sq lecture eight - balancing demand against productive capacity

Lecture Eight

• Balancing Demand

Against Productive

Capacity

(Chapter 9)

Service Quality MKTG 1268

1

JAN 2013 Semester

Overview of Chapter 9

Fluctuations in Demand Threaten Service Productivity

Defining Productive Service Capacity

Managing Capacity

Understanding Patterns of Demand

Managing Demand

Inventory Demand through Waiting Lines and Queuing Systems

Customer Perceptions of Waiting Time

Inventory Demand Through Reservations System

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Managing Resorts Requires Effective Management of

Demand and Capacity

FLUCTUATIONS IN DEMAND

THREATEN SERVICE

PRODUCTIVITY

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Carefully balancing the demands (by customers) and

the available capacity of the service firm’s resources

requires careful planning

From Excess Demand to Excess Capacity

1. Excess demand Too much demand relative to capacity at a given time

2. Demand exceeds optimum capacity Upper limit to a firm’s ability to meet demand at a

given time

3. Optimum capacity Point beyond which service quality declines as more

customers are serviced

4. Excess capacity Too much capacity relative to demand at a given time

Four conditions potentially faced by fixed-capacity services:

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Variations in Demand Relative to Capacity (Fig. 9.3)

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Managing Capacity and Demand

• Define productive capacity

• Manage capacity

Stretch capacity ― squeeze more people into a given

capacity

Adjust capacity to more closely match demand

• Understand demand

Understand patterns of demand and determine demand

drivers

• Manage demand

Use marketing strategies to smooth out peaks, fill in valleys

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Building blocks for managing capacity and demand


What is 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 businesses that are limited in

capacity depends largely on how capacity is used

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Defining – specifically – the

productive capacity of a

service

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Examples of the importance of defining productive capacity

MANAGING CAPACITY

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Managing Capacity – Rush Hour Crowd in

the Subway Train

Alternative Capacity Management Strategies

Capacity is fixed, but more people are served at the same level of capacity

Stretch and shrink:

Offer inferior 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

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Adjusting Capacity to Match Demand (Vary amount of capacity to match anticipated demand):

• Schedule downtime during periods of low demand

• Cross-train employees

• Use part-time employees

• Invite customers to perform self-service

• Ask customers to share

• Create flexible capacity

• Rent or share extra facilities and equipment

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Cross-training staff as a means of adjusting capacity to

meet demand

ANALYZE PATTERNS

OF DEMAND

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Demand Varies by Market Segment

• Demand may seem random, but analysis may reveal a predictable demand cycle for different segments

• 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

Predictable Demand Patterns and

Their Underlying Causes (Table 9.1) (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

Predictable Cycles of Demand Levels

Underlying Causes of Cyclical Variations

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20 See full details in Table 9.1 on page 272 of the text

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Some service jobs can be regularly scheduled –

example maintenance jobs

Predictable Demand Patterns and

Their Underlying Causes (Table 9.1) (2)

Underlying causes of randomly changing demand levels

Weather

Health problems

Accidents, Fires, Crime

Natural disasters

Disaggregate demand by market segment for a particular service over time

Use patterns by particular type of customer or for a particular purpose

Variations in net profitability for each completed transaction

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Understanding patterns of demand – seasonal trends in

tourist arrivals

MANAGING DEMAND

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Alternative Demand Management Strategies (Table 9.2)

Take no action

Let customers sort it out

Reduce demand

Higher prices

Communication encouraging use of other time slots

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

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See full details in Table 9.2 on page 275 of the text

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Alternative Demand

Management Strategies

Marketing Strategies Can Reshape Some Demand

Patterns

Use price and other costs to manage demand. If the firm understands the shape of demand curves for different market segments, then prices may be raised/lowered to discourage/attract particular segments at particular times.

Change product elements. Features may be varied according to the time of day (e.g., restaurants) or season of the year (hotels) to attract different market segments.

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Marketing Mix Elements Can Be Used To Shape

Demand Patterns (Pricing)

Marketing Strategies Can Reshape Some Demand

Patterns 30

Modifying time and place of delivery to reflect changing market needs over the product demand cycle.

Use promotion and education. Signage, advertising, and promotion can be used to inform customers of peak periods (encouraging them to avoid using the service during these times, if possible) and promoting off-peak times when the service facility is less crowded and service faster.

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Seasonal demand

for a service

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Service Insight 9.1 : Discouraging Demand for

Non-Emergency Calls

INVENTORY DEMAND

THROUGH WAITING LINES

AND RESERVATIONS

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When Demand Exceeds Supply

Steps to take to inventory demand (keep capacity for use later)

Asking customers to wait in line (queue), usually on a first-come first-served basis

Offering customers the opportunity to reserve or book capacity in advance

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Why do queues exist?

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Because 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

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Helping customers

avoid the hassle

of waiting lines

Waiting In Line

Almost nobody likes to wait An average person may spend up to 30 minutes/day

waiting in line—equivalent to 20 months in an 80 year lifetime

It's boring, time-wasting, and sometimes physically uncomfortable

Not all queues take physical waiting in a single location Queues may be physical but geographically

dispersed Some are virtual

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Reduce Waiting Time By:

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Rethinking the design of queuing system

Installing reservations system

Tailoring the queuing system to different market segments

Managing customer behavior and their perceptions of wait

Redesign processes to shorten the time of each transaction

Alternative Queuing Configurations (Fig. 9.15)

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Queue Configurations:

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Single line sequential stage queues are appropriate for small

waiting time and each stage is simple with little chances of

stand-offs.

Single line to multiple servers (snake) is always preferable

over multiple lines to multiple servers, as multiple lines may

not move at the same speed.

Designated lines to designated servers configuration are

suitable for different segments of customers and different

jobs.

Take a number approach saves from the hassles of standing

in the queue, if waiting time is too long. In the meantime

customers can do something else.

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Different versions of queuing systems

Virtual Waits

One problem of waiting is the waste of customers’ time

Virtual queues can eliminate the need to wait

Customers register their place in line on a computer, which estimates the time they need to reach the front of the virtual line, customers then return later to claim their place

See Service Insights 9.3 (page 283)

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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

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PERCEPTIONS OF

WAITING TIME

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Ten Propositions to Make Waiting More

Bearable (1)

1. Unoccupied time feels longer than occupied time

2. Solo waits feel longer than group waits

3. Physically uncomfortable waits feel longer than comfortable ones

4. Pre- and post-process waits feel longer than in-process waits

5. Unexplained waits are longer than explained waits

Sources: Maister; Davis & Heineke; Jones &

Peppiatt Cont.

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Occupying customers during waits

6. Unfamiliar waits seem longer than familiar ones

7. Uncertain waits are longer than known, finite waits

8. Unfair waits are longer than fair waits

9. Anxiety makes waits seem longer

10.People will wait longer for more valuable services

Ten Propositions to Make Waiting More

Bearable (2)

Sources: Maister; Davis & Heineke; Jones & Peppiatt

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Uncertain waits create customer anxiety and stress

INVENTORY DEMAND

THROUGH A

RESERVATIONS SYSTEM

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Benefits of Reservations

Avoid customer dissatisfaction due to excessive waits

Controls and smoothes demand

Allows implementation of revenue management and preselling of service to different customer segments

Data captured helps organizations Prepare financial projections

Plan operations and staffing levels

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Reservation systems in a library

Characteristics of Well-Designed Reservations System

Fast and user-friendly for customers and staff

Answers customer questions

Offers options for self service (e.g. Web)

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

Deflects demand from unavailable first choices to alternative times and locations

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Reservations Strategies Should Focus on Yield

Yield 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 record of past usage Supported by current market intelligence and good

marketing sense Realistic estimate of changes of obtaining higher

rated business

When firms overbook to increase yield, Victims of over-booking should be compensated to

preserve the relationship

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Setting Hotel Room Sales Targets by Segment

and Time Period

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Developing Loyalty Programs


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

• Managing capacity and demand

Define productive capacity

Manage capacity

Understand and manage demand

Stretching or shrinking capacity levels

Adjusting capacity to match demand




• Five basic ways to manage demand

Take no action

Reduce demand in peak periods

Increase demand in low periods

Inventory demand using a queuing system

Inventory demand using a reservations system




• 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

Installing a reservation system

Tailoring queuing system to different market segments

Managing customers’ behavior and their perceptions of the wait

Redesigning the processes to shorten the time of each transaction

• An effective reservations system

Enables demand to be controlled and smoothed in manageable way

Should focus on yield

Requires information

Practice Exam Essay Question:

60

In a popular massage parlour, there are often customers waiting at the reception to get a massage because all the masseurs are already occupied / busy serving other customers.

(a) Recommend three demand and capacity management actions this massage parlour can take to respond to the above situation.

(b) Drawing on what you have learnt in relation to the psychology of waiting, how could this massage parlour make waiting more ‘bearable’ for customers?

sq lecture eight - balancing demand against productive capacity

Business

excess demand

demand relative

match demand

anticipated demand

patternsof demand

managing capacity

excess capacity

capacity relative