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Chapter 9:
Balancing Demand
and Productive
Capacity
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 9 - 1
Overview of Chapter 9
1. Key Source of Problem: Demand-Supply Gap
1. Demand: Fluctuations in Demand
2. Supply: Capacity-Constrained Service Organizations
2. Patterns and Determinant of Demand
3. Managing Demand Levels
4. Inventory Demand through Waiting Lines and
Reservations
5. Minimize Perceptions of Waiting Time
6. Create an Effective Reservations System
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 9 - 2
1. Fluctuations in Demand
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 9 - 3
From Excess Demand to
Excess Capacity
Four conditions potentially faced by fixed-capacity services:
 Excess demand
 Too much demand relative to capacity at a given time
 Demand exceeds optimum capacity
 Upper limit to a firm’s ability to meet demand at a given time
 Optimum capacity
 Point beyond which service quality declines as more customers are
serviced
 Excess capacity
 Too much capacity relative to demand at a given time
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 9 - 4
Variations in Demand Relative to
Capacity (Fig 9.1)
VOLUME DEMANDED
Demand exceeds capacity
(business is lost)
CAPACITY UTILIZED
Maximum Available
Capacity
Demand exceeds
optimum capacity
(quality declines)
Optimum Capacity
(Demand and Supply
Well Balanced)
Excess capacity
Low Utilization
(May Send Bad Signals)
(wasted resources)
TIME CYCLE 1
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
TIME CYCLE 2
Chapter 9 - 5
Addressing Problem of
Fluctuating Demand
Two basic approaches:
 Adjust level of capacity to meet demand
 Need to understand productive capacity and how it varies on an
incremental basis
 Manage level of demand
 Use marketing strategies to smooth out peaks, fill in valleys
 Many firms use a mix of both approaches
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 9 - 6
2. Many Service Organizations Are
Capacity Constrained
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 9 - 7
Defining Productive Capacity in
Services
1. Physical Capacity

Physical facilities to contain customers

Physical facilities to store or process goods

Physical equipment to process people,
possessions, or information

Public/private infrastructure
2. Labor Capacity

Labor used for physical or mental work
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 9 - 8
Alternative Capacity Management
Strategies
 Level capacity (fixed level at all times)
 Stretch and shrink
 Offer inferior extra capacity at peaks (e.g., bus/train standees)
 Vary seated space per customer (e.g., elbow room, leg room)
 Extend/cut hours of service
 Chase demand (adjust capacity to match demand)
 Flexible capacity (vary mix by segment)
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 9 - 9
Adjusting Capacity to Match Demand
 Schedule downtime during periods of low demand
 Rent or share extra facilities and equipment
 Ask customers to share
 Invite customers to perform self-service
 Cross-train employees*
 Use part-time employees*
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 9 - 10
3. Patterns and Determinants of
Demand
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 9 - 11
Predictable Demand Patterns and
Their Underlying Causes (Table 9.1)
Predictable Cycles
of Demand Levels





day
week
month
year
other
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Underlying Causes of
Cyclical Variations
 employment
 billing or tax
payments/refunds
 pay days
 school hours/holidays
 seasonal climate
changes
 public/religious holidays
 natural cycles
(e.g., coastal tides)
Services Marketing 6/E
Chapter 9 - 12
Causes of Unpredictable Changes in
Demand Levels
 Weather
 Health problems
 Accidents, Fires, Crime
 Natural disasters
Question: Which of these events can be predicted?
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 9 - 13
Analyzing Drivers of Demand
 Understand why customers from specific market
segments select this service  Need Qualitative
Studies
 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
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 9 - 14
4. Managing Demand Levels
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 9 - 15
Alternative Demand Management
Strategies (Table 9.2)
 Reduce demand
 Higher prices
 Communication promoting alternative times
 Increase demand




Lower prices
Communication, including promotional incentives
Vary product features to increase desirability
More convenient delivery times and places
 Inventory demand by reservation system
 Inventory demand by formalized queuing
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 9 - 16
Marketing Strategies Can
Reshape Some Demand Patterns
 Use price and other costs to manage demand
 Change product elements
 Modify place and time of delivery
 No change
 Vary times when service is available
 Offer service to customers at a new location
 Promotion and education
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 9 - 17
Hotel Room Demand Curves by
Segment and Season (Fig 9.3)
Price per
room night
Bl
Bh
Bh = business travelers in high season
Th
Bl = business travelers in low season
Tl
Th = tourist in high season
Tl = tourist in low season
Bl
Bh
Th
Tl
Quantity of rooms demanded at each price
by travelers in each segment in each season
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Note: hypothetical example
Chapter 9 - 18
5. Inventory Demand through Waiting
Lines and Reservations
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 9 - 19
Why Do Waiting Lines Occur?
 Because the number of arrivals at a facility
exceeds capacity of system to process them
at a specific point in the process
 Queues are basically a symptom of unresolved
capacity management problems
Not all queues take form of a physical waiting
line in a single location
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 9 - 20
Saving Customers from
Burdensome Waits
 Add extra capacity so that demand can be met at most
times (problem: may increase costs too much)
 Rethink design of queuing system to give priority to
certain customers or transactions
 Redesign processes to shorten transaction time
 Manage customer behavior and perceptions of wait
 Install a reservation system
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 9 - 21
Alternative Queuing Configurations
(Fig 9.5)
Single line, single server, single stage
Single line, single servers, sequential stages
Parallel lines to multiple servers
Designated lines to designated servers
Single line to multiple servers (“snake”)
28
“Take a number” (single or multiple servers)
Services Marketing 6/E
24
26
27
32
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
21
20
25
30
31
29
23
Chapter 9 - 22
Criteria for Allocating Different Market
Segments to Designated Lines
 Urgency of job
 Emergencies versus non-emergencies
 Duration of service transaction
 Number of items to transact
 Complexity of task
 Payment of premium price
 First class versus economy
 Importance of customer
 Frequent users/high volume purchasers
versus others
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 9 - 23
6. Minimize Perceptions of Waiting Time
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 9 - 24
Ten Propositions on Psychology of
Waiting Lines (1) (Table 9.3)
1. Unoccupied time feels longer than occupied time*
2. Pre- and post-process waits feel longer than inprocess waits
3. Anxiety makes waits seem longer
4. Uncertain waits are longer than known, finite waits*
5. Unexplained waits are longer than explained waits*
Sources: Maister; Davis & Heineke; Jones & Peppiatt
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 9 - 25
Ten Propositions on Psychology of
Waiting Lines (2) (Table 9.3)
6. Unfair waits are longer than equitable waiting
7. People will wait longer for more valuable services
8. Waiting alone feels longer than waiting in groups
9. Physically uncomfortable waits feel longer*
10.Waits seem longer to new or occasional users
Sources: Maister; Davis & Heineke; Jones & Peppiatt
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 9 - 26
7. Create An Effective Reservation System
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 9 - 27
Characteristics of Well-Designed
Reservations System
 Fast and user-friendly for customers and staff
 Answers customer questions
 Offers options for self service (e.g., the Web)
 Accommodates preferences (e.g., room with view)
 Deflects demand from unavailable first choices to
alternative times and locations
 Includes strategies for no-shows and overbooking
 Requiring deposits to discourage no-shows
 Canceling unpaid bookings after designated time
 Compensating victims of over-booking
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 9 - 28
Setting Hotel Room Sales Targets by
Segment and Time Period (Fig.9.7)
Capacity
(% rooms)
100%
Week 7
Week 36
(Low Season)
(High Season)
Out of commission for renovation
Loyalty Program Members
Loyalty Program
Members
Transient guests
50%
Weekend
package
Transient guests
W/E
package
Groups and conventions
Groups (no conventions)
Airline contracts
Time Nights: M
Tu
W
Th
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Airline contracts
F
S
Su
M
Tu
W
Services Marketing 6/E
Th
F
S
Su
Chapter 9 - 29
Information Needed for Demand and
Capacity Management Strategies
 Historical data on demand level and composition, noting responses
to marketing variables*
 Demand forecasts by segment under specified conditions*
 Segment-by-segment data*
 Fixed and variable cost data, profitability of incremental sales*
 Meaningful location-by-location demand variations
 Customer attitudes toward queuing
 Customer opinions of quality at different levels of capacity
utilization
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 9 - 30