mpel-05-balancing demand and productive capacity

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227

LO1 Understand what is meant by

“capacity” in a service context.

LO2 Know the d ifferent demand-

sup ply situations that fixed capac-ity firms may face.

LO3 Use capacity mana gement tech-

niques to ma tch variations indemand.

LO4 Recognize that deman d varies bysegment, and predict segment-

specific variations in deman d an d

their causes.LO5 Be familiar with the five basic

ways to manage demand.

LO6 Use marketing mix elements tosmooth out fluctuations in deman d.

LO7 Know how to inventory demandthrough w aiting lines and qu euing

systems.

LO8 Understand how customers per-

ceive waits and how to make wait-ing less burde nsome for them .

LO9 Know how to inventory demandthrough reservations systems.

LO10 Be familiar with the data require-

ments for d esigning effectivestrategies to manage demand and

capacity.

Balancing the supply and demand sides of a service industry

is not easy, and whether a manager does it well or not makes

all the difference.

EARL SASSER

They also serve who only stand and wait.

JOH N MILTON

LEARNING OBJECTIVES (LOs)

By the end of this chapter, the reader shou ld be ab le to:

Balancing Demandand Productive

Capacity

C H A P T E R 9


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228 Part III • Managing the Customer Interface

Summer on the Ski SlopesIt used to be that ski resorts shut down once the snow me lted and the slopes became u nskiable.The chairlifts stopped operating, the restaurants closed, and the lodges were locked and shut-

tered until winter approached and the snows fell again. In time, however, some ski operatorsrecognized that a mountain offers summer pleasures, too, and kept lodging and restaurants

open for hikers and picnickers. Some even built Alpine slides—curving tracks in whichwheeled toboggans could run from the summ it to the base—and thus created dem and for tick-

ets on the ski lifts. With the construction of condo minium s for sale, dema nd in creased for wa rmweather activities as the owners flocked to the mou ntains in sum mer an d early fall (Figure 9.1).The arrival of the m ountain biking craze created op portu nities for equipm ent rentals as

well as chairlift rides. Killington Resort in Vermont has long encouraged summ er visitors toride to the summ it, see the view, and eat at th e mounta intop restaurant. But now it also enjoys

a booking business in renting mountain bikes and related equipment (such as helmets).Beside the base lodge, wh ere in winter skiers w ould fin d rack after rack of skis for rent, the

sum mer visitor can now choose from rows o f moun tain bikes. Bikers transpo rt their vehiclesup to the summit on specially equipped chairlifts, and then ride them d own d esignated trails.

Serious hikers reverse the process, climbing to the summit via trails that seek to avoid de-scending bikes—getting refreshments at the restaurant, and then taking the chairlift back

dow n to t he base. Once in a w hile, a biker w ill actually choose to ride his or h er bike up t hemountain, but such gluttons for punish-

ment are few and far between.Most large ski resorts look for a va-

riety of additional ways to attra ct guests

to their hotels and rental homes duringthe summer. Mont Tremblant, Quebec,

for instance, is located beside an attrac-tive lake. In addition to swimming and

other wa ter sports on the lake, the resortoffers visitors such activities as a cham-

pionship golf course, tennis, roller-blading, and a children’s daycamp. And

hikers and mou ntain bikers come to ridethe lifts u p the moun tain. This is a won-

derful example of how service develop-ment and marketing generated deman d

for otherwise idle service capacity!

FLUCTUATIONS IN DEMAND THREATEN PROFITABILITY

Fluctuating demand is a major challenge for many types of capacity-constrained serv-

ice organizations, including airlines, restaurants, vacation resorts, courier services,consulting firms, theaters, and call centers. These demand fluctuations may range in

frequency from as long as a season of the year as d iscussed in the op ening v ignette toas short as an hour, and they play h avoc with efficient use of prod uctive assets, thu s

eroding profitability. By working collaboratively with managers in operations andhuman resources, service marketers may be able to develop strategies to bring de-

mand and capacity into balance in ways that create benefits for customers as w ell asimproving finan cial return s for the bu siness.

Defi ning Produ ctive Capacit y

What do w e mean by prod uctive capacity? The term refers to th e resources or assets thata firm can emp loy to create goods and services. In a service context, produ ctive capacity

can take several forms:

1. Physical facilities designed to contain customers and used for deliver ing people-processing services or mental stimulus processing services. Examples include

med ical clinics, hotels, passenger a ircrafts, and college classrooms. The p rimary ca-pacity constraint is likely to be defined in terms of such furn ishings as bed s, rooms,

FIGURE 9.1 Riding the Chairlift Up Mont Tremblantto Hike and Bike Rather Than Ski


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Chapter 9 • Balancing Demand a nd Produ ctive Capacity 229

or seats. In some cases, for health or safety reasons, local regulations may set anup per limit to the num ber of people allowed in for health or safety reasons.

2. Physical facilities designed for storing or processing goods that either belong to customersor are being offered to them for sale. Examples include pipelines, warehouses, park-

ing lots, and railroad freight wagons.3. Physical equipment used to process people, possessions, or information may embrace a

huge range of items and may be very situation specific—diagnostic equipment,

airpor t security d etectors, toll gates, bank ATMs, and “seats” in a call center areamong the many items whose absence in sufficient numbers for a given level of demand can bring service to a crawl (or even a complete stop).

4. Labor is a key element of p roductive capacity in all high-contact services and man ylow-contact ones. Staffing levels for r estaurant servers, and nurses and call centerstaff need to be sufficient to meet anticipated demand—otherwise customers are

kept waiting or service is rushed . Professional services are especially depend ent onhighly skilled staff to create high value-added, information-based output.

Abraham Lincoln captu red it well when he remarked th at “A lawyer’s time andexpertise are his stock in t rade.”

5. Infrastructure. Many organiza tions are depend ent on access to sufficient capacityin the public or private infrastructu re to be able to deliver quality service to their

own customers. Capacity problems of this nature may include congested airwaysthat lead to air traffic restrictions on flights, traffic jams on major highways, and

power failures (or “brown outs” caused by redu ced v oltage).

Financial success in capacity-constrained bu sinesses is, in large me asure, a func-tion of man agement’s ability to u se productive capacity—labor, equipment, and facili-

ties—as efficiently and as profitably as possible. In practice, however, it’s difficult toachieve this ideal all the time. Not only do deman d levels vary, often randomly, but the

time and effort required to process each person or thing may vary widely at any pointin th e process. In general, processing times for peop le are more var iable than for objects

or things, reflecting varying levels of preparedness (“I’ve lost my credit card”), argu-ment ative versus cooperative p ersonalities (“If you w on’t give m e a table with a view,

I’ll have to ask for your supervisor”), and so forth. Furthermore, service tasks are notnecessarily homogeneous. In both p rofessional services and repair jobs, diagnosis and

treatmen t times vary accord ing to the natu re of the custom ers’ problems.

Fro m Excess Deman d t o Excess Capacit y

Most services are perishable and normally cannot be stockpiled for sale at a later

d ate, posing a challenge for any capacity-constrained service that faces wide swingsin demand. The problem is most acute for organizations that engage in physical

processes such as people or possession processing, but it also affects labor-intensive,information-processing services that face cyclical shifts in demand. Accounting and

tax preparat ion are cases in point.For fixed capacity firms, the problem is a familiar one. “It’s either feast or famine

for us!” sighs the manager. “In peak periods, we’re disapp ointing prospective customersby turning them away. And in low periods, our facilities are idle, our employees are

stand ing around looking bored, and w e’re losing money.” In other w ords, demand and

sup ply are not in balance.Effective u se of prod uctive capacity is one of the secrets of success in su ch busi-nesses. The goal should not be t o utilize staff, labor, equip ment, and facilities as m uch

as p ossible, but rath er to use the m as productively as p ossible. At the sam e time, thesearch for prod uctivity m ust not be allowed to und ermine service quality and degrade

the custom er experience.At any given moment, a fixed-capacity service may face one of four conditions

(see Figure 9.2):

• Excess demand—The level of demand exceeds m axim um available capacity w iththe result that some custom ers are denied service and business is lost.


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FIGURE 9.2 Implications of

Var iat ions in Demand Relat iveto Capacity

VOLUME DEMANDED

Time Cycle 1 Time Cycle 2

Maximum AvailableCapacity

Optimum Capacity(well-balanced

demand and supply)

Low Util ization(may send bad signals)

Demand Exceeds Capacity(business is lost)

Demand ExceedsOptimum Capacity(quality declines)

Excess capacity(wasted r esources)

CAPACITY UTILIZED

• Demand exceeds optimum capacity—No one is tu rned away, but cond itions arecrowded and customers are likely to perceive a deterioration in service quality

and may feel dissatisfied.

• Demand and supply are well balanced at t he level of optim um capacity. Staff andfacilities are busy withou t being overworked and custom ers receive good servicewithout d elays.

• Excess capacity—Demand is below op timum capacity and produ ctive resourcesare und erutilized, resulting in low prod uctivity. Low u sage also poses a risk that

customers may find the experience disappointing or have d oubts about the via-bility of t he serv ice.

Sometimes optimum and maximum capacities are one and the same. At a live

theater or sp orts performance, a full house is grand, since it stimulates the players and cre-ates a sense of excitement and a ud ience par ticipation. The net result? A more satisfying ex-

perience for all. With most other services, however, you probably feel that you get betterservice if the facility is not operating at full capacity. The quality of restaurant service, for

instance, often deteriorates when every table is occupied, because the staff is rushed and

there is a greater likelihood of errors or delays. And if you are traveling alone in an a ircraftwith high-density seating, you tend to feel more comfortable if the seat next to you isempty. When repair and maintenance shops are fully scheduled , delays may resu lt if there

is no slack in the system to allow for unexpected p roblems in completing particular jobs.There are two basic approaches to the problem of fluctuating demand. One is to

adjust the level of capacity to meet variations in demand. This approach requires anunderstanding of what constitutes productive capacity and how it may be increased or

decreased on an incremental basis. The second app roach is to manage the level of demand ,using marketing strategies to smooth out the peaks and fill in the valleys so as to generate

a more consistent flow of requests for service. Many firm s use a mix of both approaches.1

Measures of capacity utilization include: the number of hours (or percentage of

total available time) that facilities, labor and equipment are productively employed inrevenue operation, and the units or percentage of available space (e.g., seats, cubic

freight capacity, telecommu nications bandw idth ) that is utilized in revenue operations.Human beings tend to be far more variable than equipment in their ability to sustain

consistent levels of output over time. One tired or poorly trained employee staffinga single station in an assembly-line service operation like a cafeteria restau rant or a

motor vehicle license bur eau can slow t he entire service to a crawl.Many services, such as health care or repair and maintenance, involve multiple

actions delivered sequ entially. What th is means is tha t a service organization’s capacity tosatisfy demand is constrained by one or more of its physical facilities, equ ipment, person-

nel, and the number and sequence of services provided. In a well-planned , well-managedservice operation, the capacity of the facility, supporting equipment and service personnel


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will be in balance. Similarly, sequential operations will be designed to m inimize the likeli-hood of bottlenecks at any point in the p rocess.

M ANAGING CAPACITY

Althou gh service firms may encounter capacity limitations because of varying d emand ,there are a n umber of w ays in which capacity can be ad justed to redu ce the p roblem.

Capacity can be stretched or shr unk, and the overall capacity can be ad justed to matchdemand.

Capacity Level s Can Somet im es Be Str etched o r Shr unk

Some capacity is elastic in its ability to absorb extra demand. Here, the actual level of capacity remains unchanged, and more people are being served with the same level of

capacity. For example, the normal capacity for a subway car m ay offer 40 seats and allowstanding room for another 60 passengers with adequate handrail and floor space for all.

Yet at rush hours perhaps u p to 200 stand ees can be accomm odated und er sardine-likeconditions. Similarly, the capacity of service personnel can be st retched and may be able to

work at h igh levels of efficiency for short p eriods of time. However, staff would qu icklytire and begin provid ing inferior service, if they had to work that fast all day long.

Another strategy for stretching capacity is to utilize the facilities for longer p eri-ods. For example, some banks extend their op ening h ours du ring weekdays and evenopen on weekends. Universities may offer evening classes, and weekend and su mmersemester programs.

Lastly, the average amount of time customers (or their possessions) spend in processmay be reduced. Sometimes, this is achieved by minimizing slack time. For example, arestaurant can buzz tables, seat arriving diners and present menus fast, and the bill can

be presented promptly to a group of diners relaxing at the table after a meal.2 In otherinstances, it may be achieved by cutting back the level of service—say, offering a simpler

menu at busy times of the day.

Adju st ing Capacit y t o M atch Demand

Unlike the previous option, this set of options involves tailoring the overall level

of capacity to match variations in d eman d—a strategy that is also known as chasingdemand. There are several actions th at manager s can take to adjust capacity as

needed.3 These actions start from th e easiest to imp lement, to the m ore difficult.

• Schedule downtime during periods of low demand. To ensu re th at 100 percen t of capacity is available during peak periods, maintenance, repair, and renovations

should be conducted when demand is expected to be low. Employee vacationsshould be taken du ring such periods.

• Cross-train employees. Even when the service delivery system ap pears to be operatingat full capacity, certain physical elements—and their attend ant employees—may be

underutilized. If employees can be cross-trained to perform a variety of tasks, theycan be shifted to bottleneck points as needed, thereby increasing total system

capacity. In supermarkets, for instance, the manager m ay call on stockers to operatecash registers when lines become too long. Likewise, during slow periods, the

cashiers may be asked to help stock shelves.• Use part-time employees. Many organizations hire extra workers during th eir busiest

periods. Examples include postal workers and retail store associates during theChristmas season, extra staff for tax preparation service firms in the spring, and

additional hotel employees during vacation periods and for major conventions.• Invite customers to perform self-service. If the nu mber of emp loyees is limited , capacity

can be increased by involving customers in co-produ ction of certain tasks. One wayto do this is by adding self-service technologies such as electronic kiosks at the

airport for airline ticketing and check-in (Figure 9.3) or automated check-outstations at supermarkets.

FIGURE 9.3 Air lines Boost Check-in Capacity by Installing Self-

Service Ticketing Machines atAirports


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• Ask customers to share. Capacity can be stretched by asking custom ers to share a unitof capacity normally d edicated to one ind ividual. For instance, at busy airports and

train stations, where the supply of taxis is sometimes insufficient to m eet deman d,travelers going in the same direction m ay be given the op tion of sharing a ride at a

reduced rate.• Create flexible capacity. Sometimes, the pr oblem lies not in the overall capacity bu t in

the m ix available to serve the needs of d ifferent market segments. One solution lies

in d esigning physical facilities to be flexible. For example, the tables in a restau rantcan be all two-seaters. When necessary, two tables can be combined to seat four, orthree tables combined to seat six. In the airline context, an airline may have too few

seats in econom y even though there are empty seats in the business class cabin on agiven flight. Boeing, facing stiff competition from Airbus, received what were de-scribed, tongue-in-cheek, as “outrageous demands” from prospective customers

wh en it was d esigning its 777 airliner. The airlines wan ted an a ircraft in which gal-leys and lavatories could be relocated, plumbing and all, almost anywhere in the

cabin within a matter of hours. Boeing gulped but solved this challenging p roblem.Airlines can rearrange the passenger cabin of the “Triple Seven” within hours, re-

configur ing it with varying num bers of seats allocated am ong d ifferent classes.• Rent or share extra facilities and equipment. To limit investmen t in fixed assets, a serv ice

business may be able to rent extra space or machines at peak times. Firms withcomplementary d emand patterns may enter into formal sharing agreements.

ANA LYZE PATTERNS OF DEMAND

N ow let’s look at the other side of the equation. In o rder to effectively manage demandfor a particular service, managers need to understand that demand often differs by

market segment.

Dem and Varies by M arket Segment

Random fluctuations usually are caused by factors beyond management’s control.However, analysis will sometimes reveal that a predictable demand cycle for one seg-

ment is concealed within a broader, seemingly rand om pattern. This fact illustrates theimportance of breaking down demand on a segment-by-segment basis. For instance, a

repair and maintenance shop that services industrial electrical equipment may already

know a certain proportion of its work consists of regularly scheduled contracts toperform preventive maintenance. The balance may come from “walk-in” business andemergency repairs. Although it might seem hard to predict or control the timing and

volume of such work, further analysis might show that walk-in business was moreprevalent on some days of the week than others and that emergency repairs were

frequently requested following dam age sustained d uring thun derstorms (which t endto be seasonal in nature and often forecast a day or two in advance). Understanding

demand patterns allows the firm to schedule less preventive maintenance work ondays with high anticipated d emand of typically more profitable emergency repairs.

No strategy for smoothing demand is likely to succeed unless it is based on anunderstanding of why customers from a specific market segment choose to use the service

whe n they do. It’s difficult for hotels to convince business travelers to remain on Saturd aynights since few executives do business over the weekend. Instead, hotel managers may

do better to promote weekend use of their facilities for conferences or pleasure travel.Attempts to get commu ters to shift their travel to off-peak periods will probably fail, since

such travel is determined by people’s employment hours. Instead, efforts should bedirected at employers to persuade them to adopt flextime or staggered working hours.

These firms recognize that no amount of price discounting is likely to develop businessout of season. How ever, summer resort areas like Cape Cod m ay have good opportu nities

to build business during the “shoulder seasons” of spring and fall (which some considerthe most attractive times to visit the Cape) by promoting different attractions—such as

hiking, birdwatching, visiting museums, and looking for bargains in antique stores—andaltering the mix and focus of services to target a d ifferent type of clientele.


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TABLE 9.2 Alt ernat ive Demand-Management Strategies for Dif ferent Capacit y Situat ions

Capacity Situation

Approaches toManage Demand

Insufficient Capacity(Excess Demand)

Excess Capacit y(Insuf ficient Demand)

Take no action • Unorganized queuing results (may irritate customers

and discourage future use)

• Capacity is wasted (customers may have a disap-

pointing experience for services such as theater)Reduce demand • Higher prices will increase profits

• Communication can encourage use in other timeslots (can this effort be focused on less profitableand less desirable segments?)

• Take no action (but see preceding)

Increase demand • Take no action unless opportunities exist to stimu-late (and give priority to) more profitable segments

• Lower prices selectively (try to avoidcannibalizing existing business; ensure that allrelevant costs are covered)

• Use communications and variation in productsand distribut ion (but recognize extra costs, ifany, and make sure that appropriate trade-offsare made between profitability and use levels)

Inventory demand

by formalizedwait and queuingsystem

• Match appropriate queue configuration to service process

• Consider priority system for most desirable segmentsand make other customer shift to off-peak period

• Consider separate queues based on urgency, dura-tion, and premium pricing of service

• Shorten customer’s perceptions of waiting time andmake their waits more comfortable

• Not applicable

Inventory demandby reservationsystem

• Focus on yield and reserve capacity for less pricesensitive customers

• Consider a priority system for important segments

• Make other customer shift to off -peak period

• Clarify that capacity is available and letcustomers make reservation at their preferredtime slot

M ANAGING DEM AND

Once we have und erstood the d emand p atterns of the different market segments, we canmanage demand. There are five basic app roaches to managing demand. The first, which

has the virtue of simplicity but little else, involves taking no action and leaving demand tofind its own levels. Eventually, customers learn from experience or word-of-m outh wh en

they can expect to stand in line to u se the service and w hen it will be available withoutdelay. The trouble is, they may also learn to find a more responsive competitor, and low

off-peak utilization cannot be improved unless action is taken. More interventionistapp roaches involve influencing the level of demand at any g iven time by taking active

steps to reduce demand in peak periods an d to increase demand when there is excess capacity.Two more approaches to managing demand involve inventorying demand until

capacity becomes available. A firm can accomp lish th is eith er by creating formalized waitand queuing systems, or by int rod ucing a bookin g or reservations system that prom ises

customers access to capacity at sp ecified times (or by a combination of the tw o).Table 9.2 links these five app roaches to the two prob lem situat ions of excess

demand and excess capacity. Many service businesses face both situations at differentpoints in the cycle of demand and should consider use of the interventionist strategiesdescribed. Next in this section w e will discus s how m arketing mix elements can help t o

shape demand levels, followed by two sections on how to inventory demand firstthrough waiting lines and queuing systems and then through reservation systems.

M arket in g Mi x Elem ent s Can Be Used t o Shape Demand Pat ter ns

Several marketing mix variables have roles to play in stimulating dem and du ring pe-riods of excess capacity and in decreasing or shifting deman d du ring periods of insuf-

ficient capacity. Price often is the first variable to be proposed for bringing demand


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and supp ly into balance, but changes in prod uct, distribution strategy, and comm uni-cation efforts can also play an important role. Although each element is discussed

separately, effective demand man agement efforts often requ ire changes in two or moreelements jointly.

USE PRICE AND NONM ONETARY COSTS TO M ANAGE DEMA ND. One of the most direct

ways to balance sup ply and demand is the use of pricing. Nonmo netary costs, too, m ay

have a sim ilar effect. For instance, if custom ers learn th ey are likely to face increased timeand effort costs du ring pea k periods, those w ho dislike spend ing time waiting in crow ded

and unpleasant conditions will try to come during less busy times. Similarly, the lure of

cheaper pr ices and an expectation of no wa iting may encoura ge at least som e people to

change the timing of their behavior, whether it is for shopping, travel, or sending in

equipmen t for repair.

For the monetary price of a service to be effective as a demand management tool,managers must have some sense of the shape and slope of a prod uct’s demand curve—

that is, how the quantity of service demanded responds to increases or decreases inthe price per unit at a particular p oint in time. It’s important to determine wheth er the

demand curve for a specific service varies sharply from one time period to another.For instance, will the same person be willing to p ay more for a weekend stay in a hotel on

Cape Cod in summer than in winter (when the weather can be freezing)? The answer isprobably “yes.” If so, significantly different pricing schemes may be needed to fill

capacity in each time period.Com plicating matters furth er, separate de mand curv es typically exist for d ifferent

segments w ith in each tim e p eriod (e.g., business travelers u sually are less p rice sensitive

than tourists). (Figure 9.4 show s a sample d emand cu rve for two segm ents in d ifferent

seasons.)

One of the mos t difficult task s facing service marketers is determin ing the n a-

tur e of all the different dem and curves. Historical data (often from revenu e manage-ment systems), research, trial and error, and analysis of parallel situations in other

locations or in comparable services, are all ways of obtaining an understanding of the situation. Man y service bus inesses exp licitly recognize the existence of different

demand curves by designing distinct products with physical and nonphysical de-sign elements (or rate fences) for their key segment s, each p riced at levels appr opri-

ate to the d emand curve of a particular segmen t. In essence, each segmen t receives a

variation of the basic product, with value added to the core service through supple-mentary services to appeal to higher paying segments. For instance, in computerand printing service firms, produ ct enhancement takes the form of faster turnaround

and more specialized services. In each case, the objective is to maximize the rev-enu es received from each segment .

When capa city is limited, however, the goal in a p rofit-seeking bu siness shouldbe to ensur e that as mu ch capacity as possible is utilized by the m ost profitable seg-

ments available at any given time. Airlines, for instance, hold a certain number of

FIGURE 9.4 Hotel DemandCurves by Segm ent and bySeason

Bh = Business Traveler in High Season

Key

Bl = Business Traveler in Low Season

Th = Tourist in High Season

Tl = Tourist in Low Season

Bh

Bh

Bl

Bl

Th

Th

Tl

Tl

P r i c e p e r R o o m - N i g h t

Quant ity of Rooms Demanded at Each Pr iceby Travelers in Each Segment in Each Season


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seats for business pas sengers payin g full fare and place restrictive cond itions on ex-cursion fares for tourists (using nonphysical rate fences such as requiring advance

purchase and a Saturday night stay) in order to prevent business travelers from tak-ing advantage of cheap fares designed to attract tourists who can help fill the

aircraft. Pricing st rategies of this nat ure are known as revenue management and arediscussed in Chapter 6.

CHANGE PRODUCT ELEMENTS. Sometimes, pricing alone will be ineffective in m anagingdemand. The opening v ignette is a good point in case—in th e absence of skiing opportu -

nities, no skiers would buy lift tickets for use on a midsummer day at any price. Similarthinking prevails at a variety of other seasonal businesses. Thus, educational institutions

offer weekend and summ er programs for adults and senior citizens, and small pleasureboats offer cruises in the summ er and a d ockside venue for p rivate functions in w inter

months. These firms recognize that no amount of price discounting is likely to developbusiness out of season, and a new service product targeted at different segments is

needed to encourage demand.During the course of a 24-hour period, there can be product variations. Some

restaurants provide a good example of this, marking the passage of the hours withchanging menus and levels of service, variations in lighting and decor, opening and

closing of the bar, and the p resence or absence of entertainmen t. The goal is to app eal to

different need s within the same group of cus tomers, to reach ou t to different customersegments, or to d o both, accord ing to the time of day.

M ODIFY PLACE AND TIM E OF DELIVERY. Rather than seeking to mod ify d emand for aservice that continues to be offered at the same time in the same place, firms can also

respond to market needs by modifying the time and place of delivery. The followingbasic options are available:

• No change. Regard less of the level of demand , the service continu es to be offered

in the sam e location at the same times.• Varying the times when the service is available. This strategy reflects chan ging cus -

tomer preference by day of week, by season, and so forth. Theaters and cinemacomplexes often offer matinees on weekends when peop le have more leisure time

throughout the d ay; during the summ er, cafes and restauran ts may stay open later

because of the general inclination of people to enjoy long, balmy evenings out -doors; and shops may extend their hours in the lead-up to Christmas or duringschool holiday p eriods.

• Offering the service to customers at a new location. One app roach is to operate m obileunits that take the service to customers, rather than requiring them to visit fixed-

site service locations. Traveling libraries, mobile car wash services, in-office tai-loring services, home-delivered meals and catering services, and vans equipped

with p rimary care medical facilities are examples of this. A cleaning and repairfirm that wishes to generate business during low demand periods might offer

free pickup and delivery of portable items that need servicing. Alternatively,service firms whose productive assets are mobile may choose to follow the

market when that, too, is mobile. For instan ce, som e car rental firms establishseasonal branch offices in resort commun ities. In the se new locations, they often

change the schedule of service hours (as well as certain product features) toconform to local needs and preferences.

PROMOTION AND EDUCATION. Even if the other variables of the marketing mix re-

main unchanged, communication efforts alone may be able to help smooth demand.Signage, advertising, pu blicity, and sales messages can be u sed to edu cate customers

about the timing of peak periods an d encoura ge them to avail themselves of the serv-ice at off-peak times wh en there w ill be fewer delays.5 Examples include U.S. Postal

Service requests to “Mail Early for Christmas,” public transport messages urgingnoncommuters—such as shoppers or tourists—to avoid the crush conditions of the


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commute hours, and communications from sales reps for industrial maintenancefirms ad vising customers of period s when p reventive maintenance wor k can be don e

qu ickly. In add ition, man agement can ask s ervice person nel (or int ermediaries suchas travel agents) to encourage customers with discretionary schedules to favor off-

peak p eriods.Changes in pricing, product characteristics, and distribution must be communi-

cated clearly. If a firm wants to obtain a specific response to variations in marketing mix

elements it must, of course, inform customers fully about their options. As discussed inChapter 7, short-term promotions, combining both pricing and communication elementsas well as other incentives, may provide customers with attractive incentives to shift the

timing of service usage.Not all demand is desirable. In fact, some requests for service are inappropriate

and make it difficult for the organization to respond to the legitimate needs of its target

customers. As discussed in Best Practice in Action 9.1, many calls to emergency nu mberssuch as 911 are not really problems that fire, police, or ambulance services should be

dispatched to solve. Discouraging undesirable demand such as this through marketingcampaigns or screening p rocedures will not, of course, eliminate random fluctuations in

the remaining demand. It may, however, help to keep peak demand levels within theservice capacity of the organization.

BEST PRACTICE IN ACTION 9.1

Discouraging Demand for Nonemergency Calls

Have you ever wondered what it’s like to be a dispatcher for an emergency telephone servicesuch as 911? People differ widely in what they consider an emergency.

Imagine yourself in the huge communications room at police headquarters in New York. Agray-haired sergeant is talking patiently to a woman on the phone who has dialed 911 because hercat has run up a tree and she’s afraid it’s stuck t here. “ Ma’am, have you ever seen a cat skeleton ina tree?” the sergeant asks her. “ All those cats get down somehow, don’t they?” After the womanhangs up, the sergeant turns to a visitor and shrugs. “ These kinds of calls keep pouring in,” hesays. “ What can you do?” The trouble is, when people call the emergency number with complaintsabout noisy parties next door, pleas to rescue cats, or requests to turn off leaking fire hydrants, theymay be slowing response times to fires, heart attacks, or violent crimes.

At one point, the situation in New York City got so bad that officials were forced to developa marketing campaign to discourage people from making inappropriate requests for emergency as-sistance through the 911 number. The problem was that, what might seem like an emergency tothe caller—a beloved cat stuck up a tree, a noisy party preventing a tired person from gettingneeded sleep—was not a life (or property) threatening situation of the type that the city’s emer-gency services were poised to resolve. So a communications campaign, using a variety of media,was developed to urge people not to call 911 unless they were reporting a dangerous emergency.For help in resolving other problems, they were asked to call their local police station or other cityagencies. The ad shown in Figure 9.5 appeared on New York buses and subways.

FIGURE 9.5 Ad Discouraging Nonemergency Calls to 911


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INVENTORY DEMAND THROUGH WAITING LINESAND QUEUING SYSTEMS

One of the challenges of services is that they cannot normally be stored for later use.

A hairstylist cannot prepackage a haircut for th e following d ay: it must be done in realtime. In an ideal world , nobody wou ld ever have to wait to cond uct a service transaction.

However, firms cannot a fford to p rovide extensive extra capacity that wou ld go unu ti-lized most of the time. As we have seen, there are a variety of procedures for bringing

demand and supply into balance. But what’s a manager to do when the possibilitiesfor shaping demand and adjusting capacity have been exhausted and yet supp ly and

demand are still out of balance? Not taking any action and leaving customers to sortthings ou t is no recipe for customer satisfaction. Rather than allowing matters to d egener-

ate into a random free-for-all, customer-oriented firms t ry to d evelop strategies for ensur-ing order, predictability, and fairness. In businesses in which demand regularly exceedssupply, managers often can take steps to inventory demand. This task can be achieved in

one of two ways: (1) by asking customers to wait in line—usually on a first-come, first-served basis—or by offering customers more ad vanced qu euing systems and (2) by offer-

ing customers the opportunity of reserving or booking space in advance. We will discussthe w ait line and queuing systems in this section and reservation systems in the next.

Wait in g Is a Uni ver sal Phenom enon

It’s estimated that Americans spend 37 billion hours a year (an average of almost 150hours each) waiting in lines, “during which time they fret, fidget, and scowl,” accord-

ing to The Washington Post.6 Similar (or worse) situations seem to prevail around theworld. Nobody likes to be kept waiting (Figure 9.6). It’s boring, time-wasting, and

sometimes physically uncomfortable, especially if there is nowhere to sit or you areoutdoors. And yet waiting for a service process is an almost universal phenomenon:

Almost every organization faces the problem of waiting lines somewhere in its opera-tion. People are kept waiting on the phone, listening to recorded messages like “your

call is important to us”; they line up w ith their sup ermarket carts to check ou t their gro-cery purchases; and they w ait for their b ills after a restaur ant meal. They sit in their cars

w aiting to enter dr ive-in car washes and to pay at toll booths.A national survey of 1,000 adults in the United States revealed that the w aiting lines

most dreaded by Americans are those in doctors’ offices (cited by 27 percent) and ingovernm ent dep artments that issue motor vehicle registrations a nd drivers’ licenses (26 p er-

cent), followed by g rocery stores (18 percent) and airpor ts (14 percent).7 Situations that make

it even worse at retail check-outs include slow or inefficient cashiers, someone changing

their mind abou t an item that has already b een rung up , and a person w ho leaves the line to

run back for an item. It doesn’t take long before people start to lose their cool: One third of

Americans say they get frustrated after waiting in line for 10 minutes or less, although

wom en report mo re patience than m en and are more likely to chat w ith o thers to pass the

time w hile waiting.

Physical and inanimate objects wait for p rocessing, too. Customers’ emails sit incustomer service staff’s inboxes, appliances wait to be repaired, an d checks wait to be

cleared a t a bank. In each instance, a customer m ay be waiting for the outcome of thatw ork—an answer to an email, an ap pliance that is working again, and a check credited

to a customer ’s balance.

Why Wait in g Lines Occur

Waiting lines—known to operations researchers (and the British) as “queues”—occur

whenever the number of arrivals at a facility exceeds the capacity of the system toprocess them. In a very real sense, queu es basically are a symp tom of un resolved capac-

ity management problems. Analysis and modeling of queues is a well-establishedbranch of operations man agement. Queuing theory has been traced back to 1917, when

a Danish telephone engineer was charged with determining how large the switchingun it in a telephone system had to be to keep the nu mber of busy signals within reason.8


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As the telephone example suggests, not all queues take the form of a physicalwaiting line in a single location. When customers deal with a service supplier at arm’s

length, as in information-processing services, they call from home, office, or college usingtelecommunication channels such as voice telephone or the Internet. Typically, calls are

answered in the order received, often requiring customers to wait their turn in a virtualline. Some physical queues are geographically dispersed. Travelers wait at many different

locations for the taxis they have ordered by p hone to arrive and p ick them u p.Many w ebsites now a llow p eople to do things for themselves, such as obtaining in-

format ion or making reservations tha t formerly required m aking telephone calls or visit-ing a service facility in p erson. Companies often promote th e time savings that can be

achieved. Although accessing the Web can be slow sometimes, at least the wait is con-du cted w hile the customer is comfortably seated and able to attend to other matters.

Managing Waiti ng Lines

The problem of reducing customer w aiting time often requ ires a mu ltipronged strategy,as evidenced by the approach taken by a Chicago bank (Best Practice in Action 9.2).

Increasing capacity simply by adding more space or more staff is not always the opti-mal solution in situations in which customer satisfaction must be balanced against

FIGURE 9.6 Hert z Helps Its

Customers to Avoid the Time andHassle of Wait ing i n Line

Source: © 2003 The Hert z Corp orat ion. All Right s Reserved.


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Cut t ing t he Wait for Retail Banking Customers

How should a big retail bank respond to increased competition from new financial serviceproviders? A large bank in Chicago decided that enhancing service to its customers would be animportant element in its strategy. One opportunity for improvement was to reduce the amountof time customers spent waiting in line for service in the bank’s retail branches—a frequent

source of complaints. Recognizing that no single action could resolve the problem satisfactorily,the bank adopted a three-pronged approach.

First, technological improvements were made to the service operation, starting with introduc-tion of an electronic queuing system that not only routed customers to the next available tellerstation but also provided supervisors with online information to help match staffing to customerdemand. Meantime, computer enhancements provided tellers with more information about theircustomers, enabling them to handle more requests without leaving their stations. And new cashmachines for tellers saved them from selecting bills and counting them twice (yielding a time savingsof 30 seconds for each cash withdrawal transaction).

Second, changes were made to human resource strategies. The bank adopted a new jobdescription for teller managers that made them responsible for customer queuing times and forexpediting transactions. It created an officer-of-the-day program, under which a designated officerwas equipped with a beeper and assigned to help staff with complicated transactions that mightotherwise slow them down. A new job category of peak-time teller was introduced, paying pre-

mium wages for 12–18 hours of work a week. Existing full-time tellers were given cash incentivesand recognition to reward improved productivity on predicted high-volume days. Lastly, manage-ment reorganized meal arrangements. On busy days, lunch breaks were reduced to half-hourperiods and staff received catered meals; in the meantime, the bank cafeteria was opened earlier toserve peak-time tellers.

A third set of changes centered on customer-oriented improvements to the delivery system.Quick-drop desks were established on busy days to handle deposits and simple requests, whilenewly created express teller stations were reserved for deposits and check cashing. Lobby hourswere expanded from 38 to 56 hours a week, including Sundays. A customer brochure, How toLose Wait, alerted customers to busy periods and suggested ways of avoiding delays.

Subsequently, internal measures and customer surveys showed that the improvements hadnot only reduced customer wait times but also increased customer perceptions that this bank was“ the best” bank in the region for minimal waits in teller lines. The bank also found that adoption ofextended hours had deflected some of the “ noon rush” to before-work and after-work periods.

Source: Leonard L. Berry and Linda R. Cooper, “ Compet ing wi th Time-Saving Service,” Business, .40,No. 2, 1990, 3–7.

cost considerations. Like th e bank, managers shou ld consider a variety of alternatives,

including:

1. Rethinking the d esign of the queuing system.2. Installing a reservations system.

3. Tailoring the queuing system to different market segm ents.4. Managing customers’ behavior and their perceptions of the w ait.

5. Redesigning processes to shorten the time of each tran saction.

Points 1 to 4 are discussed in subsequ ent sections of this chapter, and for point 5, refer

to Chapter 8 on customer service process redesign.

Different Queue Confi gurat ions

There are a variety of different types of queues and the challenge for managers is to se-lect the m ost app ropriate procedure. Figure 9.7 shows d iagrams of several types you

hav e probably experienced yourself.

• In single line, sequential stages, customers pr oceed through several serving op era-tions, as in a cafeteria. Bottlenecks may occur at any stage w here the process takes

longer to execute than at previous stages. Many cafeterias have lines at the cash


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register because the cashier takes longer to calculate how much you owe and to

make change than the servers take to slap food on your p late.• Parallel lines to multiple servers offer more than one serving station, allowing cus-

tomers to select one of several lines in which to wait. Banks and ticket windowsare common examples. Fast food restaurants u sually have several serving lines

in operation at bus y times of day, with each offering th e full menu. A parallelsystem can have either a single stage or multiple stages. The disadvantage of

this design is that lines may not move at equal speed. How many times have youchosen what looked like the sh ortest line only to watch in frustration as the lines

either side of you m oved at twice the speed of your s, because someone in yourline has a complicated transaction?

• A single line to multiple servers, commonly know n as a “Snake.” This type of waiting line solves the problem of the p arallel lines to multip le servers m oving

at d ifferent sp eeds. This ap proach is encoun tered frequently at p ost offices andairport check-ins.

• Designated lines involve assigning different lines to specific categories of custom er.Examples include express lines (for instance, 12 items or less) and regular lines at

supermarket check-outs, and different check-in stations for first class, businessclass, and economy class airline p assengers.

• Take a number saves customers the need to stand in a queue, because they knowthey will be called in sequence. This procedu re allow s them to sit dow n and relax


FIGURE 9.7 Alternative Queue

Confi gurations

Single Line/Single Server/Single Stage

Single Line/Single Servers at Sequent ial Stages

Parallel Lines to Multiple Servers

Designated Lines to Designated Servers

Single Line to Multiple Servers (“snake”)

“Take a Number” (single or multiple servers)

2829 21

20

24

23

30 25

3126

2732


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(if seating is available) or to guess how long the wait will be and do somethingelse in the meantime—but at t he risk of losing their place if earlier customers are

served faster than expected. Users of this approach include large travel agents,governm ent offices, ou tpatient clinics in hospitals, and sup ermarket depart ments

such as the deli or bakery.• Wait list. Restaurants often have wait lists where people put their names down

and wait until their name is announced. There are four common ways of wait

listing: (1) party size seating, where the number of people is matched to the sizeof the table; (2) VIP seating, which involves giving special rights to favoredcustomers; (3) call-ahead seating, which allows people to telephone before arrival

to hold a place on the wait list; and (4) large party reservations. If customers arefamiliar with wait listing techniques, they are likely to view them to be fair. If not,large party reservations are viewed a s slightly unfair, and VIP seating is viewed as

especially unfair by guests wh o d on’t enjoy the priority treatment.9

Hybrid approaches to queue configuration also exist. For instance, a cafeteria

with a single serving line might offer two cash register stations at the final stage.Sim ilarly, patients at a small med ical clinic might visit a s ingle reception ist for registra-

tion, proceed sequentially through multiple channels for testing, diagnosis, and treat-ment , and conclude by retu rnin g to a single line for p aymen t at the receptionist’s desk.

Research suggests that selecting the most appropriate type of queue is important

to customer satisfaction. Anat Rafaeli and h er colleagues foun d that the w ay a w aitingarea is structured can produce feelings of injustice and unfairness in customers.Customers who waited in parallel lines to multiple servers reported significantly

higher agitation and greater dissatisfaction with the fairness of the service deliveryprocess than cus tomers wh o waited in a single line (“snake”) to access multiple servers,

even thou gh both group s of customers waited an identical amount of time and wereinvolved in completely fair service processes.10 The issue of perceived fairness ar ises as

waiting customers often are very conscious of their own progress toward gettingserved. Perhaps you’ve watched resentfully as other diners who arrived at a busy

restaurant later than you were given priority and leapfrogged the line. It doesn’t seemfair—especially when you are hu ngry!

Virtual Waits

One of the problems associated with waiting in line is the waste of time this involvesfor customers. The “virtual-queue” strategy is an innovative way of taking the physicalwaiting out of the wait altogether. Instead, customers register their place in line on a

compu ter, w hich estimates the t ime at wh ich they w ill reach the front o f the virtual lineand s hould retu rn to claim their place.11 Best Practice in Action 9.3 describes the virtual

queuing systems u sed in two very d ifferent ind ustries: a theme park and a call center.The concept of virtual queues has many potential applications. Cruise ships, all-

inclusive resorts, and restaurants can all use this strategy if customers are willing toprovide their cell phone numbers or remain within buzzing range of a firm-operated

pager system.

Queuing Syst ems Can Be Tailo red to M arket Segm ents

Although the basic rule in most queuing systems is “first come, first served,” not allqueuing systems are organized on this basis. Market segmentation is sometimes usedto d esign queu ing strategies that set d ifferent p riorities for different typ es of customers.

Allocation to separate qu euing areas may be based on any of the following:

• Urgency of the job. At m any hospital emergency units, a triage nu rse is assignedto greet incoming patients and decide which ones require priority medical treat-

ment and which can safely be asked to register and th en sit down while they waittheir turn.

• Duration of service tra nsaction. Banks, supermarkets, and other retail servicesoften institute “express lanes” for shorter, less complicated tasks.


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Waiting in a Virtual Queue

Disney is well known for its efforts to give visitors to its theme parks information on how longthey may have to wait to ride a particular attraction and for entertaining guests while they arewaiting in line. However, the company found that the long waits at its most popular attractionsstill represented a major source of dissatisfaction and so created an innovative solution.

The virtual-queue concept was first tested at Disney World. At the most popular attractions,guests were able to register their place in line with a computer and were then free to use the waittime visiting other places in the park. Surveys showed that guests who used the new system spentmore money, saw more attractions, and had significantly higher satisfaction. After further refine-ment, the system—now named FASTPASS—was introduced at the five most popular attractions atDisney World and subsequently extended to all Disney parks worldwide. It is now used by morethan 50 million guests a year.

FASTPASS is easy to use. When guests approach a FASTPASS attraction, they are giventwo clear choices: Obtain a FASTPASS ticket there and return at a designated t ime, or wait ina standby line. Signs indicate how long the wait is in each instance. The wait time for eachline tends to be self-regulating, because a large difference between the two will lead to in-creasing numbers of people choosing the short er line. In practice, the virtual wait tends to beslightly longer than the physical one. To use the FASTPASS option, guests insert their park ad-mission t icket into a special turnstile and receive a FASTPASS ticket specifying a return t ime.

Guests have some f lexibility because the system allows them a 60-minute wind ow beyond theprinted return t ime.

Just like the FASTPASS system, call centers also use virtual queues. Many vendors selldifferent types of virtual queuing systems designed for call centers. The first-in, first-out queuingsystem is very common. When callers call in, they will hear a message that informs them of theestimated wait time for the call to be taken by an agent. The caller can (1) wait in the queue andget connected to an agent when his turn arrives, or (2) choose to receive a call back. When thecaller chooses this option, he has to enter his telephone number and tell his name. He thenhangs up the phone. However, his virtual place in the queue is maintained. When he is nearly atthe head of the queue, the system calls the customer back and puts him at the head of thequeue where an agent will attend to him next. In both situations, the customer is unlikely tocomplain. In the first situation, it is their choice to wait in the queue, and the person can still dosomething else as he already knows the estimated wait time. In the second situation, the persondoes not have to wait for very long before reaching an agent. The call center also benefitsbecause there are fewer frustrated customers that may take up the valuable time of the agentsby complaining about how long they have to wait. In addition, firms also reduce aborted ormissed calls from customers.

Source: Duncan Dickson, Robert C. Ford, and Bruce Laval, “ Managing Real and Virt ual Wait s inHospit alit y and Service Organizations,” Cornell Hotel and Restaurant Administrati on Quart erly 46,February 2005, 52–68; “ Virtual Queue,” Wiki pedia, ww w.en.wikipeidao.org/w iki/vir tual_queuing,accessed June 2, 2009.

• Pa yment of a premium price. Airlines usu ally offer separate check-in lines for

first-class and economy-class passengers, with a higher r atio of personnel to pas-sengers in the first-class line, resulting in red uced wa its for those w ho have p aid

more for their tickets. At some airports, premium passengers may also enjoyfaster lanes for the secur ity check.

• Importance of the customer. A special area may be reserved for members of fre-quent user clubs. Airlines often provide lounges, offering newspapers and free

refreshments, where frequent flyers can w ait for their flights in greater comfort.

CUSTOMER PERCEPTIONS OF WAITING TIM E

Research shows th at people often think they have waited longer for a service than t heyactually did . Stud ies of public transport ation use, for instance, have shown that travel-

ers perceive time spent waiting for a bus or train as passing one and a half to seventimes more slowly than the time actually spent traveling in the vehicle.12 People don’t


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like wasting their time on unproductive activities any more than they like wastingmoney. Customer dissatisfaction with delays in receiving service often can stimulate

strong emotions, even anger.13

The Psycholo g y of Wait in g Tim e

The noted ph ilosopher William James observed , “Boredom results from being atten tive

to the passage of time itself.” When increasing capacity or shifting demand is simplynot possible or sufficient, service firms should try to be creative and look for ways tomake waiting more palatable for customers. Doctors and dentists stock their waiting

rooms with piles of magazines for people to read while waiting. Car repair facilitiesmay have a television for custom ers to watch. One tire dealer goes even furthe r, provid -ing custom ers with free pop corn, soft dr inks, coffee, and ice cream wh ile they wait for

their cars to be s erviced.An experiment at a large bank in Boston found that installing an electronic news

display in the lobby led to greater customer satisfaction, but it didn’t reduce the per-ceived time spen t waiting for teller service.14 In some locations, transit ope rators erect

heated sh elters equipped w ith seats to make it less unpleasant for travelers to wait for abus or train in cold weather. Restaurants solve the waiting problem by inviting dinner

guests to have a drink in th e bar u ntil their table is ready (that ap proach makes moneyfor the house as well as keeping the customer occupied). In similar fashion, guests

waiting in line for a show at a casino may find themselves queuing in a corridor linedw ith slot-machines.

The doorm an at on e Marriott Hotel has taken it upon himself to bring a combi-nation barometer/ thermomet er to wor k each day, hang ing it on a pillar at the hotel

entrance where guests waiting can spend a moment or two examining it while theywait for a taxi or for their car to be delivered from the valet parking.15 Theme park

opera tors cleverly design their w aiting areas to make the w ait look shorter than it re-ally is, finding ways to give customers in line the impression of constant progress,

and m ake time seem to pass more quickly by keeping customers amus ed or d ivertedwhile they wait.

Does it help to tell people how long they are likely to have to wait for service?Common sense would suggest that this is useful information for customers, because it

allows them to make decisions as to whether they can afford to take the time to wait

now or come back later. It also enables them to p lan the use of their time wh ile waiting.An experimental study in Canada looked at how students responded to waits whileconducting transactions by computer—a situation similar to waiting on hold on the

telephone, in that there are no visual clues as to the probable wait time.16 The studyexamined dissatisfaction with waits of 5, 10, or 15 minutes under three conditions:

(1) the stud ent subjects were told noth ing, (2) they were told how long th e wait waslikely to be, or (3) they w ere told wha t their p lace in line was. The results suggested that

for 5-m inute wa its, it was not necessary to provid e information to improve satisfaction.For waits of 10 or 15 minutes, offering information appeared to improve customers’

evaluations o f service. How ever, for longer waits, the researchers suggest that it m ay bem ore positive to let peop le know how their place in line is changing rathe r than letting

them know how much time remains before they will be served. One conclusion wem ight draw is that w hen the wait is longer, peop le prefer to see (or sense) that the line

is moving, rather than to wa tch the clock.Savvy service m arketers recognize that customers experience waiting time in d if-

ferent ways, depending on the circumstances. David Maister and other researchershav e the following suggestions on how to use the psychology of w aiting to make waits

less stressful and unpleasant:17

• Unoccupied time feels longer than occupied time. When you are sitting aroundwith nothing to do, time seems to crawl. The challenge for service organizations is

to give customers something to do or to distract them while waiting. For example,BMW car owners can wait in comfort in BMW service centers where waiting areas


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are furnished with d esigner furnitu re, plasma TVs, Wi-Fi hotspots, magazines, andfreshly brewed cappuccino. Many customers even bring their own entertainment

in the form of a cell phone w ith messaging and games, an MP3 player, or a personalplay station.

• Solo wai ts feel longer tha n group waits . Waiting with one or more people youknow is reassuring. Conversation with friends can help to pass the time, but not

everyone is comfortable talking to a stranger.

• Physically uncomforta ble wa it s feel longer than comforta ble wait s. “My feet arekilling me!” is one of the most frequently heard comments when people areforced to stand in line for a long time. And whether they are seated or stand ing,

waiting seems more burdensome if the temperature is too hot or too cold, if it’sdrafty or wind y, or if there’s no protection from rain or snow.

• Pre- and post-process wait s feel longer than in-process wait s. Waiting to buy a

ticket to enter a theme park is different from waiting to ride on a roller coasteronce you’re in th e park.

• Unfair wa its are longer tha n equitable waits. Perceptions about w hat is fair orunfair sometimes vary from one culture or country to another. In the United

States, Canada, or Britain, for example, people expect everybody to wait theirturn in line and are likely to get irritated if they see others jumping ahead or

given priority for apparently no good reason.• Unfamiliar wa its seem longer tha n familiar ones. Frequent users of a service

know what to expect and are less likely to worry while waiting. New or occasionalusers, by contrast, often are nervous, wondering not only about the probable

length of the wait but also about what hap pens next.• Uncertain w aits a re longer than known, finite wa its. Although any wait may be

frustrating, we usua lly can ad just m entally to a wait of a known length . It’s the u n-known that keeps us on edge. Imagine waiting for a delayed flight and not being

told how long the delay is going to be. You don’t know wh ether you have the timeto get up and walk about in the termina l or whether to stay at the gate in case the

flight is called any m inute.• Unexplained waits a re longer tha n explained waits. Have you ever been in a

subway or an elevator that has stopped for no apparent reason, without anyonetelling you why? In ad dition to u ncertainty a bout the length of the w ait, there’s

add ed worry abou t what is going to hap pen. Has there been an accident on the

line? Will you be stuck for h ours in close p roximity with strangers?• Anxiet y makes wa its seem longer. Can you remember waiting for someone to

show at a rendezvous, and worr ying about w hether you had gotten the time or

location correct? While w aiting in u nfamiliar locations, especially outd oors andat night, people often worry about their personal safety.

• The more valua ble or importa nt th e service, the longer people will w ait . Peoplewill queue up overnight und er un comfortable cond itions to get good seats to a

major concert or sports even t expected to sell out fast.

INVENTORY DEM AND THROUGH RESERVATIONS SYSTEM S

As an alternative, or in addition to, waiting lines, reservations systems can be used to

inventory demand. Ask someone what services come to mind when you talk aboutreservations and most likely they w ill cite airlines, hotels, restaurants, car rentals, andtheater seats. Use synonyms like “bookings” or “appointments” and they may add

haircuts, visits to professionals such as doctors and consultants, vacation rentals, andservice calls to fix anything from a broken refrigerator to a neurotic laptop. There are

man y benefits in having a reservations system:

• Customer dissatisfaction du e to excessive waits can be a voided. On e aim of reser-vations is to guarantee that service will be available when customers want it.

Customers who hold reservations should be able to count on avoiding a qu eue,because they have been guaranteed service at a specific time.


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SERVICE PERSPECTIVE 9.1

PAY TO GET THAT HARD-TO-GET TABLE RESERVATION!

PrimeTimeTables is an exclusive online company that helps customers to get table reservations.What is so special about that? Well, PrimeTimeTables is able to get reservations at the most pop-ular dining spots, where only people who are somebody, or have the right connections can securea table. Many of those reservations are not open to the ordinary diner. The company is able to geta table on a specific day—and on short notice. Currently, the company focuses on areas where itis difficult to get reservations, namely New York City, Philadelphia, and the Hamptons. Individualspay a membership fee of $500 to jo in and $45 for each reservation made.

Pascal Riffaud, the entrepreneur behind this idea, is the president of Personal ConciergeInternational, a leading company providing exclusive concierge service in the United States.During his work experience as president of Personal Concierge, Riffaud built a large network ofcontacts with exclusive restaurants, enabling him to obtain those hard-to-get reservations.

His clients were delighted with his service and kept flooding him with requests for reserva-

tions. However, there have been protests from restaurant owners who feel he is upsetting theirreservations management systems and selling their tables. Even though Riffaud does cancel unsoldreservations, restaurant owners feel these could have been sold to other customers who reallywanted a table. Restaurants may have to rethink the way they handle reservations!

Source: K. Severson, “ Now, f or $45, An Insider ’s Access to Hot Tables,” The New York Times, 31,January 2007, available: ht tp://ww w.pr imet imet ables.com, accessed September 9, 2009.

• Reservations allow d emand to be controlled and smoothed out in a more manage-able way. A w ell-organized reservations system allows the organization to deflect

demand for service from a first-choice time to earlier or later times, from one classof service to another (“upgrad es” and “dow ngrades”), and even from first-choice

locations to alternative ones, and thereby overall contributing to h igher capacityutilization.

• Reservations systems enable revenue management and serve to presell a serv-

ice to different customer segments (see Chapter 6 on revenue man agement).For example, requiring reservations for normal repair and ma intenance allowsmanagement to make sure that some time will be kept free for handling emer-

gency jobs. Since these are unpredictable, higher prices can be charged andthese bring with them higher margins.

• Data from reservation systems also help organizations to prepare operational and

financial projections for future periods . Systems vary from a simple appointmentsbook for a doctor’s office, using handwritten entries, to a central, computerized

da ta bank for an airline’s global operations.

The challenge in designing reservation systems is to make them fast and user-friendly

for both staff and customers. Many firms now allow customers to make their own reserva-tions on a self-service basis via their websites. Whether talking with a reservations agent or

making their own bookings, customers want quick answers about whether a service is

available at a preferred time and at wha t pr ice. They a lso appreciate it if the system can pro-vide further information about the typ e of service they are reserving. For instance, can a ho-tel assign a specific room on request? Or at least, can it assign a room with a view of the lake

rather than one with a view of the parking lot and the nearby power station? Some busi-nesses now in fact charge a fee for making a reservation (see Service Perspective 9.1).

Northwest Airlines charges $15 to reserve some of the most desirable economy class seats,and Air Canada charges $12 for advanced seat reservations on certain flights.18


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Of course, problems arise when customers fail to show or when service firms over-

book. Marketing s trategies for d ealing w ith these operational problems include requiringa deposit, canceling nonp aid reservations after a certain time, and providing compensa-

tion to victims of over-booking were discussed in Chap ter 6 on revenue m anagement.

Reservat io ns St rat egies Shou ld Focus on Yield

Service organizations often use percentage of capacity sold as a measure of operational

efficiency. Transport services talk of the “load factor” achieved, hotels of their “occu-pancy rate,” and hospitals of the ir “censu s.” Similarly, professiona l firms can calculate

w hat p roportion of a p artner ’s or an em ployee’s time is classified as billable hours , andrepair shops can look at utilization of both equipment and labor. By themselves,

however, these percentage figures tell us little of the relative profitability of thebusiness attra cted, since high u tilization rates may be obtained at the expen se of heavydiscounting—or even outright giveaways.

More and more, service firms are looking at their “yield”—that is, the averagerevenu e received p er unit of capacity. The aim is to maximize this yield in ord er to im-

prove profitability. As noted in Chapter 6, revenue management strategies designed toachieve this goal are widely used in such capacity-constrained industries as passenger

airlines, hotels, and car rentals. Revenue management systems based on mathematicalmodeling are of greatest value for service firms that find it expensive to modify their

capacity but incur relatively low costs when they sell another unit of available capac-ity.19 Other characteristics encouraging use of such programs include fluctuating

demand levels, ability to segment markets by extent of price sensitivity, and sale of services well in advance of usage.

Yield analysis forces managers to recognize the opportunity cost of selling ca-pacity for a given date to a customer from one ma rket segment when a nother might

subsequently yield a higher rate. Consider the following problems facing sales man-agers for d ifferent types of capacity-constrained service organ izations:

• Should a hotel accept an advan ce booking from a tour group of 200 room nightsat $140 each when som e of these same room nights m ight possibly be sold later at

short notice to business travelers at the full posted rate of $300?• Should a railroad with 30 empty freight cars at its disposal accept an immediate

request for a shipment worth $1,400 per car or hold the cars idle for a few moredays in the hop e of getting a priority shipmen t that wou ld be twice as valuable?• Should a p rint shop p rocess all jobs on a first-come, first-served basis, with a

guaranteed delivery time for each job, or should it charge a premium rate for“rush” work, and tell customers with “standard” jobs to expect some variability

in completion dates?

Decisions on problems deserve to be handled with a little more sophistication

than just resorting to the “bird in the hand is worth two in the bush” formula. Good in-formation, based on detailed recordkeeping of past usage and supported by current

market intelligence, is the key to allocating the inventory of capacity among differentsegments. The decision to accept or reject business should be based on realistic esti-

mates of the p robabilities of obtaining highe r rated bu siness and aw areness of the needto maintain established (and desirable) customer relationships. Managers who decide

on the basis of guesswork an d “gu t feel” are little better than gamblers who bet on rollsof the d ice.

Figure 9.8 illustrates capacity allocation in a hotel setting, where demand from dif-ferent types of custom ers varies not only by day of the week bu t also by season. These

allocation decisions by segment, captured in reservation databases that are accessibleworldwide, tell reservations personnel when to stop accepting reservations at certain

prices, even though many rooms may still remain unbooked. Loyalty program mem-bers, primarily business travelers, are obviously a pa rticularly desirable segment.


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Similar charts can be constructed for most capacity-constrained businesses. In

some instances, capacity is measured in terms of seats for a given performance, seat-miles, or room nights; in others, it may be in terms of machine time, labor time, bill-

able professional hours, vehicle miles, or storage volume—whichever is the scarce re-source. Unless it’s easy to divert business from one facility to a similar alternative,

allocation plann ing d ecisions w ill have to be mad e at the level of geographic operatingunits. So each hotel, repair and maintenance center, or computer service bureau may

need its own p lan. On th e other han d, transp ort vehicles represent a mobile capacitythat can be allocated across any geograp hic area the vehicles are able to serve.

Create Al t ernat iv e Use fo r Ot herw ise Wast ed Capacity

Even after professional management of capacity and demand, most service firms will

still experience periods of excess capacity. However, not all unsold prod uctive capacityhas to be wasted as alternative “demand” can be created by innovative firms. Many

firms ta ke a strategic approach to d isposition of anticipated su rp lus capacity, allocatingit in advance to build relationships with customers, suppliers, emp loyees, and interme-

diaries.20 Possible uses for free capacity includ e:

• Use capacity for service differentiation. When cap acity u tilization is low, serv iceemployees can go all the way to truly “wow ” their customers. A firm that w ants

to build customer loyalty and marke t share should u se spare time in operationsto focus on ou tstanding customer service. This can include extra attention paid

to the customer, allocation of preferred seating, and the like.• Reward your best customers and build loyalty. This can be d one th rough special

promot ions as pa rt of a loyalty p rogram, wh ile ensurin g that existing revenues

are not cann ibalized.• Customer and channel development. Provide free or heavily d iscoun ted t rials forprospective customers and for intermediaries who sell to end cu stomers.

• Reward employees. In certain industr ies such as restaurants, beach resorts, orcruise lines, capacity can be used to reward employees and their families to

build loyalty. This can impr ove emp loyee satisfaction and provid e employees anunderstanding of the service as experienced from the customer’s perspective,

thereby raising performance.• Barter free capacity. Service firms often can save costs and increase capacity utilization

by bartering capacity with their own suppliers. Among the most widely barteredservices are advertising space or airtime, airline seats, and hotel rooms.

Out of Commission for Renovation

Loyalty ProgramMembers

Transient Guests

WeekendPackage

Groups and Conventions

Airline Contracts

100%

50%

Week 7(low season)

MNights: Tu

Time

W Th F Sa Su M Tu W Th F Sa Su

Loyalty Program Members

Transient Guests

W/EPackage

Groups (no conventions)

Airline Contracts

Week 36(high season)Capacity (% rooms)

FIGURE 9.8 Sett ing CapacityAllocation Targets by Segment

for a Hotel


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Ef fective Demand and Capacit y M anagement Requires Inf orm atio n

Managers require substantial information to help them develop effective strategies to

manage demand and capacity and then monitor subsequent performance in the mar-ketp lace. The following are some imp ortant categories of information for this purp ose.

• Historical data on the level and comp osition of demand over time, including re-

sponses to changes in price or other marketing var iables.

• Forecasts of the level of demand for each m ajor segment un der specified cond itions.• Segment-by-segment data to help management evaluate the impact of periodic

cycles and random demand fluctuations.

• Cost data to enable the organization to d istinguish between fixed and var iablecosts and to d etermine the relative profitability of incremental un it sales to differ-

ent segments and at different p rices.• Meaningful variations in demand levels and composition on a location-by-location basis

(in multisite organ izations).• Customer attitudes toward queuing u nder varying conditions.

• Customer opinions on whether the qu ality of service delivered var ies with differentlevels of capacity utilization.

Where might all this information come from? Many large organizations with ex-

pensive fixed capacity have implemented revenue management systems (discussed in

Chapter 6). For organizations w ithout such systems, much of the n eeded data p robablyare already being collected within the organization—not necessarily by marketers—and new stud ies can be condu cted to obtain add itional data. A stream of information

comes into most service businesses, notably concerning individual customer transac-tions. Sales receipts alone o ften contain vast d etail. Service businesses need t o collect

detailed information for operational and accounting purposes and can frequently asso-ciate specific custom ers with specific transactions.

Unfortunately, the marketing va lue of such d ata often is overlooked , and they arenot always stored in ways that permit easy retrieval and analysis by marketers.

N evertheless, collection and storage of customer transaction data can be reformatted t oprovid e at least some of the desired information, includ ing how existing segments have

responded to p ast changes in marketing mix variables.Other information may have to be collected through special studies, such as cus-

tomer surveys or reviews of analogous situations. It may also be necessary to collectinformation on comp etitive performance, because changes in the capacity or strategy of

competitors m ay requ ire corrective action.When new strategies are under consideration, operations researchers often can con-

tribute u seful insights by developing simulation models of the effect of changes in differentvariables. Such an approach is particularly useful in service “network” environments, such

as theme parks and ski resorts, where customers can choose between mu ltip le activities atthe same site. Madeleine Pullman and Gary Thom pson mod eled customer behavior at a ski

resort, where skiers can choose between different lifts and ski runs of varying lengths andlevels of difficulty. Throu gh analysis, they were able to determ ine the potential future effect

of lift capacity upgrades (bigger or faster chair lifts), capacity expansion in the form of ex-tended skiing terrain, industry growth, day-to-day price variations, customer response to

information about wait times at d ifferent lifts, and changes in the customer mix.21

CONCLUSION

Because many capacity-constrained service organizations have heavy fixed costs, evenmodest improvements in capacity utilization tend to have a significant effect on the

bottom line. In this chap ter, we have shown how managers can man age productive capac-ity and demand and improve customers’ waiting and queuing experience. Managing

capacity and demand for a service at a particular place and tim e closely links back to whatwe’ve learned in p ast chapters, including d ecisions on product elements and tiering of service

(Chapter 4), place and time of service delivery (Chapter 5), revenue management (Chap ter 6),and promotion and education (Chapter 7).


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Chapter Summary

LO1 There are several different forms of productivecapacity in services: physical facilities for processing

customers; physical facilities for processing goods;physical equipment for processing people, posses-

sions or information; and labor and infrastructure.

LO2 At any one time, a firm with limited capacity can

face different demand-supply situations: excess de-mand , demand that’s more than ideal capacity, well-

balanced demand and supply, or excess capacity.• When demand and supply are not in balance,

firms w ill have id le capacity during low periods,but have to turn away customers during peak

periods. This situation impedes the efficient useof produ ctive assets and erodes profitability.

• Firms therefore need to try and balance demandand supply through adjusting capacity and/ or

demand.

LO3 Capacity can be managed in a number of ways,

including:• Stretching capacity—some capacity is elastic and

more people can be served with th e same capacitythrough crowd ing (e.g., in a subw ay car), extend-

ing operating hours, or speeding up customerpr ocessing times.

• Scheduling d owntime during low periods.• Cross-training employees, use part-time employees.

• Inviting customers to p erform self-service.• Asking customers to share capacity.

• Designing capacity to be flexible.• Renting or sharing extra facilities and equ ipment.

LO4 To manage demand effectively, firms need to und er-

stand d emand p atterns and drivers by market seg-ment. Different segments often exhibit different

demand patterns (e.g., routine maintenance versusemergency repairs). Once firms have an under-

standing of the demand patterns of their marketsegments, they can use marketing strategies to re-

shape those patterns.

LO5 Demand can be managed in the following five ba-

sic w ays:• Take no action, and leave demand to find its own

levels.• Reduce demand during peak periods.

• Increase demand du ring low periods.• Inventory demand through w aiting lines and

queuin g systems.• Inventory demand through reservation systems.

LO6 The following marketing mix elements can be usedto help smooth out fluctuations in dem and:• Use price and nonmonetary customer costs to

manage demand.

• Change product elements to attract different seg-ment s at different times.

• Modify the place and time of delivery (e.g.,through extended op ening hours).

• Promotion and education (e.g., “mail early for

mpel-05-balancing demand and productive capacity

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