Chapter 9

Balancing Demand and Productive Capacity

GENERAL CONTENT

Multiple Choice Questions

1. Which of the following is NOT one of the productive capacity forms in a service
context?
a. Physical facilities designed to contain customers
b. Physical equipment used to process people, possessions, or information
c. Customers
d. Labor
e. Infrastructure
(c; Moderate; p. 232)

2. The problem of capacity constrained organizations that cannot stockpile services is

most commonly found among services that process ____________ and
____________.
a. non-labor intensive information; time
b. physical possessions; time
c. people; non-labor intensive information
d. people; physical possessions
e. non-labor intensive information; physical possessions
(d; Easy; p. 233)

3. A service organization’s capacity to satisfy demand is constrained by all of the

following EXCEPT ____________.
a. physical facilities
b. equipment
c. personnel
d. sequence of services provided
e. number of competitors
(e; Easy; p. 234)

4. All of the following are questions to ask about demand patterns and their underlying
causes EXCEPT ____________.
a. Do demand levels follow a predictable cycle?
b. What are the underlying causes of these cyclical variations?
c. How much demand are competitors receiving?
d. Do demand levels seem to change randomly?
e. Can demand for a particular service over time be disaggregated by market
segment?
(c; Moderate; p. 237)

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5. Which of the following is NOT one of the five basic approaches to managing
demand?
a. Taking no action and leaving demand to find its own levels.
b. Reduce demand in peak periods.
c. Increase demand when there is excess capacity.
d. Inventory capacity until demand increases.
e. Inventory demand by creating a formalized queuing system.
(d; Easy; p. 238)

6. Which of the following is the correct action for a firm to take that wants to reduce
demand and has insufficient capacity?
a. Take no action.
b. Consider override for most desirable segments.
c. Consider priority systems for most desirable segments.
d. Increase prices or encourage use in other time slots.
e. Lower prices selectively.
(d; Challenging; p. 238)

7. Which of the following is NOT a way of understanding the nature of demand curves?
a. Research.
b. Analyzing parallel situations in other locations.
c. Trial and error.
d. Analyzing parallel situations in comparable services.
e. Analyzing competing demand positions.
(e; Challenging; p. 239)

8. Which of the following is NOT one of the alternative queuing configurations

discussed?
a. Single line/single servers at sequential stages
b. Multiple line to single servers (“snake”)
c. Parallel lines to multiple servers
d. Designated lines to designated servers
e. “Take a Number” (single or multiple servers)
(b; Moderate; p. 245)

9. Possible strategic applications of excess capacity include all of the following EXCEPT
____________.
a. reducing variation in current capacity
b. free trials for prospective customers
c. free trials for intermediaries who sell to end customers
d. employee rewards
e. bartering with the firm’s own suppliers
(a; Easy; p. 252)

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10. Which of the following may result in allocation to separate queuing areas?
a. Time already spent waiting
b. Excess capacity
c. Urgency of the job
d. Excess demand
e. Multiple locations
(c; Moderate; p. 246)

True/False

11. The term “productive capacity” refers to the resources or assets that a firm can
employ to create goods and services.
(True; Moderate; p. 232)

12. Processing times for people are typically less variable than objects or things.
(False; Easy; p. 233)

13. Optimum and maximum capacities are never one and the same (e.g. a sport
performance).
(False; Easy; p. 234)

14. Measures of capacity utilization include: the number of hours that facilities, labor
and equipment are productively employed in revenue operations and the size of the
physical facility.
(False; Moderate; p. 234)

15. Random fluctuations in business are usually caused by factors well within
management’s control.
(False; Easy; p. 236)

16. When a firm wants to inventory demand via a reservation system and has insufficient
capacity it should lower prices selectively.
(False; Moderate; p. 238)

17. 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 product’s demand curve.
(True; Easy; p. 239)

18. Queues represent a symptom of unresolved capacity management problems.

(True; Moderate; p. 242)

19. Parallel lines to multiple servers is commonly known as a “Snake”

(False; Easy; p. 245)

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20. Yield analysis forces managers to recognize the opportunity cost of selling capacity
for a given date to a customer from one market segment when another might
subsequently yield a higher rate.
(True; Moderate; p. 251)

Short Answer

21. What are the four supply and demand conditions that a fixed-capacity service may
face?

Excess demand, demand exceeds optimum capacity, demand and supply are well
balanced, and excess capacity.
(Moderate; p. 233)

22. What are the two basic approaches to fluctuating demand?

Adjust the level of capacity to meet variations in demand.

Manage the level of demand, using marketing strategies to smooth peaks and fill
valleys.
(Challenging; p. 234)

23. List the seven actions managers can take to adjust capacity as needed.

Schedule downtime during periods of low demand.

Use part-time employees.
Rent or share extra facilities and equipment.
Ask customers to share.
Invite customers to perform self-service.
Cross train employees.
Create flexible capacity.
(Challenging; p. 235)

24. List the four key marketing strategies that can be employed to reshape demand.

Use price and nonmonetary costs to manage demand, change product elements,
modify the place and time of delivery, and promotion and education
(Challenging; p. 239)

25. What are thee strategies that can be employed when considering a modification to the
place and time of service delivery?

No change, varying the times when the service is available, and offering the service
to customers at new locations.
(Moderate; p. 240)

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Essay

26. Describe four of the ten propositions on the psychology of waiting lines.

Waiting lines create dissatisfied customers for a number of reasons. The ten
propositions describe characteristics that can increase or decrease satisfaction. First,
unoccupied time feels longer than occupied time. The solution is to find a way to
occupy customers, perhaps with other services. Second, pre- and post-process waits
feel longer than in-process waits. Express/electronic check-in and speedy billing can
reduce dissatisfaction here. Third, anxiety makes waits seem longer. Here again,
occupying customers can help reduce negative effects. Fourth, uncertain waits are
longer than known, finite waits. Adjusting to a wait of known length is easier
because customers can see a finish line approaching.
(Challenging; p. 248)

27. Describe what the term “yield” means in the context of a reservation strategy.

The term “yield” refers to the average revenue received per unit of capacity. Firms
should aim to maximize this yield to enhance profitability. Yield analysis forces
managers to consider the opportunity cost of selling capacity for a given date to one
customer segment when another might yield a higher rate. Reservation systems can
provide the detailed information necessary to support an optimal strategy from both
a historical perspective and current updates.
(Moderate; p. 251)

APPLICATION CONTENT

Multiple Choice Questions

28. The demand for a city bus is most likely to vary by all EXCEPT which of the
following?
a. Time of day.
b. Day of the week.
c. Season of the year.
d. Population in the city.
e. All of the above will likely cause demand to vary on a city bus.
(d; Easy; p. 237)

29. Which of the following hotel customers has the most inelastic demand slope?
a. Business travelers in high season.
b. Business travelers in low season.
c. Tourists in high season.
d. Tourists in low season.
e. All groups have equivalent demand curves.
(a; Challenging; p. 239)

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30. A cleaning and repair firm that wants to generate business during low demand
periods would do best to offer which of the following?
a. Offer free pickup and delivery of portable items that need servicing.
b. Vary the time when service is available.
c. Add more service options.
d. Increase prices to get the most out of current customers.
e. Educate customers on when they should have things cleaned or repaired.
(a; Moderate; p. 240)

31. According to a national survey of 1000 adults in the United States, which of the
following is the most dreaded waiting queue?
a. Restaurant
b. Department of Motor Vehicles
c. Doctor’s office
d. Grocery store
e. Airport
(c; Moderate; p. 242)

32. Theme parks cleverly design their waiting areas to do which of the following?
a. Make the wait look as long as it is so they aren’t disappointed
b. Find ways to give the customers the impression of constant progress
c. Keep the waiting area distraction free so people keep moving in line
d. Post clocks everywhere so people know how long they have been in line
e. Offer customers additional services while they wait
(b; Moderate; p. 248)

True/False

33. One way to stretch capacity is to utilize the facility for longer periods.
(True; Easy; p. 235)

34. Efforts directed at changing demand patterns on a city bus should be aimed at cross-
training individual employees.
(False; Moderate; p. 236)

36. One of the most direct ways for a hotel to reduce excess demand at peak periods is to
charge customers more money to use the service during those periods.
(True; Easy; p. 239)

37. The goal of a restaurant in varying its service level and menus is only to appeal to
different needs within the same group of customers.
(False; Easy; p. 240)

35. A good example of inventorying demand is a haircut that can be set up and prepared
for one day and executed the next.
(False; Easy; p. 242)
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Short Answer

38. Describe how optimum and maximum capacities may differ in the restaurant
industry.

A full restaurant may deteriorate service because the staff is rushed and there is a
greater likelihood of errors and delays.
(Moderate; p. 234)

39. Give a situation where optimal and maximum capacities are the same.

Live theater or a sports performance.

(Moderate; p. 234)

40. Give an example of how ski resorts increase demand during the summer months.

Promoting mountain biking, hiking, horseback riding, and other warm-weather

outdoor recreation opportunities.
(Easy; p. 262)

41. Discuss why a subway car has elastic capacity.

A subway car has elastic capacity because it is designed to seat perhaps 40 and allow
another 60 to stand with adequate space. Under rush hour conditions it can supply
space for 200, though the space would be extremely cramped.
(Moderate, p. 235)

42. Describe how Boeing dealt with the need to create flexible capacity when designing
its 777 airliner.

Boeing created an airliner that can be rearranged to accommodate different capacity

requirements within a few hours.
(Challenging; p. 236)

Essay

43. Describe how ski resorts manage traditionally seasonal supply and demand
fluctuations.

Traditionally ski resorts only operated during the winter months, shutting down for
the summer. Realizing that hiking and mountain biking were coming into vogue, as
well as the value of offering other summer activities, resorts began opening in the
summertime. This allowed the firms to smooth the seasonal demand and create value
out of unused capacity. Chairlifts used for skiing and restaurants used for feeding
customers now operate year round instead of laying dormant for half of the year.
(Easy; p. 232)
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44. Discuss the multi-pronged strategy a large Chicago bank used to reduce customer
waiting times.

The bank determined that adding more space and staff was not the optimal solution,
as customer satisfaction had to be balanced against costs. The three-pronged strategy
that the bank adopted included technological, human resources, and customer-
oriented improvements. Technological improvements included an electronic queuing
system that routed customers to the next available teller and helped match customers
to appropriate staff. An officer-of-the-day program was also implemented to make
human resources more responsible for queuing times that included cash incentives
and new job categories. The customer-oriented improvements focused on the
delivery system that included a quick-drops desk, extended lobby hours, and
customer education on how to reduce waiting times.
(Challenging; p. 244)

45. Describe how Disney decided to deal with long lines.

The theme park implemented virtual waiting lines in response to long waiting lines
and subsequent customer dissatisfaction. Customers pick up a special pass that tells
them how close to the front of the line they are without actually standing in line.
This causes lines to self-regulate such that customers who are not close to the front,
do not stand around taking up space and find alternative things to do. This enhances
both customer satisfaction and has been shown to increase profit because customers
will spend money elsewhere instead of idling in line. Disney does not charge extra
for the privilege of the pass.
(Moderate; p. 247)

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