The Dynamics of Service Delivery Management: An Investigation of the Impacts of Hiring Contracted Agents on Service Capacity and Cost.

21.2 Contracted hiring in airline industry
Airline deregulation in 1978 causes airline industry to be restructured that stem
to liberalization and started opening skies in 1992 (Aharoni, 2002; Ash, 2002)
and spread out through other region.
The United Kingdom and United Arab Emirate for example, was signed
in October 2002 (ABN-AMRO, 2002). Moreover, in Asia-Pacific region, airline
is strongly supported by the Government, tends to more liberate airline business
(Heunemann & Zhang, 2002). These phenomena cause many airlines: All
Nippon Airways (2000), Delta Airline (Burns, 2002), and Lufthansa Airline (Hä
tty, 2002), employ hiring contracted agents in their firm to strengthen
competitiveness and reducing cost, labor cost in particular. In United States
airlines pay more than 36 percent to labor expense (Heimlich, 2002),
Meanwhile, Canada is slimly lower, 32 percent (Oum & Yu, 2001). Airline in
Europe and Asia have expenditure in labor force 34 and 19 percent respectively
(Doganis, 2001).
The same as other airlines, Thai Airways International is directly affected
by the world airline restructuring. After the organizational structure had
reformed in 2001, traditional model to aviation business unit model according
to Doganis (2001), partly contracted hiring staff was introduced to domestic
passenger check-in in 2002.
Even though the aggressive implementation of contracted hiring in
various businesses, the studies concerned such a matter is not the same
direction. None of those studies focused to explore its impacts to capacity and
cost: one only focused to organizational commitment (De Loria, 2001), one
3explored implementation obstacles (Vining & Globermann, 1999), or one was
only the attitude survey about introducing it to the firm (Hallam & Baum,
1996). Even the totally employed contracted staff to various activities like
airline business (Doganis, 2001) was only a survey report of using contracted
hiring in many airlines through out the world (ABN-AMRO, 2002). Those
studies finding were not enough to conclude its impacts to capacity and cost.
In explaining the interactions among any variables clearly and
systematically, System Dynamics Model, explain how things change through
time (Forrester, 1961; 1969; 1971; Coyle, 1971; 1996; Sterman, 2000) is
needed.  Therefore, to explain the impacts of hiring contracted staff to capacity
and cost, dynamics behavior of service delivery system must be understood.
Moreover, tool must be comprised of four qualifications: formal, abstract,
dynamic and non-linear, which is completely equipped in System Dynamics
Model (Commission of The European Communities, 1998).
For those reasons, the author is willing to investigate the impacts of
hiring contracted agents on service capacity and cost using System Dynamics
Model to seek the answers for the following questions: (1) How hiring
contracted agents affect service capacity and cost in passenger check-in? (2)
How contracted hiring feedback impacts firm hiring policy? And (3) what is the
optimum number of hiring contracted agent and permanent employment in
passenger check-in?
41.3 Significance
The System Dynamics approach of this research is contributed to both
managerial and theoretical implication.
In managerial context, labor cost is the major expenditure that determines
competitiveness of the firms especially in service industry. Therefore,
effectively manage labor force is directly affect organization competitiveness.
The System Dynamics approach in this research is going to enhance managers’
perspective to view their firm as a whole, which is the crucial guideline to
strengthen competitiveness.
In theoretical, on the other hand, System Dynamics itself is base on
system thinking which is able to deal with complexity of the system (Forrester,
1999). Therefore, by using this study approach, the answers to the questions
mentioned above are going to be explored clearly and precisely, finally stem to
strong theory or even law at the end.
1.4 Purposes
To investigate the impacts of hiring contracted agents on service capacity and
cost in passenger check-in on System Dynamics approach, two main purposes
will be explored:
Firstly, system interrelation among hiring contracted agents, service
productivity, and cost by using System Dynamics Modeling. Lastly, simulate
the impacts of hiring contracted agents on service capacity and cost.
51.5 Overview of dissertation
The research work described in this dissertation can be grouped into three
distinct stages: 1) formalization of the service delivery management model, 2)
empirical validation of the model, and 3) provide simulated alternative policies
for managers. The next paragraphs briefly describe the three stages stated above
and its location within the text of the dissertation.
Service delivery management model drawn upon System Dynamics
originated by Jay W. Forrester (Forrester, 1961) briefly reviewed in Chapter 2.
The model consists of four structures: labor, service capacity, cost, and service
livery which are constructed from previous works of various scholars in System
Dynamics approach, also detailed in Chapter 2. This Chapter also presented
conceptual framework of this dissertation. Then, Chapter 3, Research
Methodology is fully devoted for model formulation that is comprised of Stock
and Flow Diagrams and Model Equations.
The second stage, empirical validation of the model is presented in
Chapter 4. Prior to validation process, epistemology of Operation Research/
Management Science (OR/MS) is discussed ranging from Vienna Circle to
Forrester Approach. Later, model calibration is chosen as method of validation.
Finally, the third stage, alternative policy simulation is discussed in
Chapter 5. Three alternative policies namely: Moderate Agents, Maximizing
Agents, and Minimizing Time are drawn and simulated as well as discussion for
each policies. Moreover, this Chapter also discusses avenues of future study.
This dissertation also includes References and the Author’s briefly biography.
6Chapter 2
Literature review
2.1 Introduction
The literatures reviewed in previous chapter explored hiring contracted
backgrounds and importance. The following chapter is concerning labor cost,
service capacity, and the dynamics of service delivery.
2.2 Labor cost and service capacity.
According to resource base view theory (Penrose, 1959), labor cost is generated
both direct and indirect way that comes from salary and lost opportunity to
produce goods or services respectively. Calculating the former source cost is
not only uncomplicated, by summing up benefits paid to all employees
(Worland & Wilson, 1988; Bauer, 2003), but also easy to access data
(McGuckin et al., 1995).
Unlike direct cost, indirect cost comes from various sources: job rotation,
absenteeism, even smoking (Johanson et al., 1998). Calculating those cost
method is different in detail (see in Cascio, 1987). Labor cost in airline business
is close related to productivity, determiner of capacity. Reducing cost may be
done either by reduce wage directly or remain wage but increase labor
productivity (Alamdari, 1998). Moreover, labor cost reports in airline business
is quite deferent from other businesses; presents cost per output as ATK or RPK
that some report preferred ATK (Alamdari, 1998; Doganis, 2001 or some
7preferred RTK and RPK (Oum & Yu, 2001). The former reports base on
capacity but the latter base on revenue.
Service capacity is determined by function of total labor and labor
effectiveness (Oliva, 1996). Money incentive may stem to work capacity
according to Fitzsimmons (2002). Unit of service capacity in airline business is
difficult to count because in one-passenger concerns many activities before
flying (Bureau of Industry Economics, 1994), that consistent to Doganis (2001)
approach. Work capacity in new management era is on the basis of multi skill
approach, products of total activities done and total output divided by total labor
(Van Oyen & Michael, 2002).
In conclusion, labor cost is caused by direct and in direct expenditure.
Service capacity, on the other hand, is determined by number of labors, their
effectiveness, as well as money incentive.
2.3 The dynamics of service delivery
Invented by Forrester (Glenn, 1994; Mills & Bishop, 2000; Dooley, 2002;
Gilbert & Troitzsch, 1999), System Dynamics is not only categorized in one of
the futures research methods (Glenn, 1994; Mills & Bishop, 2000), but also
categorized in one among many simulation researches methods (Dooley, 2002;
Gillbert & Troitzsch, 1999).
Base on Information Feedback Control Theory, System Dynamics was
first developed to explain dynamics behavior of industry (Forrester, 1961) at
MIT Sloan School of Management. Eight years later, Forrester had expanded
his model to explain interrelation between industry and urban (Forrester, 1969)
8before completed his model to explain dynamics behavior of the Earth
(Forrester, 1971). After that, Forrester’ s works aim to explain dynamics
behavior of learning in educational management (Forrester, 1994; 1996; 1999).
Business and industry dynamics however, is remaining attracted to many other
scholars (Coyle, 1977; 1996; Sterman, 2000; 2001; Morecroft, 1999; Oliva,
1996; Kim, 1998; Kirkwood, 1998; Hishida, 1999; Anderson & Morrice, 2000;
Morrison, 2003; Schillinger, Zock & Größler, 2003; Dudley, 2003 etc)
Literature review in this sector concern the dynamics behavior of service
delivery applied directly from service literature and indirectly from industry
literature. For example: effects of hiring delay, trailing, absent, and turnover.
Even though the dynamics behavior of industry is different from service; focus
on raw materials and equipment, but the same focus is labor (Scholl, 2002).
Therefore the author believe that both literature can be blended to explain the
dynamics behavior of service delivery being presented in this study. The
dynamics of service delivery management will be comprised of four feedback
structures: labor structure, capacity structure, cost structure, and service
delivery structure.
2.3.1 The labor structure
Literatures related to labor structure on System Dynamics approach emerged
from many scholars both service and industry field for example: Sterman
(2000); Oliva & Sterman (2001); Barlas, Cirak & Duman (1999); Hustache,
Gibellini & DeMatos (2001); Bhattarai & Neupane (2002); Gans & Zhou
(2001); Weidenmier (2002); Warren (1998; 2000); and Repenning & Sterman
9(2000). Those scholars’ models are differentiated by different variables. The
labor structure is close related to the capacity structure.
Barlas et al. (1999), Sterman (2000), and Oliva & Sterman (2001)
focused on number of employee, which determine capacity of the system.
Recruitment process (Hastache et al., 2001) and training (Bhattarai & Neupane,
2002) have to be done before those employees could get in to the system. The
stated two steps cause delay for increasing staff (Gans & Zhou, 2001; Caufield
& Mai, 2002). Required staff is determined by service demand in the system
(Oliva, 1996; Sterman, 2001). The gap between required staff and actual staff is
the number of new employee to be hired in to the system.
In summary, the labor structure comprises required staff, determined by
service demand, and actual staffs, come from recruitment and training process.
The gap between those two numbers determines new staff to be hired. The labor
structure is close related to the capacity structure as shown in figure 1.
actual staff
required staff
new staff
hiring
serivce demand
+
staff gap +
-
+
+
+
-
Figure 1: The labor structure
10
2.3.2 The capacity structure
The capacity structure of the system describes labor capacity in the system. The
capacity of the system is function of number of employee and employee
effectiveness (Oliva 1996).
The number of employees is depending on derivative of hiring rate and
attrition rate (Warren, 1998; Größler, Notzon & Shehzad, 1999; Barlas & Diker,
1996; Sterman, 2000; Kirkwood, 1998). If hiring rate is higher than attrition,
growth behavior of the system can be expected. Decay behavior of the system,
on the other hand, can be expected if attrition rate is higher than hiring rate.
The employee effectiveness depends on training (Bhattarai & Neupane,
2002; Mellet, 2002; Sveiby, Linard & Dvorsky, 2001) and experience Mallis,
2002; Akkermans & Van Oorschot, 2002). More training cause more
effectiveness especially on the job training by internal instructor (Aragon-
Sanchez et al., 2003), as well as more experience.
In macro view however, the capacity structure includes birth rate, death
rate, migration rate, and reading rate of population in to the system for
explaining national production capacity (Saeed, 1996) or agricultural capacity
(Kopainsky, Buchli & Rieder, 2003a; 2003b). The above variables will not be
brought in to this study, because it focuses to micro view of one business only.
Moreover, those variables are beyond boundary of the micro system (Sterman,
2000).
In summary, the capacity structure comprises one main stock variable,
number of employees, and one main rate variable, employee effectiveness. The
11
stock depends on derivative of hiring rate and attrition rate. Meanwhile the
employee effectiveness is the variable determines stock capacity, which stem
from training and experience as shown in figure 2.
service capacity
training
effectiveness
staff
-
+
-
+
Figure 2: The capacity structure
2.3.3 The cost structure
The cost structure of the system describes expenditure caused by the labor and
the capacity structures. There are two groups of scholars, one treat cost as rate
while other treat it as level. This study agrees with the former group of scholars.
Nishida (1999), Gans & Zhou (2001), Größler (2000), and Dudley (2003)
argued that cost should be rate variable, because at least it will be a constant
rate in one period of time. Meanwhile, Morecroft (2000), Homer, Keane,
Lukiantseva, & Bell (1999), Hustache, Gibellini & De Matos (2001), Warren
(2000), Millis (2002), Dubelko (2002) and Bhattarai & Neupane (2002) argued
that cost is able to accumulate depending on the derivative of flow in and flow