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Lessons from Zillow and Zoots

Martin Lariviere and Sunil Chopra take a closer look at the benefits of service inventory management

  Professor Sunil Chopra
  Professor Martin Lariviere
Adapted from KELLOGG INSIGHT articles based on the research of Kellogg professors. For the full text of these and other INSIGHT articles, please visit the KELLOGG INSIGHT Web site.

Have you ever Zillowed your house? If you provide Web-based Zillow with a simple street address, it will tell you the property's square footage, lot size and estimated value, as well as the value of neighboring properties and recent comparable transactions.

While providing real estate appraisals is not a new business, the novelty of Zillow is that it gathers the necessary data and automates the number-crunching before anyone asks about a specific property. What a real estate agent would do in response to a specific demand, Zillow does and stores in anticipation of demand.

This stored work, called service inventory, is the focus of research by Martin Lariviere, professor of Managerial Economics & Decision Sciences, and Sunil Chopra, the IBM Distinguished Professor of Operations Management and Information Systems. They argue that by moving away from the notion of service as something performed completely on demand, service providers may improve the quality and responsiveness of their service, while broadening offerings and lowering costs.

Zillow is not alone. Many firms take advantage of service inventory to improve offerings along four key dimensions: quality, speed, customization and price. Managers must pay attention to these areas in order to match service structure to customer preference.

Quality: Many consumers' number-one concern is to get a well-defined service reliably and accurately. An investor looking to rebalance her portfolio wants reliable, accurate information about how best to make adjustments. Service inventory is an effective way to satisfy this need. Algorithms necessary to perform analyses can be encapsulated in self-service tools, built in advance. Fidelity Investments did this with Web-based tools for a variety of analyses.

Speed: Building service inventory means doing work before customers show up. Hence, less needs to be done after a given customer walks in. At many cleaners, laundered shirts are stored separately from dry-cleaned items, and a customer must wait for both to be fetched. One chain, Zoots, instead charges orders to a filed credit card and places completed orders in lockers that are available 24 hours a day. As a result, Zoots is able to optimize staff utilization because employees can work at a more level rate, as opposed to responding to minute-by-minute fluctuations in demand.

Customization: Customers' satisfaction increases when the service they receive is tailored to their specific desires. Marriott Hotels' "At Your Service" program is an excellent example. If a guest prefers feather pillows to foam, it is noted in the company database. This program enables Marriott to build its service inventory and use it to customize its offerings to customers' preferences.

Price: The benefit of managing service inventory is not only improved service but also reduced costs. Zoots is again a good example. Through careful selection of pre-demand process completion, the company is able to optimize its employee work stream and thereby achieve improved efficiencies. The resulting benefit is a lower cost structure.

Airlines provide a case study on service inventory and its effect on these four service dimensions. The transport of millions of customers inevitably results in lost baggage, missed connections and delayed flights. By developing protocols and training employees to handle such events, the airlines have built up their service inventory in advance of demand. Without such policies in place, the customers would experience significant delays in addressing these problems. But through pre-completed activities focused on customer needs, airlines significantly improve the service experience during times of transportation delays.

Thus, in the end it would seem that a manager's decision is not about the costs of service inventory, but rather the costs of not having service inventory. — Robert Smith '07

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