1. JAN 2013 Semester
1
Service Quality
MKTG 1268
Lecture Eight
• Balancing Demand
Against Productive
Capacity
(Chapter 9)

2. Overview of Chapter 9
2
 Fluctuations in Demand Threaten Service
Productivity
 Defining Productive Service Capacity
 Managing Capacity
 Understanding Patterns of Demand
 Managing Demand
 Inventory Demand through Waiting Lines and
Queuing Systems
 Customer Perceptions of Waiting Time
 Inventory Demand Through Reservations System

3. Managing Resorts Requires Effective Management of
Demand and Capacity
3

4. 4
FLUCTUATIONS IN DEMAND
THREATEN SERVICE
PRODUCTIVITY

5. Carefully balancing the demands (by customers) and
the available capacity of the service firm’s resources
requires careful planning
5

6. From Excess Demand to Excess Capacity
6
Four conditions potentially faced by fixed-capacity services:
1. Excess demand
 Too much demand relative to capacity at a given time
2. Demand exceeds optimum capacity
 Upper limit to a firm’s ability to meet demand at a
given time
3. Optimum capacity
 Pointbeyond which service quality declines as more
customers are serviced
4. Excess capacity
 Too much capacity relative to demand at a given time

7. Variations in Demand Relative to Capacity (Fig. 9.3)
7
7

8. Managing Capacity and Demand
• Define productive capacity
• Manage capacity
 Stretch capacity ― squeeze more people into a given
capacity
 Adjust capacity to more closely match demand
• Understand demand
 Understand patterns of demand and determine demand
drivers
• Manage demand
 Use marketing strategies to smooth out peaks, fill in valleys
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9. Building blocks for managing capacity and demand
9

10. What is Productive Capacity?
• Productive capacity can take several forms in services
 Physical facilities designed to contain customers
 Physical facilities designed for storing or processing
goods
 Physical equipment used to process people, possessions,
or information
 Labor
 Infrastructure
• Financial success in businesses that are limited in
capacity depends largely on how capacity is used
1
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0

11. Defining – specifically – the
productive capacity of a
service
11

12. Examples of the importance of defining productive capacity
12

13. 13
MANAGING CAPACITY

14. Managing Capacity – Rush Hour Crowd in
the Subway Train
14

15. Alternative Capacity Management Strategies
15
 Capacity is fixed, but more people are served at
the same level of capacity
 Stretch and shrink:
 Offer inferior extra capacity at peaks (e.g. bus/train
standees)
 Use facilities for longer/shorter periods
 Reduce amount of time spent in process by minimizing
slack time

16. Adjusting Capacity to Match Demand
(Vary amount of capacity to match anticipated demand):
16
• Schedule downtime during periods of low demand
• Cross-train employees
• Use part-time employees
• Invite customers to perform self-service
• Ask customers to share
• Create flexible capacity
• Rent or share extra facilities and equipment

17. Cross-training staff as a means of adjusting capacity to
meet demand
17

18. 18
ANALYZE PATTERNS
OF DEMAND

19. Demand Varies by Market Segment
• Demand may seem random, but analysis may reveal
a predictable demand cycle for different segments
• Keep good records of transactions to analyze
demand patterns
 Sophisticated software can help to track customer
consumption patterns
• Record weather conditions and other special factors
that might influence demand
1
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9

20. Predictable Demand Patterns and
Their Underlying Causes (Table 9.1) (1)
20
Predictable Cycles Underlying Causes of
of Demand Levels Cyclical Variations
 day  employment
 week  billing or tax payments/refunds
 month  pay days
 year  school hours/holidays
 other  seasonal climate changes
 public/religious holidays
 natural cycles
See full details in Table 9.1 on page 272 of the text 20

21. 21

22. Some service jobs can be regularly scheduled –
example maintenance jobs
22

23. Predictable Demand Patterns and
Their Underlying Causes (Table 9.1) (2)
 Underlying causes of randomly changing
demand levels
 Weather
 Health problems
 Accidents, Fires, Crime
 Natural disasters
 Disaggregate demand by market segment for a particular service over
time
 Use patterns by particular type of customer or for a particular purpose
 Variations in net profitability for each completed transaction
23

24. Understanding patterns of demand – seasonal trends in
tourist arrivals
24

25. 25
MANAGING DEMAND

26. Alternative Demand Management Strategies (Table 9.2)
26
 Take no action
 Let customers sort it out
 Reduce demand
 Higher prices
 Communication encouraging use of other time slots
 Increase demand
 Lower prices
 Communication, including promotional incentives
 Vary product features to increase desirability
 More convenient delivery times and places
 Inventory demand by reservation system
 Inventory demand by formalized queuing
See full details in Table 9.2 on page 275 of the text

27. Alternative Demand
Management Strategies
27

28. Marketing Strategies Can Reshape Some Demand
Patterns
28
 Use price and other costs to manage demand.
If the firm understands the shape of demand
curves for different market segments, then
prices may be raised/lowered to
discourage/attract particular segments at
particular times.
 Change product elements. Features may be
varied according to the time of day (e.g.,
restaurants) or season of the year (hotels) to
attract different market segments.

29. Marketing Mix Elements Can Be Used To Shape
Demand Patterns (Pricing)
29

30. Marketing Strategies Can Reshape Some Demand
Patterns
30
 Modifying time and place of delivery to reflect
changing market needs over the product demand
cycle.
 Use promotion and education. Signage,
advertising, and promotion can be used to inform
customers of peak periods (encouraging them to
avoid using the service during these times, if
possible) and promoting off-peak times when the
service facility is less crowded and service faster.

31. Seasonal demand
for a service
31

32. Service Insight 9.1 : Discouraging Demand for
Non-Emergency Calls
32

33. 33
INVENTORY DEMAND
THROUGH WAITING LINES
AND RESERVATIONS

34. When Demand Exceeds Supply
34
 Steps to take to inventory demand (keep capacity
for use later)
 Asking customers to wait in line (queue), usually
on a first-come first-served basis
 Offering customers the opportunity to reserve or
book capacity in advance

35. Why do queues exist?
35
 Because number of arrivals at a facility
exceeds capacity of system to process them at
a specific point in the process
 Queues are basically a symptom of
unresolved capacity management problems

36. Helping customers
avoid the hassle
of waiting lines
36

37. Waiting In Line
37
 Almost nobody likes to wait
 An average person may spend up to 30 minutes/day
waiting in line—equivalent to 20 months in an 80 year
lifetime
 It's boring, time-wasting, and sometimes physically
uncomfortable
 Not all queues take physical waiting in a single
location
 Queues may be physical but geographically
dispersed
 Some are virtual

38. Reduce Waiting Time By:
38
 Rethinking the design of queuing system
 Installing reservations system
 Tailoring the queuing system to different market
segments
 Managing customer behavior and their
perceptions of wait
 Redesign processes to shorten the time of each
transaction

39. Alternative Queuing Configurations (Fig. 9.15)
39
39

40. Queue Configurations:
40
 Single line sequential stage queues are appropriate for small
waiting time and each stage is simple with little chances of
stand-offs.
 Single line to multiple servers (snake) is always preferable
over multiple lines to multiple servers, as multiple lines may
not move at the same speed.
 Designated lines to designated servers configuration are
suitable for different segments of customers and different
jobs.
 Take a number approach saves from the hassles of standing
in the queue, if waiting time is too long. In the meantime
customers can do something else.

41. Different versions of queuing systems
41

42. Virtual Waits
42
 One problem of waiting is the waste of customers’
time
 Virtual queues can eliminate the need to wait
 Customers register their place in line on a
computer, which estimates the time they need to
reach the front of the virtual line, customers then
return later to claim their place
 See Service Insights 9.3 (page 283)

43. Queuing Systems can be Tailored to Market
Segments
43
 Urgency of job
 Emergencies vs. non-emergencies
 Duration of service transaction
 Number of items to transact
 Complexity of task
 Payment of premium price
 Importance of customer
 Frequent users/high volume purchasers vs. others

44. 44
PERCEPTIONS OF
WAITING TIME

45. Ten Propositions to Make Waiting More
Bearable (1)
45
1. Unoccupied time feels longer than occupied
time
2. Solo waits feel longer than group waits
3. Physically uncomfortable waits feel longer
than comfortable ones
4. Pre- and post-process waits feel longer than
in-process waits
5. Unexplained waits are longer than explained
waits
Sources: Maister; Davis & Heineke; Jones &
Peppiatt
Cont.

46. Occupying customers during waits
46

47. Ten Propositions to Make Waiting More
Bearable (2)
47
6. Unfamiliar waits seem longer than familiar
ones
7. Uncertain waits are longer than known, finite
waits
8. Unfair waits are longer than fair waits
9. Anxiety makes waits seem longer
10. People will wait longer for more valuable
services
Sources: Maister; Davis & Heineke; Jones & Peppiatt

48. Uncertain waits create customer anxiety and stress
48

49. 49
INVENTORY DEMAND
THROUGH A
RESERVATIONS SYSTEM

50. Benefits of Reservations
50
 Avoid customer dissatisfaction due to excessive
waits
 Controls and smoothes demand
 Allows implementation of revenue management
and preselling of service to different customer
segments
 Data captured helps organizations
 Prepare financial projections
 Plan operations and staffing levels

51. Reservation systems in a library
51

52. Characteristics of Well-Designed Reservations System
52
 Fast and user-friendly for customers and staff
 Answers customer questions
 Offers options for self service (e.g. Web)
 Accommodates preferences (e.g., room with view)
 Deflects demand from unavailable first choices to
alternative times and locations

53. Reservations Strategies Should Focus on Yield
53
 Yield analysis helps managers recognize
opportunity cost of allocating capacity to one
customer/segment when another segment might
yield a higher rate later
 Decisions need to be based on good information
 Detailed record of past usage
 Supported by current market intelligence and good
marketing sense
 Realistic estimate of changes of obtaining higher
rated business
 When firms overbook to increase yield,
 Victims of over-booking should be compensated to
preserve the relationship

54. Setting Hotel Room Sales Targets by Segment
and Time Period
54

55. Developing Loyalty Programs
55

56. Summary of Chapter 9 ― Balancing
Demand and Productive Capacity (1)
• At any moment in time, a fixed-capacity service may
face
 Excess demand
 Demand exceeding optimum capacity
 Demand and supply well-balanced at the level of optimum capacity
 Excess capacity
• Managing capacity and demand
 Define productive capacity
 Manage capacity
 Understand and manage demand
 Stretching or shrinking capacity levels
 Adjusting capacity to match demand
5
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6

57. Summary of Chapter 9 ― Balancing
Demand and Productive Capacity (2)
• Five basic ways to manage demand
 Take no action
 Reduce demand in peak periods
 Increase demand in low periods
 Inventory demand using a queuing system
 Inventory demand using a reservations system
5
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7

58. Summary of Chapter 9 ― Balancing
Demand and Productive Capacity (3)
• Demand levels can be reshaped by marketing
strategies
 Use price and other costs to manage demand
 Change product elements
 Modify place and time of delivery
 Use promotion and education
5
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8

59. Summary of Chapter 9 ― Balancing
Demand and Productive Capacity (4)
• Waiting is a universal phenomenon. Waits can be
reduced by
 Rethinking the design of the queuing system
 Installing a reservation system
 Tailoring queuing system to different market segments
 Managing customers’ behavior and their perceptions of the wait
 Redesigning the processes to shorten the time of each transaction
• An effective reservations system
 Enables demand to be controlled and smoothed in manageable way
 Should focus on yield
 Requires information
5
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9

60. Practice Exam Essay Question:
60
In a popular massage parlour, there are often
customers waiting at the reception to get a massage
because all the masseurs are already occupied / busy
serving other customers.
(a) Recommend three demand and capacity
management actions this massage parlour can take to
respond to the above situation.
(b) Drawing on what you have learnt in relation to the
psychology of waiting, how could this massage
parlour make waiting more ‘bearable’ for customers?