9 Balancing

DEMAND AND CAPACITY

1
Services Marketing and Management
Dr Eszter Jakopánecz
Assistant Professor
University of Pécs
Faculty of Business and Economics
[email protected]

Lovelock & Wirtz: Services Marketing and Management.

People, Technology, Strategy. Pearson, 2011

Witz & Lovelock: Essentials of Services Marketing.

Pearson, 2018

WIRTZ LOVELOCK

 Learning Objectives
9.1 Know the different demand–supply situations that fixed-capacity
firms may face.
9.2 Describe the building blocks of dealing with the problem of
fluctuating demand.
9.3 Understand what is meant by productive capacity in a service
context.
9.4 Be familiar with the basic ways to manage capacity.
9.5 Recognize that demand patterns vary by segment and examine how
segment-specific variations in demand may be predicted.

Copyright © 2018 Pearson Education Ltd. 2

 Learning Objectives
9.6 Be familiar with the five basic ways to manage demand.
9.7 Understand how to use the marketing mix elements of price,
product, place, and promotion to smooth out fluctuations in demand.
9.8 Know how to use waiting lines and queuing systems to inventory
demand.
9.9 Understand how customers perceive waits and how waiting may be
made less burdensome for them.

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 Learning Objectives
9.10 Know how to use reservations systems to inventory demand.
9.11 Be familiar with strategic approaches to utilize residual surplus
capacity even after all other options of matching demand and capacity
have been exhausted.

Copyright © 2018 Pearson Education Ltd. 4

 Balancing Demand and Capacity

9.1 Know the different demand–supply

situations that fixed-capacity firms may face.

WIRTZ LOVELOCK

 Demand–supply situations that fixed-capacity firms
may face
• Four conditions potentially faced by fixed-capacity services
• Excess demand:
BALANCING DEMAND AND

o Too much demand relative to capacity at a given time.

PRODUCTIVE CAPACITY

• Demand exceeds optimum capacity:

o Upper limit to a firm’s ability to meet demand at a given time.
• Optimum capacity:
o Point beyond which service quality
declines as more customers are
serviced.
• Excess capacity:
o Too much capacity relative to demand at a given time.

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 Demand–supply situations that fixed-capacity firms

may face
Variations in Demand Relative to Capacity
BALANCING DEMAND AND
PRODUCTIVE CAPACITY

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 Balancing Demand and Capacity

9.2
Describe the building blocks of dealing with
the problem of fluctuating demand.

WIRTZ LOVELOCK

 The problem of fluctuating demand
BALANCING DEMAND AND
PRODUCTIVE CAPACITY

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 Balancing Demand and Capacity

9.3 Understand what is meant by productive

capacity in a service context.

WIRTZ LOVELOCK

 Productive capacity in a service context
• Productive capacity can take several forms in services:
o Physical facilities designed to contain customers
BALANCING DEMAND AND

o Physical facilities designed for storing or processing goods

PRODUCTIVE CAPACITY

o Physical equipment used to process people, possessions, or information

o Labor
o Infrastructure

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 Balancing Demand and Capacity

9.4 Be familiar with the basic ways to manage

capacity.

WIRTZ LOVELOCK

 Ways to manage capacity
Alternative Capacity Management Strategies
• Financial success in businesses that are limited in capacity depends largely on
BALANCING DEMAND AND

how capacity is used.

PRODUCTIVE CAPACITY

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

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 Ways to manage capacity

Adjusting Capacity to
Match Demand
• Schedule downtime during
BALANCING DEMAND AND

periods of low demand

PRODUCTIVE CAPACITY

• 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

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 Balancing Demand and Capacity

9.5 

Recognize that demand patterns vary by segment and examine
how segment-specific variations in demand may be predicted.

WIRTZ LOVELOCK

 Understanding patterns of demand
Demand Varies by Market Segment
• Demand may seem random, but analysis may reveal a predictable demand
BALANCING DEMAND AND

cycle for different segments.

PRODUCTIVE CAPACITY

• Keep good records of transactions to analyze demand patterns.

o Sophisticated software can help to track customer consumption patterns
• Record weather conditions and other special factors that might influence
demand.

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 Understanding patterns of demand

Predictable Demand Patterns and Their Underlying Causes (1)
• Predictable Cycles of Demand Levels.
BALANCING DEMAND AND

o day
PRODUCTIVE CAPACITY

o week
o month
o year
o other

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 Understanding patterns of demand

Predictable Demand Patterns and Their Underlying Causes (2)
• Underlying Causes of Cyclical Variations.
BALANCING DEMAND AND

o employment
PRODUCTIVE CAPACITY

o billing or tax payments/refunds

o pay days
o school hours/holidays
o seasonal climate changes
o public/religious holidays
o natural cycles

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 Understanding patterns of demand

Predictable Demand Patterns and Their Underlying Causes (3)
• Underlying causes of randomly changing demand levels.
BALANCING DEMAND AND

o Weather
PRODUCTIVE CAPACITY

o Health problems
o Accidents, Fires, Crime
o Natural disasters
• Disaggregate demand by
market segment for a
particular service over time.
o Use patterns by particular
type of customer or for a particular purpose
o Variations in net profitability for each completed transaction

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 Balancing Demand and Capacity

9.6 Be familiar with the five basic ways to

manage demand.

WIRTZ LOVELOCK

 Managing Demand
Alternative Demand Management Strategies (1)
• Take no action
BALANCING DEMAND AND

o Let customers sort it out

PRODUCTIVE CAPACITY

• Reduce demand
o Higher prices
o Communication encouraging use
of other time slots

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 Managing Demand
Alternative Demand Management Strategies (2)
• Increase demand
BALANCING DEMAND AND

o Lower prices
PRODUCTIVE CAPACITY

o Communication, including promotional incentives

o Vary product features to increase desirability
o More convenient delivery times and places
• Inventory demand by formalized queuing
• Inventory demand by reservation system

Copyright © 2018 Pearson Education Ltd. 22

 Balancing Demand and Capacity

9.7 

Understand how to use the marketing mix elements of price,
product, place, and promotion to smooth out fluctuations in
demand.

WIRTZ LOVELOCK

 Using the marketing mix elements to shape demand
patterns
• Use price and nonmonetary costs to manage demand
• Change product elements
BALANCING DEMAND AND
PRODUCTIVE CAPACITY

• Modify place and time of delivery

o No change
o Vary times when service
is available
o Offer service to customers
at a new location

• Promotion and Education

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 Balancing Demand and Capacity

9.8 Know how to use waiting lines and queuing

systems to inventory demand.

WIRTZ LOVELOCK

 Waiting lines and queuing systems
When Demand Exceeds Supply
• Steps to take to inventory demand (keep for use later)
BALANCING DEMAND AND

• Asking customers to wait in line (queue), usually on a first-come first-served

PRODUCTIVE CAPACITY

basis
• Offering customers the opportunity to reserve or book capacity in advance

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 Waiting lines and queuing systems

Managing Waiting Lines
• Almost nobody likes to wait
BALANCING DEMAND AND

• An average person may spend up to 30 minutes/day waiting in line—

PRODUCTIVE CAPACITY

equivalent to 20 months in an 80 year lifetime

• Reduce waiting time by

o Rethinking the design of the queuing system

o Installing reservations system
o Tailoring queuing system to different market segments
o Managing customer behavior and their perceptions of the wait
o Redesigning processes to shorten the time of each transaction

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 Waiting lines and queuing systems

Alternative queuing configurations
BALANCING DEMAND AND
PRODUCTIVE CAPACITY

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 Waiting lines and queuing systems

Virtual Waits
• One problem of waiting is the waste of customers’ time
BALANCING DEMAND AND
PRODUCTIVE CAPACITY

• 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

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 Waiting lines and queuing systems

Queuing Systems
• Allocate queues based on:
BALANCING DEMAND AND
PRODUCTIVE CAPACITY

o Urgency of job
o Duration of service
transaction
o Payment of premium price
o Importance of customer

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 Balancing Demand and Capacity

9.9 Understand how customers perceive waits and

how waiting may be made less burdensome for
them.

WIRTZ LOVELOCK

 Customer perceptions of waiting time
Ten Propositions to Make Waiting More Bearable
• Unoccupied time feels longer than occupied time
• Solo waits feel longer than group waits
BALANCING DEMAND AND

• Physically uncomfortable waits feel longer than comfortable ones

PRODUCTIVE CAPACITY

• Pre- and post-process waits feel longer than in-process waits

• Unexplained waits are longer than explained waits
• Unfamiliar waits seem
longer than familiar ones
• Uncertain waits are longer
than known, finite waits
• Unfair waits are longer
than fair waits
• Anxiety makes waits seem
longer
• People will wait longer for
more valuable services
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 Balancing Demand and Capacity

9.10 Know how to use reservations systems to

inventory demand.

WIRTZ LOVELOCK

 Inventory Demand Through Reservation System
Benefits of Reservations
• Avoid customer dissatisfaction due to excessive waits
BALANCING DEMAND AND

• Controls and smooths demand

PRODUCTIVE CAPACITY

• Allows implementation of revenue management and preselling of service to

different customer segments

• Data captured helps organizations

o Prepare financial projections

o Plan operations and
staffing levels

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 Inventory Demand Through Reservation System

Reservations Strategies Should Focus on Yield
• Yield analysis helps managers recognize opportunity cost of allocating capacity
BALANCING DEMAND AND
PRODUCTIVE CAPACITY

to one customer/segment when another segment might yield a higher rate

later
• Decisions need to be based on good information
o Detailed record of past usage
o Supported by current market intelligence and good marketing sense
o 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.

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 Balancing Demand and Capacity

9.11 

Be familiar with strategic approaches to
utilize residual surplus capacity even after all
other options of matching demand and
capacity have been exhausted.
WIRTZ LOVELOCK

 Create alternative use for otherwise wasted capacity

• Use capacity for service

differentiation
BALANCING DEMAND AND
PRODUCTIVE CAPACITY

• Reward your best customers

and build loyalty
• Customer and channel
development
• Reward employees
• Barter free capacity

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Thank You.

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