managing capacity & demand

8/3/2019 Managing capacity & demand

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Managing capacity and

demand

Week 10


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Managing Demand and Capacity

Perishability implications for demand and supply

Present the implications of time, labor, equipment,

and facilities constraints combined with variationsin demand patterns.

Strategies for matching supply and demand

through (a) shifting demand to match capacity or(b) adjusting capacity to meet demand.


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Overview

Demonstrate the benefits and risks of yieldmanagement strategies in forging a balanceamong capacity utilization, pricing, market

segmentation, and financial return.

Provide strategies for managing waitinglines for times when capacity and demand

cannot be aligned.


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Variations in Demand Relative to Capacity

Source: C. Lovelock, Getting the Most Out of Your Productive Capacity, in Product Plus(Boston: McGraw Hill, 1994), chap. 16, p. 241.


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Alternative supply and demand

outcomes


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Alternative supply and demand

outcomes (cont.)


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Demand versus Supply

Source: C. H. Lovelock, Classifying Services to Gain Strategic Marketing Insights, Journal of Marketing47, (Summer 1983): 17.


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Understanding Capacity Constraintsand Demand Patterns

Time, labor, equipment,

and facilitiesOptimal versus

maximum use ofcapacity

Charting demand

patternsPredictable cycles

Random demandfluctuations

Demand patterns bymarket segment

Capacity Constraints Demand Patterns


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Constraints on Capacity

Nature of the Constraint Type of Service

Time LegalConsultingAccountingMedical

Labor Law firm

Accounting firmConsulting firmHealth clinic

Equipment Delivery servicesTelecommunicationNetwork servicesUtilities

Health clubFacilities Hotels

RestaurantsHospitalsAirlinesSchoolsTheatersChurches


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Strategies for Shifting Demand to Match

Supply

Use signage tocommunicate busy daysand times.

Offer incentives tocustomers for usageduring nonpeak times.

Take care of loyal orregular customers first.

Advertise peak usagetimes and benefits ofnonpeak use.

Charge full price for theserviceno discounts.

Use sales and advertising toincrease business from currentmarket segments.

Modify the service offering toappeal to new marketsegments.

Offer discounts or pricereductions.

Modify hours of operation. Bring the service to the

customer.

Demand Too High Demand Too LowShift Demand


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Adjusting demand to meet supply


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Adjusting demand to meet supply

(cont.)


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Strategies for Adjusting Supply to Match

Demand

Stretch time, labor, facilitiesand 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


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Adjusting supply to meet demand


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Adjusting supply to meet demand

(cont.)


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Challenges and Risks in Using

Yield Management Loss of competitive focus

Customer alienation

Employee morale problems

Incompatible incentive and reward systems

Lack of employee training

Inappropriate organization of the yield management function


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Waiting Line Strategies

Employ operational logic modify operations

adjust queuing system

Establish a reservation process

Differentiate waiting customers importance of the customer

urgency of the job duration of the service transaction

payment of a premium price

Make waiting fun, or at least tolerable


18/30

Waiting Line Configurations

Source: J. A. Fitzsimmons and M. J. Fitzsimmons, Service Management, 4th ed. (New York: Irwin/McGraw-Hill, 2004), chap. 11, p. 296.


19/30

Issues to Consider in Making Waiting

More Tolerable (Maister, 1986)

unoccupied time feels longer than occupiedtime

preprocess waits feel longer than in-process

waitsanxiety makes waits seem longer

uncertain waits seem longer than known, finitewaits


20/30

Wait times (cont.)

unexplained waits seem longer thanexplained waits

unfair waits feel longer than equitable waits

the more valuable the service, the longer thecustomer will wait

solo waits feel longer than group waits


21/30

Pricing of Services

Discuss three major ways that service pricesare perceived differently from goods prices by

customers

Articulate the key ways that pricing of servicesdiffers from pricing of goods from a companys

perspective


22/30

Overview (cont.)

Demonstrate what value means to customersand the role that price plays in value

Describe strategies that companies use toprice services


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3 key differences Customer knowledge of service prices:

Service variability limits knowledge

Providers are unwilling to estimate prices

Individual customer needs vary

Collection of price information is overwhelming

Prices are not visible

Role of non-monetary costs:

Time costs

Search costs

Convenience costs

Psychological costs

Price as an indicator of service quality


24/30

Three Basic Marketing Price Structures and

Challenges Associated with Their Use for Services

P= DC+OC+Profit

Challenges:1. Costs difficult to trace.2. Labor is more difficult to

price than materials.3. Costs may not equal the

value that customersperceive the services are

worth.

Challenges:1. Small firms may charge too

little to be viable.2. Heterogeneity of services

limits comparability.

3. Prices may not reflectcustomer value.

Challenges:1. Monetary price must be adjusted to reflect

the value of non-monetary costs.2. Information on service costs is less available to

customers; hence, price may not be a central factor.


25/30

Value is low price.Value is everything

I want in a service.

Value is thequality I get for

the price I pay.

Value is all thatI get for all

that I give.

Four Customer Definitions of Value


26/30

Value is low price.

Discounting Odd pricing Synchro-pricing Penetration pricing

Pricing Strategies When the Customer Defines

Value as Low Price


27/30

Value is everything

I want in a service.

Prestige pricing Skimming pricing


Value as Everything Wanted in a Service


28/30

Value is the quality I

get for the price I pay.

Value pricing Market segmentation

pricing


Value as Quality for the Price Paid


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Value is all that I getfor all that I give.

Price framing

Price bundling Complementary pricing Results-based pricing


Value as All That Is Received for All That Is Given


30/30

Value is low price. Value is everythingI want in a service.

Value is the quality

I get for the price I pay.

Value is all that I get

for all that I give.

Discounting Odd pricing Synchro-pricing

Penetration pricing

Prestige pricing Skimming pricing

Value pricing Market segmentation

pricing

Price framing Price bundling Complementary pricing Results-based pricing

Summary of Service Pricing Strategies for

Four Customer Definitions of Value

managing capacity & demand

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