The Satisfaction-Loyalty Curve

1
Chapter 9 Balancing Demand and Productive
Capacity
2
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

3
Fluctuations in Demand Threaten Service
Productivity
4
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 firms 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

5
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

6
Variations in Demand Relative to Capacity (Fig
9.1)

• Use marketing strategies to smooth out peaks,
  fill in valleys
• Many firms use a mix of both approaches

VOLUME DEMANDED
Demand exceeds capacity
(business is lost)
CAPACITY UTILIZED
Demand exceeds
Maximum Available
optimum capacity
Capacity
(quality declines)
Optimum Capacity
(Demand and Supply Well Balanced)
Excess capacity
(wasted resources)
Low Utilization
(May Send Bad Signals)
TIME CYCLE 1
TIME CYCLE 2
7
Many Service Organizations Are Capacity
Constrained
8
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

9
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)

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

11
Patterns and Determinants of Demand
12
Predictable Demand Patterns and Their Underlying
Causes (Table 9.1)
Predictable Cycles of Demand Levels
Underlying Causes of Cyclical Variations

• 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)

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?
14
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

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
• Fluctuations caused by factors beyond
  organizations control (for example
  weather)
• Detailed market analysis may reveal that one
  segments demand cycle is concealed within a
  broader, random pattern

16
Demand Levels Can Be Managed
17
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

18
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

19
Hotel Room Demand Curves by Segment and Season
(Fig 9.3)
Price per
room night
Bh
Bl


Bh business travelers in high season
Th
Bl business travelers in low season
Tl


Th tourist in high season
Tl tourist in low season
Th

Bh

Bl
Tl


Quantity of rooms demanded at each price
by travelers in each segment in each season
Note hypothetical example
20
Inventory Demand through Waiting Lines and
Reservations
21
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

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
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 behavior and perceptions of wait
• Install a reservations system

24
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)
25
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

26
Minimize Perceptions of Waiting Time
27
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
28
Ten Propositions on Psychology of Waiting Lines
(2) (Table 9.3)

• Unfair waits are longer than equitable waiting
• 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

Sources Maister Davis Heineke Jones
Peppiatt
29
Create An Effective Reservation System
30
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

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
• Requiring deposits to discourage no-shows
• Canceling unpaid bookings after designated time
• Compensating victims of over-booking

32
Setting Hotel Room Sales Targets by Segment and
Time Period (Fig.9.7)
Capacity ( rooms)
Week 7
Week 36
(Low Season)
(High Season)
100
Out of commission for renovation
Loyalty Program Members
Loyalty Program
Members

Transient guests
Weekend
package
W/E package
50
Transient guests
Groups and conventions
Groups (no conventions)
Airline contracts
Airline contracts
Time
M
Nights
Tu
W
Th
F
S
Su
M
Tu
W
Th
F
S
Su
33
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

34
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

35
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