Ch-9

Balancing
Capacity and
Demand
Why study demand and capacity
management
Fluctuations In Demand Threaten Profitability
1. Services with limited capacity face wide swings in demand
2. Service capacity cannot be kept aside for sale at a later date
3. Effective use of expensive productive capacity is a secret of success
in service businesses
4. Service marketers should develop strategies to bring demand and
capacity balance to create benefits for customers & improve
business profitability
1. Fluctuating demand is a problem that affects many businesses in both the
corporate and consumer sectors because service inventories tend to be
highly perishable.

2. A service firm must control these demand fluctuations as much as possible to

provide quality service and remain profitable in the long run.

3. Effective use of productive capacity is vital to the success of service

organizations.

4. The goal, however, should not be simply to use staff, labor, equipment, and
facilities as much as possible, but to use them as productively as possible.
 Demand–supply situations that fixed-
capacity firms may face
Four conditions potentially faced by fixed-capacity services
• Excess demand:
o Too much demand relative to capacity at a given time.
• Demand exceeds optimum capacity:
o Upper limit to a firm’s ability to meet demand at a given time.
o Conditions are crowded and customers are likely to perceive a deterioration in service
quality
• Optimum capacity:
o Point beyond which service quality declines as more customers are serviced.
o Staff and facilities are busy without being overworked.
• Excess capacity:
o Too much capacity relative to demand at a given time.
o Demand is below optimum capacity and productive resources are underutilized
 Approach to the problem
of fluctuating demand

Adjust level of capacity to

Manage the level of
meet variations in
demand
demand
Productive capacity in a service context
• Productive capacity can take several forms in services:
o Physical facilities designed to contain customers
o Physical facilities designed for storing or processing goods
o Physical equipment used to process people, possessions, or information
o Labor

o a key element of productive capacity in all high-contact

services and many low-contact ones

o Infrastructure

o organizations are dependent on access to sufficient capacity

in the public, or private infrastructure, to be able to deliver

quality service to their own customers.
Ways to manage capacity
1. Stretch and shrink:
o Offer inferior extra capacity at peaks. The same capacity is stretched to absorb extra demand.
o Ex: bus/train standees, public transportation
o Use facilities for longer/shorter periods
o Ex: stretched working hours in banks
o Average amount of time consumers spend in the process may be reduced (by minimizing slack
time).
o Ex: restaurants present menus fast, the bill can be presented promptly to the diners relaxing at
the table after the meal
2. Adjusting capacity to match demand

Schedule
Rent or share
downtime Ask
Use part-time extra facilities
during customers to
employees and
periods of share
equipment
low demand

Invite
Create
Cross-train customers to
flexible
employees perform self-
capacity
service
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.

o Sophisticated software can help to track customer consumption patterns
1 Do demand levels follow a predictable cycle?
If so, is the duration of the demand cycle:
• One day (varies by hour)
• One week (varies by day)
• One month (varies by day or by week)
• One year (varies by month or by season or reflects annual public holidays)
• Another period
2 What are the underlying causes of these cyclical variations?
• Employment schedules
• Billing and tax payment/refund cycles
• Wage and salary payment dates
• School hours and vacation
• Seasonal changes in climate
• Occurrence of public or religious holidays
• Natural cycles, such as coastal tides
3 Do demand levels seem to change randomly?
If so, could the underlying causes be:
• Day-to-day changes in the weather
• Health events whose occurrence cannot be pinpointed exactly
• Accidents, fires, and certain criminal activities
• Natural disasters (e.g., earthquakes, storms, mudslides, and volcanic eruptions)
4 Can demand for a particular service over time be disaggregated by market segment to reflect such components as follows?
• Use patterns by a particular type of customer or for a particular purpose
• Variations in the net profitability of each completed transaction
Managing Demand
Take no action and leave demand to find its own levels
• Let customers sort it out

Reduce demand during peak periods

• Higher prices
• Communication encouraging use of other time slots
Increase demand during low periods
• Lower prices
• Communication, including promotional incentives
• Vary product features to increase desirability
• More convenient delivery times and places
Inventory demand using a queuing system

Inventory demand using a reservations system

Using the marketing mix elements to
shape demand patterns
Use price and non-monetary costs to manage demand
◦ Lower prices may encourage some people to change timing of purchase.

Change product elements

◦ A new service product targeted at different segments is created to encourage demand.

Modify place and time of delivery

◦ Varying timings when service is available,
◦ offering service to customers at new locations.

Promotion and education

◦ If other variables of the marketing mix remain unchanged, communication efforts alone may
be able to help facilitate smooth demand
Inventory Demand Through
Waiting Lines And Queuing Systems

Demand can be inventoried in two ways:

By asking customers to By offering customers the
wait in line, usually on a opportunity of reserving
first-come first serve or booking a service
basis capacity in advance
Managing Waiting Lines
Managers may consider a variety of ways for managing waiting lines
• Rethinking design of queuing system
queue configuration and virtual waits.
• Tailoring queuing system to different market segments
 by urgency, price or importance of customer
• Managing customers’ behavior and their perceptions of wait
 use the psychology of waiting to make waits less unpleasant
• Installing a reservations system
 use reservations, booking, or appointments to distribute demand
• Redesigning processes to shorten the time taken in each transaction
 by installing self-service machines
Different Queue Configurations (1 of 3)
Single line sequential stages
◦ Bottlenecks may occur where process takes longer to execute

Parallel lines to multiple servers

◦ Offer more than 1 serving station, customers can choose
◦ However, not all lines move at equal speed
Different Queue Configurations (2 of 3)
Single line to multiple servers
◦ Commonly known as a “snake”, used at post offices and airport check-ins
Designated lines
◦ E.g. Express lines at supermarkets or different check-ins for first class, business class
etc
Taking a number
◦ Saves customers from standing in line
Wait lists
◦ Commonly used in restaurants
◦ E.g. Party-size seating, VIP seating, call-ahead seating or large party reservations
Different Queue Configurations (3 of 3)
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
Queuing Systems Tailored To Market
Segments
• Not all queuing systems are organized on “first come first serve” basis
• Queuing strategies can be designed on the basis of market segmentation

• Allocation to separate queuing areas may be based on any of the following:

• Urgency of the job
• Duration of service transaction
• Payment of a premium price
• Importance of the customer
Customer Perceptions Of Waiting Time (1
of 2)
Unoccupied time feels longer than occupied time
◦ Engage customer during longer waiting times
Solo waits feel longer than group waits
◦ Make group waits more enjoyable
Physically uncomfortable waits feel longer than comfortable waits
◦ Provide customers with comfortable waiting facilities
Pre- and post-process waits feel longer than in-process waits
◦ engaging customers during pre- and post-process waits
Customer Perceptions Of Waiting Time (2
of 2)
Unfair waits are longer than equitable
waits
◦ Do not honor people who jump lines
Unfamiliar waits seem longer than
familiar ones
◦ Create customer awareness about
usual waiting time
Uncertain waits are longer than known,
finite waits
◦ Be certain about wait times for
different situations
Unexplained waits are longer than
explained waits
◦ Apologize for unexplained waits
Anxiety makes waits seem longer
◦ Introduce special efforts to reduce
anxiety
The more valuable or important the
service, the longer people will wait
◦ Project the value of the service
Inventory Demand Through Reservations
Systems
Benefits of Reservations
• Avoid customer dissatisfaction due to excessive waits

• Controls and smooths demand

• Allows implementation of revenue management and preselling of service to

different customer segments

• Data captured helps organizations

o Prepare financial projections

o Plan operations and

staffing levels