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In theory, it is a simple proposition: Make customers wait longer, and fewer of them will come back. But actual practice is complicated. Marketing develops a new product, service, affinity plan, and so on. This new marketing initiative causes changes in operational processes that increase customer service times. When waiting lines form, a small increase in service times for each customer magnifies into a significant increase in waiting time for the customer at the end of the line. The increase in waiting times causes a reduction in customer loyalty, which leads to lower customer retention, and hence, repurchases. Consequently, the marketing initiative has costs as well as benefits. Blockbuster Inc. has developed a model that combines operational process analysis, waiting line simulation, real versus perceived waiting times, a customer loyalty model,
and a financial model to find the bottom-line impact from operational changes of new marketing programs.
Joseph Juran (1974), the noted quality guru, often said that upper management speaks the "language" of money, whereas the operations function typically speaks a language of process times, tolerances, and specifications. A main tenet of Juran's was that getting the attention of upper management often requires translating operational concepts into financial terms. This notion is a key reason for the "cost of quality" accounting found in virtually every operations management or quality textbook, and it is the lynchpin of the "return on quality" research stream (e.g., Rust, Zahorik, and Keiningham 1994, 1995) and other work involving financial returns on quality measures (e.g., Collier 1991; Kimes 1999).
Here, we present a specific application of linking operational changes required by marketing programs to a bottom-line financial result. Specifically, changes in operational processes at Blockbuster, Inc. stores mandated by marketing initiatives are linked to gross margin impacts. In simplified form, we combine a series of models represented in Figure 1 to get to the relationship depicted in Quadrant 1: translating changes in customer processing time to financial results.
There are many links in the chain necessary to make this connection. Quadrant 2 translates operational changes into perceived customer waiting times and requires several steps. For Quadrant 2, a process analysis and traditional time-and-motion study was performed by IBM to determine current methods and detail the time requirements. This...