Chapter 9

Chapter 9 Lovelock
Fluctuations in Demand
Threaten Service
Productivity
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
Versus
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
 Variations in Demand
Relative to Capacity (Fig
9.1)
– Use marketing strategies to smooth out peaks, fill in
VOLUME DEMANDED
valleys
Demand exceeds capacity
(business is lost)
• Many firms use a mix of both approaches
CAPACITY UTILIZED
Maximum Available Demand exceeds
Capacity optimum capacity
(quality declines)
Optimum Capacity
(Demand and Supply
Well Balanced)

Excess capacity
Low Utilization (wasted resources)
(May Send Bad Signals)

TIME CYCLE 1 TIME CYCLE 2

Many Service Organizations
Are Capacity Constrained
 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
 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)

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
Patterns and Determinants
of Demand
Predictable Demand Patterns and

Their Underlying Causes (Table 9.1)

Predictable Cycles Underlying Causes of
of Demand Levels Cyclical Variations
 day – employment
 week – billing or tax
 month payments/refunds
 year – pay days
 other – school hours/holidays
– seasonal climate changes
– public/religious holidays
– natural cycles
(e.g., coastal tides)
 Causes of Seemingly
Random Changes in Demand Levels
• Weather
• Health problems
• Accidents, Fires,
Crime
• Natural disasters

Question: Which of these events can be predicted?

Demand Levels Can Be
Managed
 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
 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
Inventory Demand through
Waiting Lines and
Reservations
 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
 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
 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 queueing 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
 Alternative Queuing
Configurations
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”)

21
29
28
20
“Take a number” (single or multiple servers) 30
26
25
24
31 27
32 23
 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
Minimize Perceptions of
Waiting Time
Ten Propositions on Psychology of
Waiting Lines
1. Unoccupied time feels longer than occupied time
2. Pre- and post-process waits feel longer than in-process waits
3. Anxiety makes waits seem longer
4. Uncertain waits are longer than known, finite waits
5. Unexplained waits are longer than explained waits
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
Create An Effective
Reservation System
 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
 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