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 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

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
Maximum Available
Demand exceeds
optimum capacity
Capacity
(quality declines)
Optimum Capacity
(Demand and Supply
Well Balanced)
Excess capacity
Low Utilization
(wasted resources)
(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 organization’s control (for example: weather)
Detailed market analysis may reveal that one segment’s 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 Can Reshape 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 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 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 line—equivalent 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 28 29 21 20 24 23 30 25 31 26 27 32
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
50%
W/E
package
Transient guests
Groups and conventions
Groups (no conventions)
Airline contracts
Airline contracts
Time
Nights: M 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