Service Operations 87
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Services lie at the hub of economic activity in the United States. Service jobs account for almost 80 percent of total U.S. employment. As such, we say that the U.S. has a service economy. Within this service economy, the term service has several meanings when paired with other words. For example, a service firm is defined as one that derives more than 50 percent of its sales from providing services. RCA's service revenues now exceed its revenues from electronic manufacturing. A service package is a bundle of explicit and implicit benefits performed with a supporting facility and using facilitated goods. When you eat at a fast food restaurant (supporting facility), you may purchase a hamburger (facilitating good) that someone else cooked for you (service). The service concept is the perception and expectations of the service itself in the minds of the customers, employers, shareholders, and lenders. The service system is the equipment, layout, and procedures used to provide the service and maintain quality and delivery standards. The service revolution relates to the shift in the United States to a service economy and the proliferation of service automation.

A service operation is an open transformation process of converting inputs (consumers) to desired outputs (satisfied consumers) through the appropriate application of resources (family, material, labor, information, and the consumer as well). More simply, services are economic activities that produce time, place, form, or psychological utility. A meal in a fast food restaurant saves time. A meal with a date in an elegant restaurant with superior service provides a psychological boost. Wal-Mart attracts millions of customers because they can find department store merchandise, groceries, gasoline, auto service, dry cleaning, movie rental, hair styling, eyeglasses and optical services, and nursery items all in one place.

The U.S. economy consists of sectors producing goods and services. The goods-producing sector consists of manufacturing, construction, and extractive industries such as agriculture, mining, forestry, and fishing. Different types of services include business services such as consulting, banking and financial services; trade services such as retailing, maintenance and repair; social/personal services such as restaurants and healthcare; public services such as government and education; and infrastructure services such as transportation and communication.


Services are not peripheral activities, but are an integral part of society. Except for basic subsistence living, services are an absolute necessity for a functional economy and enhancement of the quality of life. While an industrial society defines the standard of living by the quantity of goods, a service society sees the standard of living through quality of life as measured by health, education, and recreation. The central figure in this society is the professional who can provide information rather than energy or physical strength. In addition, infrastructure services (communication and transportation) are seen as essential links between sectors of the economy. These infrastructure services are prerequisites for the industrialization of an economy, so no advanced society can be without them.

The United States, like most societies, began as an agricultural economy. As manufacturing became dominant, the economy became centered around industry. In the early part of the twentieth century, only 30 percent of those employed in the United States were working in services, with the rest in industry or agriculture. However, by 1950, half of the workforce was employed in services. In 1956, for the first time in the history of our industrial society, the number of white-collar workers exceeded the number of blue-collar workers. The United States can no longer be characterized as an industrial society, but rather as a postindustrial or service society. Services now account for approximately 70 percent of the national income and 80 percent of the jobs.

A traditional lack of productivity in the service sector is one reason for its increasing growth. Generally, productivity in services lags that in manufacturing and agriculture. As productivity grows faster in some segments (manufacturing and agriculture) these segments will invariably shed jobs that will then be picked up by the less productive sector (services). Also, during the past four recessions in the United States, service-industry employment actually increased as jobs in manufacturing decreased or were lost to other countries. This suggests that consumers will postpone purchases of hard goods but are not willing to give up services such as education, telephone service, banking, healthcare, and public services (such as fire and police protection). Finally, countries with successful manufacturing histories are the ones that now have the ability to create service jobs. There is a ripple effect from manufacturing to the creation of services, along with a continual stream of newly invented services for sale. Also, services can now be bought in greater quantities than in the past.

The fact is that the service sector has replaced the goods-producing sector as the economy's dominant force. This shift in the economic locus has variously been called the service sector revolution, the postindustrial revolution, the information age, and the technotronic age.


While the variety of services is endless, there are a number of characteristics that most services share. Services are generally performed with an open-systems perspective, that is, the system is not closed or isolated from the consumer as it is in manufacturing. The consumer is said to be within the service's "factory." There is a high degree of customer contact throughout the service process, with the customer frequently participating in the process itself. Customer participation within the process means that there is simultaneous production and consumption; thus, the service cannot be stored for later use, possibly as a buffer to absorb fluctuations in demand.

Although services can have tangible (high goods content) and intangible (low goods content) attributes, services are generally regarded as intangible, that is, you can't see, feel, or test a service's performance before purchasing it. Hence, reputation is extremely important. Since services are intangible, it makes sense that they can't be patented. The intangibility of services sometimes makes it difficult for the service firm to identify their product. Is the product at a restaurant the food itself, the service, or the atmosphere? Another problem, due to intangibility, is the difficulty in measuring output. Service output tends to be variable and nonstandard, making quality control and productivity measurement a problem. In fact, quality control is usually limited to process control. Even this is difficult since a high degree of personal judgment by the individual performing the service makes homogeneous input a near impossibility. Measures of effectiveness and efficiency are also subjective.

Services are time perishable. An empty seat on an airline means that that seat on that flight will never be available again. The same holds true for an empty hotel room. The empty room will never again be available on that particular night. The usefulness of service capacity is time-dependent—another reason that services cannot be inventoried and held for a later date. This means that services cannot be transferred or resold but must be sold directly to the customer. It also means that services cannot be mass produced.

Labor intensity is another characteristic of services. In fact, labor is usually the most important determinant of service organization effectiveness.

Site selection for services is usually dictated by the location of consumers. Preferably, services will utilize decentralized facilities within close proximity to customers.

Services can also have very weak barriers to entry. Though not true for all services, many require little in the way of capital investment, proprietary technology, or multiple locations.


Service firms can be classified according to their various characteristics. This allows clarification of the relationships between firms and customers and of potential strategies for competition.

A simple classification of services is by capital intensity and labor skills. This allows services to be grouped into equipment-based services and people-based services. Equipment-based services can then be subdivided into automatic services such vending machines and automated car washes; services monitored by unskilled labor, such as dry cleaning and movie theaters; and services operated by skilled labor, such as excavating, airlines, and computer services. People-based services are subdivided into those utilizing unskilled labor, such as lawn care, security guards, and janitorial service; those utilizing skilled labor, such as appliance repair, plumbing, catering, electrical work, and auto body repair; and professional services such as law, medicine, accounting, and consulting.

Though generally thought of as a manufacturing tool, Wheelwright and Hayes's product-process matrix also provides a basis for classifying services. This framework groups firms based on their position on the product life cycle and product structure and their stage within the process life cycle and process structure, yielding the classifications of project, job shop, batch, repetitive-assembly, and continuous-flow manufacturing. Projects include professional services in which the process is characterized by a number of interrelated, well-defined activities, accomplished in a sequence. Doctors, lawyers, and architects typically manage a number of projects. Job shops and batches define services that are tailored to the customers' specifications. Repetitive assembly has a line flow, as do services that can be standardized and divided into routine tasks such as university registration, license renewal, and military medical examinations.

Richard Chase has argued that service delivery systems can be improved by separating them into high- and low-contact operations and managing them accordingly. High-contact services must have their operations near the customer and must be able to interact well with the public, since quality is often subjective (in the eye of the beholder). Output is variable, so wages have to be time-based. Low-contact services can place their operations near their suppliers, labor, or transportation, since the customer is not in the environment. The workforce is required to have only technical skills, as work would be performed on a customer surrogate. This also allows wages to be output-based.

Roger Schmenner expanded this concept by including the degree of labor intensity and customization with the contact (interaction) classification. Service firms with low interaction/customization utilize standard operating procedures and pay less attention to physical surroundings. Firms with high interaction/customization strive to maintain quality, react to customer intervention and gain employee loyalty. Low labor-intensive firms concentrate on capital decisions, technological advances, maintaining a high utilization rate, and scheduling service delivery. Highly labor-intensive services emphasize workload scheduling, managing growth, hiring, training, and employee welfare.

In his 1986 article, "How Can Service Businesses Survive and Prosper," Shemenner provided a framework for understanding services and utilizing them strategically. This framework, which resembles Wheelwright and Hayes's Product-Process Matrix and is used in similar fashion, is called the Service Process Matrix. Within this matrix service firms are classified by their position on a graph with two dimensions. The horizontal dimension is the degree of labor intensity, which is defined as the ratio of labor cost to capital cost. The vertical dimension of the matrix measures the degree of customer interaction and customization. Firms that have a high degree of labor intensity and a high degree of interaction/customization are termed professional services. Service firms with a high degree of labor intensity but a low degree of interaction/customization are called mass services. Low labor intensity and a high degree of interaction/customization characterize the service shop, while firms with both low labor intensity and a low degree of interaction/customization constitute a service factory.

As with the product-process matrix, firms on the service matrix have strategic implications dependent upon where they fit within the matrix. Again like the product process matrix, service firms are generally more effective if they stay in close proximity to a diagonal running from the upper-left corner to the lower-right corner of the matrix.


Theodore Levitt, in his classic article, "Production-Line Approach to Service," describes how service managers can design their operations to achieve the economics of production. The design and conversion processes of services are sometimes called the "technical core." By insulating the technical core such that the customer has essentially no personal contact with the service providers, the business can operate more efficiently. The technical core can be insulated by restricting the offerings (fast food restaurants have very limited menus); customizing at delivery (as computers are); structuring the service in such a way that the customer has to go where the service is offered (like banks); trying to incorporate self-service so that customers can shop at their own pace; and separating services that lend themselves to automation (ATMs and vending machines). By insulating the technical core one can essentially apply to services what has been learned in manufacturing, namely standardization and mass delivery. Levitt uses the example of McDonald's to provide a picture of a service that utilizes manufacturing techniques to the point that the end product results in what he terms the "technocratic hamburger." McDonald's makes use of a limited menu, division of labor, a standardized product (food preparers at McDonald's have little or no discretion when it comes to making the product), task grouping to allow specialized skills, and an assembly-line approach, all applied to the technical core that is insulated (away from the ordering and seating area) from the consumer.


Location selection in services is a macro decision, while site selection is a micro decision. As with manufacturing, service location decisions involve such variables as expansion, impact on the environment, and governmental regulation. However, services also factor in such variables as access, visibility, traffic, competition and parking.

Service layout requirements are somewhat different from manufacturing but the same terminology is used. In both services and manufacturing we find the fixed-position layout, process layout, and product, or in this case, service-based layout. The fixed-position layout is the simplest. In this situation, the customer remains in one place throughout the service as materials and labor are brought to that location. If the customer or item being serviced must remain in one location, the service must relocate there, as with pool cleaning, landscaping, or home decorator consulting. In other cases, the nature of the equipment dictates a fixed position. Examples include dialysis machines, beauty salons, or psychiatric counseling.

In process layouts, similar machines, such as hair dryers in a beauty salon, are grouped together to produce batches of services (much the same as in the batch or disconnected line-flow process of the product-process matrix). University classrooms and movie theaters provide excellent examples of a process layout in a service environment.

If the equipment required to serve the customer is sequentially arranged according to the steps of the service process, the layout is said to be service-based (or product layout). As in manufacturing, the product layout can be continuous (without interruption) and is usually lacking in flexibility. Drivers license renewal, registration for university classes, and cafeterias are examples of a service or product layout.


As with manufacturing, service operations require a strategic approach. Metters, King-Metters, Pullman and Walton describe the strategic planning process as a hierarchy consisting of strategic positioning, service strategy, and tactical execution


Strategic positioning involves first defining the firm's target market. In other words, what is the set of customers the firm seek to serve. Next, the firm must determine its core competence or what will distinguish it from other service firms, i.e., cost leadership, differentiation, or focus. At this point, the firm then must make decisions regarding its mission and high-level goals and objectives.


At the service strategy level, the service firm must define its service concept, operating system and service delivery system. The service strategy links the firm's strategic position with tactical execution. The firm begins by determining its competitive priorities, and its order winners and order qualifiers. Competitive priorities are the characteristics of the firm or things that it does better than other service firms (e.g., low cost, quality, service, or flexibility). The firm's competitive priority(s) must be both an order qualifier and an order winner. The order qualifier is a characteristic that the service must possess in order to compete in the market. If the firm lacks this then the consumer will not even consider purchasing the firm's service. The order winner is the characteristic that will cause the consumer to purchase the firm's service over its competitors. The service concept then is the set of competitive priorities that the target market values.

The operating strategy describes how the firm's different functions (marketing, finance, and operations) will support the service concept. If the firm's order winning competitive priority is quality, what will operations do to ensure quality of the service and how will marketing promote this characteristic?

The service delivery system defines the components of the system necessary to execute the service concept. Examples of the needed variables are capacity requirements, quality management systems, and management policies. Each of these should support the firm's competitive priorities so that the firm is clearly distinct from its competitors.


Finally, the firm approaches tactical execution issues. Tactical execution involves the day-to-day activities required to function and support the service strategy. Included are capacity management, facility location, inventory management, facility layout, supplier selection, operations scheduling, staffing, and productivity improvement.

Decisions that are made in the above strategic planning process are heavily influenced by their position on Marc McCluskey's service maturity model. This model divides service maturity into four stages:

Stage 1: Baseline service—the focus is mainly on responding to requests in a timely manner.

Stage 2: Operational efficiency—the focus is on cost reduction

Stage 3: Customer support excellence—the focus is on efficiency

Stage 4: The focus is on changing the concept of service and growing market opportunity

McCluskey notes that most firms are still in stage 1, moving into the second.


A recent phenomenon in services is the application of automation. Often services lag manufacturing and agriculture in productivity. One way to improve productivity in services is to remove the customer from the process as much as possible by whatever means possible. One way is the use of automation. Many of these applications are things we see everyday but give little consideration; most were introduced in fairly recent times.

Financial services have seen the proliferation of ATMs and the use of electronic funds transfer. Education makes use of PCs, audio-visual equipment, calculators, translation computers and electronic library cataloguing. Restaurants and supermarkets make wholesale use of optical scanning. If you have been to Las Vegas or an airport you have probably stood on a moving sidewalk. Hotels utilize electronic reservation systems, electronic locks, electronic wake-up calls, and message services. Other fields such as government, communication, healthcare, and the leisure industry have all benefited from the automation of services. As technology advances, we are likely to see more and more services being automated as service productivity increases.

SEE ALSO: Inventory Management ; Layout ; Operations Scheduling ; Operations Strategy ; Order-Winning and Order-Qualifying Criteria ; Product-Process Matrix ; Purchasing and Procurement ; Service Process Matrix ; Vendor Rating

R. Anthony Inman


Levitt, Theodore J. "Production-Line Approach to Service." Harvard Business Review, September-October 1972, 41–52.

McCluskey, Marc. "How Mature is Your Service Operation?" Supply Chain Management Review 8, no. 5 (2004): 17–20.

Metters, Richard, Kathryn King-Metters, Madeleine Pullman, and Steve Walton. Successful Service Operations Management. Mason, OH: Thomson South-Western, 2006.

Schmenner, Roger W. "How Can Service Businesses Survive and Prosper." Sloan Management Review, Spring 1986, 21–32.

——. Service Operations Management. Englewood Cliffs, NJ: Prentice Hall, Inc., 1995.

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