group 13 shouldice hospital limited

Term II, PGP 2010-2012

Submitted To:

Submitted By:

PGP 2010-2012 Operations Management Group 13

Contents

Introduction:...................................................................................................................3

Problem Analysis:...........................................................................................................4

Present Status of Capacity..............................................................................................4

1. Operation Theatres...............................................................................................4

2. Hospital Beds........................................................................................................5

3. Full Time Surgeons..............................................................................................5

Evaluation of Options.....................................................................................................5

Option 1: Increase bed capacity by constructing a new floor...................................5

Option 2: Operating on Saturday................................................................................6

Option 3: Construct a similar hospital in US with same capacity...............................8

Recommendations:.........................................................................................................8

Exhibits:..........................................................................................................................9

Exhibit1:......................................................................................................................9

Exhibit2:......................................................................................................................9

of 9


Introduction:

The Shouldice Hospital Ltd. represents a success story of consumer friendly innovation. The

hospital carries forward the legacy of Dr. Earle Shouldice, who had developed a new

technique for performing external hernia operations. The method differentiates itself from

others on three parameters:

1. Early ambulation: the recovery time for patients is 4 days as against 5 to 8 days

2. Very low recurrence rate: 0.8% as against the average 10%

3. Low Cost: around $ 1050 as against the average $ 2000 to $ 4000

The hospital, located in Ontario, Canada is specialised for hernia operations only. Their

surgical staff is trained to perform the Shouldice method. Compared to industry average of

25-50, their surgeons perform at least 600 hernia operations per year.

The popularity of Shouldice has been based completely on word-of-mouth publicity. Patients

are generally referred by past patients and physicians. To encourage this further; the hospital

organizes an annual reunion of past patients and also provides free of charge health check up.

Being in a high customer contact service industry, Shouldice takes all efforts to make it a

pleasurable experience for consumers (patients). Typically, a patient, after preliminary

confirmation of hernia, is allotted an operation date. The patient has to report on the previous

day and get himself checked for hernia and fitness to undergo a surgery. The confirmed

patients are then admitted. They are operated upon the next day. Immediately after the

operation, patients are encouraged to move about and exercise to emphasise the early

recovery achieved by this method. This also gives the patients a sense of control over the

process. The patients are taken care of for 3 full days and discharged on the fourth morning.

The brief admission process is illustrated in Exhibit 1. Exhibit 2 illustrates the process on the

day of the operation. During their stay, patients enjoy the exercises and the interactions with

other patients. This makes it a cherishable experience for the patients.

of 9


Problem Analysis:

With their current state of operations, Shouldice is unable to capitalize upon the huge demand

for their service. The facility has 12 full time surgeons, 5 assistant surgeons and 5 operating

rooms. This is supported by a staff of 28 full time and 12 part time nurses, each of them

trained well for a good customer interaction. Each surgeon performs typically 4 operations

per day. 82% of the operations are primary operations, which take 45 minutes to complete.

The rest 18% are recurrence operations on cases previously operated elsewhere, which are

more complex and require about 60 to 90 minutes. The no. of operations being performed per

week can be as high as 165 during peak season in September. Even when there is decline in

activity, 145 operations are performed per week. Currently, no operations are performed

during the weekend. The hospital has a current capacity of 89 beds. Another 14 beds are

available in the clinic, which can be utilised during the peak season. Despite all this, the order

backlog has gone up to as high as 1200.

To serve this huge demand the management is seeking different ways to increase the

capacity. But, the challenge is to keep a control over quality while growing out. Negligence

may result into increased recurrence rates. The success of the Shouldice method has also

exposed it to other practitioners who are trying to copy the method without proper regard to

details. This may result into degradation of the credibility of its brand. Hence, controlling

such misuse of its name is also one of the major challenges for Shouldice.

Present Status of Capacity

Before exploring new options to increase the capacity, let us have a look at the current output

capacities of various resources being employed.

1. Operation TheatresMinimum time for surgery 45 mins (82%)Maximum time for surgery 90 mins (18% average 60-90 mins)Average time for surgery 53.1minsMorning session 5 hoursAfternoon session 3 hours

Maximum capacity of 5 op rooms (5*60/53.1)*5+(3*60/53.1)*5= 45.2 operations/ day = ~ 45 operations /day =225 Operations/Week

2. Hospital BedsNumber of beds available in hospital 89

of 9


Number of beds available in clinic 14Total number of beds available 103Maximum number of patients handled by system 103*5/3 (average stay of each patient is 3 days) = 171 patients/ weekActual value 145- 165Mean Value 155

3. Full Time Surgeons

No of Full time Surgeons 12No of operations performed/surgeon per day 4Total No of operations performed/surgeon per day =12*4 = 48No of operations performed/surgeon per week =48*5 = 240

In this system, bottleneck is due to the hospital bed capacity. Hence, maximum number of

patients treated a week is restricted to 171 patients per week.

Evaluation of Options

Option 1: Increase bed capacity by constructing a new floor

As bed capacity is the bottleneck, so it is increased by 50% as explained below.

Number of beds available in hospital (50% increase in

capacity of bed)

89 * 1.5 = 135 (approx.)

Number of beds available in clinic 14

Total number of beds available 149

Maximum number of patients that can be handled

(since, patients usually leave in three days)

149*5/3 ~ 250/week

Actual demand 145 to 165 operations/week

Current Mean Value 155 operations/week

Thus, the capacity of beds is increased to 250 operations per week. Now, our output is limited

by the capacity of operation theatres, which is 225. Thus, net increase in capacity is 70 (225-

155) operations per day.

Investment on constructing a new floor $ 2 million

of 9


Current average number of patients 155 per week (Average of 145-165)

Investment cost per patient 2,000,000/(155 * 50) = $ 258 (approx.)

Revenue generated per patient(111*4 + 450 + 0.49*60 + 75 * 0.05) = $ 927

Explanation : $ 111 stay charges/day for four days, $ 450 surgical fees, 49% assistant fees to

revenue , anaesthetic charges ( assuming probability be 5%)

Total Revenue due to increased patients 927*50*70= $ 3244500(There are 50 working weeks and 70 patients are increased)

Increase in variable cost20,000*8 + 2,800,000* 0.5 * 0.5 = $ 860,000

Assumption: Due to increase in bed capacity, 50% more floor supervisors (salary $ 20,000)

are required. Variable cost, assumed to be 50% of operating cost of hospital, will be

increased by 50% with increase in capacity.

Difference between Total Revenue due to increased patients and variable cost $ 2,384,500Time of recovery of investment cost $ 2, 000, 000/2,384,500 = 1 years (approx.)Profit after first year $ 2,384,500 per year

Thus, we can see that our investment is recovered within one year. And thereafter we can

earn a profit of 2,384,500 over revenue of 3,244,500. Also, it is one time investment and the

variable cost associated with it is very small compared to the revenues generated.

Option 2: Operating on Saturday

This will be an increase of the operating capacity by 20% by operating on Saturday.

Financial impact:

Operation charges and yearly operating income by current status:

Particulars (USD)Hospital Stay 444Surgical Fee 450Assistant Surgeon Fee 30Total Charges for Normal Operation. 924Anaesthetic Charges 75Total Charges for Critical Operation 999Percentage of Critical Operations 0.05No of Critical Operations Per Day 1.65AVERAGE TOTAL CHARGES 30615.75

of 9


Average No of Operations/day 33No of Working Days Per Month 20TOTAL YEARLY CHARGE: (USD million) 7.35

Adding one working day will also lead to increase in expenditures on salaries. Let us first

calculate the existing expenditure on wages.

Total salaries paid for the year (USD)Full Time Surgeons 1100000Part Time Surgeons 242352Nurses 800000Anaesthetic Charge 72000Bonuses Distributed 65000TOTAL 2279352

ANNUAL OPERATING EXPENSES (USD million)Hospital 2.8Clinic 2Total 4.8

Annual Operating profit = (7.35-4.8) = 2.25 USD million

Saturday Operations (in USD million)Yearly increment in charges 1.47New Total Yearly Charge 8.82

We are assuming that 50% of operating cost (other than salaries) is variable.

So (4.8 – 2.28)*50% = 1.26 USD Mn.

We are increasing salaries and other variable expenses by 20% due to increase in working day.

Increment in Total Expense=(1.26+2.27)*0.2 0.708Total Expense 5.508

Increase in profit due to increase in capacity by working on Saturdays is

(3.312 – 2.55) = 0.762 USD million profit (29.8%).

We can see that by adding on more working day per week, we achieve capacity expansion of 20%, and an increase in profit of 29.8 %. No immediate huge investment is required. Moreover, since the facilities are retained at the old location, there is better control over the quality of the process. The high degree of specialization is also maintained. However, since one working day is added, the employees may not be happy with the decision.

of 9


Option 3: Construct a similar hospital in US with same capacity

Here we shall evaluate the option of constructing the hospital in the US with same capacity as

42% of the patients are from USA. As per the case, we do not have enough data to evaluate

the option. Estimating cost and revenues would have to be based on far too many

assumptions, if at all it is possible. Moreover there are serious issues in quality control if the

hospital is opened in US. Recurrence rate of all operations performed at Shouldice is 0.8%

while that in hospitals in US is 10%. We do not have specific information about the Govt

regulations in US which might be an important factor in making the decision. Since we

already have an excess of demand in Canada, it is better to invest in expanding hospitals in

Canada rather than setting up new hospitals in unknown territories like US.

Recommendations:

Based on the above analysis, we recommend that the most efficient way to increase the

capacity is to add another floor to the existing hospital facility. This will help in catering to

the existing backlog of 1200 patients. The capacity is increased by 50 %. The investment is

one time and is recovered within one year. Also, the low variable costs associated with its

maintenance assure a healthy profit margin over the added revenue. The control over quality

is also ensured.

Increasing the no. of working days is not recommended. The variable costs associated with it

are very high and it also violates the existing employee policy of the organization. We do not

recommend opening of new facility at another location in the U.S, since it can result in

deterioration of the quality. This may increase the recurrence rate and dilute the credibility of

the unique method. The existing employees are not also pleased with this consideration.

To control the menace of misuse of its name, we recommend that Shouldice should file for

patent protection of their method. This can also be a source of revenue if the firm decides to

earn a royalty in return of use of its method.

of 9


Exhibits:

Exhibit1:Process flow diagram illustrating the admission process before operation day.

Exhibit2:Process flow diagram of the operation day

of 9

group 13 shouldice hospital limited

Documents