15ChapterChapter

Managing Demand and CapacityManaging Demand and Capacity

The Underlying Issue: Lack of Inventory Capability

Capacity Constraints Demand Patterns Strategies for Matching Capacity and Demand Yield Management: Balancing Capacity

Utilization, Pricing, Market Segmentation, and Financial Return

Waiting Line Strategies: When Demand and Capacity Cannot Be Matched

© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

PerceivedService

Expected Service

CUSTOMER

COMPANY

CustomerGap

Gap 1

Gap 2

Gap 3

External Communications

to CustomersGap 4ServiceDelivery

Customer-Driven Service Designs and

Standards

Company Perceptions of Consumer Expectations

Figure 2.6

Gaps Model of Service QualityFigure 2.6

Gaps Model of Service Quality

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Figure 15.1

Variations in Demand Relative to CapacityFigure 15.1

Variations in Demand Relative to Capacity

Source: C. Lovelock, “Getting the Most Out of Your Productive Capacity,” in Product Plus (Boston: McGraw Hill, 1994), chap. 16, p. 241.

© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Understanding Capacity Constraintsand Demand Patterns

Understanding Capacity Constraintsand Demand Patterns

Time, labor, equipment, and facilities

Optimal versus maximum use of capacity

Charting demand patterns Predictable cycles Random demand fluctuations Demand patterns by market

segment

Capacity Constraints Demand Patterns

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Table 15.1

Demand versus SupplyTable 15.1

Demand versus Supply

Source: C. H. Lovelock, “Classifying Services to Gain Strategic Marketing Insights,” Journal of Marketing 47, (Summer 1983): 17.

© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Table 15.2

Constraints on CapacityTable 15.2

Constraints on CapacityNature of the Constraint Type of Service Time Legal

Consulting Accounting Medical

Labor Law firm Accounting firm Consulting firm Health clinic

Equipment Delivery services Telecommunication Network services Utilities Health club

Facilities Hotels Restaurants Hospitals Airlines Schools Theaters Churches

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Figure 15.3

Strategies for Shifting Demand to Match Capacity

Figure 15.3

Strategies for Shifting Demand to Match Capacity

• Use signage to communicate busy days and times.

• Offer incentives to customers for usage during nonpeak times.

• Take care of loyal or “regular” customers first.

• Advertise peak usage times and benefits of nonpeak use.

• Charge full price for the service—no discounts.

• Use sales and advertising to increase business from current market segments.

• Modify the service offering to appeal to new market segments.

• Offer discounts or price reductions.

• Modify hours of operation.• Bring the service to the

customer.

Demand Too High Demand Too LowShift Demand

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Figure 15.4

Strategies for Adjusting Capacity to Match Demand

Figure 15.4

Strategies for Adjusting Capacity to Match Demand

• Stretch time, labor, facilities and equipment.

• Cross-train employees.• Hire part-time employees.• Request overtime work from employees.• Rent or share facilities.• Rent or share equipment.• Subcontract or outsource activities.

• Perform maintenance, renovations.

• Schedule vacations.• Schedule employee training.• Lay off employees.

Demand Too High Demand Too LowAdjust Capacity

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Challenges and Risks in UsingYield Management

Challenges and Risks in UsingYield Management

Loss of competitive focus

Customer alienation

Employee morale problems

Incompatible incentive and reward systems

Lack of employee training

Inappropriate organization of the yield management function

© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Waiting Line StrategiesWaiting Line Strategies

Employ operational logic modify operations adjust queuing system

Establish a reservation process

Differentiate waiting customers importance of the customer urgency of the job duration of the service transaction payment of a premium price

Make waiting fun, or at least tolerable

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Issues to Consider in Making WaitingMore Tolerable

Issues to Consider in Making WaitingMore Tolerable

unoccupied time feels longer than occupied time preprocess waits feel longer than in-process waits anxiety makes waits seem longer uncertain waits seem longer than known, finite waits unexplained waits seem longer than explained waits unfair waits feel longer than equitable waits the more valuable the service, the longer the customer will

wait solo waits feel longer than group waits

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Figure 15.6

Waiting Line ConfigurationsFigure 15.6

Waiting Line Configurations

Source: J. A. Fitzsimmons and M. J. Fitzsimmons, Service Management, 4th ed. (New York: Irwin/McGraw-Hill, 2004), chap. 11, p. 296.