Balancing Demand and

Productive Capacity

Balancing Demand and

Productive Capacity

Fluctuating demand is a major challenge for

many types of capacity-constrained service
organizations,
including
airlines,
restaurants,
vacation
resorts,
courier
services, consulting firms, theaters, and call
centers.
Most services are perishable and normally
cannot be stockpiled for sale at a later date,
posing a challenge for any capacityconstrained service that faces wide swings
in demand.
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Capacity and Demand

Scenarios
are four basic scenarios resulting

There
from
different combinations of capacity and demand:
1.Excess demand: The level of demand exceeds
maximum available capacity, with the result that some
customers are denied service and business is lost.
2.Demand exceeds optimum capacity: No one is
turned away, but conditions are crowded and
customers
are
likely
to
perceive
a
deterioration(WORSE) in service quality and may feel
dissatisfied.
3.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.
4.Excess capacity: Demand is below optimum capacity
and productive resources are underutilized, resulting in
low productivity.
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Forms of Productive
Capacity
Productive capacity refers to the resources
or assets that a firm can employ to create
goods and services. In a service context,
productive capacity can take several
forms:
1. Physical facilities designed to contain customers
2. Physical facilities designed for storing or
processing goods
3. Physical equipment used to process people,
possessions, or information
4. Labor
5. Infrastructure
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Demand States and

Marketing
Tasks
1. Negative demand: A major part of the market dislikes the
service and may even pay a price to avoid it (Vaccination,
dental work, gallbladder operations)
The marketing task is to analyze why the market dislikes
the service and whether a marketing program consisting of
service re-design, lower prices, and more positive
promotion can change beliefs and attitudes.
2. No demand: Target consumers may be unaware of or
uninterested in the service (New farming method, foreignlanguage courses)
The marketing task is to find ways to connect the benefits
of the service with peoples natural needs and interests.
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Demand States and

Marketing Tasks

3. Latent demand: Consumers may share a strong need that

cannot be satisfied by any existing service (A passenger
travelling in an ordinary bus dreams of travelling in a luxury
bus)
The marketing task is to measure the size of the potential
market and develop services to satisfy the demand.
4. Declining demand: Every organization, sooner or later, faces
declining demand for one or more of its services.
The marketer must analyze the causes of the decline and
determine whether demand can be re-stimulated by new
target markets, by changing service features, or by more
effective communication. The marketing task is to reverse
declining demand through creative remarketing.
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Demand States and

Marketing Tasks

5. Irregular demand: Many organizations face demand that

varies on a seasonal, daily, or even hourly basis (Museums
are under visited on weekdays and overcrowded on
weekends)
The marketing task, called synchromarketing, is to
find ways to alter the pattern of demand through
flexible pricing, promotion, and other incentives.
6. Full demand: Organizations face full demand when they
are pleased with their volume of business.
The marketing task is to maintain the current level of
demand in the face of changing consumer preferences
and increasing competition. The organization must
maintain or improve its quality and continually
measure consumer satisfaction.
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Demand States and

Marketing Tasks

7. Overfull demand: Some organizations face a demand

level that is higher than they can or want to handle.
The marketing task, called de-marketing, requires
findings ways to reduce demand temporarily or
permanently (raising prices, reducing promotion and
services)
8. Unwholesome demand: Unwholesome services will
attract organized efforts to discourage their consumption
(x-rated movies)
The marketing task is to get people who like
something to give it up, using such tools as fear
messages, price hikes, and reduced availability.
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Demand Forecasting
Methods
There are two types of forecasting methods:
1.Opinion polling methods:
a. Consumers survey method
b. Sales force opinion method
c. Experts opinion method

2.Statistical methods:
a. Mechanical extrapolation or Trend projection
method
b. Barometric techniques
c. Regression analysis
d. Simultaneous equation method

Demand Management
Service organizations generally follow the following
strategies for shifting demand to match capacity:
capacity
When demand is too high
1.Use signage to communicate busy days and times
2.Offer incentives to customers for usage during nonpeak
times
3.Recognize regular or loyal customers and serve them
first
4.Advertise peak usage times and benefits of nonpeak use
5.Charge full/premium price during peak periods- no
discounts
6.Schedule service segment wise
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Demand Management
When demand is too low
a) Promote service aggressively to increase business from
current market segments.
b) Modify the service offering to appeal to new market
segments
c) Search for new segments and enter
d) Modify hours of operation
e) Offer discounts or price reductions
f) Schedule services as per customer convenience
g) Provide service convenience better than competitors
h) Focus on word-of-mouth communication
i) Position services differently during slow periods
j) Bundle services
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Capacity Management
Service organizations generally follow the
following strategies for flexing capacity to match
demand:
demand
When demand is too high:
1.Stretch time, labor, facilities, and equipment
2.Increase working hours of employees
3.Cross-train employees
4.Hire part-time employees
5.Motivate employees to work overtime
6.Rent or share facilities
7.Rent or share equipment
8.Subcontract/outsource support services
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Capacity Management
When demand is too low:
1. Perform maintenance and renovations
2. Schedule vacations
3. Schedule employee training
4. Lay off employees
5. Take on sub-contract jobs
6. Rent equipment and space
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Yield Management
Yield managementis avariable pricingstrategy, based
on
understanding,
anticipating
and
influencingconsumerbehaviorin
order
to
maximizerevenueorprofitsfrom a fixed, perishable
resource (such asairline seatsor hotel room reservations
or advertising inventory).
Yield management is the umbrella term for a set of
strategies that enable capacity-constrained service
industries to realize optimum revenue from operations.
This process can result inprice discrimination, where a
firm charges customers consuming otherwise identical
goods or services a different price for doing so.
Robert Crandall, former Chairman and CEO ofAmerican
Airlines, proposed the term Yield Management.
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Challenges and Risks in Using

Yield Management
1. Loss of competitive focus
2. Customer alienation
3. Employee morale problems
4. Incompatible incentive and reward
systems
5. Lack of employee training
6. Inappropriate organization of the
yield management function

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Waiting Line Management

1. Developing operational logic: The service firm
should first analyze the operational process to
locate any loopholes(GAP) in the system and initiate
corrective measures to plug them. Service firm can
innovate better systems that can either reduce the
waiting lines or reduce the pressure of customers.
2. Establishing a reservation process
3. Differentiating waiting customers: C. Lovelock
suggested
four
approaches
to
differentiate
customers.

Importance of the customer

Urgency of the job
Duration of service required
Payment of a premium price
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Waiting Line Management

4. Making waiting fun: D.A. Maister proposed several
principles in his work The Psychology of Waiting
Times
Unoccupied time feels longer than occupied time.
Pre-process waits feel longer than in-process waits.
Anxiety makes waits seem longer.
Uncertain waits are longer than known waits.
Unexplained waits are longer than explained waits.
Unfair waits feel longer than equitable waits.
The more valuable the service, the longer the
customer will wait.
Solo waits feel longer than group waits.

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THE END

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