Shouldice Hospital Limited Case Report for Operations Management Term II, PGP 2010-2012
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PGP 2010-2012
Operations Management
Group 13
Contents
Introduction: ............................................................................................................... 3 Problem Analysis: ................................ ................................................................ ....... 4 Present Status of Capacity ................................................................ ........................... 4 1. Operation Theatres ................................................................ ............................ 4 2. Hospital Beds ................................ ................................................................ .... 4 3. Full Time Surgeons ................................................................ ........................... 5 Evaluation of Options ................................................................................................. 5 Option 1: Increase bed capacity by constructing a new floor ................................ .. 5 Option 2: Operating on Saturday ................................ ................................ ............. 6 Option 3: Construct a similar hospital in US with same capacity ............................. 8 Recommendations:................................ ................................ ................................ ...... 8 Exhibits: ..................................................................................................................... 9 Exhibit1: ................................ ................................ .................................................. 9 Exhibit2: ................................ ................................ .................................................. 9
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PGP 2010-2012
Operations Management
Group 13
Introduction: The Shouldice Hospital Ltd. represents a success story of consumer friendly innovation. The hospital carries forward the legacy of Dr. Earle Shouldice, who had developed a new technique for performing external hernia operations. The method differentiates itself from others on three parameters: 1.
Early ambulation: the recovery time for patients is 4 days as against 5 to 8 days
2. Very low recurrence rate: 0.8% as against the average 10% 3. Low Cost: around $ 1050 as against the average $ 2000 to $ 4000 The hospital, located in Ontario, Canada is specialised for hernia operations only. Their surgical staff is trained to perform the Shouldice method. Compared to industry average of 25-50, their surgeons perform at least 600 hernia operations per year. The popularity of Shouldice has been based completely on word-of-mouth publicity. Patients are generally referred by past patients and physicians. To encourage this further; the hospital organizes an annual reunion of past patients and a lso provides free of charge health check up. Being in a high customer contact service industry, Shouldice takes all efforts to make it a pleasurable experience for consumers (patients). Typically, a patient, after preliminary confirmation of hernia, is allotted an operation date. The patient has to report on the previous day and get himself checked for hernia and fitness to undergo a surgery. The confirmed patients are then admitted. They are operated upon the next day. Immediately after the operation, patients are encouraged to move about and exercise to emphasise the early recovery achieved by this method. This also gives the patients a sense of control over the process. The patients are taken care of for 3 full days and discharged on the fourth morning. The brief admission process is illustrated in Exhibit 1. Exhibit 2 illustrates the process on the day of the operation. During their stay, patients enjoy the exercises and the interactions with other patients. This makes it a cherishable experience for the patients.
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PGP 2010-2012
Operations Management
Group 13
Problem Analysis: With
their current state of operations, Shouldice is unable to capitalize upon the huge demand
for their service. The facility has 12 full time surgeons, 5 assistant surgeons and 5 operating rooms. This is supported by a staff of 28 full time and 12 part time nurses, each of them trained well for a good customer interaction. Each surgeon performs typically 4 operations per day. 82% of the operations are primary operations, which take 45 minutes to complete. The rest 18% are recurrence operations on cases previously operated elsewhere, which are more complex and require about 60 to 90 minutes. The no. of operations being performed per week can be as high as 165 during peak season in September. Even when there is decline in activity, 145 operations are performed per week. Currently, no operations are performed during the weekend. The hospital has a current capacity of 89 beds. Another 14 beds are available in the clinic, which can be utilised during the peak season. Despite all this, the order backlog has gone up to as high as 1200. To serve this huge demand the management is seeking different ways to increase the capacity. But, the challenge is to keep a control over quality while growing out. Negligence may result into increased recurrence rates. The success of the Shouldice method has also exposed it to other practitioners who are trying to copy the method without proper regard to details. This may result into degradation of the credibility of its brand. Hence, controlling such misuse of its name is also one of the major challenges for Shouldice.
Present Status of Capacity Before exploring new options to increase the capacity, let us have a look at the current output capacities of various resources being employed.
1. Operation Theatres Minimum time for surgery Maximum time for surgery Average time for surgery Morning session Afternoon session Maximum
capacity of 5 op rooms
45 mins (82%) 90 mins (18% average 60-90 mins) 53.1mins 5 hours 3 hours (5*60/53.1)*5+(3*60/53.1)*5= 45.2 operations/ day = ~ 45 operations /day =225 Operations/ Week
2. Hospital Beds
Number of beds available in hospital
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PGP 2010-2012
Operations Management
Number of beds available in clinic Total number of beds available Maximum number of patients handled by system (average stay of each patient is 3 days) Actual value Mean Value
Group 13
14 103 103*5/3 = 171 patients/ week 145- 165 155
3. Full Time Surgeons
No of Full time Surgeons
No of operations performed/surgeon per day Total No of operations performed/surgeon per day No of operations performed/surgeon per week
12 4 =12*4 = 48 =48*5 = 240
In this system, bottleneck is due to the hospital bed capacity. Hence, maximum number of patients treated a week is restricted to 171 patients per week.
Evaluation of Options Option 1: Increase bed capacity by constructing a new floor
As bed capacity is the bottleneck, so it is increased by 50% as explained below. Number of beds available in hospital (50% increase in
89 * 1.5 = 135 (approx.)
capacity of bed) Number of beds available in clinic Total number of beds available Maximum
number of patients that can be handled
14 149 149*5/3 ~ 250/week
(since, patients usually leave in three days) Actual demand
145 to 165 operations/week
Current Mean Value
155 operations/week
Thus, the capacity of beds is increased to 250 operations per week. Now, our output is limited by the capacity of operation theatres, which is 225. Thus, net increase in capacity is 70 (225155) operations per day.
Investment on constructing a new floor
$ 2 million
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Operations Management
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Current average number of patients
155 per week (Average of 145-165)
Investment cost per patient
2,000,000/(155 * 50) = $ 258 (approx.)
Revenue generated per patient
(111*4 + 450 + 0.49*60 + 75 * 0.05) = $ 927
Explanation : $ 111 stay charges/day for four days, $ 450 surgical fees, 49% assistant fees to revenue , anaesthetic charges ( assuming probability be 5%) Total Revenue due to increased patients (There are 50 working weeks and 70 patients are increased) Increase in variable cost
927*50*70= $ 3244500 20,000*8 + 2,800,000* 0. 5 * 0.5 = $ 860,000
Assumption: Due to increase in bed capacity, 50% more floor supervisors (salary $ 20,000) are required.
Variable cost, assumed to be 50% of operating cost of hospital, will be
increased by 50% with increase in capacity. Difference between Total Revenue due to increased patients and variable cost Time of recovery of investment cost Profit after first year
$ 2,384,500 $ 2, 000, 000/2,384,500 = 1 years (approx.) $ 2,384,500 per year
Thus, we can see that our investment is recovered within one year. And thereafter we can earn a profit of 2,384,500 over revenue of 3,244,500. Also, it is one time investment and the variable cost associated with it is very small compared to the revenues generated. Option 2: Operating on Saturday
This will be an increase of the operating capacity by 20% by operating on Saturday. Financial impact: Operation charges and yearly operating income by curr ent status: Particulars
Hospital Stay Surgical Fee Assistant Surgeon Fee Total Charges for Normal Operation. Anaesthetic Charges Total Charges for Critical Operation Percentage of Critical Operations No of Critical Operations Per Day
(USD) 444 450 30 924 75 999 0.05 1.65 Page 6 of 9
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Operations Management
AVER AGE TOTAL CHAR GES Average No of Operations/day No of Working Days Per Month TOTAL YEAR LY CHAR GE: (USD million)
Group 13
30615.75
33 20 7.35
Adding one working day will also lead to increase in expenditures on salaries. Let us first calculate the existing expenditure on wages. Total salaries paid for the year (USD) Full Time Surgeons Part Time Surgeons
Anaesthetic Charge Bonuses Distributed TOTAL
1100000 242352 Nurses 72000 65000 2279352
ANNUAL OPER ATING EXPENSES (USD million) Hospital Clinic Total
2.8 2 4.8
Annual Operating profit = (7.35-4.8) = 2.25 USD million Saturday Operations (in USD million) Yearly increment in charges 1.47 New Total Yearly Charge 8.82 We are assuming that 50% of operating cost (other than salaries) is variable.
So (4.8 ± 2.28)*50% = 1.26 USD We
Mn.
are increasing salaries and other variable expenses by 20% due to increase in working
day. Increment in Total Expense=(1.26+2.27)*0.2 0.708 Total Expense 5.508 Increase in profit due to increase in capacity by working on Saturdays is (3.312 ± 2.55) = 0.762 USD million profit (29.8%). We
can see that by adding on more working day per week, we achieve capacity expansion of 20%, and an increase in profit of 29.8 %. No immediate huge investment is required. Moreover, since the facilities ar e retained at the old location, there is better control over the quality of the process. The high degree of specialization is also maintained. However, since one working day is added, the employees may not be happy with the decision. Page 7 of 9
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Option 3: Construct a similar hospital in US with same capacity
Here we shall evaluate the option of constructing the hospital in the US with same capacity as 42% of the patients are from USA. As per the case, we do not have enough data to evaluate the option. Estimating cost and revenues would have to be based on far too many assumptions, if at all it is possible.
Moreover
there are serious issues in quality control if the
hospital is opened in US. Recurrence rate of all operations performed at Shouldice is 0.8% while that in hospitals in US is 10%.
We
do not have specific information about the Govt
regulations in US which might be an important factor in making the decision. Since we already have an excess of demand in Canada, it is better to invest in expanding hospitals in Canada rather than setting up new hospitals in unknown territories like US.
R ecommendations: Based on the above analysis, we recommend that the most efficient way to increase the capacity is to add another floor to the existing hospital facility. This will help in cater ing to the existing backlog of 1200 patients. The capacity is increased by 50 %. The investment is one time and is recovered within one year. Also, the low variable costs associated with its maintenance assure a healthy profit margin over the added revenue. The control over quality is also ensured. Increasing the no. of working days is not recommended. The variable costs associat ed with it are very high and it also violates the existing employee policy of the organization.
We
do not
recommend opening of new facility at another location in the U.S, since it can r esult in deterioration of the quality. This may increase the recurrence rate and dilute the credibility of the unique method. The existing employees are not also pleased with this consideration. To control the menace of misuse of its name, we recommend that Shouldice should file for patent protection of their method. This can also be a source of revenue if the firm decides to earn a royalty in return of use of its method.
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Operations Management
Group 13
Exhibits: Exhibit1:
Process flow diagram illustrating the admission process before operation day.
Exhibit2: Process flow diagram of the operation day
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