Chapter 9 Balancing Demand Productive Capacity Copyright 2008

Learning Objectives - Chapter 9 § Study service capacity § Consider how variations in demand can be predicted § Explore how capacity management techniques can be employed to match variations in demand § Assess how marketing strategies can smooth out fluctuations in demand § Reveal what can be done to reduce the waiting time discomfort § Uncover what makes a reservation system effective Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9 - 2

Fluctuations in Demand Threaten Service Productivity Copyright © 2008 Pearson Education Canada Services Marketing,

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 Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9 - 4

From Excess Demand to Excess Capacity Four conditions potentially faced by fixed-capacity services: § Excess demand Ø Too much demand relative to capacity at a given time § Demand exceeds optimum capacity Ø Upper limit to a firm’s ability to meet demand at a given time § Optimum capacity Ø Point beyond which service quality declines as more customers are serviced § Excess capacity Ø Too much capacity relative to demand at a given time Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9 - 5

Addressing Problem of Fluctuating Demand Two basic approaches: § Adjust level of capacity to meet demand Ø Need to understand productive capacity and how it varies on an incremental basis § Manage level of demand Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9 - 6

Variations in Demand Relative to Capacity (Fig 9. 1) Ø Use marketing strategies to smooth out peaks, fill in valleys VOLUME DEMANDED § Many firms use a mix of both approaches Demand exceeds capacity (business is lost) CAPACITY UTILIZED Maximum Available Capacity Optimum Capacity (Demand Supply Well Balanced) Low Utilization (May Send Bad Signals) Demand exceeds optimum capacity (quality declines) Excess capacity (wasted resources) TIME CYCLE 1 Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition TIME CYCLE 2 Chapter 9 - 7

Many Service Organizations Are Capacity Constrained Copyright © 2008 Pearson Education Canada Services Marketing,

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 § Labour used for physical or mental work § Public/private infrastructure § See Best Practice In Action 9. 1: Improving -In Service at Logan Airport Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Check Chapter 9 - 9

Alternative Capacity Management Strategies § Level capacity (fixed level at all times) § Stretch and shrink Ø Offer inferior extra capacity at peaks (e. g. , bus/train standees) Ø Vary seated space per customer (e. g. , elbow room, leg room) Ø Extend/cut hours of service § Chase demand (adjust capacity to match demand) § Flexible capacity (vary mix by segment) Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9 - 10

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 Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9 - 11

Patterns and Determinants of Demand Copyright © 2008 Pearson Education Canada Services Marketing, Canadian

Predictable Demand Patterns and Their Underlying Causes (Table 9. 1) Predictable Cycles of Demand Levels Ø day Ø week Ø month Ø year Ø other Copyright © 2008 Pearson Education Canada Underlying Causes of Cyclical Variations Ø employment Ø billing or tax payments/refunds Ø pay days Ø school hours/holidays Ø seasonal climate changes Ø public/religious holidays Ø natural cycles (e. g. , coastal tides) Services Marketing, Canadian Edition Chapter 9 - 13

Causes of Seemingly Random Changes in Demand Levels § Weather § Health problems § Accidents, Fires, Crime § Natural disasters Question: Which of these events can be predicted? Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9 - 14

Analyzing Drivers of Demand § Understand why customers from specific market segments select this service § Keep good records of transactions to analyze demand patterns Ø Sophisticated software can help to track customer consumption patterns § Record weather conditions and other special factors that might influence demand Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9 - 15

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 Ø Fluctuations caused by factors beyond organization’s control (for example: weather) Ø Detailed market analysis may reveal that one segment’s demand cycle is concealed within a broader, random pattern Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9 - 16

Demand Levels Can Be Managed Copyright © 2008 Pearson Education Canada Services Marketing, Canadian

Alternative Demand-Management Strategies (Table 9. 2) § Take no action Ø Let customers sort it out § Reduce demand Ø Higher prices Ø Communication promoting alternative times § Increase demand Ø Lower prices Ø Communication, including promotional incentives Ø Vary product features to increase desirability Ø More convenient delivery times and places § Inventory demand by reservation system § Inventory demand by formalized queuing Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9 - 18

Marketing Strategies Can Reshape Some Demand Patterns § Use price and other costs to manage demand § Change product elements § Modify place and time of delivery Ø No change Ø Vary times when service is available Ø Offer service to customers at a new location § Promotion and education Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9 - 19

Hotel Room Demand Curves by Segment and Season (Fig 9. 3) Price per room night Bl Bh Bh = business travelers in high season Th Bl = business travelers in low season Tl Th = tourist in high season Tl = tourist in low season Bl Bh Th Tl Quantity of rooms demanded at each price by travelers in each segment in each season Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Note: hypothetical example Chapter 9 - 20

Inventory Demand through Waiting Lines and Reservations Copyright © 2008 Pearson Education Canada Services

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 Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9 - 22

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 Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9 - 23

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 behaviour and perceptions of wait § Install a reservations system Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9 - 24

Alternative Queue 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”) 28 “Take a number” (single or multiple servers) 26 32 Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition 21 20 25 30 31 29 27 24 23 Chapter 9 - 25

Criteria for Allocating Different Market Segments to Designated Lines § Urgency of job Ø Emergencies versus non-emergencies § Duration of service transaction Ø Number of items to transact Ø Complexity of task § Payment of premium price Ø First class versus economy § Importance of customer Ø Frequent users/high volume purchasers versus others Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9 - 26

Minimize Perceptions of Waiting Time Copyright © 2008 Pearson Education Canada Services Marketing, Canadian

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; see your Services Marketing text, page 275 for full source information. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9 - 28

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; see your Services Marketing text, page 275 for full source information. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9 - 29

Create an Effective Reservation System Copyright © 2008 Pearson Education Canada Services Marketing, Canadian

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 Ø Prepare financial projections Ø Plan operations and staffing levels Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9 - 31

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 Ø Requiring deposits to discourage no-shows Ø Canceling unpaid bookings after designated time Ø Compensating victims of over-booking Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9 - 32

Setting Hotel Room Sales Targets by Segment and Time Period (Fig. 9. 7) Capacity (% rooms) 100% Week 7 Week 36 (Low Season) (High Season) Out of commission for renovation Loyalty Program Members Transient guests 50% Weekend package Transient guests W/E package Groups and conventions Groups (no conventions) Airline contracts Time Nights: M Tu W Copyright © 2008 Pearson Education Canada Th Airline contracts F S Su M Tu W Services Marketing, Canadian Edition Th F S Su Chapter 9 - 33

Information Needed for Demand 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 Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9 - 34

Summary – Chapter 9 § Service capacity may face four types of demand § Service capacity can be adjusted to match demand by using temporary employees, cross-training employees etc § Variations in demand can be predicted through good record keeping and analysis § Firms have many options on how they can match capacity to variations in demand § Marketing strategies can smooth out fluctuations in demand by deploying the four traditional Ps of the marketing mix § There are five different approaches to reducing waiting time discomfort § Reservation systems are when they are customer focussed and provide actionable information Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 9 - 35