Balancing Demand and Capacity: Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E

Chapter 9
Balancing Demand
and Capacity
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 9- 1
Relating Demand to Capacity:
Four Key Concepts
 Excess demand: too much demand relative to capacity at a

given time
 Excess capacity: too much capacity relative to demand at a

given time
 Maximum capacity: upper limit to a firm’s ability to meet

demand at a given time
 Optimum capacity: point beyond which service quality

declines as more customers are serviced
Variations in Demand Relative to Capacity
(Fig. 9-1)
VOLUME DEMANDED
Demand exceeds capacity
(business is lost)
CAPACITY UTILIZED
Maximum Available Demand exceeds

Capacity optimum capacity
(quality declines)
Optimum Capacity
(Demand and Supply
Well Balanced
Excess capacity
Low Utilization (wasted resources)
(May Send Bad Signals)
TIME CYCLE 1 TIME CYCLE 2
Defining Productive Capacity
in Services
 Physical facilities to contain customers

 Physical facilities to store or process goods
 Physical equipment to process people, possessions, or
information
 Labor used for physical or mental work

 Public/private infrastructure—e.g., highways, airports,
electricity
Alternative Capacity Management Strategies
 Level capacity (fixed level at all times)

 Stretch and shrink
 offer inferior extra capacity at peaks (e.g. bus/metro standees)
 vary seated space per customer (e.g. elbow room, leg room)
 extend/cut hours of service
 Chase demand (adjust capacity to match demand)

 schedule downtime in low demand periods
 use part-time employees
 rent or share extra facilities and equipment
 cross-train employees
 Flexible Capacity (vary mix by segment)
Predictable Demand Patterns and
Their Underlying Causes (Table 9-1)
Predictable Cycles Underlying Causes of

of Demand Levels Cyclical Variations
 day  employment
 week  billing or tax
 month payments/refunds
 year  pay days
 other
 school hours/holidays
 seasonal climate changes
 public/religious holidays
 natural cycles
(e.g. coastal tides)
Causes of Seemingly Random Changes in
Demand Levels
 Weather
 Health problems
 Accidents, Fires, Crime
 Natural disasters
Question: which of these
events can be predicted?
Alternative Demand Management Strategies
(Table 9-2)
 Take no action
 let customers sort it out
 Reduce demand
 higher prices
 communication promoting alternative times
 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 queueing
Hotel Room Demand Curves by Segment
and by Season (Fig. 9-2)
Price per
Room Night
Bl Bh
Th Bh = business travelers in high season
Bl = business travelers in low season
Tl Th = tourist in high season
Tl = tourist in low season
Th
Bh
Bl Tl
Quantity of Rooms Demanded at Each Price
by Travelers in Each Segment in Each Season Note: hypothetical example
Avoiding Burdensome Waits for Customers
 Add extra capacity so that demand can be met at most

times (problem: may add too many costs)
 Rethink design of queuing system to give priority to certain

customers or transactions
 Redesign processes to shorten transaction time

 Manage customer behavior and perceptions of wait
 Install a reservations system
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 9 - 10
Alternative Queuing Configurations (Fig. 9-4)
Single line, single server, single stage
Single line, single servers at sequential stages
Parallel lines to multiple servers
Designated lines to designated servers
Single line to multiple servers (“snake”)
21
29
28
“Take a number” (single or multiple servers) 30 25
20
24
26
31 27
32 23
Tailoring Queuing Systems to Market Segments:
Criteria for Allocation to Designated Lines
 Urgency of job
 emergencies vs. non-emergencies
 Duration of service transaction

 number of items to transact
 complexity of task
 Payment of premium price

 First class vs. economy
 Importance of customer
 frequent users/loyal customers vs. others
Ten Propositions on the Psychology of Waiting
Lines (Table 9-3)
1. Unoccupied time feels longer

2. Preprocess/postprocess waiting feel longer than in-
process
3. Anxiety makes waiting seem longer
4. Uncertain waiting is longer than known, finite waiting
5. Unexplained waiting seems longer
6. Unfair waiting is longer than equitable waiting
7. People will wait longer for more valuable services
8. Waiting alone feels longer than in groups
9. Physically uncomfortable waiting feels longer
10. Waiting seems longer to new or occasional users
Sources: Maister; Davis & Heineke; Jones & Peppiatt
Benefits of Effective Reservations Systems
 Controls and smoothes demand

 Pre-sells service
 Informs and educates customers in advance of arrival
 Customers avoid waiting in line for service (if service times
are honored)
 Data capture helps organizations prepare financial

projections
Characteristics of Well-designed
Reservations Systems
 Fast and user friendly for customers and staff

 Can answer 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
 Includes strategies for no-shows and overbooking
 requiring deposits to discourage no-shows
 canceling unpaid bookings after designated time
 compensating victims of over-booking
Setting Capacity Allocation Sales Targets for a
Hotel by Segment and Time Period (Fig. 9-5)
Week 7 Week 36
Capacity (% rooms) (Low Season) (High Season)
100%
Out of commission for renovation Executive service guests
Executive service
guests
Transient guests
Weekend
package
50% W/E
package
Transient guests
Groups and conventions
Groups (no conventions)
Airline contracts Airline contracts
Nights: M Tu W Th F S Sn M Tu W Th F S Sn
Time
Information Needed for Demand and
Capacity Management Strategies
 Historical data on demand level and composition, noting

responses to marketing variables
 Demand forecasts by segment under specified conditions
 Fixed and variable cost data, profitability of incremental
sales
 Site-by-site demand variations
 Customer attitudes towards queuing
 Customer evaluations of quality at different levels of
capacity utilization

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Chapter 9

 Excess demand: too much demand relative to capacity at a

 Excess capacity: too much capacity relative to demand at a

 Maximum capacity: upper limit to a firm’s ability to meet

 Optimum capacity: point beyond which service quality

Maximum Available Demand exceeds

TIME CYCLE 1 TIME CYCLE 2

 Physical facilities to contain customers

 Labor used for physical or mental work

 Level capacity (fixed level at all times)

 Chase demand (adjust capacity to match demand)

 Flexible Capacity (vary mix by segment)

Predictable Cycles Underlying Causes of

 Inventory demand by reservation system

Tl = tourist in low season

 Add extra capacity so that demand can be met at most

 Rethink design of queuing system to give priority to certain

 Redesign processes to shorten transaction time

Single line, single server, single stage

Single line, single servers at sequential stages

Parallel lines to multiple servers

Designated lines to designated servers

Single line to multiple servers (“snake”)

 Duration of service transaction

 Payment of premium price

1. Unoccupied time feels longer

 Controls and smoothes demand

 Data capture helps organizations prepare financial

 Fast and user friendly for customers and staff

Groups (no conventions)

Airline contracts Airline contracts

 Historical data on demand level and composition, noting

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