Chapter 9: Balancing Demand and Productive Capacity

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

Fluctuations in Demand Threaten Service Productivity

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

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

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

Many Service Organizations Are Capacity Constrained

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

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)

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

Patterns and Determinants of Demand

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)

Causes of Seemingly Random Changes in Demand Levels Weather Health problems Accidents, Fires, Crime Natural disasters Question: Which of these events can be predicted?

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

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

Demand Levels Can Be Managed

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

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

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

Inventory Demand through Waiting Lines and Reservations

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

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

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

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)

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

Minimize Perceptions of Waiting Time

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

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

Create An Effective Reservation System

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

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

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

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

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

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