Managing capacity and demand

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Managing capacity and demand

• Week 10

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Managing Demand and Capacity

• Perishability implications for demand and
  supply
• Present the implications of time, labor,
  equipment, and facilities constraints combined
  with variations in demand patterns.
• Strategies for matching supply and demand through
  (a) shifting demand to match capacity or (b)
  adjusting capacity to meet demand.

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Overview

• Demonstrate the benefits and risks of yield
  management strategies in forging a balance among
  capacity utilization, pricing, market
  segmentation, and financial return.
• Provide strategies for managing waiting lines for
  times when capacity and demand cannot be aligned.

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Variations in Demand Relative to Capacity
Source C. Lovelock, Getting the Most Out of
Your Productive Capacity, in Product Plus
(Boston McGraw Hill, 1994), chap. 16, p. 241.
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Alternative supply and demand outcomes
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Alternative supply and demand outcomes (cont.)
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Demand versus Supply
Source C. H. Lovelock, Classifying Services to
Gain Strategic Marketing Insights, Journal of
Marketing 47, (Summer 1983) 17.
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Understanding Capacity Constraintsand Demand
Patterns
Demand Patterns
Capacity Constraints

• Time, labor, equipment, and facilities
• Optimal versus maximum use of capacity

• Charting demand patterns
• Predictable cycles
• Random demand fluctuations
• Demand patterns by market segment

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Constraints on Capacity
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Strategies for Shifting Demand to Match Supply
Demand Too High
Demand Too Low
Shift Demand

• Use signage to communicate busy days and times.
• Offer incentives to customers for usage during
  nonpeak times.
• Take care of loyal or regular customers first.
• Advertise peak usage times and benefits of
  nonpeak use.
• Charge full price for the serviceno discounts.

• Use sales and advertising to increase business
  from current market segments.
• Modify the service offering to appeal to new
  market segments.
• Offer discounts or price reductions.
• Modify hours of operation.
• Bring the service to the customer.

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Adjusting demand to meet supply
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Adjusting demand to meet supply (cont.)
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Strategies for Adjusting Supply to Match Demand
Demand Too High
Demand Too Low

• Stretch time, labor, facilities and equipment.
• Cross-train employees.
• Hire part-time employees.
• Request overtime work from employees.
• Rent or share facilities.
• Rent or share equipment.
• Subcontract or outsource activities.

• Perform maintenance, renovations.
• Schedule vacations.
• Schedule employee training.
• Lay off employees.

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Adjusting supply to meet demand
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Adjusting supply to meet demand (cont.)
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Challenges and Risks in UsingYield Management

• Loss of competitive focus
• Customer alienation
• Employee morale problems
• Incompatible incentive and reward systems
• Lack of employee training
• Inappropriate organization of the yield
  management function

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Waiting Line Strategies

• Employ operational logic
• modify operations
• adjust queuing system
• Establish a reservation process
• Differentiate waiting customers
• importance of the customer
• urgency of the job
• duration of the service transaction
• payment of a premium price
• Make waiting fun, or at least tolerable

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Waiting Line Configurations
Source J. A. Fitzsimmons and M. J. Fitzsimmons,
Service Management, 4th ed. (New York
Irwin/McGraw-Hill, 2004), chap. 11, p. 296.
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Issues to Consider in Making WaitingMore
Tolerable (Maister, 1986)

• unoccupied time feels longer than occupied time
• preprocess waits feel longer than in-process
  waits
• anxiety makes waits seem longer
• uncertain waits seem longer than known, finite
  waits

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Wait times (cont.)

• unexplained waits seem 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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Pricing of Services

• Discuss three major ways that service prices are
  perceived differently from goods prices by
  customers
• Articulate the key ways that pricing of services
  differs from pricing of goods from a companys
  perspective

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Overview (cont.)

• Demonstrate what value means to customers and the
  role that price plays in value
• Describe strategies that companies use to price
  services

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3 key differences

• Customer knowledge of service prices
• Service variability limits knowledge
• Providers are unwilling to estimate prices
• Individual customer needs vary
• Collection of price information is overwhelming
• Prices are not visible
• Role of non-monetary costs
• Time costs
• Search costs
• Convenience costs
• Psychological costs
• Price as an indicator of service quality

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Three Basic Marketing Price Structures and
Challenges Associated with Their Use for Services
P DCOCProfit Challenges 1. Costs difficult
to trace. 2. Labor is more difficult to
price than materials. 3. Costs may not equal
the value that customers perceive the services
are worth.
Challenges 1. Small firms may charge too
little to be viable. 2. Heterogeneity of
services limits comparability. 3. Prices
may not reflect customer value.
Cost-based
Competition-
based
Demand-based
Challenges 1. Monetary price must be adjusted
to reflect the value of non-monetary
costs. 2. Information on service costs is
less available to customers hence, price
may not be a central factor.
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Four Customer Definitions of Value
Value is everything I want in a service.
Value is low price.
Value is the quality I get for the price I pay.
Value is all that I get for all that I give.
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Pricing Strategies When the Customer Defines
Value as Low Price
Value is low price.

• Discounting
• Odd pricing
• Synchro-pricing
• Penetration pricing

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Pricing Strategies When the Customer Defines
Value as Everything Wanted in a Service
Value is everything I want in a service.

• Prestige pricing
• Skimming pricing

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Pricing Strategies When the Customer Defines
Value as Quality for the Price Paid
Value is the quality I get for the price I pay.

• Value pricing
• Market segmentation pricing

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Pricing Strategies When the Customer Defines
Value as All That Is Received for All That Is
Given
Value is all that I get for all that I give.

• Price framing
• Price bundling
• Complementary pricing
• Results-based pricing

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Summary of Service Pricing Strategies forFour
Customer Definitions of Value
Value is everything I want in a service.
Value is low price.

• Discounting
• Odd pricing
• Synchro-pricing
• Penetration pricing

• Prestige pricing
• Skimming pricing

Value is the quality I get for the price I pay.
Value is all that I get for all that I give.

• Value pricing
• Market segmentation pricing

• Price framing
• Price bundling
• Complementary pricing
• Results-based pricing