Northwest Liquor & Spirits Individual Case Assignment - Northwest Liquor & Spirits MGT 6355 - Operations Management: Creating Competitive Advantages Section number University of Houston - Victoria Name Date 1 Northwest Liquor & Spirits 2 1. Abstract Northwest Liquor & Spirits has been losing business to competitors because of excessive wait times in Northwest's drive-through lane. Excessive wait times are often the result of poor business-process design or inefficient use of labor. The problem faced by Northwest is how to reduce the wait-time of its customers in the drive-through lane. This paper will apply waiting line models to determine the ideal service time, the corresponding wait time in the drive-through line, as well as server productivity. Using the results of this analysis to offer a more competitive level of service, Northwest is expected to decrease the amount of time required to serve a customer, increase the number of customers served per hour, and decrease the average customer's wait in the drive-through significantly, all of which will help Northwest keep and earn more customers from the local market area. Northwest Liquor & Spirits 3 2. Background Information The author of this paper works as an accountant for a certified public accounting firm in Northwest Arkansas that specializes in tax accounting, business process analysis, and mergers and acquisitions. Recently, an existing client of the firm acquired three liquor stores - Northwest Liquor & Spirits, Country Liquor, and Uncle Jim's Liquor. The previous owner of these three liquor stores was not active in the management of the stores, and as a result, profits have been decreasing at each store for several years. After a business valuation by our firm, it was determined that our client could purchase these stores at a discount and greatly improve each store's profitability through business-process redesign. The largest of the three liquor stores, Northwest Liquor & Spirits (Northwest), is located within a mile of the University of Arkansas campus, several major apartment complexes, and a large residential subdivision. Northwest offers a selection of popular beers, everyday wines, and fine bourbons, and is operated by a single manager along with eight part-time employees. In the past, Northwest had a reputation as a liquor store with reasonable prices and a fast drive-through lane. Poor management decisions by the previous owner have caused the store to lose its aforementioned reputation as prices have been raised above those of competitors and the waittime in the drive through lane has increased. 3. Problem Description Through a survey of its current customers, Northwest Liquor & Spirits has determined that many of its customers choose to purchase their alcohol from a competing liquor store, when the customers feel they are pressed for time. The customers' perceptions are that the wait-time in the drive-through lane of Northwest is exceptionally long. Even though the competing liquor Northwest Liquor & Spirits 4 stores in the area require a longer drive away from many customers' homes, a number of respondents feel that they still save time by not waiting in the drive-through lane at Northwest. The issue of long wait-times in the drive-through lane at Northwest mainly occurs between 4PM and 10PM on Thursdays, Fridays, and Saturdays. Past efforts to estimate appropriate staffing levels and assign employee responsibilities during the evening shift have resulted in underutilized staff, which translates into additional store expense in the form of increased wage/payroll expense. The previous owner felt that he could reduce the \"after-hours payroll expenses\" by rescheduling the store's administrative duties (stocking, inventory, and cleaning) to be day-time tasks. The current store manager recalls the previous owner's words \"If there are no customers at the counter, then you should be stocking/doing inventory/cleaning.\" The current task assignments have these staff members serving customers, restocking shelves, doing inventory and/or cleaning the store from approximately 5PM until close of business. The manager of Northwest noticed a significant increase in customers' wait-times shortly after the new task assignments were put in place. More noticeably, the store manager observed that the time required to serve a customer was increasing because she had no one to help retrieve the product from the shelf/refrigerator after an order was taken at the drive-through window. Several weeks later the manager also noticed a decrease in sales. Both the store manager and the new store owner feel that they would regain lost market share if they could reduce the wait-time of their drive-through window service. This paper considers the problem of determining how to reduce the wait-time of customers in the Northwest Liquor & Spirits drive-through lane and still provide the quality of service necessary to satisfy existing customers and attract new customers to Northwest Liquor & Spirits. 4. Proposed OM Concepts and Tools Northwest Liquor & Spirits 5 To address Northwest's problem of lengthy customer wait-times in the drive-through lane, the author proposes a waiting line analysis. By conducting a waiting-line analysis we may determine how many customers are waiting at any given time during peak shopping hours, the average time that these customers wait in line, how utilized the staff are during those times, and how to reduce the wait time in the drive-through line to an acceptable, competitive level. A waiting line analysis is comprised of several waiting line models that are based on queuing theory (Jacobs, Chase & Aquilano, 2009). Queuing theory tells us that there are three components to analyze when performing a waiting line analysis. 1. The population from which customers are gained and the mode by which they arrive For the purpose of examining the business of Northwest Liquor & Spirits, we will assume that customers are drawn from an infinite population because the servicing of a customer will not appreciably affect Northwest's ability or chances of serving new/additional customers. Because customers arrive at the liquor store in a random fashion, we will assume that the arrival pattern of the customers is \"Poisson\". 2. The design of the queuing system In terms of the design of the drive-through lane at Northwest items such as the potential length of the line, and how the employees will serve the customers will determine how many customers can possibly wait in the drive-through lane, how long they may wait before being served, and how quickly they may be served once greeted by the server. The queuing design will also help Northwest identify staffing metrics like server utilization, efficiency, and productivity. Since Northwest has one drive-through window with a drive-through lane that is only wide enough for one automobile, and customers must wait to order until they arrive at the window, the waiting-line may be classified as single-channel, single phase. Northwest Liquor & Spirits 6 3. The method by which customers exit the queuing system After a customer purchases alcohol at Northwest, it is unlikely that the customer will return for additional service within the same business day, assuming normal product consumption by the customer. Since customers are drawn from an infinite population source, the exiting of the queuing system by a customer does not materially affect potential customer pool. 5. Application of OM Concepts and Tools The Northwest store manager estimates that during peak shopping hours (4PM until 10PM) on Thursdays, Fridays, and Saturdays, customers arrive at a rate of 25 customers per hour, which means a new customer arrives approximately every 2 minutes and 40 seconds. The cashier at the window currently serves customers at an average rate of 1 customer every 2 minutes, or in hourly terms, 30 customers an hour. If the new owner of Northwest wishes to serve his drive-through customers more expeditiously, he will need to determine his current service metrics in order to make the necessary adjustments in his business so that he may decrease wait-times in the drive-through line. Below are some of the questions that need to be answered. 1. What is the average number of customers in the drive-through \"queuing\" system (includes waiting in line and waiting while being served)? 2. What is the average wait-time to exit the drive-through system? To determine the average number of customers in the system, we will use the following formula (where Ls = the average number of customers in the system, = the arrival rate per hour and = the service rate per hour): Ls = . - Ls = 25 . = 5 customers 30 - 25 Northwest Liquor & Spirits 7 Now that we know that there is an average of 5 customers in the drive-through system during peak hours, we need to determine the average wait-time to exit the drive-through system for these customers. Keep in mind that this \"system\" time includes the time that the customer is being served. We will use the formula below to compute the average time spent in the system, where Ws = the average wait-time in the system, Ls = the average number of customers in the system and = the arrival rate of customers per hour. Ws = Ls . Ws = 5 25 . = .2 hours or 12 minutes So we now know that the average customer at peak shopping time will spend 12 minutes to drive through Northwest Liquor. If the average customer experience in Northwest's drive-through service is a 12 minute wait, customers will compare that time to the wait times of Northwest's closest competitors and will most likely choose to shop at the store that will minimize the customers' total shopping time, ceteris paribus. The new owner of Northwest Liquor & Spirits realizes that in order to change customers' perceptions he must make a radical improvement in service if he hopes to win market share in the short term. He asked our firm how he could alter his business such that no more than 2 customers would be in line in the drive-through lane during peak shopping hours. Using the formula below, where = 25 and = 30, our firm determined that with Northwest's \"current\" level of service, there are MORE than two cars waiting in the drive-through line 58% (almost 60 %!) of the time. P2 = ( 1 - .) x ( )0 + ( 1 - .) x ( )1 + ( 1 - .) x ( )2 = 57.9% Northwest Liquor & Spirits 8 The manager and the owner would ideally like for there to be no more than two customers in the drive-through line 90% of the time during peak hours. This would mean that there should only be 36 minutes out of the 6-hour time of peak shopping hours each Thursday, Friday, and Saturday night that more than 2 customers will be in line. Since we do not want to reduce the number of customers that arrive at Northwest each hour, our best option is to decrease the amount of time it takes to serve a customer. The number of minutes required to serve one customer directly affects the service rate (), so our solution will focus on decreasing the service rate to the extent that 90% of the time during peak hours there are no more than two customers waiting in the drive-through line. By programming the above equation into Excel and setting P2 = .90, we can use the \"Goal-Seek\" tool to arrive at the ideal service time per customer. The resulting equation looks like the equation below. .90 = ( 1 - 25 .) x ( 25 )0 + 54 54 ( 1 - 25 .) x ( 25 )1 + 54 ( 1 - 25 .) x ( 25 )2 = 90.7% 54 54 54 For further analysis, the Excel worksheet is located in the Appendix. Using our calculations above and on our Excel model, we see that the average time to serve a customer must decrease from (1/ = 1/30 = .0333 hours) or 2 minutes per customer to (1/ = 1/54 = .0185 hours) or 1.12 minutes per customer. This equates to 67.2 seconds to serve each customer. Service of this level would require an average server utilization rate ( / = 25 /54 = .4647 ) of 46.5%. 6. Analysis of Expected Results The results of the waiting line analysis show us that Northwest Liquor & Spirits needs to decrease its customers' time in the drive-through line by 44% in order to deliver the speed of service necessary to regain lost market share. This would allow for no more than two customers Northwest Liquor & Spirits 9 to wait in the drive-through line 90% of the time. Is this possible with current staffing levels? We believe that is not only possible, but a more efficient use of the employees time. Before our waiting-line analysis the server utilization rate was 83% (arrival time / service rate). Because the drive-through server was taking a longer time to serve the customer, he was busy/utilized 83% of the time. Now, with the goal serving customers in 67 seconds or less, the server will be utilized at a rate of 46%. For Northwest, this means there is time during the non-peak hours complete the stocking, inventory, and cleaning since the server will not be utilized 54% of the time. This will translate into reduced after-hours payroll expense because administration can be handled during business hours. Considering the results of the wait line analysis, we would expect that Northwest will achieve two goals - 1.) increase market share because they will better meet the customers' needs for speedy service at a location that is close to home, and 2.) increase profitability due to an increase in sales without increasing labor/wage expenses. 7. Conclusion Northwest Liquor & Spirits was losing customers to competitors who had what customers perceived as faster drive-through window services. This paper addressed the problem of determining to what extent the wait-time of customers in the Northwest Liquor & Spirits drivethrough lane must be reduced. Through the implementation of a waiting-line analysis, we identified exactly how fast Northwest must serve its drive-through customers to ensure that 90% of the time there are no more than two people in line. Customers will now spend 67 seconds or less driving through Northwest. Since there are more than enough staff on hand to help meet the performance standards, Northwest should now consider improving other aspects of their business like friendliness, better service through recommendations, or possibly offering premium services to those \"walk-in\" customers. This could also increase the sale of complimentary items within Northwest Liquor & Spirits 10 the store, further increasing revenues. The author also recommends that Northwest consider redesigning the drive-through lane to a multiple-to-single channel structure where there are two windows to take customers orders and the lines merge to a single window where the product is delivered and payment is received. Through the use of this and other OM concepts and tools Northwest Liquor & Spirits could become the benchmark for efficiency in the Northwest Arkansas liquor store market. References Jacobs, F. J., R.B. Chase, & N.J. Aquilano (2009). Operations & Supply Management. New York, NY: McGraw-Hill. Appendix Calculate Current Service Time per Customer Minutes in 1 hour Minutes to serve 1 customer Customers served per hour Arrival rate ( ) 60 2.00 30.00 25 Service rate ( ) Avg. server utilization 30.00 0.8333 Desired % of time that service meets manager's goal ( P2 ) Actual % of time that 2 customers or less are in drive-through % of time that MORE than 2 customers are in drive-through 90% 42% 57.9% Calculate Ideal Service Time per Customer Minutes in 1 hour Minutes to serve 1 customer Customers served per hour Arrival rate ( ) 60 1.12 53.80 25 Service rate ( ) Avg. server utilization 53.80 0.4647 Desired % of time that service meets manager's goal ( P2 ) Actual % of time that 2 customers or less are in drive-through % of time that MORE than 2 customers are in drive-through 90% 90% 10.0%