Lovelock PPT Chapter 09

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

Chapter 9: Balancing Demand and Productive Capacity


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


Fluctuations in Demand Threaten Service

Productivity


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 Upper limit to a firm’s 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 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


Variations in Demand Relative to Capacity (Fig 9.1)

VOLUME DEMANDED

TIME CYCLE 1 TIME CYCLE 2

Maximum Available Capacity

Optimum Capacity (Demand and Supply Well Balanced)

Low Utilization (May Send Bad Signals)

Demand exceeds capacity (business is lost)

Demand exceeds optimum capacity (quality declines)

Excess capacity (wasted resources)

CAPACITY UTILIZED

Use marketing strategies to smooth out peaks, fill in valleys

Many firms use a mix of both approaches


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

See Best Practice In Action 9.1: Improving Check-In Service At Logan Airport


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 (Table 9.1)

day week month year other

employment billing or tax

payments/refunds pay days school hours/holidays seasonal climate

changes public/religious

holidays natural cycles (e.g., coastal tides)

Predictable Cycles

of Demand Levels

Underlying Causes of

Cyclical Variations


Causes of Seemingly Random Changes in Demand Levels

Weather

Health problems

Accidents, Fires, Crime

Natural disasters

Question: Which of these events can be predicted?


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


Overall Usage Levels Comprise Demand from Different Segments

Not all demand is desirable

Keep peak demand levels within service capacity of organization

Marketing cannot smooth out random fluctuations in demand

Fluctuations caused by factors beyond organization’s control (for example: weather)

Detailed market analysis may reveal that one segment’s demand cycle is concealed within a broader, random pattern


Demand Levels Can Be Managed


Alternative Demand Management Strategies (Table 9.2)

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


Marketing Strategies CanReshape Some Demand Patterns

Use price and other costs to manage demand

Change product elements

Modify place and time of delivery

No change Vary times when service is available Offer service to customers at a new location

Promotion and education


Hotel Room Demand Curves by Segment and Season (Fig 9.3)

Bh = business travelers in high season

Bl = business travelers in low season

Th = tourist in high season

Tl = tourist in low season

Bh

Bh

Bl

Bl

Th

Th

Tl

Tl

Price per room night

Quantity of rooms demanded at each price by travelers in each segment in each season

Note: hypothetical example


Inventory Demand through Waiting Lines and

Reservations


Waiting Is a Universal Phenomenon!

An average person may spend up to 30 minutes/day waiting in line—equivalent to over a week per year!

Almost nobody likes to wait

It's boring, time-wasting, and sometimes physically uncomfortable


Why Do Waiting Lines Occur?

Not all queues take form of a physical waiting line in a single location

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


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


Alternative Queuing Configurations (Fig 9.5)

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”)

“Take a number” (single or multiple servers)28 29

21

20

24

23

30 25

3126

2732


Criteria for Allocating Different Market Segments to Designated Lines

Urgency of job

Emergencies versus non-emergencies

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


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

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 Sources: Maister; Davis & Heineke; Jones & Peppiatt


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

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

Sources: Maister; Davis & Heineke; Jones & Peppiatt


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


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)

Out of commission for renovation

Loyalty Program Members

Transient guestsWeekend package

Groups and conventions

Airline contracts

100%

50%

Week 7 (Low Season)

MNights: TuTime W Th F S Su

Loyalty Program Members

Transient guests

W/Epackage

Groups (no conventions)

Airline contracts

Week 36 (High Season)

M Tu W Th F S Su

Capacity (% rooms)


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

Waiting is a universal phenomenon. Waits can be reduced by 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

An effective reservations system

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

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Lovelock PPT Chapter 09