JAN 2013 Semester

Service Quality
MKTG 1268
Lecture Eight

Balancing Demand Against Productive Capacity

(Chapter 9)

Overview of Chapter 9
2

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

Managing Resorts Requires Effective Management of Demand and Capacity

FLUCTUATIONS IN DEMAND THREATEN SERVICE PRODUCTIVITY

Carefully balancing the demands (by customers) and the available capacity of the service firms resources requires careful planning

From Excess Demand to Excess Capacity

6

Four conditions potentially faced by fixed-capacity services:

1.

Excess demand
Too

much demand relative to capacity at a given time

2.

Demand exceeds optimum capacity

Upper

limit to a firms ability to meet demand at a given time beyond which service quality declines as more customers are serviced much capacity relative to demand at a given time

3.

Optimum capacity
Point

4.

Excess capacity
Too

Variations in Demand Relative to Capacity (Fig. 9.3)

7

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 patterns of demand and determine demand drivers Use marketing strategies to smooth out peaks, fill in valleys
Pearson Education South Asia Pte Ltd 2013. All rights reserved

Understand demand

Manage demand

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
Pearson Education South Asia Pte Ltd 2013. All rights reserved

1 0

Defining specifically the productive capacity of a service

11

Examples of the importance of defining productive capacity

12

13

MANAGING CAPACITY

Managing Capacity Rush Hour Crowd in the Subway Train

14

Alternative Capacity Management Strategies

15

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) facilities for longer/shorter periods

Use

Reduce

amount of time spent in process by minimizing slack time

Adjusting Capacity to Match Demand

(Vary amount of capacity to match anticipated demand):
16

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

Cross-training staff as a means of adjusting capacity to meet demand

17

18

ANALYZE PATTERNS OF DEMAND

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
Pearson Education South Asia Pte Ltd 2013. All rights reserved

1 9

Predictable Demand Patterns and Their Underlying Causes (Table 9.1) (1)
20

Predictable Cycles of Demand Levels

Underlying Causes of Cyclical Variations

day week month year other

employment billing or tax payments/refunds pay days school hours/holidays seasonal climate changes public/religious holidays natural cycles

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

20

21

Some service jobs can be regularly scheduled example maintenance jobs

22

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
23

Understanding patterns of demand seasonal trends in tourist arrivals

24

25

MANAGING DEMAND

Alternative Demand Management Strategies (Table 9.2)

26

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

Alternative Demand Management Strategies

27

Marketing Strategies Can Reshape Some Demand Patterns

28

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.

Marketing Mix Elements Can Be Used To Shape Demand Patterns (Pricing)

29

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.

Seasonal demand for a service

31

Service Insight 9.1 : Discouraging Demand for Non-Emergency Calls

32

33

INVENTORY DEMAND THROUGH WAITING LINES AND RESERVATIONS

When Demand Exceeds Supply

34

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

Why do queues exist?

35

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

Helping customers avoid the hassle of waiting lines

36

Waiting In Line
37

Almost nobody likes to wait

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

Reduce Waiting Time By:

38

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)

39

39

Queue Configurations:
40

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.

Different versions of queuing systems

41

Virtual Waits
42

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)

Queuing Systems can be Tailored to Market Segments

43

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

44

PERCEPTIONS OF WAITING TIME

Ten Propositions to Make Waiting More Bearable (1)

45

1.

2. 3.

4.

5.

Unoccupied time feels longer than occupied time Solo waits feel longer than group waits Physically uncomfortable waits feel longer than comfortable ones Pre- and post-process waits feel longer than in-process waits Unexplained waits are longer than explained waits
Sources: Maister; Davis & Heineke; Jones & Peppiatt

Cont.

Occupying customers during waits

46

Ten Propositions to Make Waiting More Bearable (2)

47

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
6.

Sources: Maister; Davis & Heineke; Jones & Peppiatt

Uncertain waits create customer anxiety and stress

48

49

INVENTORY DEMAND THROUGH A RESERVATIONS SYSTEM

Benefits of Reservations
50

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

Reservation systems in a library

51

Characteristics of Well-Designed Reservations System

52

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

Reservations Strategies Should Focus on Yield

53

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

Setting Hotel Room Sales Targets by Segment and Time Period

54

Developing Loyalty Programs

55

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
Pearson Education South Asia Pte Ltd 2013. All rights reserved

5 6

Summary of Chapter 9 Balancing Demand and Productive Capacity (2)

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

5 7

Pearson Education South Asia Pte Ltd 2013. All rights reserved

Summary of Chapter 9 Balancing Demand and Productive Capacity (3)

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

5 8

Pearson Education South Asia Pte Ltd 2013. All rights reserved

Summary of Chapter 9 Balancing Demand and Productive Capacity (4)

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
Pearson Education South Asia Pte Ltd 2013. All rights reserved

5 9

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?