Chapter 9:

Balancing Demand and Productive Capacity

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 1

Overview of Chapter 9
Fluctuations in Demand Threaten Service Productivity Capacity-Constrained Service Organizations Patterns and Determinant of Demand Managing Demand Levels Inventory Demand through Waiting Lines and Reservations Minimize Perceptions of Waiting Time Create an Effective Reservations System

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 2

Fluctuations in Demand Threaten Service Productivity

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 3

From Excess Demand to Excess Capacity

Four conditions potentially faced by fixed-capacity services: Excess demand
o

Too much demand relative to capacity at a given time => customer is denied service => biz lost

Demand exceeds optimum capacity

o

Upper limit to a firms ability to meet demand at a given time => no one turned away, but conditions are deteriorating
Demand =Supply ; Staff not over worked and Customers face no delay Supply > Demand

Optimum capacity
o o

Excess capacity

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 4

Variations in Demand Relative to Capacity (Fig 9.1)

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

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 6

Many Service Organizations Are Capacity Constrained

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 7

Defining Productive Capacity in Services

Physical facilities to contain customers Ex aircraft, classrooms Physical facilities to store or process goods Warehouses Physical equipment to process people, possessions, or information diagnostic equip Labor used for physical or mental work hotel staff, nurses

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 8

Alternative Capacity Management Strategies

Level capacity (fixed level at all times)- No. of seats in theatre Stretch and Shrink Capacity
Offer extra capacity at peaks (e.g., bus/train standees)- Mumbai Trains . Introduce spl trains Shabrimala Season Extend/cut hours of service Introducing token systems (prepaid) in hotels to reduce time for people to wait for billing. Hence they leave and new customers can walk in.

Chase demand (adjust capacity to match demand)

Use part time employees during peak season Rent /Share additional facilities at peak times. Eg. Renting cars for large conferences. Ask customers to share. At peak times customers asked to share taxis at Airports If employees ltd, then customers to opt for SST .Ex platform ticket purchase Cross train employees to perform multi tasking in peak times

Flexible capacity (vary mix by segment): Boeing 777 can

change passenger cabins with hours for adjusting demand

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 9

Patterns and Determinants of Demand The other side

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 11

Predictable Demand Patterns and Their Underlying Causes (Table 9.1)

Predictable Cycles of Demand Levels
Day varies every hour Week varies every day month every day/week Year month/season other

Underlying Causes of Cyclical Variations

Employment Schedules pay days high demand school hours and vacation seasonal climate changes public/religious holidays Natural disasters impact on ambulance, fire coast guard services

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 12

Analyzing Drivers of Demand

Understand why customers from specific market segments select this service. Get the WHY behind choice Keep records of each transactions to analyze demand patterns based on past experience
o

Sophisticated software can help to track customer consumption patterns

Record weather conditions and other special factors ( big convention, price change etc) that might influence demand

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 14

Overall Usage Levels Comprise Demand from Different Segments

A micro segment may have a pattern of demand that needs to be tapped.
Ex : Industrial Equipment Service/Repair center: Some walk ins, some regular contracts, some emergency services. Walk ins happen on week ends, emergency mainly after heavy rains.

Marketing cannot smooth out random fluctuations in demand , but detailed market analysis may reveal that one segments demand cycle is concealed within a broader, random pattern
Ex: Retail store has varied set of customers Some visit for Monthly once for months provisions. Some visit daily for staple items purchase like milk, vegetables etc

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 15

Demand Levels Can Be Managed

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 16

Alternative Demand Management Strategies

(Table 9.2)

Take no action
o

Let customers sort it out. They learn from WOM when is the slack and peak time, where to stand and what is the possible waiting time Higher prices Communication : promoting usage of time slots. Evening Colleges

Reduce demand
o o

Increase demand
o o o

Lower prices Communication, including promotional incentives More convenient delivery times and places

Inventory demand by reservation system :

Provide priority to special customers, others attended later.

Inventory demand by formalized queuing :

Special line for VIPs.

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 17

Marketing Strategies Can Reshape Some Demand Patterns

Use price and other costs( time, psychological cost) to manage demand Change product elements. Price discounting will not boost sales in off peak seasons. Ex Hotels offer various menus during different time of the day to cater to different customer needs Modify place and time of delivery
No change Vary times when service is available during summer caf remain open till late night. Shops extend working hours during Diwali and dussera o Offer service to customers at a new location Free dental check up in mobile dental vans.
o o

Promotion and education customers about peak period and slack period
Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 18

Inventory Demand through Waiting Lines and Reservations

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 20

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

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 21

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 Not all queues take form of a physical waiting line in a single location . Ex Waiting for customer care rep to answer the call. Waiting for a taxi at a different location than from where it was reserved( Taxi HQ)

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 22

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. Use of internet Manage customer behavior and perceptions of wait Install a reservations system Ex Web check in
Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 23

Alternative Queuing Configurations (Fig 9.5)

Single line, single server, single stage
Ex : Small railway reservation stations

Single line, single servers, sequential stages

Govt offices

Parallel lines to multiple servers

Large railway reservation centers

Designated lines to designated servers

Ladies Q, Credit card booking, Group booking Q

Single line to multiple servers (snake)-Ex

Airport Check in One entrance and diff check in for diff flights
28 30 31 26 32 29 25 21 20 24

Take a number (single or multiple servers)

Ex Banks

27
23

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 24

Criteria for Allocating Different Market Segments to Designated Lines

Urgency of job
o
o

Emergencies versus non-emergencies at hospitals

Duration of service transaction

Number of items to transact Bulk Cash Deposit/ Withrawal > Rs 5 Lacs o Complexity of task -Spl Fx Transactions

Payment of premium price

o o o

First class versus economy. Spl lines, check in facilities Frequent users/high volume purchasers versus others. Ex Spl Airport lounges for premium fliers.

Importance of customer

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 25

Minimize Perceptions of Waiting Time

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 26

Ten Propositions on Psychology of Waiting Lines (1) (Table 9.3)

Unoccupied time feels longer than occupied time Place TV Pre- and post-process waits feel longer than in-process waits Ex Movie: Wait 1 Buying Ticket, Wait 2 : Maneuvering vehicle
from parking lot

Anxiety makes waits seem longer

Uncertain waits are longer than known, finite waits Inform customer the approx wait time Unexplained waits are longer than explained waits- Inform customer reason for delay and possible time for recovery
Sources: Maister; Davis & Heineke; Jones & Peppiatt

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 27

Ten Propositions on Psychology of Waiting Lines (2) (Table 9.3)

Unfair waits are longer than equitable waiting : People jumping Q People will wait longer for more valuable services Waiting alone feels longer than waiting in groups Physically uncomfortable waits feel longer Waits seem longer to new or occasional users Place a lobby manager to take care of this

Sources: Maister; Davis & Heineke; Jones & Peppiatt

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 28

Create An Effective Reservation System

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 29

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
o o

Prepare financial projections Plan operations and staffing levels

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 30

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
o o

Requiring deposits to discourage no-shows Canceling unpaid bookings after designated time

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 31

Setting Hotel Room Sales Targets by Segment and Time Period (Fig.9.4)
Week 7
(Low Season)

Week 36
(High Season)

100%

Out of commission for renovation Loyalty Program Members Transient guests

Loyalty Program Members

Capacity (% rooms) 50%

Weekend package
Transient guests
W/E package

Groups and conventions Groups (no conventions) Airline contracts M Tu W Th Time Nights: F S Su Airline contracts M Tu W Th F S Su

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 32

Information Needed for Demand and Capacity Management Strategies

Historical data on demand level and composition 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

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 33

Thank You