1. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 1 Chapter 9: Balancing Demand and Productive Capacity

2. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 2 Overview of Chapter 9 1.Key Source of the Problem: Demand-Supply Gap* 1.Demand side: Fluctuations in Demand 2.Supply side: Capacity-Constrained Service Organizations 2.Patterns and Determinant of Demand* 3.Managing Demand Levels* 4.Inventory Demand through Waiting Lines and Reservations 5.Minimize Perceptions of Waiting Time 6.Create an Effective Reservations System

3. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 3 1. Fluctuations in Demand

4. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 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. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 5 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

6. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 6 Addressing Problem of Fluctuating Demand Two basic approaches:  Adjust level of capacity (supply) to meet demand  Need to understand productive capacity and how it varies on an incremental basis  Manage level of demand  Use marketing strategies to smooth out peaks, fill in valleys  Many firms use a mix of both approaches

7. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 7 2. Many Service Organizations Are Capacity Constrained

8. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 8 Defining Productive Capacity in Services 1.Physical Capacity  Physical facilities to contain customers  Physical facilities to store or process goods  Physical equipment to process people, possessions, or information  Public/private infrastructure 2. Labor Capacity  Labor used for physical or mental work

9. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 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. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 10 Adjusting Capacity to Match Demand  Schedule downtime during periods of low demand  Rent or share extra facilities and equipment  Ask customers to share  Invite customers to perform self-service  Cross-train employees*  Use part-time employees*

11. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 11 3. Patterns and Determinants of Demand

12. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 12 Predictable Demand Patterns and Their Underlying Causes (Table 9.1)  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) Predictable Cycles of Demand Levels Underlying Causes of Cyclical Variations

13. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 13 Causes of Unpredictable Changes in Demand Levels  Weather  Health problems  Accidents, Fires, Crime  Natural disasters Question: Which of these events can be predicted?

14. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 14 Analyzing Drivers of Demand  Understand why customers from specific market segments select this service  Need Qualitative Studies  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. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 15 4. Managing Demand Levels

16. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 16 Alternative Demand Management Strategies (Table 9.2)  Reduce demand  Higher prices (Peak pricing)  Communication promoting alternative times  Increase demand  Lower prices (Off peak pricing)  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

17. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 17 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

18. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 18 Hotel Room Demand Curves by Segment and Season (Fig 9.3) 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

19. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 19 5. Inventory Demand through Waiting Lines and Reservations

20. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 20 Why Do Waiting Lines Occur? Not all queues take form of a physical waiting line in a single location  Because the number of arrivals at a facility exceeds capacity of system at a specific point in the process  Queues are basically a symptom of unresolved capacity management problems

21. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 21 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)

22. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 22 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 reservation system

23. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 23 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

24. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 24 6. Minimize Perceptions of Waiting Time

25. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 25 Ten Propositions on Psychology of Waiting Lines (1) ( Table 9.3) 1.Unoccupied time feels longer than occupied time* 2.Pre- and post-process waits feel longer than in-process waits 3.Anxiety makes waits seem longer 4.Uncertain waits are longer than known, finite waits* 5.Unexplained waits are longer than explained waits* Sources: Maister; Davis & Heineke; Jones & Peppiatt

26. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 26 6.Unfair waits are longer than equitable waiting 7.People will wait longer for more valuable services 8.Waiting alone feels longer than waiting in groups 9.Physically uncomfortable waits feel longer* 10.Waits seem longer to new or occasional users Ten Propositions on Psychology of Waiting Lines (2) (Table 9.3) Sources: Maister; Davis & Heineke; Jones & Peppiatt

27. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 27 7. Create An Effective Reservation System

28. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 28 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

29. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 29 Setting Hotel Room Sales Targets by Segment and Time Period (Fig.9.7) Out of commission for renovation Loyalty Program Members Transient guests Weekend package Groups and conventions Airline contracts 100% 50% Week 7 (Low Season) MNights:Tu Time WThFSSu Loyalty Program Members Transient guests W/E package Groups (no conventions) Airline contracts Week 36 (High Season) MTuWThFSSu Capacity (% rooms)

30. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 30 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