services – The OM Blog by Heizer, Render, & Munson

OM in the News: How Services Drag Down Productivity Growth

Technology advances have boosted productivity in many sectors, but we still haven’t figured out how to build a better barber

As we point out in Chapter 1, growth in productivity—the goods and services a worker produces in an hour, a key determinant of wages and living standards—has petered out along with a slowdown in technological advances, which typically reduce the time spent to build a laptop or car. “It has been even more stubborn, though, on the services front,” writes The Wall Street Journal (Oct. 31, 2016). People want their hairdresser, therapists, accountants and lawyers, to take their time, often the definition of good service.

American households spent $8.3 trillion on services last year, more than double their expenditure on goods. Meanwhile, the share of Americans employed in the more-productive manufacturing sector has shriveled from 13% to 8% since 2000. At the same time, those working in the fast-growing health, education and food-and-beverage services has swollen from 17% to 23%.

This is where the big drag is: Average annual productivity growth in these three sectors—from hospitals to the corner bar—ranged from minus-0.6% a year to zero over the 10 years to 2014. “The changing distribution of workers might be able to explain up to one-half of the slowdown in labor productivity growth from 2.5% to 1.5% per year since the 1960s,” says a U. of Houston economist.

Reforms that remove barriers to entry and promote competition in services, especially in health and education, could have a massive impact on aggregate productivity growth. Almost 30% of U.S. jobs—from carpenters and accountants to florists, dance teachers and interior designers—now require an occupational license, up from 5% in the 1950s. Absent such reforms, the service sector, expected to generate almost 95% of new jobs in the next decade, might be a ball and chain on productivity growth for some time.

Classroom discussion questions:

Why is productivity such an important issue?
What can be done to increase service-sector productivity?

OM in the News: Starbucks Scheduling Software Makes the Headlines–Again

Starbucks employees protesting work conditions at a Starbucks in Decatur, Ga

Starbucks’ CEO Howard Schultz has long presented the brand as involving its customers and employees in something more meaningful than a basic economic transaction. But Starbucks has once again has drawn fire for its workplace practices, reports The New York Times (Sept. 24, 2015). Last year, the firm vowed to provide store employees with more consistent schedules from week to week, and to post their schedules at least 10 days in advance. The company said it would stop asking workers to endure the sleep-depriving ritual known as a “clopening,” which requires them to shut down a store at night only to return early the next morning to help open it.

But in the last 2 years, the combination of a tight labor market and legal changes has raised labor costs for employers of low-skill workers. And there has long been another central obstacle to change: the incentives of store managers, who are encouraged by company policies to err on the side of understaffing. It often turns peak hours into an exhausting frenzy that crimps morale and drives workers away. (Starbucks employees are often responsible for finding their own replacements when they are sick. “A lot of times when I’m really sick, it’s less work to work the shift than to call around everywhere,” said one barista.)

On the question of scheduling, Starbucks uses Kronos state-of-the-art software that forecasts store traffic and helps managers set staff levels accordingly. Using the software to schedule workers 3 weeks in advance typically is not much less accurate than using it to schedule workers one week in advance. “The single best predictor of tomorrow is store demand a year ago,” says Kronos’ VP.

Classroom discussion questions:

Why is scheduling in the service sector complex?
What benefits does Starbucks offer full-time and part-time employees that other food service operations do not?

OM in the News: IBM’s Strategy Changes Bring it 100 Years of Success

Every newspaper in the country heralded IBM’s 100th anniversary this week, so we also look at this globe-spanning technology behemoth. “IBM’s global reach and broad product portfolio still make it one of the largest and most profitable IT companies in the world”, says Computerworld (June 16-23, 2011). With 427,000 employees and nearly $15 billion profit on sales of $100 billion in 2010, IBM is 2nd in sales in the computer industry only to H-P. Not that the firm has avoided ups and downs. The US antitrust suit in 1969 (dismissed in 1982) pushed IBM to separate hardware from software. After Tom Watson, Jr., retired in 1971, its mainframe business faced strong competition from smaller, more modular systems. But under the reins of Lou Gerstner, the firm bounced back in the 1990’s focusing on software, system integration, and other services. It was the strategy change has likely been IBM’s key to success today.

A quick history:

1911 The merger of 4 tabulating companies results in the company, which has 13,000 employees.

1914 The icon Tom Watson, Sr., leaves NCR to lead IBM for 40 years.

1928 The IBM punched card becomes the standard for five decades.

1953 The IBM 701 becomes the 1st production computer; it features tape drive technology.

1957 IBM introduces FORTRAN, the standard for technical programming.

1964 The firm successfully bets $5 billion on the System/360– a family of computers that share technology.

1981 The IBM PC is invented, with Microsoft providing the operating system, paving the way for PC-clones such as Dell .

2002 IBM pays $3.5 billion for PricewaterhouseCoopers to strengthen its services and technology consulting units.

2007-today The company spends over $14 billion to acquire dozens of business analytics software firms (such as SPSS and iLog), planning on $16 billion revenue from analytics by 2015.

As OM professors, this latest move will have a major impact on the availability of free software we can use in class, a trend we need to watch carefully.