Managing Capacity and Demand

• Airlines miss out on revenue if the seats are not filled.

• The railways lose money if trains have empty seats.

• Similarly, hotels can be at a rooms are unoccupied.

Underlying Issue

• Lack of inventory capability due to the perishability of services

Seasonal Factors Affecting the Restaurant Industryby Valencia Higuera, Demand Media

• Business in the restaurant industry can fluctuate. Customer numbers may increase or remain steady in a good economy and then decline in a troubled economy. What's more, seasonal changes can have an impact on business in the restaurant industry, which forces many restaurant owners to increase or boost their marketing campaigns.

Seasonal Factors Affecting the Restaurant Industryby Valencia Higuera, Demand Media

• Combating Seasonal Changes• Some restaurant owners anticipate a drop in sales during the

winter months and exhaust their marketing efforts during the busy season to compensate. However, owners can take steps to increase restaurant business and sales during the slow season. Marketing campaigns are an effective means of limiting seasonal declines. If a restaurant business tends to decline during the winter or on major holidays, restaurant owners can offer specials during these times, which are likely to draw customers. For example, restaurant owners can offer deals, such as two-for-one meals, 25 percent off the check, free appetizer or a free dessert. While the company might lose money by giving away free items, coupons lure business and ultimately help increase the bottom line.

Low-cost air fares: How ticket prices fall and riseBy Erica Gornall BBC

• "You can't have paid less than me, you booked a week later," said one Easyjet passenger to the friend seated next to her.

• As the pair waited at Venice's Marco Polo airport for their flight home, the woman who had paid more for her ticket became increasingly annoyed.

• Her friend must have got the figure wrong, she insisted. Like many of us, she had assumed that prices only go up as the date of departure nears.

• But BBC research suggests we may need to reassess some of the things we think we know about air fares.

• "We will know whether we are over or below [the target for passengers buying seats]," says Michael Cawley, Ryanair's deputy chief executive.

"And if we are above it, we can increase the fare, because we need to slow down the rate of booking, or if we are below it, we need to reduce the fares," he explains.

This is classic demand management, of course. But it makes particular sense for the low-cost airlines, because their business models depend as much on selling extras - hotels, refreshments and car hire - as they do on selling tickets.

What is the Nature of Demand Relative to Supply?

Extent of demand fluctuations over timeExtent to whichsupply isconstrained

Wide Narrow

Peak demand canusually be metwithout a majordelay

1ElectricityNatural gasTelephoneHospital maternity unitPolice and fireemergencies

2InsuranceLegal servicesBankingLaundry and dry cleaning

Peak demandregularly exceedscapacity

4Accounting and taxpreparationPassenger transportationHotels and motelsRestaurantsTheaters

3Services similar to those in2 but which haveinsufficient capacity fortheir base level of business

Source: Christopher H. Lovelock, “Classifying Services to Gain Strategic Marketing Insights,” Journal of Marketing, 47, 3 (Summer 1983): 17.

What is the Constraint on Capacity?

Nature of the constraint Type of serviceTime Legal

ConsultingAccountingMedical

Labor Law firmAccounting firmConsulting firmHealth clinic

Equipment Delivery servicesTelecommunicationUtilitiesHealth club

Facilities HotelsRestaurantsHospitalsAirlinesSchoolsTheatersChurches

Strategies for Shifting Demand to Match Capacity

• Use signage to communicate busy days and times.

• Offer incentives to customers for usage during nonpeak times.

• Take care of loyal or “regular” customers first.

• Advertise peak usage times and benefits of nonpeak use.

• Use sales and advertising to increase business from current market segments.

• Modify the service offering to appeal to new market segments.

• Offer discounts or price reductions.

• Modify hours of operation.

Demand Too High Demand Too LowShift Demand

Strategies for Adjusting Capacity to Match Demand

• Stretch time, labor, facilities and equipment.

• Cross-train employees.• Hire part-time employees.• Request overtime work from

employees.• Rent or share facilities.• Rent or share equipment.• Subcontract or outsource

activities.

• Perform maintenance, renovations.

• Schedule vacations.• Schedule employee

training.• Lay off employees.

Demand Too High Demand Too LowAdjust Capacity