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Another way to find their theoretical TAT is using a flow chart. This can be found in Exhibit 3. The
inventory numbers for this were found in the case (Exhibit 3). The flow times for each stage were also
found in the case (Exhibit 4) and named weighted average processing time per request. With this
information the flow rate (R) for each stage can be calculated using Littles Law. After all the flow rates
are calculated the bottleneck can be found. This is the stage that has the lowest flow rate. This is the
weakest link and will establish what the maximum flow rate for the entire process is. In this case, Policy
Writing is the bottleneck. That stage has a flow rate of 3.3/hour or 24.75/day. This is lower than the flow
rate found from Manzanas estimation of 40 requests per day (this is actually the demand rate). 24.75
days can be used as the flow rate for the process and 82 can be used as the inventory. This leads to a total
flow time of 3.31 days. This calculation is shown in Exhibit 4. 3.31 days is another estimate of
theoretical TAT (in addition to 2.05 days). While this is a longer time than the first calculation gave it is
still much shorter than their current 6 day actual TAT.
Causes Of The Problem:
The theoretical and actual TATs for Manzana are clearly very different. Theoretically it should be about
2-3 days but in reality the turnaround time is 6 days. They are not achieving anywhere close to the TAT
that they could be and there are a number of reasons for this. One main reason for this problem is that the
current practice at Manzana is to give priority to RUNs and RAPs over RERUNs. Renewals are less
profitable to the company and employees so they are often not allowed to interfere with the progress of
the more profitable new requests. This is the main reason for the increasingly late renewals. In addition
to delaying renewals and leading to lost policies, this practice also took up some of the employees time.
They most likely spend a good deal of time searching through policies until they find a RUN or RAP.
This can take up some of their time that could otherwise be spent on processing policies. Another cause
of their problem is the attention they are paying to RAPs. These only amount to a new policy 15% of the
time yet they are being given priority over renewals that almost certainly will lead to a consistent sale for
several years if handled right. In reality a new policy arriving from a RAP is pretty rare and the priority
being given to them does not add up. Also, the fact that only 15% become RUNs is a source of variability
in the system that can cause congestion and increase the average flow time.
The due date for RERUNs is known 30 days in advance but they are being sent to the Distribution Clerks
only 1 day in advance. This is adding to the late and lost renewals that have become such a problem for
Manzana. Waiting for the last day makes the process less flexible and can also lead to a higher variability.
Both of these raise the flow time and thus the actual TAT. The salary/plus program may be to blame for
Manzanas problems as well. These employees receive an incentive payment for each new policy written,
but receive nothing for a renewal. When there is an incentive for employees to ignore RERUNs and
focus on RUNs that is what will most likely happen. Manzana has seen the impact of the commission
based salary for new policies only. It has led to a disregarding of renewals and an extremely high
late/loss rate for these policies that employees have no incentive to complete.
Surprisingly, even the way Manzana calculates TAT may have led to some of their problems. In the case
(Exhibit 3) their calculations for Total TAT are shown. The current procedure to calculate TAT assumes
that the activities wait for earlier activities to complete. The Underwriting team starts work after 0.6 days
after distribution clerk finish their current work. It is assumed that policies move from one activity to
another in batches equal to the total number of current policies (work) with that department. Thus, TAT
calculation as shown in the case (Exhibit 3) seems to be incorrect. Also, instead of using the time for an
average policy they use the 95th percentile standard completion time. This is a much higher number than
the average (50th percentile). That is how they got such a high TAT (8.2 days). This is more of a worst
case scenario type of calculation and should not be used in an industry when having a lower TAT can lead
to much more business. Golden Gate looking much better in comparison (2 day TAT and future 1 day on
RUNs) cannot be ignored as a reason for Manzanas recent struggles. While John Lombard may think
that Golden Gate will not be able to live up to their 1 day promise, the possibility has to be accepted. The
guarantee is only for RUNs and if Golden Gate gives these the highest priority they may just be able to
pull it off, which will lead to even bigger problems for Manzana.
Recommendations:
Based on an analysis of the problems facing Manzana and the causes of these problems, there are a few
things that can be recommended to them. First, Manzana should modify their strategy in terms of the
order in which they review policies. Going back to a true FIFO system will make them more efficient.
Their modifications to the FIFO strategy are causing problems. Giving priority to the new policies has
caused tons of late and lost renewals that are severely hurting them. Also, they are wasting time by
sorting through all the policies trying to find new ones. Even if they choose not to follow a true FIFO
system, the way they are doing it right now is wrong. They should focus on RUNS first, RERUNS
second, and RAINS and RAPs last (only 15% of RAPs become RUNS).
They should also modify the procedure for handling RERUNs. Their renewal loss rate is absolutely too
high, mostly due to being late. There is no excuse for being late; especially when they always know the
date they need to provide the renewal well ahead of time. If the due date is known a month in advance
then they should be sent to Distribution much sooner than just a day early. Even a week in advance
would greatly increase their ability to adjust their schedules to make sure RERUNs are processed on time
without disrupting the flow of new policies. Manzana should prepare documentation for the renewals
approximately 30 days before the policy expires. They should then ensure that the agents receive the
paperwork at least 1 week ahead of the expiration. Manzana should re-visit their employee compensation
plan. The salary/plus employees currently receive a bonus for every new policy written. This promotes
their modified FIFO structure focusing on new policies first at the expense of renewals. The case proves
this can be counterproductive. The Salary/Plus program has also added approximately 10% to the Salary
expense, and no significant increase in the number of new policies written.
Investing in procedure standardization is another recommendation for Manzana. While the variation in
the insurance business is high overall, there are opportunities to standardize based on the type of client to
eliminate rework. Reducing the flow time at the bottleneck (Policy Writing) will increase the flow rate
and process capacity for the entire process. Also, there is little customer contact in the insurance industry
so standardization should not be a problem. As stated above, Manzanas calculation for TAT (Exhibit 3 in
the case) is flawed and is much longer than it should be. If they quote this inflated TAT number to agents
then they are hurting their chances at getting that policy. The Fruitvale branch manager states that the
branch is overstaffed. However, the manager fails to understand that there is a significant variation in the
input process (processing time for different types of requests) that requires reserve capacity. There must
be a compromise between productivity and utilization so that there is enough flexibility within the system
to respond to the inherent variability in demand and request processing times.
In addition to having a few chances to improve their operation process Manzana also can also improve
their marketing policy. Although they seem scared by it, Golden Gates 1 day guarantee actually presents
an opportunity for Manzana. They can approach it in two different ways:
1. While hard to tell, due to the method of calculating TAT, Manzana should evaluate their own
capability to turnaround new requests for underwriting in 1 day. Their current practice is to give
RUNs priority. This means that the TAT for RUNs will be much lower than the average TAT that
is inflated due to the long time it takes for a RERUN to be processed. They could then market
this as direct competition to the new Golden Gate strategy.
2. Manzana could market that they can turn around ANY policy in less than 3 days, and if not,
they will pay agents a penalty of 15%. This option requires them to go to a true FIFO strategy. If
Golden Gate is committed to turning around RUNs in 1 day then their other policies will suffer.
Manzana should then promote their ability to quickly turnaround the RERUNs, RAINs, and
RAPs. Although Golden Gate may win out on RUNs, Manzana can gain an advantage in the
other 3.
In conclusion, Manzana currently has many operational problems that are preventing them from having
their best turnaround time. Theoretically the TAT should be about 2-3 days but it is actually at 6 days.
When compared to Golden Gates 2 day TAT this has significantly hurt their business because TAT is such
an important performance indicator in the insurance industry. Manzana is also seeing increasing late and
lost renewals which must be fixed soon. The main culprit for these problems is the altered FIFO strategy
that gives priorities to new policies over renewals. This has led to a backlog of policies (especially
RERUNs) and has caused their turnaround time and late renewals to skyrocket. Their operational and
marketing policies need to be altered in order to fix this and other problems and we have laid out
numerous recommendations for Manzana that should be able to do this.
Exhibit 1:
New Policies
Endorsements
Renewals
Turnaround time
(avg.)
Renewals late
Renewal loss rate
Manzana Fruitvale
This
Last
Year
Year
326
278
206
235
2063
1253
6 days
44%
47%
5 days
20%
33%
Golden
Gate
This Year
375
300
1400
2 days
NA
15%
Exhibit 2:
R=40/day
I=82
T=I/R
T=82/40
TAT=2.05 days
Exhibit 3:
DISTRIBUTI
ON
I=16
R=23.4/hr
T=.683 hrs
UNDERWRITI
NG
I=52
R=109.86/hr
T=.473 hrs
Exhibit 4:
Policy Writing = Bottleneck
R=3.3/hr or 24.75/day
I=82
T=I/R
TAT=3.31 days
RATING
I=11
R=9.36/hr
T=1.173 hrs
POLICY
WRITING
I=3
R=3.3/hr
T=.913 hrs