The Service Industries Journal

Vol. 31, No. 11, August 2011, 1825 1847

FMEA-based portfolio approach to service productivity improvement

Youngjung Geuma, Juneseuk Shinb and Yongtae Parka
a

Department of Industrial Engineering, Seoul National University, Seoul, 151-742, Republic of

Korea; bDepartment of Systems Management Engineering, Sungkyunkwan University,
Chunchun dong, Jangan Gu, Suwon, Kyounggi-do, Suwon, Republic of Korea
(Received 7 July 2009; final version received 5 April 2010)
The conceptual approach has contributed significantly to service productivity, but it
should be complemented by practical deliverable methods. This paper proposes a
systematic framework for improving service productivity by employing the failure
mode and effect analysis-based portfolio approach. By structuring and decomposing
a service into a set of sub-processes, failure and innovation modes are identified and
evaluated using different constituents, such as the severity and occurrence of failure
mode, and the impacts and feasibilities of innovation modes. Innovation and failure
portfolios are constructed, clarifying the values of opportunities. To illustrate the
function of the proposed approach, hospital service is used as an example.
Keywords: service productivity; FMEA; portfolio; hospital service

Introduction
In any organization, improving productivity is considered important to enhanced performance (Gunasekaran, Korukonda, Virtanen, & Yli-Olli, 1994). A number of studies have
attempted to improve productivity, such as through local improvement, the use of computers in information systems, and flexibility control (Drucker, 1991). It is frequently observed
that productivity is related to guidelines for productivity improvements achieved through
strategic planning (Gold, 1985). However, most work on productivity puts emphasis on
manufacturing rather than on service (Filiatrault, Harvey, & Chebat, 1996; Gronroos,
1990; Johnston & Jones, 2004), because productivity management is deeply rooted in the
context of mass production (Rutkauskas & Paulaviciene, 2005). Although the role of
service has changed from being peripheral to the product to being a core part of the offer
for customers, few studies have focussed on service productivity. So far, the marketing
perspective (Chase, 1996), which is closely associated with customer satisfaction and
customer-perceived quality, has produced the most advances. Not surprisingly, previous
works have overwhelmingly tended to use the normative approach (Drucker, 1991;
Filiatrault et al., 1996) such as the conceptual framework (Gummesson, 1998) or the
service quality strategy (Blumberg, 1994). This is mainly due to the innate characteristics
of service, such as intangibility, heterogeneity, inseparability of production and consumption, and perishability (Fitzsimmons & Fitzsimmons, 1994). These characteristics make
it difficult to measure and analyze services and thus narrow the scope of the analytic
approach.
To address these issues, it is imperative to use a concrete method. Such a method can
be found in manufacturing where a number of methodologies have been suggested,

Corresponding author. Email: jsshin@skku.edu

ISSN 0264-2069 print/ISSN 1743-9507 online

# 2011 Taylor & Francis
DOI: 10.1080/02642069.2010.503876
http://www.informaworld.com

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Y. Geum et al.

analyzed, been shown to be superior, and have been refined over several decades to
increase productivity. However, a relatively limited methodology has been used in the
service setting, despite the available analytic and systematic power. It is no wonder that
the need for applying qualified methodologies in manufacturing to service has increased.
Within the emerging trend of service engineering, service management can advance not
only by adopting manufacturing-based approaches, but also by developing hybrid
approaches that take advantage of both the marketing and manufacturing approaches
(Bullinger, Fahnrich, & Meiren, 2003).
In that regard, this paper suggests a new hybrid approach called failure mode and effects
analysis (FMEA), which is taken from manufacturing and portfolio management and has
been used widely in marketing and finance, among other areas. FMEA is a technique that
predicts the potential failure modes of a product together with its effects and criticality
(Teng & Ho, 1996). Since FMEA has been sufficiently examined to detect and analyze failures in manufacturing, it is likely to be effective when applied to service. Note that service
productivity improvement should be closely associated with risk minimization, a core
concept of FMEA. In addition, the process-based characteristic of service (Hill, 1977;
Levitt, 1972; Shostack, 1987) makes it easy to adapt FMEA to any service because it is
based on the decomposition of a system into a logical sequence of processes.
Portfolio management is employed to represent how to select productivity improvement
targets among the identified either failure-prone or potentially innovative processes.
Because of the importance of prioritization in practice, the traditional FMEA is too nave
for practical use. This is because it commonly uses the product of severity, occurrence,
and the chance of detection in a process called RPN (risk priority number). The higher is
the RPN value, the more prone to failure is the process. The effectiveness of both the prioritization method and criteria has been relentlessly criticized. Several studies have been
suggested to provide more multilateral consideration for prioritization, such as fuzzy
logic (Bowles & Pelaez, 1995; Chang, Wei, & Lee, 1999; Dong, 2007; Pillay & Wang,
2003; Tay & Lim, 2006; Wang, Chin, Poon & Tang, 2009), grey theory (Chang et al.,
1999; Pillay & Wang, 2003), life cost-based analysis (Rhee & Ishii, 2003), and ANP
(Chen, 2007). However, all of these methods still use a final ranking score and thus leave
room for further development. Even if the final RPNs of two processes are identical, the
risk implications may be totally different. Portfolio management is employed to overcome
this problem and thus make the multilateral decision-making process more effective. Moreover, rather than selecting the best alternative and discarding the others, portfolio management can demonstrate the potential values of the other alternatives over the long term.
The remainder of this study is organized as follows. The theoretical background deals
with service productivity and two key methodologies composed of FMEA and portfolio
management. The proposed approach section explains how to adapt FMEA and portfolio
management to improve service productivity. To illustrate the application procedure and
effectiveness of our approach, the illustrative case example section shows our approach
applied to hospital service. Finally, the major contributions, limitations, and areas for
further research are discussed in the conclusions.
Theoretical background
Service productivity
Productivity is basically the measure of the efficiency of converting inputs into outputs in
order to produce the desired products; put more simply, it is the ratio of outputs to inputs.
Productivity has been discussed as an umbrella concept including utilization, efficiency,

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effectiveness, quality, predictability, and other performance dimensions, as well as a

narrower concept that reflects only production efficiency (Johnston & Jones, 2004). In
manufacturing, productivity is defined in terms of the utilization of resources such as
materials, labor, and machines to produce qualified goods and services (Gunasekaran
et al., 1994).
Service productivity is also defined as the ratio of outputs to inputs, but it is not limited
to the traditional definition of productivity (Green, 2005). Instead service productivity
should reflect a variety of service characteristics and thus be more comprehensive. In
that regard, the most important issue in defining service productivity is the incorporation
of service-specific factors originating from innate service characteristics. At the core of
this approach is the customer perspective (Johnston & Clark, 2001; Johnston & Jones,
2004; Martin & Horne, 2001). In most service operations, customers participate in the
service process, providing significant input and output (Fitzsimmons & Fitzsimmons,
1994; Johne & Storey, 1998). Consequently, the inputs and outputs of service productivity
should be defined and measured not only from suppliers perspective, but also from that of
the customer.
To this end, many attempts have been made. Johnston and Jones (2004) suggested that
operational productivity and customer productivity should be defined separately. Operational productivity is defined as the function of the ratio of operational outputs to
inputs such as materials and costs, among other factors. Revenue and products are
typical outputs. Customer productivity has the same form, but uses different inputs and
outputs. Input is usually measured by the customers time and effort and output by
value, utility, and experience, among other factors. Gronroos and Ojasalo (2004) argue
that service productivity should be composed of internal efficiency, external efficiency,
and capacity efficiency. Internal efficiency uses the classic inputs and outputs of the manufacturing area, focussing on cost efficiency. External efficiency is associated with the perception of service quality by customers, while emphasizing revenue efficiency. Capacity
efficiency develops from the perishability of service, because service providers cannot use
inventories to address excess capacity or excess demand.
In summary, many conceptual studies have attempted to define well-balanced service
productivity and will continue to do so. Such concepts are highly important to service
studies. However, one important issue in practice, that is, a practical way of identifying
potential opportunities, implementing solutions, and improving service productivity, has
been relatively neglected.
Failure mode and effect analysis
FMEA is a technique that predicts the potential failure modes of a product by considering
the effects and criticalities of failures (Teng & Ho, 1996). It first emerged from studies
conducted by NASA and then spread to manufacturing industries (Puente, Pino, Priore,
& de la Fuente, 2002). Since the basic function of FMEA is to find, prioritize, and minimize failures, it is widely used in various manufacturing areas as a solution to reliability
problems (Dale & Shaw, 1990; Rhee & Ishii, 2003; Vandenbrande, 1998). Recently, the
scope of FMEA has been extended by a wide array of applications in services (Chuang,
2007).
FMEA begins by identifying failures. A product is defective when it is used in abnormal conditions or when it becomes incapable of meeting its minimum performance
(Stamatis, 2003). The widely accepted FMEA procedure can be summarized as follows
(Puente et al., 2002):

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(1) Identify all potential failure modes of the system.

(2) Identify the possible causes, effects, and hazards of each failure.
(3) Calculate the RPN of a failure mode relative to its probability of occurring, criticality (or severity) of failure, and ease of detection, as shown in Equation (1). Do
this for all failure modes.
(4) Provide suitable follow-up or corrective actions for each type of failure mode.
(5) Monitor the modified process and recalculate after an appropriate time lapse.
RPN = S(severity rating) O(occurrence rating) D(detection rating)

(1)

The question of how to prioritize identified failures has stirred much controversy (BenDaya & Raouf, 1993; Bowles & Pelaez, 1995; Chang et al., 1999). Criticism concentrates
on whether RPN satisfies the usual requirements of measurement, whether the relation is
appropriate, how it deals with the different impacts of severity, occurrence, and detection
in the risk implication, why multiplication is used, and how the effect of production quantity is reflected. To cope with these problems, several studies have been conducted to
provide more multilateral consideration for prioritization, as mentioned previously.
However, the key problem remains: with scoring methods, the risk implication may be
totally different even if the final RPN is identical. A new and advanced approach is
required to address this issue and thus to provide mangers with a more multilateral and
practical assessment method.
Portfolio management
Portfolio management is a dynamic decision process through which a businesss list of
active new products or projects is constantly updated and revised (Cooper, Edgett, &
Kleinschmidt, 1999). It has been very popular, especially in determining the successes
or failures of products or strategies (Cooper et al., 1999; Day, 1977; Hax & Majluf,
1983; Henderson, 1979; Segev, 1995). One of the best-received portfolio models is the
Product Portfolio Matrix, which has been developed as a guide for the rational allocation
of a firms resources to several products based on the market growth rate and market-share
dominance of each product (Day, 1977).
The portfolio-based decision process is best characterized by severe uncertainty,
ever-changing environments, ample information, dynamic opportunities, multiple goals,
and strategic consideration (Cooper et al., 1999). It is a method for achieving intended
objectives and has the following advantages. First, the portfolio is one route by which
managers effectively operate their business strategy. Strategic decisions can be operationalized in detail. Second, it enables firms to follow a well-formed business list to make
dynamic decisions about what business they should conduct and can promote consensus-building with regard to the optimal resource allocation for the firm. In addition,
it can help a company to identify and maintain a competitive position in a market
(Cooper et al., 1999).
Because of these advantages, portfolio management has been regarded as an effective
business tool. It allows either products or projects to be analyzed systematically by providing an opportunity for business optimization for mid- and long-term corporate growth and
profitability (Mikkola, 2001). That is why it has long been used for various applications,
such as new product development (Cooper et al., 1999; Day, 1977; Henderson, 1979),
technology portfolios (Capon & Glazer, 1987; Lauro & Veps la inen, 1986), and R&D
project selection (Mikkola, 2001; Vepsa la inen & Lauro, 1988).

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Proposed approach
Overall process
The overall process of our proposed approach is shown in Figure 1.
First and foremost, the service process is broken down into a set of sub-processes. Two
types of improvement modes are identified by evaluating each sub-process, namely, the
failure mode and the innovation mode. To prioritize the sub-processes, the evaluation constituents are chosen by considering the characteristics of each mode. As for the failure
modes, risk priority, RPN in traditional FMEA, is calculated by multiplying the values
of severity and occurrence. As for the innovation modes, the two constituents of
innovation priority, a new term developed in our research, are impact and feasibility.
The innovation priority is calculated in the same manner as risk priority. Using the constituents as the horizontal and vertical axis variables, we construct both failure and innovation portfolios. Opportunities for service productivity improvement are identified and
ranked according to their potentials, as visualized by the portfolios. Finally, in order to
estimate the expected improved service productivity and to verify the customer-perceived
utility, a simple simulation is conducted on the basis of a customer survey. Customers are
asked to rate the key inputs and outputs on a five-point Likert scale, and the ratio of inputs
and outputs is defined as the customer-based service productivity.
Decomposition of the service process
The target service is broken down into a set of sub-processes. Service decomposition, in
general, is conducted according to the process perspective because service definitions are
formed mainly from the process perspective (Hill, 1977; Levitt, 1972; Shostack, 1987).
Decomposition is a good way of focussing on customer activity in order to understand

Figure 1. Overall process.

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the dynamic interactions between customers and the service system. Similarly, the basic
premise of decomposition is that the sequence of sub-processes should be based on customer activities. By linking these sub-processes with customer activities in a logical way, it
is easier to understand and control the overall service system.
Identification of failure modes and innovation modes
Within the set of sub-processes, two types of improvement modes are identified: the failure
mode and the innovation mode.
Failure modes
The failure mode is defined as the extent to which a process or a subsystem is likely to fail,
causing either system failure or a decrease in quality (Kneip, 2004). Thus, detecting and
eliminating failure modes can result in productivity improvement. In a service setting, a
failure mode can be defined as a potential occurrence that can cause customer dissatisfaction or decrease the customers perceived quality. Identification of failure modes in service
differs from that in manufacturing. As mentioned previously, this is because service
management should be associated not only with operational issues, but also with customer
issues (Johnston & Clark, 2001; Johnston & Jones, 2004). Since the most distinctive
feature of the service arises from customer participation, identifying the failure mode in
a service setting should encompass the various unique aspects of service, including
both the customer and operational perspectives. Certain key considerations, shown in
Table 1, serve this purpose well.
To prioritize the risk of identified failure modes, two types of evaluation variables are
employed: severity and occurrence. For this purpose, the current FMEA uses an RPN as in
Equation (1). However, the risk priority in our approach is composed of severity and
occurrence, excluding the ease of detection as a factor for consideration. In most services,
the success of the service depends on the customers perception about whether the service
works well rather than the service itself. Thus, the ease of detecting supplier failures is
important to manufacturing but can be relatively negligible in the service industry. The
perceived customer risk is influenced little by the extent to which the detection variable
is easy to work with. All failure modes detected are listed in the FMEA sheet as described
in Table 2 (Granholm, 2004).

Table 1. Consideration points for identifying failure modes in a service setting.

Consideration point
Customer participation and
interaction in a service process
Customization
Service visibility
Service encounter
Output heterogeneity
Resources

Reference
Customer participation as a co-producer or participant
(Fitzsimmons & Fitzsimmons, 1994; Johne & Storey, 1998)
Customization or mix in consumption points (Johne & Storey,
1998; Kellogg & Nie, 1995)
The distinction between front office and back office (Shostack,
1987)
Importance of service encounters (Carlzon, 1987; Czepiel,
Solomon, & Surprenant, 1985)
Heterogeneity in service output (Johne & Storey, 1998; de
Brentani, 1989)
Possibility that a resource is unavailable or unsuitable for
executing the service

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Table 2. FMEA sheet for failure modes.

Operation
Failure
modes

Characteristics of
failure
Cause of
failure

Effect of
failure

Rating
Severity Occurrence

Action
Decision
taken

Severity

Occurrence

Innovation modes
The failure mode in this paper denotes the extent to which a process or subsystem is likely to
fail, causing either system failure or a decrease in quality (Kneip, 2004). Treating the failure
mode appropriately can increase productivity by eliminating or amending the possible
failure points. Though a proactive exploration and treatment of failure points is important,
it is not sufficient to improve a service system by considering only the failure modes. To
achieve genuine innovation, innovation modes, such as completely new procedures or concepts, should be developed rather than focussing only on minor improvements of the current
process (Oke, 2007; Preissl, 2000). The literature also has suggested that service innovation
is a new paradigm (Gallouj, 1997). Therefore, service innovation can be described as a new
development in service products, procedures, activities, or new services undertaken to
deliver core service products, making the core service products more attractive to consumers (Gronroos, 1990; Oke, 2007; Sundbo & Gallouj, 1998; Toivonen & Tuominen, 2009).
Put simply, innovation modes are different from failure modes with regard to their
original purposes in the system. The purpose of a failure mode is to minimize losses,
whereas that of the innovation mode is to create value. To foster innovation, researchers
must first develop new procedures or concepts. In that regard, an innovation mode in our
research is defined as a process or a subsystem providing an opportunity for innovation. It
is detected not by scrutinizing the current status of the sub-processes, but by imagining the
potential for future innovation. The latter is a complex process that requires expertise,
knowledge, and creativity both for service itself and the relevant external environment.
In order to investigate the potential of future innovation, some studies have attempted
to identify the key driving forces (Berry, Shankar, Parish, Cadwallader, & Dotzel, 2006;
Hull & Covin, 2010; Kandampully, 2002; Marklund, 1998; Sundbo & Gallouj, 1998). The
importance of organization, human capital, customers, and embodied knowledge and technology in human capital have been commonly suggested as key driving forces in the
service industry. In particular, the role of technology in service sector innovation has
been a popular issue mentioned by many authors (Djellal & Gallouj, 1998; Fincham
et al., 1995; Gallouj, 2002; Kandampully, 2002; Marklund, 1998; Miles et al., 1995;
Sheehan, 2006; Toivonen & Tuominen, 2009). Table 3 summarizes the key driving
forces for service innovation. Considering these driving forces, including technology,
knowledge, market, human resources, and organization, innovation modes are identified.
To choose high-potential innovation opportunities, innovation priority should be
measured. To adapt the risk priority measure to the innovation context, two evaluation
variables, impact and feasibility, are used. The impact variable denotes the expected
power of the innovation mode, thereby signifying the effectiveness and influence of the
innovation. The feasibility variable represents the possibility of implementing innovation
in practice under various constraints, including technology, cost, and organizational resistance. For successful implementation, the latter is as important as the former. Suffice it to

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Y. Geum et al.

Table 3. Driving forces toward service innovation.

Description

Reference

Technology

Miles et al. (1995), Djellal and Gallouj (1998), Marklund (1998), Kandampully
(2002), Gallouj (2002), Sheehan (2006), Toivonen and Tuominen (2009)
Knowledge
Kandampully (2002), Hull and Covin (2010)
Human resources Marklund (1998), Sundbo and Gallouj (1998)
Organization
Sundbo (1997), Marklund (1998), Antonacopoulou and Konstantinou (2008),
Hull and Covin (2010)
Market
Sundbo (1997), Magnusson, Matthing, and Kristensson (2003), Abramovici and
(customer)
Bancel-Charensol (2004), Berry et al. (2006), Antonacopoulou and
Konstantinou (2008)

say that the two evaluation variables consider not only the innovative power of technology,
but also the practical barriers to it. Across other disciplines, given several alternatives, it is
frequently observed that impact and feasibility have been used as the key variables in
decision making problems (Cooper, 1978). All of the innovation modes detected are
listed in the adapted FMEA sheet as shown in Table 4.
Comparison between failure modes and innovation modes
Table 5 shows the difference between the potential failure mode and the potential innovation mode with regard to definition, detection, and priority measures.
The distinction between failure modes and innovation modes may be vague. As mentioned previously, a failure mode is defined as the occurrence causing a failure. Thus, properly modifying a failure mode is indubitably associated with customer satisfaction. An
innovation mode is a point of potential innovation and thus can greatly increase customer
satisfaction. Consequently, the perceived level of customer satisfaction can be a criterion
Table 4. FMEA sheet for innovation modes.
Operation
Innovation
modes

Table 5.
Type

Characteristics of innovation
Main source
of innovation

Effect of
innovation

Rating
Impact Feasibility

Decision
taken

Impact Feasibility

Differences between failure mode and innovation mode in service.

Potential failure mode

Definition Possible failure point that can cause a

service failure
Purpose
Minimization of loss
Detection Operational perspective
Customer perspective

Priority
measure

Action

S (severity)
O (occurrence)

Potential innovation mode

Possible operational point that can cause
innovation in the service
Creation of value
Technology perspective
Knowledge perspective
Human resources perspective
Organization perspective
Market perspective
I (impact)
F (feasibility)

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for distinguishing improvement from innovation. However, it should be noted that failure
modes should focus on increasing the productivities of the current service process, while
innovation modes should focus on advancing toward the future by investigating the significant potentials of new processes or innovations. Because the innovation literature focusses
on new innovations, there is a perception that service innovation should concentrate on new
services, new processes, and new technology (Gronroos, 1990).
Constructing the portfolio of failure modes and innovation modes
With two sets of failure modes and innovation modes, the key issue is deciding which
mode will be most effective under the specific resource constraints. Despite the importance of prioritization in practice, the basic FMEA method provides a simple way to multiply the severity, occurrence, and ease of detection. This approach has presented some
difficulties, especially in dealing with problems related to how the severity, occurrence,
and chance of detection should be linked in order to prioritize the failure modes.
However, linking these constituents is not a trivial task, since the impacts of severity,
occurrence, and the chance of detection are different in terms of risk implication. As a
simple solution, a weighted constituent is used to modify the importance of the variable
under various situations. This is not a satisfactory solution, however, because an essential
problem remains: even if the final RPNs of two situations are identical, the risk implications can be completely different.
In that regard, it is worthwhile to employ the portfolio as a new solution to prioritize
the modes. The portfolio approach has the advantage of providing not only the final score,
but also for visualizing the value of each key evaluation variable. The decision maker can
see what lies beneath the final RPN and is able to make a real multilateral decision accordingly. Some decision makers give more weight to one of the key evaluation variables for
productivity improvement. The portfolio is the most appropriate method to support this
kind of decision making. For instance, when choosing a high-potential innovation
mode, it is difficult to judge the importance of the two key criteria of impact and feasibility. The portfolio helps a decision maker to estimate the relative importance of each criterion quickly while securing rationality. Besides this, the portfolio makes it possible to
recognize and make use of the long-term opportunities from both failure modes and innovation modes. Because the service industry changes rapidly, dynamic strategic decisions
can be significantly improved through the use of this method.
Portfolio matrix for failure modes
A portfolio for failure modes is constructed on two axes comprising severity and occurrence, as illustrated in Figure 2. The matrix is divided into four quadrants: highly dangerous, big shot, casual failure, and insignificant.
Highly dangerous. The highly dangerous quadrant is characterized by high severity and
high occurrence, implying failure modes with frequent occurrence and great destructive
power. Obviously, the top priority should be given to the processes in this highly dangerous quadrant. Consider an example at a service counter. If a front-line employee is
unskilled and often makes customers angry, customer dissatisfaction will increase the
more this employee serves customers. Moreover, if very important customers are served
by this employee, those customers might switch to another service, thereby causing a
huge loss of revenue. This is a typical failure mode with high occurrence and high severity.

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Figure 2. Portfolio matrix for failure modes.

To improve service productivity, before all else, this employee should be replaced or
retrained.
Big shot. The big shot quadrant is characterized by high severity and low occurrence. The
failure modes in this quadrant arise when a failure is not as frequent but causes a huge loss
to the total system when it does occur. Because failure is infrequent, it is not easy to identify these modes, and therefore most of them are often ignored. Because of the huge negative impact, however, consistent attention should be paid to the failure modes in the big
shot quadrant. For instance, a resource breakdown can be a big shot failure mode. If the
effect of a special resource is linked to many distributed processes, the unexpected breakdown of this resource may cause several processes to fail simultaneously, resulting in a
severe impact on the whole service system. Because such a failure cannot be detected
easily, managers must do their best to pre-identify these types of failures.
Casual failure. Contrary to the big shot quadrant, the casual failure quadrant is characterized by low severity and high occurrence. These failures modes are generated very frequently but have a negligible impact on the system. These failures are an everyday
occurrence and thus usually become a target of productivity improvement, implying
that the importance of this type of failure has likely been overestimated. In some cases,
the cost of improvement can outweigh the benefits. Thus, the importance of failure
modes in the casual failure quadrant is not overestimated.
Insignificant. Failure modes with both low severity and low occurrence belong to the
insignificant quadrant and are not critical to overall productivity. Under resource constraints, the failure modes in the insignificant quadrant are negligible.
Portfolio matrix for innovation modes
A portfolio for innovation modes is constructed on two axes of impact and feasibility, as
illustrated in Figure 3. The matrix is divided into four quadrants: core to innovation, tracking required, incremental innovation, and dud.

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Figure 3. Portfolio matrix for innovation modes.

Core to innovation. The core to innovation quadrant is characterized by high impact and
high feasibility. The innovation modes in this category have the potential to increase the
overall productivity to a great extent. In other words, these modes are the sources of breakthrough innovation. At the same time, innovation is likely to succeed if all of the requirements for innovation, feasibility conditions, are met. Above all, these occurrences should
be considered strong candidates for resource investment and implementation in order to
improve productivity.
Tracking required. The tracking required quadrant is characterized by high impact and
low feasibility. These innovation modes have a high potential but face critical and difficult
obstacles. Nevertheless, if successfully implemented, these modes can greatly enhance the
overall system performance. Particularly for these modes, managers should keep their eyes
on changes in innovation feasibility. Advances in technology and organizational theory,
among other areas, can make an infeasible innovation feasible. Consistent tracking is
therefore necessary.
Incremental innovation. Innovation modes under the incremental innovation quadrant
are exactly the opposite of those in the tracking required quadrant. Characterized by
low impact and high feasibility, these modes are likely to be feasible for specific innovations, but results in limited productivity improvement. The service life cycle becomes
important when considering these innovations. At the mature stage, with little opportunity
for radical innovation, managers make active use of these opportunities. At earlier stages,
priority should be given to opportunities for radical innovation.
Dud. Innovation modes in the dud quadrant show low impact and low feasibility. Almost
without exception, these factors are not likely to boost innovation. The modes in the dud
quadrant are the first to be ignored, especially under severe constraints.
Measuring productivity improvement
To validate our approach, it must be determined whether our approach can increase service
productivity in practice. However, the priority of improvements should be determined

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because there are competing alternatives both for the failure and innovation modes. To
arrive at a consensus about which alternatives will be most effective, a mix of customer
surveys and simple simulations can be greatly helpful.
Above all, to measure service productivity, the key metrics of input and output should
be defined not only from an operational perspective, but also from a customer perspective.
Thus, measuring service productivity improvement should be well balanced between the
customer and operational perspectives (Johnston & Clark, 2001; Johnston & Jones, 2004;
Martin & Horne, 2001). Operational productivity is measured through the traditional
approach by using the weighted sum of input measures to that of output measures. This
approach tends to use simple quantity measures such as time and cost. Customer productivity measures, however, are based mainly on subjective customer perception and
evaluation, focussing on qualitative features (Johnston & Jones, 2004; Rutkauskas &
Paulaviciene, 2005). In other words, service productivity measurements should include
a measure of how a given amount of production inputs in the form of resources and
resource structures affects the perceived service quality (Gronroos & Ojasalo, 2004). As
a means for measuring customer productivity, therefore, customer satisfaction or customer
value has been considered an important output measure for service productivity.
Illustrative example
To demonstrate the capabilities of our approach, we apply it to hospital service. FMEA is
applied to identify the failure and innovation modes. Portfolio management is then
employed to prioritize new solutions for effective productivity improvement. The
effects of the selected solutions are simulated through a simple customer survey and are
provided as a rough guide for decision making.
Hospital service
A hospital service is chosen as an example for the following reasons. First and foremost, a
hospital service is a typical high-contact service that involves significant interactions
between customers and employees. This kind of service entails opportunities for
varying degrees of productivity improvement, and a number of failure modes are likely
to be found. Recently, many high-technology innovations have become integral parts of
hospital service. The opportunities arising from innovation modes are expected to be
quite significant. Altogether, hospital service is likely to include plenty of failure and innovation modes and thus face difficulty in prioritizing opportunities for improvement. It
should be noted that hospital service varies significantly by department. Hence, to
exclude complex services, which are neither understood nor evaluated by patients, diagnosis and treatment services in a Department of Internal Medicine is chosen as an example.
Decomposition of the service process
Service decomposition requires an understanding of the current service system. For this
purpose, a flowchart of hospital service, as shown in Figure 4, is constructed, providing
a basis both for understanding and analysis.
Identification of failure modes and innovation modes
Data
Given a set of sub-processes, both failure modes and innovation modes are identified
through a customer survey. For customer data collection, 120 randomly selected patients

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Figure 4. Process flowchart of hospital service.

from the records of the Department of Internal Medicine at the Seoul Medical Centre were
asked to fill out the FMEA sheet. Patients were provided with the guidelines in Tables 1
and 3 and a brief description of the service process. Pre-processing was undertaken to
avoid predictable biases due to patient profiles including age and knowledge. First, respondents younger than 12 years and older than 70 years were excluded because they were
expected to not have a good understanding of the service process or the possible innovations. Second, respondents experiencing the service fewer than four times were eliminated because of a lack of experience with the service process. After these respondents,
along with the non-respondents, were excluded, a total of 74 patients responded to our
survey over a 1-month period.
As mentioned previously, innovation modes and failure modes are potential sources of
service productivity improvement and thus provide a good reflection on the core concepts
of FMEA. Appendix 1 shows a sample survey questionnaire that attempts to identify the
impact of failure modes. The survey questionnaire for innovation modes takes a similar
form. It consists of the following processes. Most importantly, the hospital service
process is decomposed. For each process that is decomposed, the possible failure from
the failure modes is measured by severity and occurrence and that from the innovation
modes by impact and feasibility. Simple questions are posed primarily to measure these

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Y. Geum et al.

four key metrics and to help patients understand the purpose of the survey. Patients are
asked to rate questions on a five-point Likert scale from 1 (not likely) to 5 (strongly likely).

Results
Tables 6 and 7 show the FMEA sheets for the identified failure modes and innovation
modes, respectively. A sub-process is considered to be the unit of a failure mode.
Hence, the sub-processes of reservation, reception, waiting, checking medical history,
basic questions, primary diagnosis, explaining prescription, explaining medical fees,
payment, and getting a receipt are identified as failure modes. Similarly, four key innovation modes are identified: SMS-related service, entertainment service, U-healthcare,
and automatic payment. These are identified not only by investigating the current sub-processes from various angles, but also by exploring several different possible dimensions of
future service innovation, as mentioned in Table 3. The innovation mode unit can be either
a single sub-process or a module of collective sub-processes.

Construction of the failure and innovation portfolios

Portfolio matrices are constructed from the results of the FMEA. Figures 5 and 6 show the
portfolio matrices for the failure modes and innovation modes, respectively.
With regard to failure modes, the sub-processes comprising basic questioning, primary
diagnosis (temperature or blood pressure), checking medical history, and reservations
Table 6. FMEA sheet for failure modes.
Operation
Failure modes
Reservation
Reception
Waiting
Service during
waiting

Characteristics of failure
Cause of failure
Standby (busy signal,
waiting)
Rudeness
Delay of consultation
Duplication of reservation
Limited waiting room

Effect of failure

Rating
S

Giving up reservation, 4.2 4

displeasure
Displeasure
2.8 2
Boredom, displeasure 2.6 4
Long perceived
waiting time

Lack of entertainment
source (TV, magazine)
Repetition
Boredom

Checking
medical history
Basic questions Repetition
Boredom
Primary diagnosis Repetition
Boredom
Explaining
Quick and insincere
Difficulty
prescription
explanation, unkindness
understanding,
displeasure
Explaining
Quick and insincere
Little understanding,
medical fees
explanation, rudeness
displeasure
Payment
Limited means of payment Giving up revisit,
inconvenience
Getting a receipt Not issuing the receipt
Displeasure
Reservation for
next visit

3.2 4

3.6 4
3.2 5
3.2 5
4 2
3

3.2 4
2

Action
Decision
taken
S

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Table 7. FMEA sheet for innovation modes.

Operation

Characteristics of innovation

Rating

Innovation modes

Main source of innovation

Effect of
innovation

Checking the patient

information
Checking the visiting
purpose
Checking the visiting date
Checking the schedule
Waiting
Service during waiting
Checking medical history
Basic questions
Primary diagnosis
Receiving prescription
sheet
Explaining medical fees

Technology (SMS)

1 5

Technology (SMS)

1 5

Technology (SMS)
Technology (SMS)
Service (Entertainment)
Service (Entertainment)
Technology (U-health)
Technology (U-health)
Technology (U-health)
Technology (Automatic
payment)
Technology (Automatic
payment)
Technology (Automatic
payment)
Technology (Mobile
payment)
Technology (Automatic
payment)
Technology (SMS)

5
5
2
2
5
4.2
3.6
5

2
2
3
3
4
4
4
2

3 4

2 5

3 2

2 5

2.6

2 2.6

Payment

Getting a receipt
Reservation for next visit

Action
Decision
taken

5
5
2
2
5
4.2
3.6
5

Figure 5. Portfolio matrix for failure modes in a hospital.

have potential critical failures with both high severity and high occurrence. The subprocess of explaining prescriptions rarely causes failures but shows high severity. In particular, patients older than 50 years struggle to understand these explanations. In contrast,
the sub-process of getting a receipt fails frequently but has little impact on patient
satisfaction.

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Y. Geum et al.

Figure 6. Portfolio matrix for innovation modes in a hospital.

As for innovation modes, some researchers believe that the U-healthcare system can be
an innovative way of changing the sub-process, checking medical history, because it has
both a high impact and a high feasibility. In addition, several relevant sub-processes are
expected to show productivity increases. Automatic payment ranks second among
innovation modes and is likely to increase the productivity of five sub-processes. SMSrelated service can be implemented easily but will not have a significant impact on
productivity. Even worse, both entertainment and mobile payment must overcome
several obstacles before they can be implemented. If possible, the productivity increase
will be incremental. Consequently, it is reasonable to choose two innovation alternatives,
namely, U-healthcare and automatic payment.
Simulation of productivity improvement
Actual implementation has to be conducted on the basis of portfolio-based decisions.
Since our study is conducted at the planning stage, the real effects of eliminating failures
and creating innovative solutions on service productivity cannot be measured. To arrive at
a consensus about the effectiveness of the alternatives, a simple simulation will help
greatly. Before simulation, patients are struggling to estimate the incremental change in
either productivity or customer satisfaction by eliminating the sources of potential failures.
Thus, focussing on two of the more innovative solutions, we simulate the expected
improvement in service productivity. Service productivity can be defined in several
ways. Measures and survey questions vary by definition. FMEA was developed to
measure operational productivity in manufacturing. However, assuming that the development costs do not vary greatly between alternatives, the expected levels of productivity
improvement will depend mainly on the value delivery for customers. In addition,
because of the customer-oriented characteristics of hospital service, customer productivity
is a more important than operational productivity.
With this definition, a simple survey on the inputs and outputs of patients is sufficient
to simulate a change in service productivity before and after the application of two
innovative solutions. With reference to the literature on customer productivity, in our
survey, inputs are measured according to a customers time and effort and outputs are
measured according to satisfaction and reuse intention through service experience.
Appendix 2 shows a sample survey questionnaire that measures customer-based service
productivity for innovation modes. This questionnaire is similar to that for failure
modes. The survey questionnaire was constructed as follows. First, the overall hospital

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1841

Table 8. Statistical differences between the productivities of pre-improvement and after

improvement.
Test value 0

df

Significance
probability

Mean
difference

95%
Confidence
interval
Upper

U-healthcare vs. checking medical

history
U-healthcare vs. basic question
U-healthcare vs. primary diagnosis

Lower

4.450 39

0.000

0.82500

0.4500 1.2000

7.873 39
4.928 39

0.000
0.000

1.37500
0.95833

1.0217 1.7283
0.5650 1.3516

service process was decomposed. For each process, customers were asked to estimate the
inputs of time, cost, and mental fatigue and to measure their satisfaction and reuse intention. Inputs and outputs were rated on a five-point Likert scale. After improving the service
process using the identified innovation method, the after-improvement service productivity was measured using the same survey and then compared with the pre-improvement service productivity. This survey was conducted on the population of 74 patients
mentioned previously. In all, 74 respondents gave responses, amounting to a 100%
response rate.
Tables 8 and 9 show the results of productivity increases and their statistical
reliabilities before and after the application of each innovative solution. As mentioned,
the survey about the consequent improvement productivity was conducted with an imaginary representation of new service processes and thus should be considered a rough
guide to real decision making. Despite this limitation, the results show a significant
difference between the pre-improvement productivity and that after the improvements.
At the very least, these two innovations, if implemented correctly, will be appealing to
some patients.
Table 9. Statistical differences between the productivities of pre-improvement and after
improvement.
Test value 0

df

Significance
probability

Mean
difference

95%
Confidence
interval
Upper Lower

Automatic payment vs. explaining

prescription
Automatic payment vs. explaining
medical fee
Automatic payment vs. payment
Automatic payment vs. receiving
prescription sheet
Automatic payment vs. getting a
receipt

29.734 39

0.000

2.15417

2.0076 2.3007

39.465 39

0.000

2.50208

2.3738 2.6303

16.346 39
14.863 39

0.000
0.000

1.39167
1.53750

1.2195 1.5639
1.3283 1.7467

10.029 39

0.000

1.03750

0.8283 1.2467

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Y. Geum et al.

Conclusions
Our research proposes a systematic framework for improving service productivity using an
FMEA-based portfolio approach. Adapting FMEA to the service area, we can scrutinize
every opportunity for productivity improvements and take further advantage of separately
identifying the two kinds of opportunities comprising failure modes and innovation
modes. A failure mode is defined as the way in which a process or a subsystem is likely
to fail or decrease the output quality. For the purposes of prioritization, the two evaluation
variables of severity and occurrence are employed. An innovation mode is similar; it is a
process or a subsystem providing an opportunity for innovation that is expected to increase
the productivity far more than the improvements brought about due to the failure modes.
Once all of the modes are identified, two portfolio matrices are constructed to effectively
prioritize new solutions. A failure portfolio is divided into four quadrants: highly dangerous, big shot, casual failure, and insignificant. Innovation modes belong to one of the four
innovation quadrants: core to innovation, tracking required, incremental innovation, and
dud. This portfolio helps managers choose the most effective solutions for productivity
improvement. To determine the priorities of competing solutions, a simulation based on
a customer survey is used. To demonstrate how our approach works, we apply it to a
real hospital service.
Our proposed approach is conducive to service productivity studies in three ways.
First, we provide a practical and systematic way to improve service productivity. Although
it has not been tested in practice, our approach can be effective for scrutinizing all of the
underlying opportunities and prioritizing them with ease. Another contribution is the
methods ability to produce quick but rational decision making. Through the visualization
of new solutions with two key variables, managers can simultaneously consider multiple
key variables, thus making a quick multilateral decision while being aware of the pros and
cons. The identification of long-term opportunities is also a benefit. Finally, this paper
attempts to develop a new hybrid approach, albeit simple, by combining FMEA with portfolio management. In addition, previous works on FMEA have remained static, providing
only catch-up activities. Our approach takes a further step toward a dynamic approach by
employing portfolio management and thus can address the dynamic nature of service,
while also extending the application area of portfolio management.
Though it is simple and useful, our research is subject to some limitations, and these
limitations suggest the need for further studies. The primary concern is to develop practical
guidelines for more systematically identifying failure modes and innovation modes. To
address this weakness, service productivity should be investigated not only from the customers perspective, but also from the suppliers perspective, because taking both perspectives may be required to develop a well-structured hierarchy of productivity measures.
Although the portfolio can be a partial solution to the problems of traditional FMEA
scoring methods, it is not sufficient and thus has to be complemented with advances in
the evaluation method that allow for quantitative measurement. Finally, applying the
method to real services will reveal unexpected problems and thus indicate directions for
further research.

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Appendix 1. Sample of a survey to identify the failure modes and their impacts
This survey seeks to investigate the current service process and its propensity toward failure. Please
answer the questions regarding the service process of the Department of Internal Medicine in Seoul
Medical Centre.
(1) Process: Denotes theE detailed process of the Department of Internal Medicine at the Seoul
Medical Centre.
(2) Failure: Please mention, according to your experience, what kinds of failures might occur.
Please mention any kinds of possible failure points that may cause the failure of a service.
(3) Cause of failures: Please mention the causes of failures.
(4) Effects of failures: Please mention the effects of failures.
(5) How severe the possible failure is: This question is for measuring the severities of failures.
(1: not likely, 5: very likely)
(6) How frequently does the failure occur? This question is for measuring the occurrence of
failures. (1: not likely, 5: very likely)

Process

Failure

Cause of
failure

Effect of
failure

How severe is
the possible
failure?

How frequently
does the failure
occur?

1 2 3 4 5

1 2 3 4 5

Reservations
Checking the patient
information
Checking the visiting
purpose
(Continued)

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Y. Geum et al.

Appendix 1. Continued

Process

Failure

Cause of
failure

Effect of
failure

How severe is
the possible
failure?

How frequently
does the failure
occur?

1 2 3 4 5

1 2 3 4 5

Checking the visiting date

Checking the schedule
Confirming the reservation
Reception
Informing medical office
Waiting
Checking medical history
Basic questions
Primary diagnosis (blood
sugar, body
temperature)
Diagnosis (by doctor)
Description of diagnosis
Additional treatment
Explaining prescription
Receiving prescription
sheet
Explaining medical fees
Payment
Getting a receipt
Reservation for next visit

Appendix 2. Sample of a survey to measure service productivity

This survey seeks to measure the improvement in service productivity. Please answer the questions
regarding the service of the Department of Internal Medicine at the Seoul Medical Centre. Please fill
in the blanks.
The table below shows the overall process of this department (Department of Internal Medicine)
for measuring the input necessary for performing each service process.
(1) Process: Denotes the detailed process of Department of Internal Medicine in Seoul Medical
Centre.
(2) Time: Please fill in the blank with the amount of time necessary to finish the process.
(3) Cost: Please fill in the blank with the costs of finishing the process.
(4) Mental fatigue: Please rate this factor from 1 to 5. This question is for measuring the mental
cost, mental fatigue, or any other kinds of efforts you have used to finish this process. (1: not
tired, 5: very tired)

Process

Time to finish the

process (min)

Costs of finishing the

process (won)

Mental fatigue
1 2 3 4 5

Reservations
Checking the patient
information
Checking the visiting purpose
Checking the visiting date
Checking the schedule
(Continued)

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Appendix 2. Continued

Process
Confirming the reservation
Reception
Informing medical office
Waiting
Checking medical history
Basic questions
Primary diagnosis (blood sugar,
body temperature)
Diagnosis (by doctor)
Description of diagnosis
Additional treatment
Explaining prescription
Receiving prescription sheet
Explaining medical fees
Payment
Getting a receipt
Reservation for next visit

Time to finish the

process (min)

Costs of finishing the

process (won)

Mental fatigue
1 2 3 4 5

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