DSE7100 Managing Service Operations

Discussion of Shouldice Hospital Limited Case

Assignment #2: Questions for Shouldice Hospital Limited

1. How Successful is the Shouldice Hospital? 2. How do you account for the success of the

hospital?3. What is the strategic service concept of

Shoudice Hospital? How are the elements in the service systems designed and managed to support the strategic service concept?

4. As Dr. Shouldice, what actions, if any, would you take to expand the hospital’s capacity?

5. How would you implement changes you propose?

How Successful is Shouldice Hospital?

• 140,000 highly satisfied “Alumni”(past patients)

• 1,200 backlog of scheduled operations• Demand appears to expand with supply• Superior quality Shouldice Method of

Hernia operation imitated by competitor• Low recurrence rate, 0.80% vs 10%• High degree of employee satisfaction

Cost Comparison: Shouldices vs. Other Hospitals

Shouldice OthersCosts of typical operations $954 (p9) $2000-4000Transportation $200-600 $0Time Lost from work in Hospital 4 days 5 daysTime lost from work while recovering 5 days 10 daysValue of time lost (ranging from $50 to 500 per day)$450-4500 $750-7500Total before Allowancefor recurrence $1604-6054 $2750-11500Probability of Recurrence 0.80% 10.00%Expected Cost of Recurrence $13-48 $275-1150Total cost to patient, employee and insurer $1,617-6,102 $3,025-12,650

How About the Profitability of Shouldice Hospital?Hospital:

Revenues

(4 days X $111/day x 6,850 patients/year) 3,041,400

Cost 2,800,000

Profit: 241,400

Clinic:Revenues (($450+ 60 + 75 X 0.20) X6,850) 3,596,250Cost 2,000,000

Profit 1,596,250

Total Profit 1,837,650

Return on equity

• Total Depreciated Assets: $5 mil• Return on Asset:

– 1,837,650/5,000,000 = 37%

• What is the return on Asset if they expand the capacity by 50% at the cost of $2 mil?– 1,837,650 x 1.50 / 7,000,000 = 40%

“The Dream World ”

• Shoudice is offering:– high quality service at low

price• Shodice is having

– Highly satisfied customers– Happy Employees

• Shouldice is also– making high profit

How is all of this achieved?What are the major reasons for the success?

• Maximizing the difference between perceived quality and value to the patient on one hand and the cost of supplying services on the other.

What is the Unique Service Concept?

• What does Shouldice hospital offer to its customers?

• The hernia surgery (the Shouldice method)

• Peace of mind/low risk/Low Recurrence• Independence/Dignity/Control• Social experience, fraternity• Excused absence from work without guilt• A vocation

• Market Focus– focus on a narrow segment of potential

patients who have hernia and– they are predominantly male, older in age,

essentially in good health– large market potential: 600,000 operations

in U.S. in 1979• Internal Focus

– Doctors: Dedicated to quality of shoudice method, tolerance for boredom, family oriented

– Nurses: people oriented, assist patients– Staff: flexible, team oriented

A Focus Strategy A Focus Strategy

Operating Concept

• Shouldicce achieves outstanding results as a low price and at a high profit because:– Everything done by the hospital is

designed to maximize the difference between perceived quality and the value of the service provided patients on one hand and

– the cost of providing the service on the other.

How did they do that?• Patients are carefully screened• Patients are active participants in the

service delivery process• The avoidance of general anesthestics

allows a wide range of involvement of patients

• Staff is freed from much disagreeable work• Reducing the cost of nursing,

housekeeping and laundry• Structure hospital jobs that involves more

counseling and positive interaction with the patients

How did they do that?– The Clinic is a focused factory resulting in:– Highly productive surgeon:

• 300 hernia/yr Vs. 30 by less focused surgeon

– Sharing of expensive services such as anesthetist

– Short and relatively regular hours for surgeon– high compensation ($50,000 + $40,000)– Opportunities for surgeons to observe and

and advise one another– Peer group pressure that leads to higher

level of self-control of quality– A conscious effort is made to make Shouldice

a “family”experience

The elements in the service system to support the service Concept (managerial elements) • Service encounter

– Doctors and nurses are carefully recruited– Employees trained to help / counsel

patients– Communal dinning for doctors, nurses ,

staff and patients

• Quality– adherence to Shouldice method– opportunity for surgeon to observe &

advise one another

The elements in the service system to

support the service Concept (managerial elements)

• Managing capacity & demand– Admission by appointment: scheduled service– Screening patients: easier to estimate the

service time– walk-in patients or local residents on waiting

list to make up cancelled reservation• Information

– Medical Information questionnaire– Free annual check-up -> unique data base on

the result of the surgery– Annual reunion to keep alumni informed and

gather customer feedbacks-> loyal customer base -> effective word-of-mouth

The elements in the service system to support the service Concept (structural elements)

• Delivery system– Maximum degree of customer participation– Efficient and low cost– Avoid a typical hospital atmosphere

• Facility design– Acres of gardens to encourage exercise & rapid

recovery – minimize hospital feeling (carpeting and odorless

disinfectant etc)– Stairways are designed for patients to use right after

operations– No TVs and Telephones in rooms to encourage walking– Operating rooms are located in semicircle to

encourage doctors to help each other and use the same anesthetist

The elements in the service system to support the service Concept (structural elements)

• Location– large city near air port -> access to

worldwide market– large local population to fill up cancelled

bookings• Capacity planning

– Elective procedures -> scheduled operations

– Balancing Capacity and improving capacity utilization

– Needs to increase capacity

The Capacity Decision

• Where is the bottle neck?• How should they increase the

capacity?• How should they implement

that change?

Shoudice Hospital Limited: Analysis of Capacity

Current Throughput• 6,850 Operations/50 weeks = 137 operations/week • ( with a peak of 165/week)

Capabilities• Examination Rooms:• (6 rooms x 3 hrs (1-4 PM) x 5 days x 60 min/hr) / (20 min /

exam) = 270 patients /week• Admitting Procedure:• (2 people x 4 hrs (1-5 PM) x 5 days/week x 60 min/hr) /

(10min/patient) = 240 patients/week• Nursing Station:• (2 stations x 4 hrs (1-5 PM) x 5 days/week x 60min/hr)/(10

min/patient)=240 patients /week

Shoudice Hospital Limited: Analysis of Capacity

Capabilities Operating Rooms:• (5 rooms x 8.5 hrs/room/day x 1.1 hrs/patient x 5

days/week)/ = 188 patients /week• Surgeons:• 11 surgeons x 3.5 operations /day x 5 days = 178

patients/week• Hospital rooms: (see transparency)• 89 rooms = 134 patients per week (assuming use of

weekends for convalescence and 3.5 days average stay)

• 103 rooms = 148 patients (assuming use of weekend for convalescence, 3.5 days average stay, and use of 14 “hostel” rooms for two nights each week)

How to expand the capacity?• Aim : increase capacity & maintain

control of service quality• Alternatives:

– Add Saturday operations– Add a new floor (45 more hospital

beds)– Establish a new facility for hernia– Expand to other types of operations– Others?

Please Help Shoudice to make the Decisions

• Which alternative do you recommend?

• Why?• How do you implement the

solution that you are recommending?

Add in a new floor (45 beds)• Total Number of Rooms: 89 +45= 134• Total number of patents per week = 193• 137 current throughput/148 theoretical• = x / 193 theoretical• New throughput = 193 x (137/148)= 179 patients /

week• Additional patients per year=(179-137) x 50=2100 • additional revenue for the clinic • = 2100 x (450+0.20 x 75) = $976,500 • Less cost 176,500 • Return on investment = 800,000/2,000,000=40%

Add in a new floor (45 beds)• Disadvantages

– Require to schedule doctors to the full capacity of five days per week

– Increase work load on admissions, kitchen, laundry, housekeeping and accounting

– Further staggering of meal hours for patients (100 seat dinning room)

– Disruption during construction• Advantages

– Easy to control and maintain quality– Retain the culture and environment

Schedule Saturday as an Operating Day

• Use 89 + 14 rooms, 3.5 average stay• Total number of patents per week = 180• 137 current throughput/148 theoretical• = x / 180 theoretical• New throughput = 180 x (137/148)= 167 patients /

week• Additional patients per year=(167-137) x 50= 1450 • additional revenue for the clinic • = 1450 x (450+0.20 x 75) = $674,250 • Less cost 124,250 • Net increase in profit: 550,000 for no additional

investment

Schedule Saturday as an Operating Day

• Disadvantages– Require to schedule 23-25 operations on Saturday– Six surgeons and a supervising surgeon have to

work on Saturdays– Additional other personnel – Violates the implied contract that Shouldice has

with its surgeons, strong opposition by the senior doctors

– Operating close the the theoretical capacity of the facility

• Advantages– No investment is needed– Can still maintain quality

A Second Facility for Treating Hernia

• Advantages– New location close to the customers, say USA– Improve its competitive position and increase its profits– Operate in a less restrictive environment– New Opportunities for existing personnel– Transfer of knowledge and expertise to the new facilities

• Disadvantages– Requires a significant investment and Dr. Shoudice’s

time– Control of quality– It is difficult to create the same culture and atmosphere– Potential competition with the existing facility

Discussion Questions

1. Describe Shoudice Hospital’s service package.

2. How are the distinctive characteristics of a service firm illustrated by Shoudice Hospital?

Shoudice Hospital’s Service Package

• Supporting Facility– Acres of gardens to encourage exercise & rapid

recovery – Carpeting and odorless disinfectant etc to

minimize hospital feeling – Stairways are designed for patients to use right

after operations– No TVs and Telephones in rooms to encourage

walking– Operating rooms are located in semicircle to

encourage doctors to help each other and use the same anesthetist

– Located to a large city: Toronto, access to worldwide market, large local population to fill up cancelled bookings

.

Shoudice Hospital’s Service Package

• Facilitating Goods:– Medical supplies– Food, medicine etc.

• Explicit Services– Quality hernia surgery using the Shouldice

method, low recurrence– Very experienced doctors

Shoudice Hospital’s Service Package

• Implicit Services– Peace of mind/low risk– Independence/Dignity/Control– Social experience, fraternity– Excused absence from work without

guilt– A vocation

Shoudice Hospital’s Distinctive Characteristics

• Customer Participation in the Service Process

• Simultaneity

• Intangibility

• Perishability

• Heterogeneity

END

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