Academic journal article The McKinsey Quarterly

Managing a Sprawling Service Business: Executives No Longer Have to Rely on Rules of Thumb to Manage Geographically Dispersed Service Networks. A New Set of Tools Provides Solutions for Individual Markets

Academic journal article The McKinsey Quarterly

Managing a Sprawling Service Business: Executives No Longer Have to Rely on Rules of Thumb to Manage Geographically Dispersed Service Networks. A New Set of Tools Provides Solutions for Individual Markets

Article excerpt

Fish gotta swim. Birds gotta fly. And service companies gotta spread out, geographic expansion has been, and will continue to be, one of their primary means of growth. Adding new retail stores, sales branches, and service centers significantly increases customer access and can do the same for sales. But managing the result--a classic distributed service network with hundreds or even thousands of service and retail-customer touch points--can be surprisingly difficult, and the challenge becomes more complex the more the network grows.

Anyone who has managed such networks will recognize the varied and tough decisions they require. Consider a few typical ones:

* After a rival equipment-repair company announces a two-hour service guarantee, its business jumps. Your company serves its customers in about three hours. Should you do nothing, match your competitor's offer, or try one-upmanship?

* You are the regional manager of a coffee chain deciding whether to add a tenth store in a given city or to branch out to a totally new one. How do you determine the acceptable level of cannibalization for your existing stores? Do you open the tenth one or enter the new city?

* Last year, some bank branches in your region easily hit their 8 percent growth target, while others worked hard but fell short. This year, you have been told to expand revenues in your region by 10 percent. You think some branches should shoulder more of the load. How do you set differentiated targets?

* As the CFO of a clothing retailer, you have allocated enough capital to open 20 additional stores this quarter. Do you encourage your real-estate development team to select the best potential locations in all of your current markets or to focus on a particular region?

From the cash register to the corporate center, problems like these vex managers, who must balance customer service levels against store margins, determine priorities for capital investment across local markets, and, ultimately, try to wring the greatest profit from geographically dispersed networks. Meanwhile, these managers must also understand that the needs of customers and the nature of the competition vary widely from one local market to another.

In practice, many companies use general rules of thumb or centralized corporate mandates to run their network operations. Lacking quick and easy ways to generate tailored solutions, these companies base decisions about staffing levels, growth targets, and the like on broad, company-wide guidelines, including "one-size-fits-all" expense parameters or financial targets. Thus, for example, a clothing retailer might keep labor outlays at 25 percent of its sales across the board or set uniform sales growth targets of 5 percent a year for all of its stores.

Typically, such mandates fail. Centralized decision making oversimplifies the wide variations among a network's customers and competitors and isn't sufficiently flexible to accommodate different growth rates in different locations and regions. In fact, since the network of locations accounts for 50 to 75 percent of the cost structure of a geographically dispersed company, the effect of seemingly minor mistakes in the rule-of-thumb way of allocating resources can quickly be amplified across several thousand locations and perhaps threaten the whole company.

Start at the grass roots

Analytical tools to help optimize a distributed service network have existed for a long time. But companies rightly view them as too inaccessible and abstract to be useful or too time-consuming to use meaningfully at every location. Many regional managers approach customer segmentation, for instance, by relying on the company-wide analysis of the needs of their customers, since they believe that expensive efforts to segment local customers won't yield actionable or profitable insights. Moreover, many managers totally avoid simulation models or queuing theory, regarding them with trepidation because they are highly technical and time-consuming and believing that, in themselves, they offer only marginal insights into business strategy. …

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