Engine Services, Inc

6 Pages Posted: 21 Oct 2008

See all articles by Sherwood C. Frey

Sherwood C. Frey

University of Virginia - Darden School of Business

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Abstract

Engine Services, Inc., is a world-class jet-engine overhaul center. An about-to-be-published quarterly report supports the perception that the overhaul facility is providing too much value relative to contractual guarantees. The root of the problem may be the "two standard deviations rule," which is being used to provide a cushion above the guarantee. Lower targets increase the chances of costly rework but save on the costs of initial work.

Excerpt

UVA-QA-0663

Engine Services, Inc.

As John Houston, general manager of the Commercial Engine Overhaul division of Engine Services, Inc., scanned the draft quarterly performance statement of his division(Exhibit 1), he again saw distressing evidence that his team delivered too much value to its customers. Although he shuddered to think that providing “too much customer value” was a problem, he realized that clients paid for a guaranteed level of engine performance as the result of an engine overhaul, but generally received far more value. It was well recognized that the engine overhaul process was far from a science because identical services could be performed on different jet engines from the same family of engines with very different results. Some allowance had to be made for such variability, but the time had come for a careful appraisal of the two standard-deviation policy.

Although Houston thought he might ultimately want to change the two standard-deviation policy, he decided to start with a specific example—the engine that had arrived that morning for overhaul. Once he understood in that specific case how much leeway to build in for overhaul variability, he might be able to think more clearly about the policy and be able to respond more intelligently to the questions that he knew would be coming from the members of the Executive Committee when they received the same statement that was currently in front of him.

Engine Services, Inc.

Engine Services, Inc., (ESI) was a fully FAA-certified major repair station for commercial and military jet engines. Over the past 40 years, ESI's proven quality, superior turnaround time, competitive pricing, and excellent customer satisfaction had made it a center of excellence in the jet engine overhaul industry. ESI maintained its competitive edge by investing heavily in personnel development. It provided more than 80 hours of training annually for each of its employees. That investment paid off in a highly skilled workforce that was also very dedicated. At less than 1% a year, the employee turnover rate was extraordinarily low by any standard.

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Keywords: quantitative analysis, risk analysis

Suggested Citation

Frey, Sherwood C., Engine Services, Inc. Darden Case No. UVA-QA-0663. Available at SSRN: https://ssrn.com/abstract=912123

Sherwood C. Frey (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

HOME PAGE: http://www.darden.virginia.edu/faculty/frey.htm

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