Managing Demand and Managing Demand and CapacityCapacity

Chapter 15Chapter 15

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

Review - PreviewReview - Preview

Gaps Model of Service QualityGaps Model of Service Quality

Service Delivery

Customer-Driven Service Designs and Standards

Deficiencies in human resource policies Ineffective recruitment Role ambiguity and role conflict Poor employee-technology job fit Inappropriate evaluation and compensation systems Lack of empowerment, perceived control, and teamwork

Customers who do not fulfill roles Customers who lack knowledge of their roles and responsibilities Customers who negatively impact each other

Problems with service intermediaries Channel conflict over objectives and performance Difficulty controlling quality and consistency Tension between empowerment and control

Failure to match supply and demand Failure to smooth peaks and valleys of demand Inappropriate customer mix Overreliance on price to smooth demand

Key Factors Leading to Provider Key Factors Leading to Provider Gap 3Gap 3

Gap3

ObjectivesObjectives

This chapter’s objectives are to:This chapter’s objectives are to: 1. Explain lack of inventory capability.1. Explain lack of inventory capability. 2. Show the implications of time, labour, equipment, 2. Show the implications of time, labour, equipment,

and facilities constraints when combined with demand and facilities constraints when combined with demand fluctuations.fluctuations.

3. Lay out strategies for matching supply and 3. Lay out strategies for matching supply and demand.demand.

4. Demonstrate advantages and drawbacks of yield 4. Demonstrate advantages and drawbacks of yield management strategies.management strategies.

5. Outline strategies for managing waiting lines.5. Outline strategies for managing waiting lines.

Managing Demand and CapacityManaging Demand and Capacity

Many service providers face challenges of Many service providers face challenges of demand and capacity management. demand and capacity management. For example, hotels have a fixed number of rooms, For example, hotels have a fixed number of rooms,

and must employ strategies to fill these rooms even and must employ strategies to fill these rooms even when demand is low.when demand is low.

Overuse or underuse of a service can directly Overuse or underuse of a service can directly contribute to Gap 3 – failure to deliver what was contribute to Gap 3 – failure to deliver what was designed and specified.designed and specified. For example, when demand exceeds maximum For example, when demand exceeds maximum

capacity service quality may drop. During periods of capacity service quality may drop. During periods of slow demand, service providers may be forced to slow demand, service providers may be forced to reduce prices or cut out certain services.reduce prices or cut out certain services.

The Underlying Issue: Lack of The Underlying Issue: Lack of Inventory CapabilityInventory Capability

It is important to remember that unlike It is important to remember that unlike manufacturing firms, service firms are unable to manufacturing firms, service firms are unable to store inventory during slow demand periods to store inventory during slow demand periods to be used later when demand increases.be used later when demand increases.

The lack of inventory capability is due to the The lack of inventory capability is due to the perishability perishability of services and their of services and their simultaneous simultaneous production and consumptionproduction and consumption. . For example, airline seats not sold on one day cannot For example, airline seats not sold on one day cannot

be resold the next day. be resold the next day.

Variations in Demand Relative to Variations in Demand Relative to CapacityCapacity

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

Variations in Demand Relative to Variations in Demand Relative to CapacityCapacity

The middle areas of the figure represent four The middle areas of the figure represent four basic scenarios that may result from different basic scenarios that may result from different combinations of supply and demand:combinations of supply and demand: Excess demand: Excess demand: Demand exceeds maximum Demand exceeds maximum

capacity; some customers may be turned away.capacity; some customers may be turned away. Demand exceeds optimum capacity: Demand exceeds optimum capacity: No one is turned No one is turned

away, but service quality may suffer.away, but service quality may suffer. Demand and supply balanced at level of optimum Demand and supply balanced at level of optimum

capacity: capacity: Staff and facilities are utilized at the ideal Staff and facilities are utilized at the ideal level.level.

Excess capacity: Excess capacity: Demand is below optimum capacity, Demand is below optimum capacity, and productive resources are underutilized.and productive resources are underutilized.

Variations in Demand Relative to Variations in Demand Relative to CapacityCapacity

Not all firms will encounter the same Not all firms will encounter the same challenges when managing supply and challenges when managing supply and demand.demand.

The seriousness of the problem will The seriousness of the problem will depend on two factors:depend on two factors: 1. The extent of demand fluctuations over 1. The extent of demand fluctuations over

time;time; 2. The extent to which supply is constrained.2. The extent to which supply is constrained.

Capacity Constraints – Time, Capacity Constraints – Time, Labour, Equipment, FacilitiesLabour, Equipment, Facilities

For some service businesses, the primary For some service businesses, the primary constraint on service production is constraint on service production is time.time. If time is not used productively and effectively, profits If time is not used productively and effectively, profits

are lost. If there is excess demand, time cannot be are lost. If there is excess demand, time cannot be created to make use of it.created to make use of it.

If a firm employs a large number of service If a firm employs a large number of service providers, the primary capacity constraint may providers, the primary capacity constraint may be be labourlabour or staffing levels. or staffing levels. If staff is already operating at peak capacity, there If staff is already operating at peak capacity, there

may be times when demand for an organization’s may be times when demand for an organization’s services cannot be met.services cannot be met.

Capacity Constraints – Time, Capacity Constraints – Time, Labour, Equipment, FacilitiesLabour, Equipment, Facilities

In some cases, In some cases, equipmentequipment may be the most may be the most important constraint.important constraint. For services such as trucking or airline delivery, the For services such as trucking or airline delivery, the

trucks or airplanes needed to service demand may be trucks or airplanes needed to service demand may be the capacity limitation.the capacity limitation.

Finally, some firms face restrictions due to their Finally, some firms face restrictions due to their limited limited facilities.facilities. Hotels have a fixed number of rooms, and airlines Hotels have a fixed number of rooms, and airlines

only have a limited number of seats to sell.only have a limited number of seats to sell.

Optimal vs. Maximum Use of Optimal vs. Maximum Use of CapacityCapacity

When capacity is used at an optimum level, When capacity is used at an optimum level, resources are fully employed but are not resources are fully employed but are not overused.overused. In this case, customers are receiving quality service in In this case, customers are receiving quality service in

a timely manner. (For example, a restaurant that uses a timely manner. (For example, a restaurant that uses reservations and does not overbook)reservations and does not overbook)

Maximum capacity represents the absolute limit Maximum capacity represents the absolute limit of service availability.of service availability. In some cases, maximum use of capacity may result In some cases, maximum use of capacity may result

in situations such as excessive waiting for customers. in situations such as excessive waiting for customers. (For example, a popular restaurant)(For example, a popular restaurant)

Demand PatternsDemand Patterns

In order to manage fluctuating demand in a In order to manage fluctuating demand in a service business, the firm must have a clear service business, the firm must have a clear understanding of understanding of demand patterns, why demand demand patterns, why demand patterns vary, and the market segments that patterns vary, and the market segments that comprise demand at different points in time.comprise demand at different points in time.

This understanding can be gained by:This understanding can be gained by: 1. The Charting of Demand Cycles1. The Charting of Demand Cycles 2. Identifying Predictable Cycles2. Identifying Predictable Cycles 3. Identifying Random Demand Fluctuations3. Identifying Random Demand Fluctuations 4. Identifying Demand Patterns by Market Segment4. Identifying Demand Patterns by Market Segment

Strategies for Matching Capacity Strategies for Matching Capacity and Demandand Demand

Once an organization fully understand its Once an organization fully understand its capacity constraints and demand patterns, capacity constraints and demand patterns, it is in the position to develop strategies for it is in the position to develop strategies for matching supply and demand.matching supply and demand.

There are two general approaches used to There are two general approaches used to accomplish this:accomplish this: 1. Smooth demand fluctuations by shifting 1. Smooth demand fluctuations by shifting

demand to match existing supply.demand to match existing supply. 2. Adjust capacity to match fluctuations in 2. Adjust capacity to match fluctuations in

demand.demand.

Shifting Demand to Match CapacityShifting Demand to Match Capacity

With this strategy, the organization aims to shift With this strategy, the organization aims to shift customers away from periods in which demand exceeds customers away from periods in which demand exceeds capacity. The organization may attempt to convince capacity. The organization may attempt to convince customers to use the service during periods of slow customers to use the service during periods of slow demand.demand.

Insert Figure 15.3 belowInsert Figure 15.3 below

Strategies for Shifting Demand to Strategies for Shifting Demand to Match CapacityMatch Capacity

• Use signage to communicate Use signage to communicate busy days and times.busy days and times.

• Offer incentives to customers Offer incentives to customers for usage during nonpeak for usage during nonpeak times.times.

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

• Advertise peak usage times Advertise peak usage times and benefits of nonpeak use.and benefits of nonpeak use.

• Charge full price for the Charge full price for the service—no discountsservice—no discounts..

• Use sales and advertising to increase business from current (and new) 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

Adjusting Capacity to Meet Adjusting Capacity to Meet DemandDemand

When using this strategic approach, capacity is adjusted, When using this strategic approach, capacity is adjusted, stretched, and aligned to match customer demand. stretched, and aligned to match customer demand. During periods of peak demand, capacity is expanded as During periods of peak demand, capacity is expanded as much as possible. During slow periods, the organization much as possible. During slow periods, the organization shrinks capacity to avoid wasting resources.shrinks capacity to avoid wasting resources.

Insert Figure 15.5 belowInsert Figure 15.5 below

Figure 15.4Figure 15.4

Strategies for Adjusting Capacity to Strategies for Adjusting Capacity to Match DemandMatch Demand

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

• Perform maintenance, renovations.

• Schedule vacations.

• Schedule employee training.

• Lay off employees.

Demand Too High Demand Too LowAdjust Capacity

In Class ExerciseIn Class Exercise

Choose ONE service organization (examples Choose ONE service organization (examples you could choose include the GoldenX, the you could choose include the GoldenX, the Bauer Theatre, Health and Counselling Centre, Bauer Theatre, Health and Counselling Centre, Wellness Centre, Gabrieau’s Bistro, The Wheel, Wellness Centre, Gabrieau’s Bistro, The Wheel, Snow Queen Leisure World, Lawton’s or Snow Queen Leisure World, Lawton’s or Shopper’s PhC operations, etc.)Shopper’s PhC operations, etc.)

Identify Capacity and Demand Management Identify Capacity and Demand Management Strategies Strategies

Combining Demand and Capacity Combining Demand and Capacity StrategiesStrategies

Many firms use multiple strategies, Many firms use multiple strategies, combining marketing-driven demand combining marketing-driven demand management approaches with operations-management approaches with operations-driven capacity management strategies.driven capacity management strategies. Determining which is the best set of strategies Determining which is the best set of strategies

for maximizing capacity utilization, customer for maximizing capacity utilization, customer satisfaction and profitability can be satisfaction and profitability can be challenging.challenging.

Yield Management: Balancing Capacity Yield Management: Balancing Capacity Utilization, Pricing, Market Utilization, Pricing, Market

Segmentation, and Financial ReturnSegmentation, and Financial Return

By using yield management models, By using yield management models, organizations find the best balance at a organizations find the best balance at a particular point in time among the prices particular point in time among the prices charged, the segments sold to, and the charged, the segments sold to, and the capacity used.capacity used. The goal of yield management is to “produce The goal of yield management is to “produce

the best possible financial return from a the best possible financial return from a limited available capacity.”limited available capacity.”

Yield Management: Balancing Capacity Yield Management: Balancing Capacity Utilization, Pricing, Market Utilization, Pricing, Market

Segmentation, and Financial ReturnSegmentation, and Financial Return The effectiveness measure is the ratio of The effectiveness measure is the ratio of

actual revenueactual revenue to to potential revenuepotential revenue for a for a particular measurement period:particular measurement period:

Yield = Yield = Actual revenueActual revenue

Potential revenuePotential revenue

• Actual revenue = Actual capacity used X Average actual priceActual revenue = Actual capacity used X Average actual price• Potential revenue = Total capacity X Maximum pricePotential revenue = Total capacity X Maximum price

Implementing a Yield Management Implementing a Yield Management SystemSystem

In order to implement a yield management system, an In order to implement a yield management system, an organization must possess detailed data on past organization must possess detailed data on past demand patterns by market segment, as well as demand patterns by market segment, as well as methods of projecting current market demand.methods of projecting current market demand.

Traditional yield management approaches are most Traditional yield management approaches are most profitable when:profitable when:

1. A service provider faces different market segments or 1. A service provider faces different market segments or customers, who arrive or make their reservations at different customers, who arrive or make their reservations at different times;times;

2. Customers who arrive or make their reservations early are 2. Customers who arrive or make their reservations early are more price sensitive than those who arrive or reserve late.more price sensitive than those who arrive or reserve late.

Airlines and hotels are well suited to the use of yield Airlines and hotels are well suited to the use of yield management systems. management systems. RyanAirRyanAir

Challenges and Risks in Using Challenges and Risks in Using Yield ManagementYield Management

When a firm becomes focused on maximizing When a firm becomes focused on maximizing financial returns through the use of differential financial returns through the use of differential capacity allocation and pricing, an organization capacity allocation and pricing, an organization may encounter the following problems:may encounter the following problems: Loss of competitive focusLoss of competitive focus Customer alienationCustomer alienation Employee morale problemsEmployee morale problems Incompatible incentive and reward systemsIncompatible incentive and reward systems Lack of employee trainingLack of employee training Inappropriate organization of the yield management Inappropriate organization of the yield management

functionfunction

Waiting Line Strategies: When Demand Waiting Line Strategies: When Demand and Capacity Cannot be Matchedand Capacity Cannot be Matched

In some cases, it is not possible to manage In some cases, it is not possible to manage capacity to match demand. capacity to match demand. For example, most health clinics will not add For example, most health clinics will not add

additional facilities or doctors during peak flu season; additional facilities or doctors during peak flu season; patients simply wait their turn.patients simply wait their turn.

Waits may occur when demand backs up Waits may occur when demand backs up because of variability in length of time for because of variability in length of time for service.service.

When customers are forced to wait, When customers are forced to wait, organizations take the chance that they will lose organizations take the chance that they will lose business, or at the very least customers will be business, or at the very least customers will be dissatisfied.dissatisfied.

Employ Operational LogicEmploy Operational Logic

In situations where customer waits are common, the first In situations where customer waits are common, the first step is to analyze the process itself, removing any step is to analyze the process itself, removing any inefficiencies. inefficiencies.

When waiting lines are inevitable, the organization must When waiting lines are inevitable, the organization must choose what kind of queuing system to use, or how to choose what kind of queuing system to use, or how to configure it. Insert Fig. 15.7 belowconfigure it. Insert Fig. 15.7 below

Waiting Line ConfigurationsWaiting Line Configurations

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

Establish a Reservation ProcessEstablish a Reservation Process

When waiting cannot be avoided, a reservation When waiting cannot be avoided, a reservation system may help spread demand. system may help spread demand.

A reservation system guarantees that the A reservation system guarantees that the service will be available when the customer service will be available when the customer arrives. It also reduces waiting time significantly.arrives. It also reduces waiting time significantly.

Differentiate Waiting CustomersDifferentiate Waiting Customers

Not all customers will necessarily need to Not all customers will necessarily need to wait the same length of time for service.wait the same length of time for service.

On the basis of need or customer priority, On the basis of need or customer priority, some organizations differentiate among some organizations differentiate among customers.customers. Differentiation may be based on such factors Differentiation may be based on such factors

as:as:• Importance of the customer.Importance of the customer.• Urgency of the job.Urgency of the job.• Duration of the service transaction.Duration of the service transaction.• Payment of a premium price.Payment of a premium price.

Make Waiting Fun, or at Least Make Waiting Fun, or at Least TolerableTolerable

Depending on how the wait is handled by the Depending on how the wait is handled by the organization, customers can be more or less organization, customers can be more or less satisfied even when they have to wait.satisfied even when they have to wait.

The actual length of the wait will affect how The actual length of the wait will affect how customers judge their service experience, customers judge their service experience, however it is not only the time spent waiting that however it is not only the time spent waiting that impacts customer satisfaction.impacts customer satisfaction.

How customers feel about the wait and their perceptions during How customers feel about the wait and their perceptions during it can also influence customer satisfaction.it can also influence customer satisfaction.

Make Waiting Fun, or at Least Make Waiting Fun, or at Least TolerableTolerable

David Meister proposed several principles about David Meister proposed several principles about waiting, and each has implications for how waiting, and each has implications for how organizations can make waiting more tolerable.organizations can make waiting more tolerable.

Unoccupied time feels longer than occupied time.Unoccupied time feels longer than occupied time. Pre-process waits feel longer than in-process waits.Pre-process waits feel longer than in-process waits. Anxiety makes waits seem longer.Anxiety makes waits seem longer. Uncertain waits are longer than known, finite waits.Uncertain waits are longer than known, finite waits. Unexplained waits are longer than explained waits.Unexplained waits are longer than explained waits. Unfair waits are longer than equitable waits.Unfair waits are longer than equitable waits. The more valuable the service, the longer theThe more valuable the service, the longer the customer will wait.customer will wait. Solo waits feel longer than group waits.Solo waits feel longer than group waits.

In Class ExerciseIn Class Exercise

What examples can you identify to What examples can you identify to illustrate each of David Meisner’s insights illustrate each of David Meisner’s insights into waiting? into waiting?

SummarySummary

Because of the inability to inventory products, effective Because of the inability to inventory products, effective use of capacity can be critical to the success of service use of capacity can be critical to the success of service organizations.organizations.

Unused capacity can be a direct drain on profitability, Unused capacity can be a direct drain on profitability, while overused capacity may cause service quality to while overused capacity may cause service quality to deteriorate.deteriorate.

There are two basic strategies for matching supply and There are two basic strategies for matching supply and demand:demand:

Demand strategiesDemand strategies (shifting demand to match capacity) (shifting demand to match capacity) Supply strategiesSupply strategies (adjusting capacity to meet demand) (adjusting capacity to meet demand)

Yield management is a sophisticated form of supply and Yield management is a sophisticated form of supply and demand management that balances capacity utilization, demand management that balances capacity utilization, pricing, market segmentation, and financial return.pricing, market segmentation, and financial return.

SummarySummary

Strategies for aligning capacity and demand Strategies for aligning capacity and demand often imply changes in marketing mix elements often imply changes in marketing mix elements in order to support the strategy.in order to support the strategy. Because of these implications, firms should consider Because of these implications, firms should consider

the potential strategic impact of these changes on the the potential strategic impact of these changes on the entire organization.entire organization.

In some situations, it is not possible to match In some situations, it is not possible to match supply with demand. In these cases, the result is supply with demand. In these cases, the result is often customer waiting. Waiting must be often customer waiting. Waiting must be effectively managed in order to maintain effectively managed in order to maintain customer satisfaction with the service.customer satisfaction with the service.

SummarySummary

D > CD > C D < CD < CSegment IdentificationSegment Identification

Demand Strategies Demand Strategies

Capacity StrategiesCapacity Strategies

Waiting StrategiesWaiting Strategies

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In Class Exercise MaterialIn Class Exercise Material