Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Chapter 9 Balancing Demand and Capacity

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Relating Demand to Capacity: Four Key Concepts  Excess demand: too much demand relative to capacity at a given time  Excess capacity: too much capacity relative to demand at a given time  Maximum 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

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 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

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 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—e.g., highways, airports, electricity

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Alternative Capacity Management Strategies  Level capacity (fixed level at all times)  Stretch and shrink  offer inferior extra capacity at peaks (e.g. bus/metro standees)  vary seated space per customer (e.g. elbow room, leg room)  extend/cut hours of service  Chase demand (adjust capacity to match demand)  schedule downtime in low demand periods  use part-time employees  rent or share extra facilities and equipment  cross-train employees  Flexible Capacity (vary mix by segment)

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Predictable Demand Patterns and Their Underlying Causes (Table 9-1) Predictable Cycles of Demand Levels  day  week  month  year  other Underlying Causes of Cyclical Variations  employment  billing or tax payments/refunds  pay days  school hours/holidays  seasonal climate changes  public/religious holidays  natural cycles (e.g. coastal tides)

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Causes of Seemingly Random Changes in Demand Levels  Weather  Health problems  Accidents, Fires, Crime  Natural disasters Question: which of these events can be predicted?

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 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 queueing

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Hotel Room Demand Curves by Segment and by Season (Fig. 9-2) B h = business travelers in high season B l = business travelers in low season T h = tourist in high season T l = tourist in low season BhBh BhBh BlBl BlBl ThTh ThTh TlTl TlTl Price per Room Night Quantity of Rooms Demanded at Each Price by Travelers in Each Segment in Each Season Note: hypothetical example

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Avoiding Burdensome Waits for Customers  Add extra capacity so that demand can be met at most times (problem: may add too many costs)  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

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Alternative Queuing Configurations (Fig. 9-4) Single line, single server, single stage Single line, single servers at 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)

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Tailoring Queuing Systems to Market Segments: Criteria for Allocation to Designated Lines  Urgency of job  emergencies vs. non-emergencies  Duration of service transaction  number of items to transact  complexity of task  Payment of premium price  First class vs. economy  Importance of customer  frequent users/loyal customers vs. others

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Ten Propositions on the Psychology of Waiting Lines (Table 9-3) 1.Unoccupied time feels longer 2.Preprocess/postprocess waiting feel longer than in- process 3.Anxiety makes waiting seem longer 4.Uncertain waiting is longer than known, finite waiting 5.Unexplained waiting seems longer 6.Unfair waiting is longer than equitable waiting 7.People will wait longer for more valuable services 8.Waiting alone feels longer than in groups 9.Physically uncomfortable waiting feels longer 10. Waiting seems longer to new or occasional users Sources: Maister; Davis & Heineke; Jones & Peppiatt

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Benefits of Effective Reservations Systems  Controls and smoothes demand  Pre-sells service  Informs and educates customers in advance of arrival  Customers avoid waiting in line for service (if service times are honored)  Data capture helps organizations prepare financial projections

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Characteristics of Well-designed Reservations Systems  Fast and user friendly for customers and staff  Can answer customer questions  Offers options for self service (e.g. 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

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Setting Capacity Allocation Sales Targets for a Hotel by Segment and Time Period (Fig. 9-5) Out of commission for renovation Executive service guests Transient guests Weekend package Groups and conventions Airline contracts 100% 50% Week 7 (Low Season) MNights:Tu Time WThFSSn Executive service guests Transient guests W/E package Groups (no conventions) Airline contracts Week 36 (High Season) MTuWThFSSn Capacity (% rooms)

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 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  Fixed and variable cost data, profitability of incremental sales  Site-by-site demand variations  Customer attitudes towards queuing  Customer evaluations of quality at different levels of capacity utilization