Integrated system design and operational decisions for service sector outlets
Authors: Banker Rajiv D. , Morey Richard C. 
Published: October 2002

Effective system design for service sector outlets requires the explicit consideration of the interconnectedness of its myriad elements. Facility design decisions as well as tactical, operational choices must recognize the marketing environment, including competitive and demographic factors, and their interactions. The particular design and operational features selected for a given retail service outlet will affect its sales, fixed and variable costs, service levels, efficiency, and profits.

We consider a fast food chain contemplating acquiring, building, and operating a new outlet at a particular candidate site, with its own particular environment. We offer a normative approach for this type of decision, which arrives endogenously at the best choices for both design and operational features for the site. The final decision as to whether or not to actually acquire, build, and operate the outlet at the candidate site thus depends on several complex connected choices.

Our implementable approach integrates the non‐parametric allocative data envelopment analysis methodology with parametric regression analysis to yield a mathematical programming optimization model. We illustrate the approach with actual data from Hardee's, a fast food chain with over 3100 outlets, and an actual candidate site. The recommendations from the approach are compared with those from the conventional approach.

A key advantage of our approach is its contrast to conventional approaches for site selection which ignore the more detailed design and operational choices. Additionally, the conventional approaches do not recognize the real possibility that labor and material costs might be affected by these choices. In conventional approaches, two types of errors can occur: (i) an incorrect “go/no‐go” decision could be recommended for the site in question, and (ii) even if the optimal design choices are coincidentally identified, the forecasted level of annualized profits could be quite different, leading to an incorrect decision or priority about acquiring, building, and operating the candidate outlet. Other key advantages of our suggested approach are that: (i) various substitution possibilities (between more or less capital, labor, material, etc.) are considered, (ii) not only is the best configuration identified, but also a ranking of the possible configurations is available to help in sensitivity analyses and answering “what‐if” questions, (iii) other specific sites (which serve as the basis for the recommendations) are identified, thereby enabling management (through site visits) to isolate the actual processes and procedures to be employed at the candidate site, and (iv) identify economies of scale possible.

In summary, our approach identifies the chain's best practices in different environments, thereby enabling management to factor out poor performances due to flawed installation, lack of proper worker incentives, etc. Also, while the illustration is for a fast food outlet, the approach is equally appropriate for other service outlets, e.g., banks, hospitals, or pharmacies.