Managing capacity and demand

Week 10

Managing Demand and Capacity

Perishability

implications for demand and supply

Present

the implications of time, labor, equipment, and facilities constraints combined with variations in demand patterns. for matching supply and demand through (a) shifting demand to match capacity or (b) adjusting capacity to meet demand.

Strategies

Overview

Demonstrate the benefits and risks of yield management strategies in forging a balance among capacity utilization, pricing, market segmentation, and financial return. Provide strategies for managing waiting lines for times when capacity and demand cannot be aligned.

Variations in Demand Relative to Capacity

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

Alternative supply and demand outcomes

Alternative supply and demand outcomes (cont.)

Demand versus Supply

Source: C. H. Lovelock, Classifying Services to Gain Strategic Marketing Insights, Journal of Marketing 47, (Summer 1983): 17.

Understanding Capacity Constraints and Demand Patterns

Capacity Constraints
Time,

Demand Patterns
Charting

labor, equipment, and facilities Optimal versus maximum use of capacity

demand

patterns Predictable cycles Random demand fluctuations Demand patterns by market segment

Constraints on Capacity
Nature of the Constraint
Time

Type of Service
Legal Consulting Accounting Medical Law firm Accounting firm Consulting firm Health clinic Delivery services Telecommunication Network services Utilities Health club Hotels Restaurants Hospitals Airlines Schools Theaters Churches

Labor

Equipment

Facilities

Strategies for Shifting Demand to Match Supply

Demand Too High

Use signage to communicate busy days and times. Offer incentives to customers for usage during nonpeak times. Take care of loyal or regular customers first. Advertise peak usage times and benefits of nonpeak use. Charge full price for the serviceno discounts.
Shift Demand

Demand Too Low

Use sales and advertising to increase business from current market segments. Modify the service offering to appeal to new market segments. Offer discounts or price reductions. Modify hours of operation. Bring the service to the customer.

Adjusting demand to meet supply

Adjusting demand to meet supply (cont.)

Strategies for Adjusting Supply to Match Demand

Demand Too High
Adjust Capacity

Demand Too Low

Perform maintenance, renovations. Schedule vacations. Schedule employee training. Lay off employees.

Stretch time, labor, facilities and equipment. Cross-train employees. Hire part-time employees. Request overtime work from employees. Rent or share facilities. Rent or share equipment. Subcontract or outsource activities.

Adjusting supply to meet demand

Adjusting supply to meet demand (cont.)

Challenges and Risks in Using Yield Management

Loss of competitive focus Customer alienation Employee morale problems Incompatible incentive and reward systems Lack of employee training Inappropriate organization of the yield management function

Waiting Line Strategies

Employ

operational logic

modify operations adjust queuing system

Establish

a reservation process waiting customers

Differentiate

importance of the customer urgency of the job duration of the service transaction payment of a premium price
Make

waiting fun, or at least tolerable

Waiting Line Configurations

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

Issues to Consider in Making Waiting More Tolerable (Maister, 1986)

unoccupied

time feels longer than occupied

time preprocess waits feel longer than in-process waits anxiety makes waits seem longer uncertain waits seem longer than known, finite waits

Wait times (cont.)

unexplained waits seem longer than explained waits unfair waits feel longer than equitable waits the more valuable the service, the longer the customer will wait solo waits feel longer than group waits

Pricing of Services

Discuss

three major ways that service prices are perceived differently from goods prices by customers
the key ways that pricing of services differs from pricing of goods from a companys perspective

Articulate

Overview (cont.)

Demonstrate what value means to customers and the role that price plays in value Describe strategies that companies use to price services

3 key differences

Customer knowledge of service prices:

Service variability limits knowledge Providers are unwilling to estimate prices Individual customer needs vary Collection of price information is overwhelming Prices are not visible Time costs Search costs Convenience costs Psychological costs

Role of non-monetary costs:

Price as an indicator of service quality

Three Basic Marketing Price Structures and Challenges Associated with Their Use for Services
P= DC+OC+Profit Challenges: Challenges:
1. Small firms may charge too little to be viable. 2. Heterogeneity of services limits comparability. 3. Prices may not reflect customer value. 1. Costs difficult to trace. 2. Labor is more difficult to price than materials. 3. Costs may not equal the value that customers perceive the services are worth.

Challenges:
1. Monetary price must be adjusted to reflect the value of non-monetary costs. 2. Information on service costs is less available to customers; hence, price may not be a central factor.

Four Customer Definitions of Value

Value is everything I want in a service.

Value is low price.

Value is the quality I get for the price I pay.

Value is all that I get for all that I give.

Pricing Strategies When the Customer Defines Value as Low Price

Value is low price.

Discounting

Odd pricing Synchro-pricing Penetration pricing

Pricing Strategies When the Customer Defines Value as Everything Wanted in a Service

Value is everything I want in a service.

Prestige pricing Skimming pricing

Pricing Strategies When the Customer Defines Value as Quality for the Price Paid

Value is the quality I get for the price I pay.

Value pricing Market segmentation pricing

Pricing Strategies When the Customer Defines Value as All That Is Received for All That Is Given

Value is all that I get for all that I give.

Price framing Price bundling Complementary pricing Results-based pricing

Summary of Service Pricing Strategies for Four Customer Definitions of Value

Value is low price.
Discounting Odd pricing Synchro-pricing Penetration pricing

Value is everything I want in a service.

Prestige pricing Skimming pricing

Value is the quality I get for the price I pay.

Value pricing Market segmentation pricing

Value is all that I get for all that I give.

Price framing Price bundling Complementary pricing Results-based pricing