Manzana's Worst Performing Branch

PROFITS DETERIORATING

The Fruitvale branch has become Manzana's worst performing branch, and the pressure from its competitor, Golden Gate, gives Fruitvale a hard time to maintain its current profitability. The profit decline was caused by both internal operations and external competition.

Large Number of Late Renewals

At Fruitvale, instead of following a straight first-in-first-out (FIFO) policy, RUNs and RAPs were prioritized over RAINs and RERUNs. Moreover, RERUNS were not released until the last day before the due date, which made it impossible to finish them on time. As a result, Fruitvale suffered from 44% late renewals, which further led to a 47% of renewal loss rate in Q2 1991.

High Turnaround Time

Turnaround time (TAT) is determined by average inventory and processing time. It is a critical indicator of the efficiency of operations. At Fruitvale, policy backlog has increased since 1989 because of late renewals, while their issue of new policies and endorsements appeared to have no advancement. Moreover, there is an uneven workload among the three Underwriting teams (UT), which will lead to substantial delay in the system. Compared with the guaranteed one day TAT of Golden Gate, Fruitvale has a significant competitive disadvantage. Actions need to be taken in order to prevent Fruitvale from continuous loss of agents and profits.

Mismatched Reward System and Profitability

As a result of commission policy and "Salary-Plus" policy, agents and staff will both prioritize RUNs over RERUNs. However, RERUNs are comparatively more profitable than RUNs that will be further discussed in the section Profitability of RUNs and RERUNs. Therefore, the reward system is contradictory to the profitability.

ESSENCE OF COMPETITION

Golden Gate is Manzana's major competitor with a corporate parent who was one of the largest retailers in the world with resources backing it up. Maintaining a close and cooperative relationship with independent agents is a critical factor to build and sustain market share and profitability during the operations, since these agents are the main sales force within the industry.

Commission schedules had become identical among competitors as competition in the insurance had increased. As a result, agents had begun to introduce their clients to insurers on the basis of service. Currently, the most relied on measure was a company's TAT, which made it the essence of competition within the industry. As Golden Gate announced a promise of one-day TAT, a lot of agents would be defecting from Manzana since its currently announced TAT is 6 days.

SOURCES OF VARIABILITY

Variability can decrease the throughput rate and lower the effectiveness of capacity. The sources of variability are coming from both demand and capacity. In terms of demand, policy requests are not coming on a regular basis, and the proportion of different types of policy varies as well. On the other hand, service times of different types of request vary, and the prioritization of RUNs and RAPs further increased the fluctuation of capacity. Moreover, by passing on requests to a particular UT based on the territory, variability of demand and capacity both increased, since the situation of different territories were not identical. A summary of sources of variability can be found in Appendix 9.

UTILIZATION

To calculate the utilization rates of Fruitvale's resources, we need to first determine the demand (Ri) and capacity (Rp) of each resource as demonstrated in Appendix 1. Using the total requests processed for 6 months from Exhibit 7 and dividing it by 120, we can get the daily demand rate for each resource. Total capacity of each step in the process can be found by dividing the number of servers at each step by the weighted average completion time at each step from Exhibit 4. Take the Distribution department (DC) for example, Utilization (U) = Ri/Rp = 39/43.90 = 88.84%. However, flows split into three at the UW stage, and each team should be treated separately. Take territory 1 for example, Utilization (U) = Ri/Rp = 14.625/15.85 = 92.27%. By using the same method, we can get the utilization rate for each step as shown in Appendix 1.

Although none of the resources exceeds 100% utilization, the Fruitvale branch is not overstaffed. The reason is that a number of variability factors exist during the operations. If any variability happens, the utilization rates are very easy to reach 100%, thus result in substantial delays in the systems. Cutting staff will further increase the delay time and result in more profit loss. The bottleneck process is UW team in territory 1, because they have the highest utilization rate (92.27%). Team 1 also had the highest renewal loss rate in 1991, which is 403 out of 636 requests.

THEORETICAL FLOW TIME AND TAT ANALYSIS

Theoretical flow time is calculated by adding up the average processing time of each procedure, including DC, UW, Rating (RT) and Policy Writing (PW). As shown in Appendix 2, the theoretical flow time is 258.6mins for a RUN, and 172.3mins for a RERUN.

Currently, Manzana is using the 95th percentile standard completion time (SCT) to estimate their TAT instead of the average completion time. This estimation is extremely conservative because the probability that all four steps will be above the 95% SCT is (0.05)4, which is a very small percentage (close to zero). This is more of a worst case scenario type of calculation and should not be used in a competitive industry,