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Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 1
Chapter 9
Balancing Demand and Productive Capacity
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 2
Learning Objectives - Chapter 9
Study service capacity
Consider how variations in demand can be predicted
Explore how capacity management techniques can be employed to match variations in demand
Assess how marketing strategies can smooth out fluctuations in demand
Reveal what can be done to reduce the waiting time discomfort
Uncover what makes a reservation system effective
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 3
Fluctuations in Demand Threaten Service
Productivity
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 4
Productive Capacity and Service Success
Services cannot be stockpiled
This is problematic for people or physical possession services due to wide swings in demand
Goal is to utilize staff, equipment, and facilities as productively as possible
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 5
From Excess Demand to Excess Capacity
Four conditions potentially faced by fixed-capacity services:
Excess demand Too much demand relative to capacity at a given time
Demand exceeds optimum capacity Upper limit to a firm’s ability to meet demand at a given time
Optimum capacity Point beyond which service quality declines as more
customers are serviced
Excess capacity Too much capacity relative to demand at a given time
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 6
Addressing Problem of Fluctuating Demand
Two basic approaches:
Adjust level of capacity to meet demand
Need to understand productive capacity and how it varies on an incremental basis
Manage level of demand
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 7
Variations in Demand Relative to Capacity (Fig 9.1)
VOLUME DEMANDED
TIME CYCLE 1 TIME CYCLE 2
Maximum Available Capacity
Optimum Capacity (Demand and Supply Well Balanced)
Low Utilization (May Send Bad Signals)
Demand exceeds capacity (business is lost)
Demand exceeds optimum capacity (quality declines)
Excess capacity (wasted resources)
CAPACITY UTILIZED
Use marketing strategies to smooth out peaks, fill in valleys
Many firms use a mix of both approaches
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 8
Many Service Organizations Are Capacity Constrained
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 9
Defining Productive Capacity in Services
Physical facilities to contain customers
Physical facilities to store or process goods
Physical equipment to process people, possessions, or information
Labour used for physical or mental work
Public/private infrastructure
See Best Practice In Action 9.1: Improving Check-In Service at Logan Airport
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 10
Alternative Capacity Management Strategies
Level capacity (fixed level at all times)
Stretch and shrink
Offer inferior extra capacity at peaks (e.g., bus/train standees)
Vary seated space per customer (e.g., elbow room, leg room)
Extend/cut hours of service
Chase demand (adjust capacity to match demand)
Flexible capacity (vary mix by segment)
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 11
Adjusting Capacity to Match Demand
Schedule downtime during periods of low demand
Use part-time employees
Rent or share extra facilities and equipment
Ask customers to share
Invite customers to perform self-service
Cross-train employees
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 12
Patterns and Determinants of Demand
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 13
Predictable Demand Patterns and Their Underlying Causes (Table 9.1)
day week month year other
employment billing or tax
payments/refunds pay days school hours/holidays seasonal climate
changes public/religious
holidays natural cycles (e.g., coastal tides)
Predictable Cycles
of Demand Levels
Underlying Causes of
Cyclical Variations
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 14
Causes of Seemingly Random Changes in Demand Levels
Weather
Health problems
Accidents, Fires, Crime
Natural disasters
Question: Which of these events can be predicted?
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 15
Analyzing Drivers of Demand
Understand why customers from specific market segments select this service
Keep good records of transactions to analyze demand patterns
Sophisticated software can help to track customer consumption patterns
Record weather conditions and other special factors that might influence demand
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 16
Overall Usage Levels Comprise Demand from Different Segments
Not all demand is desirable
Keep peak demand levels within service capacity of organization
Marketing cannot smooth out random fluctuations in demand
Fluctuations caused by factors beyond organization’s control (for example: weather)
Detailed market analysis may reveal that one segment’s demand cycle is concealed within a broader, random pattern
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 17
Demand Levels Can Be Managed
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 18
Alternative Demand-Management Strategies (Table 9.2)
Take no action Let customers sort it out
Reduce demand Higher prices Communication promoting alternative times
Increase demand Lower prices Communication, including promotional incentives Vary product features to increase desirability More convenient delivery times and places
Inventory demand by reservation system
Inventory demand by formalized queuing
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 19
Marketing Strategies CanReshape Some Demand Patterns
Use price and other costs to manage demand
Change product elements
Modify place and time of delivery
No change Vary times when service is available Offer service to customers at a new location
Promotion and education
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 20
Hotel Room Demand Curves by Segment and Season (Fig 9.3)
Bh = business travelers in high season
Bl = business travelers in low season
Th = tourist in high season
Tl = tourist in low season
Bh
Bh
Bl
Bl
Th
Th
Tl
Tl
Price per room night
Quantity of rooms demanded at each price by travelers in each segment in each season
Note: hypothetical example
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 21
Inventory Demand through Waiting Lines and
Reservations
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 22
Waiting Is a Universal Phenomenon!
An average person may spend up to 30 minutes/day waiting in line—equivalent to over a week per year!
Almost nobody likes to wait
It's boring, time-wasting, and sometimes physically uncomfortable
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 23
Why Do Waiting Lines Occur?
Not all queues take form of a physical waiting line in a single location
Because the number of arrivals at a facility exceeds capacity of system to process them at a specific point in the process
Queues are basically a symptom of unresolved capacity management problems
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 24
Saving Customers from Burdensome Waits
Add extra capacity so that demand can be met at most times (problem: may increase costs too much)
Rethink design of queuing system to give priority to certain customers or transactions
Redesign processes to shorten transaction time
Manage customer behaviour and perceptions of wait
Install a reservations system
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 25
Alternative Queue Configurations (Fig 9.5)
Single line, single server, single stage
Single line, single servers, sequential stages
Parallel lines to multiple servers
Designated lines to designated servers
Single line to multiple servers (“snake”)
“Take a number” (single or multiple servers)28 29
21
20
24
23
30 25
3126
2732
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 26
Criteria for Allocating Different Market Segments to Designated Lines
Urgency of job
Emergencies versus non-emergencies
Duration of service transaction
Number of items to transact Complexity of task
Payment of premium price
First class versus economy
Importance of customer
Frequent users/high volume purchasers versus others
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 27
Minimize Perceptions of Waiting Time
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 28
Ten Propositions on Psychology of Waiting Lines (1) (Table 9.3)
Unoccupied time feels longer than occupied time
Pre- and post-process waits feel longer than in-process waits
Anxiety makes waits seem longer
Uncertain waits are longer than known, finite waits
Unexplained waits are longer than explained waits
Sources: Maister; Davis & Heineke; Jones & Peppiatt; see your Services Marketing text, page 275 for full source information.
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 29
6. Unfair waits are longer than equitable waiting
7. People will wait longer for more valuable services
8. Waiting alone feels longer than waiting in groups
9. Physically uncomfortable waits feel longer
10.Waits seem longer to new or occasional users
Ten Propositions on Psychology of Waiting Lines (2) (Table 9.3)
Sources: Maister; Davis & Heineke; Jones & Peppiatt; see your Services Marketing text, page 275 for full source information.
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 30
Create an Effective Reservation System
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 31
Benefits of Reservations
Controls and smoothes demand
Pre-sells service
Informs and educates customers in advance of arrival
Saves customers from having to wait in line for service (if reservation times are honored)
Data captured helps organizations
Prepare financial projections Plan operations and staffing levels
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 32
Characteristics of Well-Designed Reservations System
Fast and user-friendly for customers and staff
Answers customer questions
Offers options for self service (e.g., the Web)
Accommodates preferences (e.g., room with view)
Deflects demand from unavailable first choices to alternative times and locations
Includes strategies for no-shows and overbooking
Requiring deposits to discourage no-shows Canceling unpaid bookings after designated time Compensating victims of over-booking
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 33
Setting Hotel Room Sales Targets by Segment and Time Period (Fig.9.7)
Out of commission for renovation
Loyalty Program Members
Transient guestsWeekend package
Groups and conventions
Airline contracts
100%
50%
Week 7 (Low Season)
MNights: TuTime W Th F S Su
Loyalty Program Members
Transient guests
W/Epackage
Groups (no conventions)
Airline contracts
Week 36 (High Season)
M Tu W Th F S Su
Capacity (% rooms)
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 34
Information Needed for Demand and Capacity Management Strategies
Historical data on demand level and composition, noting responses to marketing variables
Demand forecasts by segment under specified conditions
Segment-by-segment data
Fixed and variable cost data, profitability of incremental sales
Meaningful location-by-location demand variations
Customer attitudes toward queuing
Customer opinions of quality at different levels of capacity utilization
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9- 35
Summary – Chapter 9
Service capacity may face four types of demand
Service capacity can be adjusted to match demand by using temporary employees, cross-training employees etc
Variations in demand can be predicted through good record keeping and analysis
Firms have many options on how they can match capacity to variations in demand
Marketing strategies can smooth out fluctuations in demand by deploying the four traditional Ps of the marketing mix
There are five different approaches to reducing waiting time discomfort
Reservation systems are when they are customer focussed and provide actionable information