Chapter 9:

Balancing Demand and Productive Capacity

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 9 - 1

Overview of Chapter 9
 Fluctuations in Demand Threaten Service Productivity  Capacity-Constrained Service Organizations  Patterns and Determinant of Demand  Managing Demand Levels  Inventory Demand through Waiting Lines and Reservations  Minimize Perceptions of Waiting Time  Create an Effective Reservations System

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 9 - 2

Fluctuations in Demand Threaten Service Productivity

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 9 - 3

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 firms 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
Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 4

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

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 9 - 5

Variations in Demand Relative to Capacity (Fig 9.1)

 Use marketing strategies to smooth out peaks, fill in valleys VOLUME DEMANDED
Demand exceeds capacity (business is lost) Demand exceeds optimum capacity (quality declines)

 Many firms use a mix of both approaches

CAPACITY UTILIZED Maximum Available Capacity Optimum Capacity (Demand and Supply Well Balanced)

Low Utilization (May Send Bad Signals)

(wasted resources) TIME CYCLE 1

Excess capacity

TIME CYCLE 2
Chapter 9 - 6

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Many Service Organizations Are Capacity Constrained

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 9 - 7

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  Labor used for physical or mental work  Public/private infrastructure  See Best Practice In Action 9.1: Improving Check-In Service At Logan Airport
Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 8

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)

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 9 - 9

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

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 9 - 10

Patterns and Determinants of Demand

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 9 - 11

Predictable Demand Patterns and Their Underlying Causes (Table 9.1)

Predictable Cycles of Demand Levels
     day week month year other

Underlying Causes of Cyclical Variations

 employment  billing or tax payments/refunds  pay days  school hours/holidays  seasonal climate changes  public/religious holidays  natural cycles (e.g., coastal tides)

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 9 - 12

Causes of Seemingly Random Changes in Demand Levels

 Weather  Health problems  Accidents, Fires, Crime  Natural disasters

Question: Which of these events can be predicted?

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 9 - 13

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

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 9 - 14

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 organizations control (for example: weather)  Detailed market analysis may reveal that one segments demand cycle is concealed within a broader, random pattern

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 9 - 15

Demand Levels Can Be Managed

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 9 - 16

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

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 17

Marketing Strategies Can Reshape 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

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 9 - 18

Hotel Room Demand Curves by Segment and Season (Fig 9.3)

Price per room night Bl Bh

Th
Tl

Bh = business travelers in high season Bl = business travelers in low season Th = tourist in high season Tl = tourist in low season

Bl

Bh

Th Tl

Quantity of rooms demanded at each price by travelers in each segment in each season
Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E

Note: hypothetical example

Chapter 9 - 19

Inventory Demand through Waiting Lines and Reservations

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 9 - 20

Waiting Is a Universal Phenomenon!

 An average person may spend up to 30 minutes/day waiting in lineequivalent to over a week per year!  Almost nobody likes to wait  It's boring, time-wasting, and sometimes physically uncomfortable

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 9 - 21

Why Do Waiting Lines Occur?

 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

Not all queues take form of a physical waiting line in a single location
Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 22

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 behavior and perceptions of wait  Install a reservations system

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 9 - 23

Alternative Queuing 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)

28 29 25 26 27 32 23 21 20 24

Take a number (single or multiple servers)

30 31

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 9 - 24

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

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 9 - 25

Minimize Perceptions of Waiting Time

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 9 - 26

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

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 9 - 27

Ten Propositions on Psychology of Waiting Lines (2) (Table 9.3)

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

Sources: Maister; Davis & Heineke; Jones & Peppiatt

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 9 - 28

Create An Effective Reservation System

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 9 - 29

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

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 9 - 30

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
Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 31

Setting Hotel Room Sales Targets by Segment and Time Period (Fig.9.7)
Capacity (% rooms)
100%

Week 7
(Low Season) Out of commission for renovation Loyalty Program Members Transient guests Weekend package

Week 36
(High Season) Loyalty Program Members

50%

Transient guests Groups and conventions

W/E package

Groups (no conventions) Airline contracts Airline contracts F S Su M Tu W Th F S Su

Chapter 9 - 32

Time Nights: M

Tu

Th

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

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
Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 33

Summary of Chapter 9: Balancing Demand and Productive Capacity (1)

 At any moment in time, a fixed-capacity service may face
    Excess demand Demand exceeding optimum capacity Demand and supply well-balanced at the level of optimum capacity Excess capacity

 Productive resources are used for creating goods and services; when facing capacity constraints, firms can consider
 Stretching or shrinking capacity levels  Adjusting capacity to match demand  Creating flexible capacity  To determine what factors govern demand, firms need to  Understand patterns of demand  Analyze drivers of demand  Divide demand by market segments
Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 34

Summary of Chapter 9: Balancing Demand and Productive Capacity (2)

 Demand levels can be reshaped by marketing strategies
        Use price and other costs to manage demand Change product elements Modify place and time of delivery Use promotion and education

 Waiting is a universal phenomenon. Waits can be reduced by Rethinking the design of the queuing system Redesigning the processes to shorten the time of each transaction Managing customers behavior and their perceptions of the wait Installing a reservation system

 An effective reservations system

 Enables demand to be controlled and smoothed in manageable way  Should focus on yield  Requires information
Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 35