BALANCING DEMAND AND

PRODUCTIVE CAPACITY

Fluctuations in Demand
Threaten Service Productivity

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

Service Decision Framework:

Decisions on Matching Demand and
Capacity
W h a t B u s in e s s A r e W e In ?

W h a t S e r v ic e P r o c e s s e s C a n B e U s e d in
O u r O p e r a tio n ? (P R O C E S S )

W h o A r e O u r C u s to m e r s a n d H o w S h o u ld W e
R e la te to T h e m ?

W h a t S h o u l d b e th e C o r e a n d S u p p l e m e n ta r y E le m e n ts
o f O u r S e r v i c e P r o d u c t? (P R O D U C T E L E M E N T S )
W h a t P r ic e S h o u ld W e C h a r g e ?
(P R I C E A N D O T H E R U S E R O U T L A Y S )

H o w to C o m m u n ic a te ? (P R O M O T I O N &
E D U C A TIO N , P H Y S IC A L E V ID E N C E )

O p ti o n s fo r D e liv e r y ? (P L A C E , C Y B E R S P A C E
& TIM E , P H YSIC A L E V ID E N C E)

H o w C a n W e B a la n c e
P R O D U C T IV ITY A N D Q U A L ITY ?

H O W S H O U LD W E M A TC H D EM A N D A N D P R O D U C TIV E C A P A C ITY ?
W h a t A r e A p p r o p r i a te R o l e s fo r P e o p le a n d Te c h n o lo g y ? (P E O P L E )
H o w C a n O u r F ir m A c h ie v e S e r v ic e L e a d e r s h ip ?

How Should We Match Demand

and Productive Capacity?
How do we define our productive capacity? (e.g., buildings,

physical space, machines, brawn, brains?)

What are demand levels for our service and do they exceed

capacity at any time?

What explains variations in demand?
What strategies can we employ to match demand and

capacity?
How should we design waiting lines and reservations systems?

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 Maximum 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

Addressing the 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

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)

Flexible capacity (vary mix by segment)

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
Predictable Cycles
Underlying Causes of
of Demand Levels

Cyclical Variations

day

employment

week

billing or tax

month
year
other

payments/refunds
pay days
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

Demand Levels Can Be

Managed

Inventory Demand through

Waiting Lines and Reservations

Criteria for Allocating

Urgency of job
Different
Market
Segments
Emergencies versus nontoemergencies
Designated Lines
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

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

DISTRIBUTION CHANNELS IN
SERVICES

 Direct

Organizations that supply products, rather than

services, use distribution channels as intermediaries

to deliver products to customers. This system creates
an indirect relationship between manufacturer and
customer. In the services sector, the relationship is
direct. The services firm delivers the service directly
to the customer. In the consultancy sector, for
example, the customer deals directly with the person
who delivers the service.
Agents

In some service markets, an indirect marketing

relationship exists. Firms selling services, such as
insurance, financial services, labor, travel or
entertainment, may use agents as well as selling
directly to customers. However, many established
insurance companies transformed their distribution
model of agents and direct sales force when they
faced competition from new entrants that used the
Internet to sell directly to customers. The new
entrants, with no field sales infrastructure to support,
were able to offer customers lower premiums and win
business.

Multichannel

Using the Internet as an additional distribution

channel enables service businesses to offer their customers
greater choice. In retail banking, for example, customers can
carry out transactions by telephone, online banking or by
visiting their branch.

Internet

The Internet enables service firms to change their

business model, as well as their distribution model. On its
website, marketing firm Moderandi Inc. describes a graphic
design firm that created a virtual business with no physical
offices and a pool of freelance designers to offer its services
globally. Clients placed orders and used Internet services,
such as conferencing, to interact with the consultancy
throughout a project. The low-cost Internet distribution model
enabled the consultancy to offer competitive prices and
bring the most appropriate design team to the project.

Partnership

Partnership with organizations

operating in a firm's target market provides
a distribution channel that can accelerate
growth.
A firm offering computer maintenance
services, for example, could expand its
customer base by partnering with a
computer manufacturer or distributor and
providing services to its partners'
customers.