How is the Fruitvale branch doing?
On viewing the financial performance of Manzana Ltd., we see that the branch
profitability is decreasing. There is a huge backlog of policies, which is resulting
in delays for current orders too. The number of new policies and endorsements
appeared to be stagnating, whereas the rest of the industry reported moderate
According to the figures of the present quarter, Fruitvale had shown a decline in
insuring new policies whereas Golden Gate had issued 100 more policies than
them in the same quarter. Moreover, the turnaround time, the time from policy
request to policy issue, for Fruitvale was 5 days, which was, much more than the
turnaround time of Golden Gate (2 days). The branch was also losing on
renewals, which amounted to nearly 33%, again more than double of Golden
Gate. The renewal losses represent a significant loss of business and an overall
reduction in the number of policies in force. While new policies have not
increased substantially, renewal policies are being lost, thus, effective growth
What are the causes of these problems?
One of the causes is the wrong method used in calculating the turnaround time.
Their calculations show a much higher time than is actually the case, hence,
agents don't want to work for them and readily switch to the competition.
Another cause is the employees' lack of willingness to work more at RERUNs
and RAINs. When the conversion rate of RAP to RUN is only 15%, it seems that
a lot of time is being wasted. The revenue figures for RAPs hasn't been given
explicitly, but still, a proper cost-benefit analysis needs to be done to establish
The employees aren't working enough on renewals, hence, they are losing their
existing customers. This can be partly traced to the practice of working on RUNs
and RANs first. Another part of the problem is that in their quest for up-to-date
information, the relevant data are released just one day before the date of renewal.
When the information is released, it is not acted quickly upon as the employees
focus more on RUNs and RAPs. Elementary marketing theory states that it costs
at least 5 times to attract a new customer than to please an existing customer.
Hence, their practice isn't cost-effective, which is being reflected in the falling
Another problem is that agents' contracts aren't being renewed at the same pace
as that of the competition. Hence, these agents were recommending other
We can look at the utilization percentage of the groups of employees.
For example, let's consider distribution.
Weighted average time = 41 min.
Arrival rate = 39 policies/day (given)
Total time available = 7.5 * 60 * 4 = 1800 min/ day
Capacity = 1800 / 41 = 43.9 policies.
Hence, utilization = 39 / 43.9 = 89%
Similarly, if we calculate the % utilization for all groups, we get the following:
Hence, we see that the rating and policy writing departments have a lot of idle time. This is a symptom, the cause lies in incorrect calculation of turnaround time and doing the work in series rather than in parallel.
Can you identify the problems in the way Manzana is calculating turnaround time in exhibit 3?
In calculating the turnaround time, Manzana takes into account the 95th percentile
of the completion time. This is a very conservative estimate, the calculation
should be done using the mean. This results in a difference by a factor of 2-3,
which has a significant effect on the turnaround time.
Another issue is that they assume a series operation while calculating the
turnaround time. Ideally, work should be done simultaneously by the different
groups of people. When these 2 factors are taken into consideration, the actual
turnaround time will be reduced substantially.
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