Balancing Demand and Capacity - STRATEGIES FOR MANAGING DEMAND

Many services, such as health care or repair and maintenance, involve multiple actions delivered sequentially. What this means is that a service organization's capacity to satisfy demand is constrained by one or more elements of its productive capacity its physical facilities, equipment, personnel, or the number and sequence of services provided. Consequently, financial success in capacity-constrained businesses is, in large measure, a function of management's ability to use productive capacity as efficiently and as profitably as possible. Services involving tangible actions to customers or their possessions are more likely to be subject to capacity constraints than are information-based services. In the latter instance, however, similar capacity problems may occur when customers are obliged to come to a service site for delivery, as in live entertainment or traditional retail banking. In a well-designed, well-managed service operation, the capacity of the facility, supporting equipment, and service personnel will be in balance. Sequential operations will be designed to minimize the risk of bottlenecks at any point in the process. This ideal, however, may prove difficult to achieve. The level of demand may vary, often randomly, and the time and effort required to process each person or thing may vary widely at any point in the process. In general, processing times for people are more variable than for objects or things, reflecting varying levels of customer preparedness ("I've lost my credit card"), argumentative versus cooperative personalities ("If you won't give me a table with a view, I'll have to ask for your supervisor"), and so forth. But information processing and possession-processing service tasks are not necessarily homogeneous either. For both professional services and repair jobs, service delivery times vary according to the nature of the customers' needs. Managing Demand Under Different Conditions There are five basic approaches to managing demand. The first, which has the virtue of simplicity but little else, involves taking no action and leaving demand to find its own levels.Eventually customers learn from experience or word-of-mouth when they can expect to stand in line to use the service and when it will be available without delay. The problem is that they may also learn about a competitor who is more responsive. More strategic approaches attempt to influence the level of demand at any given time by taking active steps to reduce demand in peak periods and increase demand when there is excess capacity. Two additional strategies involve inventorying demand until capacity becomes available. A firm can accomplish this either by introducing a reservations systemthat promises customers access to capacity at specified times, or by creating formalized queuing systems (or by a combination of the two). Table links these five approaches to the two problem situations of excess demand and excess capacity and provides a brief strategic commentary on ach. Many service businesses face both situations at different points in their demand cycles and should consider using one or more of the strategies described above.

Using Marketing Strategies to Shape Demand Patterns Four of the 8Ps play a part in stimulating demand during periods of excess capacity and decreasing it during periods of insufficient capacity. Price is often the first variable companies use to bring demand and supply into balance, but changes in product, distribution strategy, and communication efforts can also play an important role. Although we discuss each element separately here, effective demand management efforts often require changes in two or more elements simultaneously.

Price and Other User Outlays One of the most direct ways of reducing excess demand at peak periods is to charge customers more money to use the service during those times. Increases in no financial outlays may have a similar effect. For instance, if customers learn that they are likely to spend more time and physical effort during peak periods, this information may lead those who dislike waiting in crowded and unpleasant conditions to try later (or to use an arm's length delivery alternative like the Internet or self-service machines). Similarly, the lure of cheaper prices and an expectation

of no waiting may encourage at least some people to change the timing of their consumption behavior. For the monetary price of a service to be effective as a demand management tool, managers must have some sense of the shape and slope of a product's demand curve that is, how the quantity of service demanded responds to increases or decreases in the price per unit at a particular point in time (Figure shows a sample demand curve). It's important to determine whether the demand curve for a specific service varies sharply from one time period to another. (For example, will the same person be willing to pay more for a weekend stay in a hotel on Cape Cod in summer than in winter? The answer is probably "yes-") If so, significantly different pricing schemes may be needed to fill capacity in each time period. To complicate matters further, there may be separate demand curves for different segments within each time period (for instance, business travelers are typically less price sensitive than vacationers).

One of the most difficult tasks facing service marketers is to determine the nature of all these different demand curves. Research, trial and error, and analysis of parallel situations in other locations or in comparable services are all ways of obtaining an understanding of the situation. Many service businesses explicitly recognize the existence of different demand curves by establishing distinct classes of service, each priced at levels appropriate to the

demand curve of a particular segment. In essence, each segment receives a variation of the basic product, with value being added to the core service through supplementary services to appeal to higher-paying segments. For instance, first-class service on airlines offers travelers larger seats, free drinks, and better food. In computer and printing service firms, product enhancement takes the form of faster turnaround and more specialized services; and in hotels, a distinction is made between rooms of different size and amenities, and different types of views. The Outrigger Hotel on the Big Island of Hawaii charges premium prices for its ocean view suites and rooms. Rooms overlooking the hotel gardens and golf course are in the middle of the hotel's pricing tier, while parking lot views command the lowest prices. When capacity is constrained, the goal in a profit-seeking business should be to ensure that as much capacity as possible is utilized by the most profitable segments available at any given time. Airlines, for instance, hold a certain number of seats for business passengers paying full fare and place restrictive conditions on excursion fares for tourists (such as requiring advance purchase and a Saturday night stay) in order to prevent business travelers from taking advantage of cheap fares designed to attract tourists who can help fill the aircraft. Changing Product Elements Although pricing is often a commonly advocated method of balancing supply and demand, it is not quite as universally feasible for services as for goods. A rather obvious example is provided by the respective demand problems of a ski manufacturer and a ski slope operator. The manufacturer can either produce for inventory or try to sell skis in the spring and summer at a discount. If the skis are sufficiently discounted, some customers will buy early in order to save money. However, in the absence of skiing opportunities, no skiers would buy lift tickets for use on a midsummer day at any price. So, to encourage summer use of the lifts, the operator has to change the service offering. Similar thinking prevails in a variety of other businesses that undergo significant modifications according to the season. For example, tax preparation firms like H&R Block offer bookkeeping and consulting services to small businesses in slack months. Educational institutions offer weekend and summer programs for adults and senior citizens. Small pleasure boats offer cruises in the summer and a dockside venue for private functions in winter months. And resort hotels sharply alter the mix and focus of their peripheral services like dining, entertainment, and sports to reflect customer preferences in different seasons. All of these firms recognize that no amount of price discounting is likely to develop business out of season. There can be variations in the product offering even during the course of a 24- hour period. Some restaurants provide a good example of this, marking the passage of the hours by changing menus and levels of service, variations in lighting and decor, opening and closing the bar, and the presence or absence of entertainment. The intent is to appeal to different needs within the same group of customers, to reach out to different customer segments, or to do both, according to the time of day. Modifying the Place and Time of Delivery Some firms attempt to modify demand for a

service by changing the time and place of delivery by choosing one of two basic options. The first strategy involves varying the times when the service is available to reflect changes in customer preference by day of week, by season, and so forth. Theaters and cinema complexes often offer matinees on weekends when people have more leisure time. During the summer, cafes and restaurants may stay open later because of daylight savings time and the general inclination of people to enjoy the longer, warmer evenings outdoors. Retail shops may extend their hours in the pre-Christmas season or during school holiday periods. A second strategy involves offering the service to customers at a new location. One approach is to operate mobile units that take the service to customers rather than requiring them to visit fixed-site service locations. Examples include traveling libraries, mobile car wash and windshield repair services, in-ofBce tailoring services, home-delivered meals and catering services, and vans equipped with primary care medical facilities. A cleaning and repair firm that wishes to generate business during low-demand periods might offer free pickup and delivery during these times for portable items that need servicing. Alternatively, service firms whose productive assets are mobile may choose to follow the market when that, too, is mobile. For instance, some car rental firms establish seasonal branch offices in resort communities. In these locations, they will tailor the schedule of service hours (as well as certain product features) to meet local needs and preferences. Customers using information-based services can be offered a cyberspace option, in the form of Internet or telephone-based delivery from a remote server or core center. Networked systems allow firms to transfer demand across time zones to locations where capacity is readily available. Promotion and Education Communication efforts alone may be able to help smooth demand even if the other variables of the marketing mix remain unchanged. Signage, advertising, publicity, and sales messages can be used to educate customers about the timing of peak periods and encourage them to use the service at off-peak times when there will be fewer delays. Examples include requests and incentives to "Mail Early for Christmas," public transportation messages urging no commuters like shoppers or tourists to avoid the overcrowded conditions of the commute hours, and communications from sales reps for industrial maintenance firms advising customers of time periods when preventive maintenance work can be done quickly. Management can ask service personnel (or intermediaries such as travel agents) to encourage customers with discretionary schedules to favor off-peak periods. Short-term promotions, combining both pricing and communication elements as well as other incentives, may also provide customers with attractive incentives to shift the timing of service usage.