service stress the intangibility of the offering. Services are in- deed intangible; that is, their processes create value for customers by performing transformations that do not result in a physical entity (product). However, ser- vices can be difficult to define and cannot be easily quantified; for example, do hospital patients consume one service or multiple services as they receive tests and treatments-perhaps numerous in quantity? Rather than specify a formal def- inition of a service, it is important to consider the characteristics of such processes and their implications for both managers and customers.

Simultaneous production and consumption is a critical characteristic of services because it implies that the customer may be in the production system while produc- tion takes place. The customer can introduce uncertainty into the process by placing demands on the service provider at the time of production. Also, the simultaneity of production and consumption means that most services cannot be stored. Examples are tax and accounting services, retail services, automobile and appliance repair ser- vices, and government services. Simultaneous production and consumption implies that the service must often be located near the <Customer so that the customer can travel to the service provider or vice versa. Exceptions are communications and electricity services that can be provided over long distances (e.g., television broad- casting, call centers, and electric power).

It is important to distinguish between service processes that are front office and those that are back office. Processes that require the presence of or interaction with the customer are front office service processes. Processes that do not require the presence of the customer are back office processes. The importance of simultaneous production and consumption therefore applies to front office services because the customer is participating in the process. For example, bank tellers and dentists provide front office services when interacting with customers. This interaction within the service process between providers and customers is critical to service process design but quite foreign to manufacturers. We account for this interaction with the customer as we discuss service processes throughout this chapter.

Back office services, in contrast, can be performed separately from their con- sumption by the customer. Check processing in banks and X-ray development in dental offices are back office processes that are not produced and consumed simul- taneously but become valuable to the customer some time after the work is per- formed. Therefore, back office processes do not have to accommodate an interaction with the customer.

Because characteristics of services vary widely and the extent of interaction be- tween the provider and the customer can also vary greatly, it is difficult to generalize about services. However, they are clearly different from products that are outputs of manufacturing. Some of the important contrasts between products and services are shown in Table 5.1.

The definition of the service-product bundle in the following section provides a foundation for management activities. Additionally, a classification system distin- guishes among different types of services and the associated management tasks.

-!.BLE 5.1 - erences Between

duct and a ce

A Product

A product is tangible Ownership is transferred at the ti me of purchase A product can be resold A product can be demonstrated before purchase A product can be stored in inventory Production precedes consumption A product can be transported

The se ller produces

*Exceptions are electricity and communications services.

Chapter 5 Service Delivery System Design 89

A Service

A service is intangible Ownership generally is not transferred No resale is possible A service does not exist before purchase A service cannot be stored Produdion and consumption are simultaneous A service cannot be transported (though

producers can bef The buyer can perform part of the production

Such a classification system-the service delivery system matrix-is provided later in the chapter.


Before the process to deliver a service is designed, the service-product bundle must be defined. The service-product bundle consists of three elements:

1. The tangible service (explicit service). 2. The intangible or psychological benefits of the service (implicit service).

3. The physical goods (facilitating goods).

Most services come bundled with tangible services, intangible benefits, and facili- tating goods. For example, when customers go to a fast-food restaurant, they receive both a tangible (explicit) service, which they hope is fast and accurate, and a facilitating good, the food . In this case, the intangible benefits (implicit service) are the customer's feelings about the interaction and the pleasantness of the sur- roundings. Many services (e.g., medical services) have fixed facilitating goods, such as the office and equipment that are used but not consumed during delivery.

In the case of a taxicab ride, the explicit service is the transportation from one place to another and includes customer perceptions and experiences such as the sound, sight, smell, and feel of the ride. The implicit service is the sense of well- being and security that the cab ride ideally provides. Finally, the taxicab is the facilitating good. It is important in the design of the service not to overemphasize one piece of the service-product bundle and neglect the other elements. New York cab drivers are often accused of making just this mistake when they say, "You got your ride, why are you complaining?"

Most services require a more complex design than a taxicab ride. Consider, for example, any pizza store that delivers (e.g., Domino's). The explicit service is the availability of delivery service and the time it takes for delivery. The implicit service relates to the "clean-cut appearance" and courtesy provided by the delivery agent. These implicit services contribute to a sense of professionalism and security for the customer. The facilitating goods are the pizza itself, which should be delivered hot to the customer, and the pizza delivery vehicle. Consider, as another example, the ex- plicit services, implicit services, and facilitating goods for a ski resort. The tangible (explicit) service is the experience gathered by the five senses in the chalet, the shops, and the ski runs. This includes interactions with the resort employees, the visual ex- perience, the grooming of the slopes, and the challenging nature of the runs. The

90 Part Two Process Design

FIGURE 5.1 Comparison of various products and services packages.


Products Services

100% 75% 50% 25% 0% 25% 50% 75% 100%

Self-service groceries


Installed carpeting I Fast-food ~estaurant

Auto maintenance


Consulting services

implicit service is having fun and the exhilaration of skiing. The facilitating goods are the chair lifts, the buildings, and the mountain itself. The ski resort must ensure that it plans and manages all three aspects of the service-product bundle.

Figure 5.1 provides more examples of a variety of service-product bundles. Notice that most of the bundles typically are provided by service organizations, for example, self-service groceries, fast-food restaurants, and auto maintenance, whereas an auto- mobile typically is considered a manufactured product. Here, we include the auto- mobile as an example of a service-product bundle because the purchase of a new auto includes several service elements that customers recognize and pay for. The auto bundle includes not only the physical product but also the ability to test-drive and finance the product at the dealership in addition to the manufacturer warranty that covers the auto. The combination of these service elements with the product makes up what we consider a service-product (or product-service!) bundle.

The task for operations management, before delivering any services to custom- ers, is to design the service delivery system. That system includes all the processes that will be used to deliver services, including details such as the technology used in the process design, the types of employees needed, and even the appearance of the employees and facilities. While operations management can fairly tightly con- trol both the explicit service and the facilitating goods, implicit services- or the feeling customers get from a service- are obviously harder to control (and may vary greatly from one customer to another). Therefore, it is important that man- agement use the means it has available (e.g., technology or employees) to do its best to design the intended feeling into the service delivery system.

An important point to emphasize is that the design of the service to be deliv- ered and the design of the service delivery system are intertwined and, often, can- not be conducted separately. Also, the delivery of a service is a simultaneous marketing and operations act that requires both the right visual cues and well- functioning processes. Therefore, cross-functional cooperation is the essence of service design and delivery. Service cannot be provided without it.

Like products, services have supply chains, although they may be less con- cerned with the flow of the physical product and more concerned with the flow of work, customer, and information. Services use inventory, and so they rely on product-based supply chains to provide that inventory. But they also rely on

Chapter 5 Service Delivery System Design 91

intangible work, information, and financial flows. For example, a hospital patient requires service processes for explicit service treatments (surgery, perhaps) and additionally the work flow of outsourced lab tests, the information and financial flows from insurers, and coordination of work and information as the patient is discharged from the hospital to a rehabilitation center. Such a complex network of supply chain activities mirrors the activities of product-based supply chains but usually includes both tangible product flows and intangible work flows .


_ oodles and - ompany-Service

ign," Vol. XV

There are many ways to think about services, the options they offer customers, and the variety of ways in which they can be delivered or carried out. For exam- ple, some services can be delivered in only one standardized way and every cus- tomer gets more or less the same service. Other services are highly customized to customer requests, and exactly the same service is virtually never repeated for another customer. The challenge for management is to design the right service process to match the service delivery system to the requirements of its customers.

To incorporate both customer preferences and design requirements of the ser- vice delivery system, Collier and Meyer (1998) suggest the service delivery system matrix, which is shown in Figure 5.2. On the top of the matrix is the dimension of customer wants and needs, which captures the service package (or service-product bundle) customers are seeking. This dimension incorporates the uniqueness of de- mands from one customer to another, an indication of the uncertainty and varia- tion introduced into operations by individual customers. Customers with basically the same wants and needs can be served by processes that are highly standardized and routinized, whereas customers with unique wants and needs must be served by processes that allow a great variety and high levels of customization.

The vertical side of the service delivery system matrix represents the opera- tions service system and denotes the number of different pathways that service customers can take in the service process. In other words, this side of the service delivery system matrix answers the question: "How many different ways can the service be delivered?" It varies from a single pathway or small number of path- ways to a virtually infinite number. A small number of pathways allows few op- tions in how the service is delivered; however, an infinite number of pathways allows the service to be different each time it is delivered.

When both dimensions of the service delivery system matrix are considered, three types of services can be identified. Customer-routed services are those in which cus- tomers want a unique, highly customized experience. Customers have a great deal of decision-making power to determine the components of the service as well as how and when and the sequence in which they are delivered. For these services, each cus- tomer wants a different set of experiences, and the service process must allow a great deal of personal discretion and interaction with the customer. These services are car- ried out using highly flexible processes and may rely on highly trained workers to deliver the right set of experiences to match customer wants and needs. Personal trainers, Internet shopping, and museums are examples of customer-routed services. Customer-routed services are similar to those delivered by the job shops described in the previous chapter in terms of their allowance for customization.

In the midranges of both customer wants and needs and service delivery sys- tem design, co-routed services offer a moderate number of choices to customers, using moderately standardized processes. Medical and stockbroker services fit in

92 Part Two Process Design

FIGURE 5.2 Service delivery system matrix. Source: Adapted from Collier and Meyer (1998).

-~ <JJ

"' 0 e .2l ~


~ "' .:::

0:: 0

"' v .E "' (/)

Many process pathways. Jumbled flows, complex work with many exceptions.

Moderate number of process pathways. Flexible flows with some dominant paths, moderate work complexity.

Limited number of process pathways. Line flows, low work complexity.

Customer Wants and Needs in the Service Package

Highly customized with unique process sequence. Customer has great decision-making power.

Standard with options, using moderately repeatable sequence. Customer has some decision-making power.

Standardized with highly repeatable process sequence. Customer has low decision-making power.

this category. A golf course is another example of a co-routed service in which management has designed the course to be played in a standardized sequence (from Hole 1 to Hole 18), but within the service delivery system customers have a reasonable degree of decision-making power in how they choose to play.

Finally, highly standardized services are delivered using a design for provider- routed services. These services are characterized by processes that allow few op- tions during service delivery and are matched with customers whose needs are very similar to one another. Automatic teller machines (ATMs) are examples of a service delivery system with a very limited number of pathways from which cus- tomers may choose. An ATM provides a limited set of services, and there is little customer discretion in using an ATM. Customers whose needs are not met by an ATM must interact with the bank via other means, such as calling or visiting a branch office. Eating at McDonald's and getting a blood test are other examples. Provider-routed services are therefore similar in nature to the assembly-line

Chapter 5 Service Delivery System Design 93

process. We refer to them as provider-routed because the provider, either an indi- vidual or an organization, decides how a particular service will be carried out.

The service delivery system matrix is intended not only to classify the different types of services but also to indicate how the operations management task differs among services. For example, provider-routed services may require operations management attention to automation and capital investment, but customer-routed services may require more attention to management of human resources and flexible technology issues.

Like the product-process matrix, the service delivery system matrix suggests that service firms be located on the diagonal, indicating alignment between the service package and the service process. Both the choice of which customer segments to serve (horizontal dimension) and decisions regarding design of the service delivery system (vertical dimension) are strategic in nature. Marketing, operations, and hu- man resources functions must work closely to ensure that external opportunities and internal capabilities have been considered during strategic planning.

The major difference between the service delivery system matrix and the product-process matrix that guides the selection and design of manufacturing pro- cesses is that the design of the service delivery system generally does not vary with customer volume. In the product-process matrix, the volume and customiza- tion of the product offering are the major factors in determining the most appro- priate production process. In contrast, services often are delivered using the same process whether they are produced in small or large volumes. For example, very similar processes are used for a medical service such as setting a broken leg re- gardless of whether the service is delivered at a large 2000-bed hospital, which has many such patients, or in a smaller 120-bed hospital. Similarly, fast-food res-

- -service appeals to many customers - - ¥ iding efficiency.

taurants treat customers the same way regardless of the num- ber of customers they serve and regardless of customer order size. To increase volume, fast-food restaurants simply open more locations, but the service process is the same. The de- gree of customization of a service, rather than volume, is the main characteristic that affects the design of the service pro- cess and the way the service is delivered.

Self-service by customers is also a consideration in service delivery system design. Customers may serve as labor at key points in a service process, such as bagging their own grocer- ies, or they may complete an entire service process indepen- dently, as occurs when they fill their tanks at a self-service gas station. Self-service usually benefits the firm as customers pro- vide "free" labor during service delivery. For self-service to be a successful component of service delivery system design firms must design their service processes carefully for both simplicity and customer satisfaction.

Self-service is possible delivery system for any of the types of services defined in the service delivery system matrix, from simple standardized services to highly cus- tomized services. A key issue for operations managers is designing self-service opportunities that customers are both willing and able to perform. While the relatively sim- ple self-service offered at ATMs appeals to a wide range of customer segments, having to pull one's retail selections

94 Part Two Process Design

from warehouse shelving (e.g., at IKEA stores) may limit the appeal of the retail service for some segments. For more highly customized service needs, such as planning a complex vacation, some customers revel in the intricacies of self- service websites, but other customers find it easier to purchase the services of a travel agent. An understanding of the needs of a firm's target customer seg- ments must serve as a guide to the right service delivery system design.


~ "The Service

System Design Matrix," Vol. XI

We now look at interactions between customers and ser,vice organizations in detail to understand the management of customer contact. Chase and Tansik (1983) re- late service processes to the extent of customer contact. With low-contact services, it is possible to separate a service into two portions: a service creation or produc- tion portion and a service consumption or delivery portion. By doing so, the cus- tomer can be removed from the service creation portion. Separating the customer from the service production portion allows for greater standardization of processes and therefore better efficiency. Examples of low-contact services are catalog order processing and ATM transactions. As indicated above, these services are usually designed using a provider-routed approach. See Figure 5.3, in which low-contact

FIGURE 5.3 Customer contact matrix. Source: Adapted from Richard B. Chase, F. Robert Jacobs, and Nicholas J. Aquilano, Operations Management for Competitive Advantage, lOth ed. (New York: McGraw-Hill, 2004). r


Sales opportunity

Low Worker


Focus of Operations


Buffered core (none)

Clerical Helping skills skills

Paper Demand handling mgmt.

Office Routing automation methods

Degree of customer/server contact

Permeable system (some)

Verbal Procedural skills skills

Scripting Flow calls control

Computer Electronic databases aids

Trade skills

Reactive system (much)

Diagnostic skills

Capacity Client mgmt. mix

Self- Client/ serve worker teams


Production efficiency


of Customer-

Chapter 5 Service Delivery System Design 95

services are referred to as buffered core because these services are buffered or re- moved from interactions with the customer.

At the other end of the contact spectrum, high-contact services involve the customer during the production of the service. Examples are dentistry, haircut- ting, and consulting. In these services, the customer can introduce uncertainty into the process with a resulting loss of efficiency. For example, a customer may impose unique requirements on the service provider, resulting in a need for more processing time. In this case the service delivery system design typically will be customer-routed unless customization has been limited by the provider. These interactions are referred to as reactive in Figure 5.3 because the service delivery system must react to customer requests. In the middle ground of cus- tomer contact, permeable systems have processes that are penetrated by cus- tomers in fairly restricted ways, usually via telephone or limited face-to-face contact.

Operations managers must be concerned with the amount of customer contact because higher levels of customer contact can introduce variability into a process. Variability is a challenge for operations managers because it makes capacity planning more difficult and can result in waiting lines. Variability within the service delivery system results from the uncertainty introduced by customers, which comes in many forms. Frei (2006) categorizes customer-introduced variability by various types of uncertainty. Table 5.2 defines these five types of uncertainty. Service firms must overcome the challenges of managing such types of uncertainty to be as efficient as possible. Service firms that try to accommodate all types of customer-introduced uncertainty may find that the cost of delivering the service begins to spiral out of control. Managing the uncertainty, either by using creative means to reduce it or by finding low-cost means of accommodating it, provides a better solution.

Chase and 'Fansik (1983) propose that …