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Cbapter-2

ESTIMATING DEMAND FOR SERVICES

- SYNOPSIS-Forecasting demand-service capacity-yield' management-Managing demandpartitioning demand-establishing price incentives-promoting off

-Peak demand-develop complimenting service- develop reservation system

Managing supply Sharingcapacity-scheduling work shifts-increasing customer participationcreating adjustable capacity-cross training employees-using part-time employees- Quantitative Methods for demand forecasting.

2500

CALLS

25

5:30 AM

TIME

10:30 AM

FORECASTING DEMAND

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Forecasting demand for services gives us strategy, which will lead to competitive advantage.

There are essentially three methods:

1. SUBJECTIVE~ to assess the impact on service business for changing demographics. Aging of the population, which means the set of techniques relevant and applied to a younger set of consumer will not work with the next set of consumers who are older and have overcome the fancy and impulse buying age.

2. CASUAL-the demand for hotel services may be categorized here.

3. TIME SERVICES- Fast food restaurants here need'to forecast daily demand for menu

items. /

Each

As we move from 1 st method to 3'd method, the forecast time horizon becomes shorter. Let us examine the three alternatives, one by one: .

1. Subjective method - this is useful at the critical planning stage for service delivery system when a long- term time horizon exists. The best examples are government policy' planning for Nuclear Power Data required in New Delhi, for example. The opinion of higher level professionals from Architectural firms.Engineering companies who produce Nuclear Power components, like L&T, Walchandnagar Industries, KCP, Madras etc., Government Power Department personnel and other bureaucrats. T~is is also one of the techniques in survey for demand. The pr?ject costs are usually high and a long- term perspective exists. The Delphi technique is also used in Technology forecasting. Olaf Helmer developed this at Rand Corporation. It is based on expert opinion. In its simplest form, questions are asked of persons with expertise in a given area, and these individuals are not permitted to interact with each other. They then are asked to make numerical estimates. For example they may be asked to make prediction of the SENSEX index of the Bombay Stock Exchange for the )lear 1999.

The test administrator tabulates the result into quartiles and supplies the findings to the experts, who are then asked to reconsider their answers in the light of new information. Additionally, those outside the two quartiles are asked to justify their opinions. All the information is then tabulated and once again returned to the participants. On this occasion, each participant who remains outside the middle two quartiles may be asked to provide an argument on why he or she believes those who are at the opposite extreme are incorrect. The process continues till a consensus arrived at which is used for future planning. This method is labor intensive, very

expensive and time consuming. '

2. Casual Method- this consists of Regression models and econometric models which use a system of equations. The computer age has simplified the use of regression models today. Now it is necessary to only to collect the appropriate data and plug it into one of the many software programs available. A brief description of the mechanics of the models will suffice for an understanding of their application.

OS)

Each model involves the factor being forecast which is designated as the dependant variable" or Y, and the factors that determine the valueof'Y, known as the independent variables, or Xp. If there are n independent variables, then the relationship between the dependant variable Y and independent variable X is expressed as follows:

Y=ao+a1X1 +a2x2+ ... +anXn

.. The values ao, a2, ... an are constant coefficients, which are determined by the computer program being used.I f the calculations are being done byhand, the values are-determined by using regression equations found in elementary statistics texts. As a practical example, suppose a hotel chain wants to determine a profitable location for its expansion.plans. It would need to know what factors would decide this.

( It would then allow the management to screen available real estate for new hotel sites. The data then need to be collected on the following factors:

Traffic count, number of competitive rooms nearby, visibility of signs, local airport traffic, types of neighboring businesses, and distance to the nearest business district or city center. In all 35 factors, or independent variables. These can then be further classified according to competitive factors, demand generators, area demographics, market awareness, physical attributes .A primary statistical evaluation of data for all those variables, then allowed the investigators to identify four critical factors-STATE, PRICE, INCOME, AND COLLEGE- to be used inn the forecast model.

. The operating margin, obtained by adding depreciation and interest expenses to the profit and by dividing by the total revenue, was chosen as the most reliable measure, or dependant variable Y, o which to base a forecast. For this case, the constant coefficients were calculated as ao=- 3.09, and

a4=+ 1.75. . .

Substituting these coefficient values and the independent variables into equation yields the

regression-forecasting model below: . -

Operating margin Y= 39.05+(-5.41) STATE +(5.86)PRICE+(-3.09) INCOME+(1.75) COLLEGE. -

An econometric model consists of a set of simultaneous equations that expresses a dependent variable in terms of several different independent variables. Econometric models tend to be more expensive and sophisticated to use than other regression models; therefore they are generally used only for long range forecasting.

Time series models are applicable for making short term forecasts when the values of observations occur in identifiable pattern over time Themodelsrange from the simple Nsperiod moving average model to the more sophisticated and useful exponential smoothening models.

Where all past data for all variables ata relatively moderate to high cost, gives a medium range demand forecasting. If the data is uncomplicated, a competitive service organization may have to deal with a wealth of statistical information, some of which may be extraneous and some may be relevant to making profitable forecasts. The time frame could be for next year, or for the next few years, rather than for the next day or the next week. Here a data ought to follow an identifiable pattern.

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I MANAGING DEMAND

n·

. MANAGING SUPPLY

A. Sharing capacity

B. Increasing customer

participation

C. Creating adjustable capacity

D. Cross training employees

E. Using part time employees E Scheduling work shifts

,

After fixed capacity investment decisions have been made (number of hotel rooms to be built

or aircraft to be purchased), the hotel beds must be filled or airline seats sold to make daily operations profitable.

The challenge faced by mangers i-s of matching service supply with customer demand on a daily basis in a dynamic environment.

SERVICE CAPACITY

Service is a perishable commodity. For example a plarie flying with empty seats has lost revenue forever the revenue opportunity of flying with one more passenger. American AU-lines realized this first, and applied YIELD MANAGEMENT TECHNIQUES SUPPORTED BY

INFORMATION TECHNOLOGY. .'

Service is produced and consumed simultaneously-it is an intangible personal experience, which cannot be either stored in warehouse or transferred from one person to another. Whenever demand is short of capacity or supply of service idle servers and facilities result.

Variability on service demand is pronounced; there are cultural and economic reasons, we eat meals at the same time, take vacations at same time and even cash our cheques at the Same time. Even hospitals have low utilization in summer and dry months. These create idle periods of service at some time and cons\lmers waiting at other time.

MANAGING SERVICE CAPACITY:

A. Partitioning demand

B. Establishing price incentives

C. Promoting off peak demand

D. Develop complementing service

E. Develop reservation system

-: YIELD MANAGEMENT :-

I Managing demand

Excessive fluctuations in demand for services need not be accepted as inevitable. One of the ways-is to SMOOTHEN DEMAND by reducing cyclic variations. The average rate of arrivals of customers will be more stable over a period of time, though it will occur at random intervals. This can beactive as well as passive methods.

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to be built operations

nand on a

ts has lost esrealized fED BY

cperience, Whenever

lOS, we eat arne time. of service

city

One of the arrivals of vals, This

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a.

PARTITIONING DEMAND

By partitioning demand we mean group customers into random arrivals and planned arrivals.

For example, in a bank Current accounts are. regulars and they come to operate.at about the same time. While Savings accounts arrive at random intervals. Here, walk-in demands are uncontrollable, while appointments are controllable. The solution is to take appointments in-later part of the 'week to smoothen demand in the lean period while take the random load, now lighter, in the initial few days. This can, further be refined by re-scheduling appointments at suitable times in the day.

The advantages are increase in the number of patients, in case of a doctor, increased patient demand met-without adding another doctor and overall increased doctor- patient time. The biggest fallout is the increase in the morale of the doctor •.

b.

PRICE INCENTIVE OFFERS:

Here examples are many. Weekend plus night rates for long distance telephone calls are at fraction of the normal rate [l/3rd or Y2 the call rates: when the telephone exchange remains idle]. that is charged' during the week. Matinee shows before 6 P.M. are at reduced price.

c. PROMOTING OFF PEAK DEMAND

Promoting Off- season hotel rates at Resort locations and camp- sites are also an attraction for the bargain seeker. Peak load pricing by utilitycompanies is to discourage simultaneous use by

everyone.

Here the assumption is-

~ The room occupancy is directly affected by the available leisure time and prevailing climate.

~ Marginal visitor was the one who incurred the highest cost to come to location.

..

Fill this for better utiliza.tion for source/resource

. "

100 Occupancy

Off peak

Time ----7

cP There is no necessity to maintain regular staff.

~. The intention IS to tap latent demand instead of redistributing peak demand to off-peak times.

Fees charged should at least cover variable costs.

"

Avoid high paying customer to low rate schedules. [Airlines exclude the Business Class travelers

by using restrictions-requiring passengers to remain at their destination over the weekend.

Creative use of off-rate capacity. e.g. RESORT Hotel during off -season is converted as a

RETREAT location for Business or professional groups. '

Department stores appeal- "shop early to avoid festival rush" ..

, '

Super markets offer double coupons on Wednesdays, which is their middle-of- the- week lean day.

SCHEDULING

DEVELoP COMPLIMENTARY SERVICE

'To solve this the service U,",',l1all\_l\

o

•

Restaurants add a Bar, divert the waiting customers to a lounge during busy period. This is ·ofitable to the restaurant and soothing to the customer. Movie theatres offer popcorn, soft drinks, ldvideo.games in the lobby to keep the waiting customers occupied. Convenience stores extend .rvices to include self -service, a petrol pump and.a fast food meal option.

Polyclinics offer Medicines, nutritional advice, psychiatric care, a~ add-ons.

The advantage is that it is a natural way of expanding ones market This is attractive when new emands on service are contra-cyclical and result in uniform average demand, old service demand id new complimentary service.

o

RESERVATION SYSTEM

.Taking reservations means pre-sell potential service business.

As reservation fills up capacity, deflect additional demand to other time slots or other neighboring icility, Reservation benefits customer by reducing Waiting time and guaranteed service availability . . problem can arise when-the customer fails to honor Reservation made." NO SHOW" does not lean that good establishments hold customer financially liable for unkept reservations:

Common Business-class passengers, who make several flight reservations by multiple bookings, nee they do not know when they need to depart. They want an assured Flight out. Airlines cannot o with empty seats if not'notified in advance. Some nowadays issue non-refundable tickets. Airlines ISO deliberately take over-bookings. FAA has forced them to reimburse over-booked passengers id find them alternative accommodation on the next flight out.

In conclusion here we must balance opportunity cost of idle service with expected cost of . rrning away reservation. Penalty associated with the loss of customer good will-and impact on iture business. By Probability method -no shows vs. reservations over booked can be spotted.

Front desk personnel have to be trained to handle over book~clguests in a gracious manne-r.

INCREASING o

o

o

Airlines depending upon the

lANAGING SUPPLY

For many, service demand cannot be smoothened effectively. For example telephone peak emand at 1030 hours is 2500 calls. The minimum demand is at 0530 hours and is only 20 calls. '

eak total-variation is 2500/20 = 125 times.

•

Class travelers the weekend.

converted as a

e-of- the- week

r period. This is om, soft drinks, ce stores extend

ctive when new service demand

er neighboring rice availability. flOW" does not

fns.

ultiple bookings, Airlines cannot tickets. Airlines ked passengers

rxpected cost of land impact on an be spotted.

.acrous manner.

telephone peak ; only 20 calJs.

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SHARING CAPACITY:

Hotel Aurora Towers never says 'no' to a guest but directs him to nearby Hotel Sagar Plaza or Regency hotel by a taxi, at no extra cost, in order to win customer goodwill.

Airlines ask other airlines to handle their ground staff service needs such as ladders, luggage loading and unloading, filling-service, cleaning service etc. in reciprocation.

SCHEDULING WORK SHIFTS:

. To solve this problem, use work-shift scheduling. The service supply has to match approximately the service demand. Current demand of hourly calls must match service staff requirement.

o The demand has to be forecast hourly, on weekdays, on weekends, holidays, during various seasons, during the week. Then staff is to be provided accordingly, The question of equity is to be solved by overtime, compensatory off, Night shift allowance et,c.

AT&T has only 55% of the normal call load on Saturdays and Sundays. It has discovered that 89% of the incoming calls must be answered within 10 seconds to achieve acceptable service levels. The customer will otherwise shift to some other service provider.

o Service for 365 days- round the clock being provided by organizations like Fire services, Police, Telephones, university library service,computer centers, hotels, ambulance service etc. are sorted out by Linear programming.

INCREASING CUSTOMER PARTICIPATION:

o This is evidentin Fast food restaurants. They have no people to clean tables, serve food, take. away leftovers, serve straw, sauce seasoning, salt! pepper etc. The customer places order, is also a co-producer of service. He serves himself and is expected to clear the table and finally

is ordering from a very limited menu. - .

o He naturally expects a very fast service and less expensive meal to compensate for the help in the form oflabor, which he provides,just at the moment it is required. Here capacity to serve varies more directly with the demand and is not fixed.

o Self service can also cause damage, for example in a petrol pump. The customer will only fill petrol, and does not check oil, water, air, battery water, or in food service, may spill food.

CREATING ADJUSTABLE CAPACITY:

Airlines routinely move partitions between first class, business class, and economy class,

depending upon the passenger mix, to meet the daily varying demand. •

CROSS TRAINING OF EMPLOYEE~ :

• Benihana restaurants in Tokyo assign one chef for eight people and only use required number of chefs. Off peak they do other work.

, Fees charged should at least cover variable costs.

, '

Avoid high paying customer to low rate schedules. [Airlines exclude the Business Class travelers by using restrictions-requiring passengers to remain at their destination over the weekend.

Creative use of off-rate capacity, e.g. RESORT Hotel during off -season is converted as a

RETREAT location for Business or professional groups. '

Department stores appeal- "shop early to avoid festival rush". '

, .

Super markets offer double coupons on Wednesdays, which is, their middle-of- the- week

lean day. '

1. DEVELoP COMPLIMENTARY SERVICE

Restaurants add a Bar, divert the waiting customers to a lounge during busy period. This is xofitable to the restaurant and soothing to the customer. Movie theatres offer popcorn, soft drinks, add video .games in the lobby to keep the waiting customers occupied. Convenience stores extend services to include self -service, a petrol pump and a fast food meal option.

Polyclinics offer Medicines, nutritional advice, psychiatric care, a~ add-ons.

The advantage is that it is a natural way of expanding ones market. This is attractive when new demands on service are contra-cyclical and result in uniform average demand, old service demand and new complimentary service.

e. RESERVATION SYSTEM

.Taking reservations means pre-sell potential service business.

As reservation fills up capacity, deflect additional demand to other time slots or other neighboring facility. Reservation benefits customer by reducing, Waiting time and guaranteed service availability. A problem can arise when the customer fails to honor Reservation made." NO SHOW" does not

mean that good establishmentshold customer financially liable for unkept reservations. '

Common Business class passengers, who make several flight reservations by multiple bookings, since they do not know when they need to depart. They want an assured Flight out. Airlines cannot go with empty seats if nornotified in advance. Some nowadays issue non-refundable tickets. Airlines also deliberately take over-bookings. FAA has forced them to reimburse over-booked passengers and find them alternative accommodation on the next flight out.

In conclusion here we must balance opportunity cost of idle service with expected cost of . turning away reservation. Penalty associated with the loss of customer good will- and impact on future business. By Probability method -no shows vs. reservations over booked can be spotted.

Front desk personnel have to be trained to handle over book~clguests in a gracious mann~r.

MANAGING SUPPLY

For many, service demand cannot be smoothened effectively. For example telephone peak demand at 1030 hours is 2500 calls. The minimum demand is at 0530 hours and is only 20 calls.

Peak total-variation is 2500 120 =125 times.

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ness Class travelers 'er the weekend.

1 is converted as a

ldle-of- the- week

usy period. This is , soft drinks, stores extend

gracious mann~r.

telephone peak is only 20 calls.

, (19)

SHARING CAPACITY:

Hotel Aurora Towers never says 'no' to a guest but directs him to nearby Hotel Sagar Plaza or Regency hotel by a taxi, at no extra cost, in order to win customer goodwill.

Airlines ask other airlines to handle their ground staff service needs such as ladders, luggage loading and unloading, filling service, cleaning service etc. in reciprocation.

SCHEDULING WORK SHlFfS:

. To solve this problem, use work-shift scheduling. The service supply has to match approximately the service demand. Current demand of hourly calls must match service staff requirement.

o The demand has to be forecast hourly, on weekdays, on weekends, holidays, during various seasons, during the week. Then staff is to be provided accordingly: The question of equity is to be solved by overtime, compensatory off, Night shift allowance etc.

AT&T has only 55% of the normal call load on Saturdays and Sundays. It has discovered that 89% of the incoming calls must be answered within 10 seconds to achieve acceptable service levels. The customer will otherwise shift to some other service provider.

o Service for 365 days- round the clock being provided by organizations like Fire services, Police, Telephones, university library service, computer centers, hotels, ambulance service etc. are sorted out by Linear programming.

INCREASING CUSTOMER PARTICIPATION:

o This is evidentin Fast food restaurants. They have no people to clean tables, serve food, take. away leftovers, serve straw, sauce seasoning, salt! pepper etc. The customer places order, is also a co-producer of service. He serves himself and is expected to clear the table and finally

is ordering from a very limited menu. .

o He naturally expects a very fast service and less expensive meal to compensate for the help in the form of labor, which he provides,just at the moment it is required. Here capacity to serve varies more directly with the demand and is not fixed.

o Selfservicecan also cause damage, for example in a petrol pump. The customer will only fill petrol, and does not check oil, water, air, battery water, or in food service, may spill food.

CREATING ADJUSTABLE CAPACITY:

Airlines routinely move partitions between first class, business class, and economy class,

. .

depending upon the-passenger mix, to meet the daily varying demand.

CROSS TRAINING OF EMPLOYEE~ :

• Benihana restaurants in Tokyo assign one chef for eight people and only use required number of chefs. Off peak they do other work.

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'. Airlines at smaller airports show same persons handling- gates, ramps, luggage and other ground services. They also lease aircraft including painting their sign -boards and logos.

• Cross training in super markets to meet the rush at the. counters by inducting stores and other: back office staff, while in low periods, cashiers become stokers. The advantage is a relief from monotony and spirit de corpse prevails. The job is temporarilyenlarged in slow period, while division of labor in the peak one.

USE PART TIME EMPLOYEES:

When peaks are predictable, (payday, lunch hours, beach resorts in summer) college students and those interested in supplementary income or off duty personnel, and provide extra pay to clear

the load. This is resorted to, by airlines, hospita1s etc. '

YIELD MANAGEMENT:

De regulation in the airlineindustry has led them to set their own prices, exceptin India- where still government has a large say in the matter of incomes and customer price levels.

A new approach to revenue maximization has emerged, called YIELD MANAGEMENT. It is actually a comprehensive system that incorporates many of the strategies like reservation systems, over bookings, partitioning demand etc. ,

Airline seats are perishable. Once the flight has departed the potential revenue from an empty seat is lost forever. Offering a discount on fares to fill the aircraft becomes attractive. However, selling all seats at a discount would preclude the possibility of selling some at full price. Yield management attempts to allocate the fixed capacity of seats on a flight to match potential demands in various market segments in the most profitable manner.

Though airlines were the first to use Yield management, other capacity constrained services like hotels, car rental firms, and cruise liners are also adopting the practice .

. Yield management is appropriate for services that exhibit the following characteristics:

,

~ RELATIVELY FIXED CAPACITY

~ ABILITY TO SEGMENT THEIR MARKET

~ PERISHABLE INVENTORY

~ PRODUCT SOLD IN ADVANCE

~ FLUCTUATING DEMAND

~ LOW MARGINAL SALES COSTS AND HIGH MARGINAL CHANGE COSTS.

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ndother

gos.

nd other s a relief in slow

students r to dear

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Typically mSTOG RAMS are used to analyze the solution to the problem or demand e.g.:

A RESORT: (% capacity allocated to. different seasons)

Peak summer [30%] autumn [20 %] offpeak [40 %] spring [10 %]

First class 30% 20% 20% 20%
Standard 60% 50% 30% 50%
Budget class 10% 30% 50% 30%
WAITING A WAIT can destroy an otherwise perfect service experience. A customer waiting in line is

a potentially lost customer. .

. The dramatic difference between the 198Q's and 1990's is described in one word "speed", and that between 1990's and 2000's will be acceleration of speedier service demand.

a-where
rffiNT. It
systems,
mempty
.owever,
.e. Yield
lemands
services
-
.s: 27.% of customers who cannot wait or get through on. a linewill buy elsewhere or skip

the transaction. . . .

YOU CAN'T BE OUTLINED BY THE COMPETITION OR YOU LOOSE BUSINESS.

Many companies have stepped up efforts to shorten waits- or at least make them tolerable.

. ' .

. Methods employed are as follows:

ANIMATE

o In MACY'S DEPARTMENT STO~S, as many as 10,000 people queue-up to see SANTA CLAUS every day. The line wends its way through displays of dancing teddy bears, elves, and electric trains. Nearly 300,OOO,people see Santa in a month.

. .