Balancing Demand and Supply

Chapter 9
Balancing
Demand and
Productive
Capacity
Copyright 2008 Pearson Education Canada
Services Marketing, Canadian Edition
Chapter 9- 1
Learning Objectives - Chapter 9

Study service capacity
Consider how variations in demand can be predicted
Explore how capacity management techniques can be
employed to match variations in demand
Assess how marketing strategies can smooth out
fluctuations in demand
Reveal what can be done to reduce the waiting time
discomfort
Uncover what makes a reservation system effective
Chapter 9- 2
Fluctuations in Demand
Threaten Service
Productivity
Chapter 9- 3
Productive Capacity and Service Success
Services cannot be stockpiled

This is problematic for people or physical possession
services due to wide swings in demand
Goal is to utilize staff, equipment, and facilities as
productively as possible
Chapter 9- 4
From Excess Demand to

Excess Capacity
Four conditions potentially faced by fixed-capacity services:
Excess demand
Too much demand relative to capacity at a given time
Demand exceeds optimum capacity

Upper limit to a firms ability to meet demand at a given time
Optimum capacity
Point beyond which service quality declines as more customers are
serviced
Excess capacity
Too much capacity relative to demand at a given time
Chapter 9- 5
Addressing Problem of
Fluctuating Demand
Two basic approaches:
Adjust level of capacity to meet demand
Need to understand productive capacity and how it varies on an
incremental basis
Manage level of demand
Chapter 9- 6
Variations in Demand Relative to

Capacity (Fig 9.1)
Use marketing strategies to smooth out peaks, fill in valleys
VOLUME DEMANDED
Many firms use a mix of both approaches

Demand exceeds capacity
(business is lost)
CAPACITY UTILIZED
Maximum Available
Capacity
Optimum Capacity
(Demand and Supply
Well Balanced)
Low Utilization
(May Send Bad Signals)
Demand exceeds
optimum capacity
(quality declines)
Excess capacity
(wasted resources)
TIME CYCLE 1
TIME CYCLE 2
Chapter 9- 7
Many Service Organizations

Are Capacity Constrained
Chapter 9- 8
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
Labour used for physical or mental work
Public/private infrastructure
See Best Practice In Action 9.1: Improving
Logan Airport
Check-In Service at
Chapter 9- 9
Alternative Capacity Management

Strategies
Level capacity (fixed level at all times)
Stretch and shrink
Offer inferior extra capacity at peaks (e.g., bus/train standees)
Vary seated space per customer (e.g., elbow room, leg room)
Extend/cut hours of service
Chase demand (adjust capacity to match demand)

Flexible capacity (vary mix by segment)
Chapter 9- 10
Adjusting Capacity to Match Demand

Schedule downtime during periods of low demand
Use part-time employees
Rent or share extra facilities and equipment
Ask customers to share
Invite customers to perform self-service
Cross-train employees
Chapter 9- 11
Patterns and Determinants

of Demand
Chapter 9- 12
Predictable Demand Patterns and

Their Underlying Causes (Table 9.1)
Predictable Cycles
of Demand Levels
day
week
month
year
other
Underlying Causes of
Cyclical Variations
employment
billing or tax
payments/refunds
pay days
school hours/holidays
seasonal climate
changes
public/religious holidays
natural cycles
(e.g., coastal tides)
Chapter 9- 13
Causes of Seemingly
Random Changes in Demand Levels
Weather
Health problems
Accidents, Fires, Crime
Natural disasters
Question: Which of these events can be predicted?
Chapter 9- 14
Analyzing Drivers of Demand

Understand why customers from specific
market segments select this service
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
Chapter 9- 15
Overall Usage Levels Comprise

Demand from Different Segments
Not all demand is desirable
Keep peak demand levels within service capacity of
organization
Marketing cannot smooth out random fluctuations
in demand
Fluctuations caused by factors beyond organizations control
(for example: weather)
Detailed market analysis may reveal that one segments demand
cycle is concealed within a broader, random pattern
Chapter 9- 16
Demand Levels Can Be

Managed
Chapter 9- 17
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 queuing
Chapter 9- 18
Marketing Strategies Can

Reshape Some Demand Patterns
Use price and other costs to manage demand
Change product elements
Modify place and time of delivery
No change
Vary times when service is available
Offer service to customers at a new location
Promotion and education
Chapter 9- 19
Hotel Room Demand Curves by

Segment and Season (Fig 9.3)
Price per
room night
Bl
Bh
Bh = business travelers in high season
Th
Bl = business travelers in low season

Tl
Th = tourist in high season

Tl = tourist in low season
Bl
Bh
Th
Tl
Quantity of rooms demanded at each price

by travelers in each segment in each season
Note: hypothetical example
Chapter 9- 20
Inventory Demand through

Waiting Lines and
Reservations
Chapter 9- 21
Waiting Is a Universal Phenomenon!
An average person may spend up to 30 minutes/day waiting

in lineequivalent to over a week per year!
Almost nobody likes to wait
It's boring, time-wasting, and sometimes physically
uncomfortable
Chapter 9- 22
Why Do Waiting Lines Occur?
Because the 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
Not all queues take form of a physical waiting

line in a single location
Chapter 9- 23
Saving Customers from

Burdensome Waits
Add extra capacity so that demand can be met at most
times (problem: may increase costs too much)
Rethink design of queuing system to give priority to certain
customers or transactions
Redesign processes to shorten transaction time
Manage customer behaviour and perceptions of wait
Install a reservations system
Chapter 9- 24
Alternative Queue Configurations

(Fig 9.5)
Single line, single server, single stage
Single line, single servers, sequential stages
Parallel lines to multiple servers
Designated lines to designated servers
Single line to multiple servers (snake)
29
28
Take a number (single or multiple servers)
25
30
31
26
32
27
21
20
24
23
Chapter 9- 25
Criteria for Allocating Different Market

Segments to Designated Lines
Urgency of job
Emergencies versus non-emergencies
Duration of service transaction

Number of items to transact
Complexity of task
Payment of premium price

First class versus economy
Importance of customer
Frequent users/high volume purchasers
versus others
Chapter 9- 26
Minimize Perceptions of
Waiting Time
Chapter 9- 27
Ten Propositions on Psychology of

Waiting Lines (1) (Table 9.3)
Unoccupied time feels longer than occupied time
Pre- and post-process waits feel longer than in-process

waits
Anxiety makes waits seem longer
Uncertain waits are longer than known, finite waits
Unexplained waits are longer than explained waits

Sources: Maister; Davis & Heineke; Jones & Peppiatt; see your Services
Marketing text, page 275 for full source information.
Chapter 9- 28
Ten Propositions on Psychology of

Waiting Lines (2) (Table 9.3)
6. Unfair waits are longer than equitable waiting
7. People will wait longer for more valuable services
8. Waiting alone feels longer than waiting in groups
9. Physically uncomfortable waits feel longer
10. Waits seem longer to new or occasional users
Sources: Maister; Davis & Heineke; Jones & Peppiatt; see your Services
Marketing text, page 275 for full source information.
Chapter 9- 29
Create an Effective
Reservation System
Chapter 9- 30
Benefits of Reservations
Controls and smoothes demand
Pre-sells service
Informs and educates customers in advance of arrival
Saves customers from having to wait in line for service (if
reservation times are honored)
Data captured helps organizations
Prepare financial projections
Plan operations and staffing levels
Chapter 9- 31
Characteristics of Well-Designed
Reservations System
Fast and user-friendly for customers and staff
Answers customer questions
Offers options for self service (e.g., the 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
Chapter 9- 32
Setting Hotel Room Sales Targets by

Segment and Time Period (Fig.9.7)
Capacity
(% rooms)
Week 7
Week 36
(Low Season)
100%
Out of commission for renovation
(High Season)
Loyalty Program Members
Loyalty Program
Members
Transient guests
50%
Weekend
package
Transient guests
W/E
package
Groups and conventions

Groups (no conventions)
Airline contracts
Time Nights:
M
Tu
Th
Airline contracts
F
Su
Tu W
Th
Su
Chapter 9- 33
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
Segment-by-segment data
Fixed and variable cost data, profitability of incremental sales
Meaningful location-by-location demand variations
Customer attitudes toward queuing
Customer opinions of quality at different levels of capacity utilization
Chapter 9- 34
Summary Chapter 9
Service capacity may face four types of demand
Service capacity can be adjusted to match demand by using temporary
employees, cross-training employees etc
Variations in demand can be predicted through good record keeping
and analysis
Firms have many options on how they can match capacity to variations
in demand
Marketing strategies can smooth out fluctuations in demand by
deploying the four traditional Ps of the marketing mix
There are five different approaches to reducing waiting time
discomfort
Reservation systems are when they are customer focussed and provide
actionable information
Chapter 9- 35

Balancing Demand and Supply

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Chapter 9

Copyright 2008 Pearson Education Canada

Services Marketing, Canadian Edition

Learning Objectives - Chapter 9

Services Marketing, Canadian Edition

Copyright 2008 Pearson Education Canada

Services Marketing, Canadian Edition

Productive Capacity and Service Success

Services cannot be stockpiled

Copyright 2008 Pearson Education Canada

Services Marketing, Canadian Edition

From Excess Demand to

Demand exceeds optimum capacity

Services Marketing, Canadian Edition

Manage level of demand

Copyright 2008 Pearson Education Canada

Services Marketing, Canadian Edition

Variations in Demand Relative to

Many firms use a mix of both approaches

Copyright 2008 Pearson Education Canada

Services Marketing, Canadian Edition

Many Service Organizations

Copyright 2008 Pearson Education Canada

Services Marketing, Canadian Edition

Defining Productive Capacity in

Copyright 2008 Pearson Education Canada

Services Marketing, Canadian Edition

Alternative Capacity Management

Chase demand (adjust capacity to match demand)

Copyright 2008 Pearson Education Canada

Services Marketing, Canadian Edition

Adjusting Capacity to Match Demand

Copyright 2008 Pearson Education Canada

Services Marketing, Canadian Edition

Patterns and Determinants

Copyright 2008 Pearson Education Canada

Services Marketing, Canadian Edition

Predictable Demand Patterns and

Copyright 2008 Pearson Education Canada

Services Marketing, Canadian Edition

Question: Which of these events can be predicted?

Copyright 2008 Pearson Education Canada

Services Marketing, Canadian Edition

Analyzing Drivers of Demand

Record weather conditions and other

Copyright 2008 Pearson Education Canada

Services Marketing, Canadian Edition

Overall Usage Levels Comprise

Copyright 2008 Pearson Education Canada

Services Marketing, Canadian Edition

Demand Levels Can Be

Copyright 2008 Pearson Education Canada

Services Marketing, Canadian Edition

Inventory demand by reservation system

Services Marketing, Canadian Edition

Marketing Strategies Can

Promotion and education

Copyright 2008 Pearson Education Canada

Services Marketing, Canadian Edition

Hotel Room Demand Curves by

Bh = business travelers in high season

Bl = business travelers in low season

Th = tourist in high season