Chapter 9:

Balancing Demand
and Productive
Capacity

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 1
 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

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 2
 Fluctuations in Demand Threaten
Service Productivity

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 3
 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

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

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 5
 Variations in Demand Relative to
Capacity (Fig 9.1)
 Use marketing strategies to smooth out peaks, fill in valleys
VOLUME DEMANDED
 Many firms use a mix of both approaches
Demand exceeds capacity
(business is lost)
CAPACITY UTILIZED

Maximum Available Demand exceeds

Capacity optimum 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

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

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 7
 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

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 8
 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)

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

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 10
 Patterns and Determinants of Demand

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 11
 Predictable Demand Patterns and
Their Underlying Causes (Table 9.1)

Predictable Cycles Underlying Causes of

of Demand Levels Cyclical Variations

 day  employment
 week  billing or tax
payments/refunds
 month
 pay days
 year  school hours/holidays
 other  seasonal climate
changes
 public/religious holidays
 natural cycles
(e.g., coastal tides)

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 12
 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 © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 13
 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

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 14
 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

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 15
 Demand Levels Can Be Managed

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 16
 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

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

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)

Price per
room night
Bl Bh
Th Bh = business travelers in high season
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

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

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 20
 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

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

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 reservations system

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

21
29
28
20
“Take a number” (single or multiple servers) 30
26
25
24
31 27
32 23

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 24
 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

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 25
 Minimize Perceptions of Waiting Time

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 26
 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

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 27
 Ten Propositions on Psychology of
Waiting Lines (2) (Table 9.3)

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

Sources: Maister; Davis & Heineke; Jones & Peppiatt

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 28
 Create An Effective Reservation System

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 29
 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

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

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 31
 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

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 32
 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

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 33
 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

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 34
 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

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 35