Article | Manufacturing & Service Operations Management

Market Heterogeneity and Local Capacity Decisions in Services

by Dennis Campbell and Frances X. Frei

Abstract

We empirically document factors that influence how local operating managers use discretion to balance the tradeoff between service capacity costs and customer sensitivity to service time. Our findings, using data from one of the largest financial services providers in the U.S., indicate that customer sensitivity to service time varies widely and predictably with observable market characteristics. In turn, we find evidence that local operating managers account for market specific customer sensitivities to service times by deviating frequently and in predictable ways from the recommendations offered by a centralized capacity planning model. Finally, we document that these discretionary capacity supply decisions exhibit a strong learning effect whereby experienced operating managers place more weight than their less experienced counterparts on the market-specific tradeoff between service capacity costs and customer sensitivity to service times. Overall, our results demonstrate both the importance of local knowledge as an input in service operations and the potential for incorporating richer data on customer behavior and preferences into service cost and productivity standard metrics.

Keywords: Customer Satisfaction; Cost; Standards; Service Delivery; Service Operations; Performance Capacity; Performance Productivity; Financial Services Industry; United States;

Citation:

Campbell, Dennis, and Frances X. Frei. "Market Heterogeneity and Local Capacity Decisions in Services." Manufacturing & Service Operations Management 13, no. 1 (Winter 2011). (Lead Article.)