BALANCING DEMAND AND PRODUCTIVE CAPACITYDIMPLE UDANI

Fluctuations in Demand Threaten Service Productivity

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

Service Decision Framework: Decisions on Matching Demand and CapacityWhat Business Are We In? What Service Processes Can Be Used in Our Operation? (PROCESS) Who Are Our Customers and How Should We R elate to Them?

What Should be the Core and Supplementary Elements of Our Service Product? (PRODUCT ELEMENTS) What Price Should We Charge? (PRICE AND OTHER USER OUTLAYS) Options for Delivery? (PLACE, CYBERSPACE & TIME, PHYSICAL EVIDENCE) How to Communicate? (PROMOTION & EDUCATION, PHYSICAL EVIDENCE) How Can We Balance PRODUCTIVITY AND QUALITY?

H OW SHOULD WE M ATCH DEMAND AND PRODUCTIVE CAPACITY? What Are Appropriate R oles for People and T echnology? (PEOPLE) How Can Our Firm Achieve Service Leadership?

How Should We Match Demand and Productive Capacity? How do we define our productive capacity? (e.g.,

buildings, physical space, machines, brawn, brains?) What are demand levels for our service and do they exceed capacity at any time? What explains variations in demand? What strategies can we employ to match demand and capacity? How should we design waiting lines and reservations systems?

From Excess Demand to Excess CapacityFour conditions potentially faced by fixed-capacity services: Excess demand Too much demand relative

to capacity at a given time

Demand exceeds optimum

capacity Maximum Capacity

Upper limit to a firms

ability to meet demand at a given time service quality declines as more customers are serviced

Optimum capacity Point beyond which

Excess capacity

Addressing the Problem of Fluctuating DemandTwo basic approaches: Adjust level of capacity to meet demand Need to understand productive capacity and how it varies on an incremental

Variations in Demand Relative to Capacity Use marketing strategies to

smooth out peaks, fill in VOLUME DEMANDED valleys Many firms use a mix ofCAPACITY UTILIZED

Demand exceeds capacity (business is lost) bothDemand exceeds optimum capacity (quality declines)

approaches

Maximum Available Capacity Optimum Capacity (Demand and Supply Well Balanced)

Low Utilization (May Send Bad Signals)

(wasted resources) TIME CYCLE 1

Excess capacity

TIME CYCLE 2

Many Service Organizations Are Capacity Constrained

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

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) room)

Vary seated space per customer (e.g., elbow room, leg Extend/cut hours of service

Chase demand (adjust capacity to match demand)

Flexible capacity (vary mix by segment)

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

Patterns and Determinants of Demand

Predictable Demand Patterns and Their Underlying CausesPredictable Cycles of Demand Levels day week

Underlying Causes of Cyclical Variations employment billing or tax

month year other

payments/refunds pay days 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?

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

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

Analyzing Demand by Market Segment Different customers have different demand

patterns by day or by season (e.g., business travelers vs. tourists) Some users have little choice in timing of demand, others are flexible (e.g. commuters vs. shoppers) Some demand is undesirable and should be discouraged (e.g., inappropriate calls to emergency services)

Identifying Variations in Demand by Time PeriodSeason of Year Off-peak Shoulder Time of Day Morning peak Midday Afternoon peak Evening/ night Peak

Day of Week Weekday Weekend

Demand Levels Can Be Managed

Alternative Demand-Management Strategies 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

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

Hotel Room Demand Curves by Segment and SeasonPrice per room night Bl Bh

ThTl

Bh = business travelers in high season Bl = business travelers in low season

Th = tourist in high seasonTl = 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

Inventory Demand through Waiting Lines and Reservations

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

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

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

Alternative Queue ConfigurationsSingle 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)28 29 25 26 27 32 23 21 20 24

Take a number (single or multiple servers)

30 31

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

Minimize Perceptions of Waiting Time

Ten Propositions on Psychology of Waiting Lines1.Unoccupied time feels longer than occupied time 2. Pre- and post-process waits feel longer than in-process waits 3. Anxiety makes waits seem longer 4. Uncertain waits are longer than known, finite waits 5. Unexplained waits are longer than explained waits

Ten Propositions on Psychology of Waiting Lines6. 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

Create an Effective Reservation System

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

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

Setting Hotel Room Sales Targets by Segment and Time PeriodCapacity (% rooms)100%

Week 7(Low Season) Out of commission for renovation Loyalty Program Members Transient guests

Week 36(High Season) Loyalty Program Members

50%

Weekend packageTransient guests

W/E package

Groups and conventions

Groups (no conventions)Airline contracts Airline contracts Th F S Su M Tu W Th F S Su

Time Nights: M

Tu

W

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

THANK YOUDIMPLE UDANI