Managing Demand and Supply

Chapter 9:
Balancing Demand and Productive Capacity
Slide 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 9 - 1
Seven Service Quality Gaps

Customer needs and expectations 1. Knowledge Gap Management definition of these needs 2. Standards Gap Translation into design/delivery specs
CUSTOMER MANAGEMENT
3. Delivery Gap
Execution of design/delivery specs 5. Perceptions Gap Customer perceptions of service execution 7. Service Gap Customer experience relative to expectations
4. Internal Gap 4. Advertising and sales promises
Communications
6. Interpretation Gap Customer interpretation of communications
Chapter 9 - 2
Key Factors Leading to Provider Gap 3 ( delivery gap)
Chapter 9 - 3
Fluctuations in Demand Threaten Service Productivity
Chapter 9 - 4
Fluctuating demand is a major challenge for service providers like airlines, restaurants, resorts, transport, courier services, beauty saloons, theatres etc Services are perishable It cannot be inventoried and cant be consumed at later stage There are cyclical shifts in demand An airline seat not sold on a given flight cannot be left in inventory and resold the following day. The productive capacity of that seat on that light has perished.
Services cannot be transported from one place to another or transferred from one person to another.
In peak periods prospective customers are turned away and its very disappointing for service provider. In low periods the facilities are idle
Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 5
The fundamental issue underlying supply and demand management is the lack of inventory capability.
Services cannot be inventoried during periods of slow demand to use later when demand increases.
The lack of inventory capability is due to the perish ability of services and their simultaneous production and consumption An airline seat not sold on a given flight cannot be left in inventory and resold for the following day. The productive capacity of that seat on that flight has perished.
Services cannot be transported from one place to another or transferred from one person to another.
Chapter 9 - 6
From excess demand to excess capacity

Excess demand: level of demand > maximum available capacity. Customers are turned away resulting in lost business. Demand exceeds optimum capacity( maximum available capacity) : customers are not turned away but conditions are crowded and customers are likely to perceive a deterioration in service quality and may feel dissatisfied
Demand and supply are well balanced at the level of optimum capacity : staff and facilities are busy without being overworked and customers receive good service without delays. It is the ideal stage.
Excess capacity : demand is below optimum capacity and productive resources are underutilized, resulting in low productivity. Customers may receive excellent quality on an individual level because they have full use of facilities, no waiting and complete attention from staff. But its loss of capacity for
Variations in Demand Relative to Capacity

VOLUME DEMANDED
Demand exceeds capacity (business is lost)
CAPACITY UTILIZED Maximum Available Capacity Optimum Capacity (Demand and Supply Well Balanced) Demand exceeds optimum capacity (quality declines)
Low Utilization (May Send Bad Signals)
(wasted resources) TIME CYCLE 1
Excess capacity
TIME CYCLE 2
Chapter 9 - 8
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
Chapter 9 - 9
Many Service Organizations Are Capacity Constrained
Chapter 9 - 10
There are often limits to a firms capacity to serve additional customers at any particular time Service firms may also be constrained in terms of being unable to reduce their productive capacity during periods of low demand Productive capacity: it refers to the resources or assets that a firm can employ to create goods and services.
Chapter 9 - 11
Defining Productive Capacity

Physical facilities : designed to contain customers and used for delivering people processing services. E.g hospitals, hotels, airlines, and education Physical facilities designed for storing or processing goods: that either belong to customers or are being offered to them for sale. E.g parking lots.
Physical equipment used to process people, possession or information processing : it embraces a huge range of items and it is very situation specific. E.g ATMs.
Labor: it is key element of productive capacity. Staffing for restaurant servers, nurses, call centers staff Infrastructure: public or private infrastructure to facilitate the delivery of services. E.g electricity
Capacity constraints
Time: a consultant, a hair dresser, a counselor all sells their time. If demand exceeds, additional time cannot be created. Service provider is time constrained Labor: labor or staffing levels can be the primary capacity constraint. Equipment constrained: e.g health clubs Facilities constrained: hotel rooms, airline seats.
Chapter 9 - 13
Strategies for Adjusting Capacity to Match Demand
Chapter 9 - 14
Capacity levels can be stretched or shrunk

Some capacity is elastic in its ability to absorb extra demand Some airlines, increase the capacity of their aircraft by switching to a higher capacity aircraft on a certain route on a busy day. A restaurant may add extra tables and chairs. Offering evening classes by the universities and weekend programs. Minimizing the slack time ( offering bill promptly) Cutting back the level of service-offering a simpler menu at the busy times of day
Chapter 9 - 15
Stretch existing capacity: new resources are added like people facilities and equipment are asked to work harder and linger to meet demand Stretch time temporarily: extend the hours of service to accommodate demand. Stretch labor temporarily: employees are asked to work longer and harder during periods of peak demand Stretch facilities temporarily: restaurants etc can sometimes be expanded temporarily by the addition of tables, chairs etc.
Stretch equipment facilities
Chapter 9 - 16
Adjusting Capacity to Match Demand

Schedule downtime during periods of low demand
Use part-time employees

Rent or share extra facilities and equipment
Invite customers to perform self-service

Cross-train employees
Chapter 9 - 17
Chase demand : Adjusting capacity to match demands

Schedule downtime during periods of low demand: to ensure that 100 percent capacity is available during peak periods, repair and renovations should be taken during such periods. E.g internet banking software upgrades on Sunday early morning. Use part-time employees: many organization hire extra workers during their busiest periods. Temporary retail store workers during weekends or holidays. Rent or share extra facilities and equipment: to limit investment in fixed assets, a service business may be able to rent extra space or machines at peak times. E.g express mail delivery services rent or lease trucks during the peak of holiday season. It would not make sense to buy trucks that would sit idle during the rest of year.
Chapter 9 - 18
Cross-train employees: if employees are cross-trained, they can shift among tasks, filling in where they are most needed. Cross-training increases the efficiency of the whole system and avoids underutilizing employees in some areas while others are over-burdened. E.g many banks cross-train their employees, for different roles and to meet peak demands. Outsource: firms that find they have a temporary demand may choose to outsource service. Modify or move equipments and facilities ( creating flexible demand) : sometimes it is possible to adjust, move, or creatively modify existing capacity to meet demand fluctuations. E.g in hotels, two rooms with a locked door in between can be rented to two different customers in high demand and turned into suite in low demand. Boeing 777 can be modified in hours to match demand and seating arrangement can be quickly reconfigured. Mobile training facilities, mobile clinic vans of blood donation
Patterns and Determinants of Demand
Chapter 9 - 20
Understanding Patterns of Demand

The charting of demand patterns: to begin to understand demand patterns, the organization needs to chart the level of demand over relevant time periods. Organizations that have good customer information systems can chart this information very accurately. Informally also the charting can be done. E.g daily, weekly and monthly demand levels should be tracked, and if seasonability is suspected problem, graphing should be done for data from at least the past year. E.g restaurants, health care should consider hourly fluctuations within a day itself.
Chapter 9 - 21
Predictable Cycles
In looking to the graphic representation of demand levels, predictable cycles may be detected, including daily ( variations occur by hours) , weekly (variations occur by day), monthly ( variation occur by day or week) and yearly ( variations occur according to months or seasons) E.g in restaurant industry, demand generally varies by hours, week, and season. In banking industry demand can vary by hour, by day of the week ( last day and the first day of week most demand) and festivals.
Chapter 9 - 22
Predictable Demand Patterns and Their Underlying Causes

Predictable Cycles of Demand Levels
day week month year other
Underlying Causes of Cyclical Variations

Employment hours billing or tax payments/refunds festivals holidays public/religious holidays Random changes in demand occurs because of weather
Chapter 9 - 23
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
Chapter 9 - 24
Demand Patterns by Market Segment

An organization that has detailed records on customer transactions may be able to segregate demand by market segment, revealing patterns within patterns. Analysis may reveal that demand from one segment is predictable, whereas demand from another segment is relatively random E.g for a bank, visits from its commercial accounts may occur daily at a predictable time, whereas personal account holders may visit the bank at seemingly random intervals.
Chapter 9 - 25
Demand Levels Can Be Managed
Chapter 9 - 26
Strategies for Shifting Demand to Match Capacity
Chapter 9 - 27
Alternative Demand Management Strategies

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

1) Taking no action
Taking no action and leaving demand to find its own level Customers learn from experience or word of mount when they can expect to stand in line to use the service and when it will be available without delay. The trouble for the service provider is that they may find competitor who is more responsive. Unorganized queuing results and may irritate and discourage customers for future usage.
Chapter 9 - 29
2) Reducing demand during Peak Times

1) Pricing strategy: charge customers more to use service during peak hours. No discounts are allowed during such times. 2) Communicate with customers: one approach for shifting demand is to communicate with customers, letting them know the times of peak demand so they can choose to use the services at alternative times and avoid crowding or delays. 3) Modify the time and place of service delivery: varying the times when the service is available generally extending time. Also offering services to customers at new location, or making services internet based.
4) Offer incentives for nonpeak usage: in an attempt to shift demand away from peak times, some firms will offer incentives to encourage customers to shift their use of services to other times. 5) Set priorities: when demand for the services is high and there is limited capacity, service providers can prioritize who is served by taking care of loyal customers first.
Chapter 9 - 31
Increase Demand to Match Capacity

1) Stimulate business from current market segments: advertising and other forms of promotion can emphasize different service benefits to customers during slow periods. Advertising and sales messages can remind customers about times when demand is low. 2) Vary how the facility is used 3) Vary the service offering: changing the nature of service offering
4) Differentiate on pricing: discounting prices during the slow demand. It relies on basic economies of supply and demand.
Inventory Demand through Waiting Lines and Reservations
Chapter 9 - 33
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
Chapter 9 - 34
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
Chapter 9 - 35
Why waiting line occur

Waiting line occurs when the number of arrivals at a facility exceeds the capacity of the system to process them. Queues are a symptom of unresolved capacity management problems. When customers deal with a service supplier at arms length, as in information processing services, they call from home using telephone or internet. Virtual line. Physical queues are geographically dispersed. Websites do not allow , and it also results in virtual queuing
Chapter 9 - 36
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
Chapter 9 - 37
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)
28 29 25 26 27 32 23 21 20 24
Take a number (single or multiple servers)
30 31
Chapter 9 - 38
Different Queue Configuration

There are variety of different types of queues and the challenge for managers is to select the most appropriate procedure. In single-line, sequential stages, customers proceed through several serving operations. Bottlenecks may occur at any stage at which the process takes longer time to execute than at previous stages. Parallel lines to multiple servers: offer more than one serving station, allowing customers to select one of the several lines in which to wait. The disadvantage of this design is that design is that lines may not move at equal speed.
Single line to multiple servers
Designated lines: involve assigning different lines to specific categories of customer. It mainly is observed in the supermarkets. E.g 12 items or less. Different check in stations for first class, business-class, and economyclass airline passengers.
Take a number: saves customers the need to stand in queue, because they know they will be called in sequence. This allows the customers to sit and relax. Hybrid approaches
Chapter 9 - 40
Virtual waiting
Research suggests that selecting the most appropriate type of queue is important to customer satisfaction Virtual queue is the strategy to take the physical waiting out of the wait altogether. Customers can register their place in line on a computer, which estimates the time at which they will reach the front of the virtual lines and should return to their places.
Chapter 9 - 41
Queuing System can be tailored to Market segments

Market segmentation is used used to design queuing strategies. It set the different priorities for different types of customers Allocation to separate queuing areas may be based on following
Urgency of job: Emergencies versus non-emergencies Duration of service transaction: Number of items to transact Complexity of task Importance of customer Payment of premium price
Minimize Perceptions of Waiting Time
Chapter 9 - 43
The psychology of waiting
Chapter 9 - 44
Ten Propositions on Psychology of Waiting Lines (1)

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
Chapter 9 - 45
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
Chapter 9 - 46
Create An Effective Reservation System
Chapter 9 - 47
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
Chapter 9 - 48
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
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
Week 36
(High Season) Loyalty Program Members
50%
Weekend package
Transient guests
W/E package
Groups and conventions
Groups (no conventions)

Airline contracts Airline contracts F S Su M Tu W Th F S Su
Chapter 9 - 50
Time Nights: M
Tu
Th
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
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
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 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
Waiting is a universal phenomenon. Waits can be reduced by
An effective reservations system

Enables demand to be controlled and smoothed in manageable way Should focus on yield Requires information

Managing Demand and Supply

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Chapter 9:

Balancing Demand and Productive Capacity

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Seven Service Quality Gaps

4. Internal Gap 4. Advertising and sales promises

6. Interpretation Gap Customer interpretation of communications

Services Marketing 6/E

Key Factors Leading to Provider Gap 3 ( delivery gap)

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Fluctuations in Demand Threaten Service Productivity

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

From excess demand to excess capacity

Variations in Demand Relative to Capacity

Low Utilization (May Send Bad Signals)

(wasted resources) TIME CYCLE 1

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Addressing Problem of Fluctuating Demand

Adjust level of capacity to meet demand

Manage level of demand

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

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Defining Productive Capacity

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Strategies for Adjusting Capacity to Match Demand

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Capacity levels can be stretched or shrunk

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Stretch equipment facilities

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Adjusting Capacity to Match Demand

Use part-time employees

Invite customers to perform self-service

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chase demand : Adjusting capacity to match demands

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Patterns and Determinants of Demand

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Understanding Patterns of Demand

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Predictable Demand Patterns and Their Underlying Causes

Underlying Causes of Cyclical Variations

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E