Services Marketing 7e, Global Edition

Chapter 9:
Balancing Demand
and Productive
Capacity

Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 10 – Page 1
 Overview of Chapter 9

 Fluctuations in Demand Threaten Service Productivity

 Managing Capacity

 Analyze Patterns of Demand

 Managing Demand

 Inventory Demand Through Waiting Lines and Queing Systems

 Customer Perceptions of Waiting Time

 Inventory Demand Through Reservation Systems

Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 10 – Page 2
 Fluctuations in Demand
Threaten Service Productivity

Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 10 – Page 3
 Defining Productive Capacity?

 Productive Capacity can take several forms in services

➢ Physical facilities designed to contain customers
➢ Physical facilities designed for storing or processing goods.
➢ Physical equipment used to process people, possessions, or information
➢ Labor
➢ Infrastructure

 Financial success in capacity-constrained business is a

function of management’s ability to use productive
capacity as efficiently and profitably as possible.

Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 10 – Page 4
 From Excess Demand to Excess Capacity

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 Addressing Problem of Fluctuating Demand

Two basic approached of which most firms use a mix of:

• Adjust level of capacity 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
➢ Inventorying demand until capacity becomes available.

Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 10 – Page 6
 Managing Capacity

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 Managing Capacity

 Enables more people to be served at same level of capacity

 Stretch and shrink:

➔ Offer interior extra capacity at peaks (e.g. bus/train standees)
➔ Use facilities for longer/shorter periods.
➔ Reduce amount of time spent in process by minimizing slack time.

 Adjusting capacity to match demand

➢ Rest during low demand ➢ Ask customers to share
➢ Cross-train employees ➢ Create flexible strategy
➢ Rent/Share facilities and
➢ Use part-time employees
equipment
➢ Customers perform self service

Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 10 – Page 8
 Analyze Patterns of Demand

Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 10 – Page 9
 Demand Varies by Market Segment

 Understand why customers from specific market segments select this

service

 Keep good records of transactions to analyze demand patterns

➔ Sophisticated software can help track customer consumption patterns.

 Record weather conditions and other special factors that might

influence demand.

Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 10 – Page 10
 Predictable Demand Patterns and Their Underlying Causes

Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 10 – Page 11
 Causes of Seemingly Random Changes in Demand
Levels

Question: Which of these events can be predicted ?

1. Weather

2. Health Problems

3. Accidents, Fires, Crime

4. Natural Disasters

Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 10 – Page 12
 Managing Demand

Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 10 – Page 13
 Managing Demand

 Take no action
➢ Let demand find its own levels

 Interventionist approach
➔ Reduce demand in peak periods
➔ Increase demand when there is excess capacity

 Inventorying demand until capacity becomes available

➔ Formal wait and queuing system
➔ Reservation system

Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 10 – Page 14
 Marketing Mix Elements to Shape Demand Patterns

• Use price and other nonmonetary 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 © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 10 – Page 15
 Hotel room demand curves by Segment and Season

Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 10 – Page 16
 Inventory Demand Through
Waiting Lines and Queuing
Systems

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 Waiting Is a Universal Phenomenon

 An average person may spend up to 30 minutes/day waiting

in line-equivalent to over one week per year!

 Nobody likes to wait

 Its boring, time-wasting, and sometimes physically

uncomfortable

Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 10 – Page 18
 Why do Waiting Lines Occur ?

 Because numbers 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.
➔ Queues may be physical but geographically dispersed
➔ Some are virtual (e.g phone)

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 Managing Waiting Lines

 Rethink design of queuing system

 Install a reservation system

 Tailoring the queuing system to

different market segments

 Manage customer behavior and

perceptions of wait

 Redesign processes to shorten

transaction time

Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 10 – Page 20
 Queuing Systems can be Tailored to
Market Segments

 Urgency of job
➔ Emergencies vs. non-emergencies

 Duration of service transaction

➔ Number of items to transact
➔ Complexity of task

 Payment of premium price

 Importance of Customer
➔ Frequent users/high volume purchasers vs others

Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 10 – Page 21
 Customers Perceptions of
Waiting Time

Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 10 – Page 22
 Ten Propositions on Psychology of
Waiting Lines

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 Inventory Demand Through

Reservations System

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 Benefits of Reservations

 Saves customers from having to wait in line

 Helps to control and manage the demand (e.g. leave time for
emergency jobs)

 Pre-sells the service and can be used to prepare and educate the
customer for the service encounter

 Data captured helps organizations to understand their demand

patterns and to plan their operations and staffing levels.

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 Characteristics of Well-Designed reservation system

 Fast and user-friendly for customers and staff

 Responsive to customer queries and needs

 Offers options for self service (e.g. through an online

reservations system)

 Accommodates preferences (e.g., room with a view)

 Deflects demand from unavailable first choices to

alternative times and locations.

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 Reservations Strategies Should
Focus on Yield

 Yielf analysis helps managers recognize opportunity cost of

allocating capacity to one customer/segment when another
segment might yield a higher rate later

 Decisions need to be based on good information

➔ Detailed records of past usage
➔ Current market intelligence and good marketing sense
➔ Realistic estimate of the chances of obtaining higher rates business

 When firms overbook to increase yield,

➔ Victims of overbooking should be compensated to preserve the
relationship

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 Creating Alternative Use for
Otherwise Wasted Capacity

 Use capacity for service

differentiation

 Reward your best

customers and build
loyalty

 Customer and channel

development

 Reward employees

 Barter free capacity

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 Information Needed for Demand and
Capacity Management Strategies

Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 10 – Page 29
 Summary

 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

 To balance demand and capacity, a firm can:

➔ Manage capacity
➔ Take no action and let demand find its own levels
➔ Reduce demand in peak periods
➔ Increase demand when there is excess capacity
➔ Inventory demand using wait & queuing, and reservation systems

 Capacity can be managed through:

➔ Stretching or shrinking capacity levels
➔ Adjusting capacity to match demand
➔ Creating flexible capacity

Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 10 – Page 30
 Summary

 Demand can be managed through

➔ Analysis of patterns
➔ To be reshaped by marketing strategies

 Waiting is a universal phenomenon. Waits can be reduced by

➔ Rethinking and redesigning the queuing system
➔ Managing customer’s behavior and their perceptions of the wait
➔ Installing an effective reservation system focused on yield

Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 10 – Page 31