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.

 Strategies for matching supply and demand

through (a) shifting demand to match capacity or
(b) adjusting capacity to meet demand.
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 Demand Patterns
 Time, labor, equipment,  Charting demand
and facilities patterns
 Optimal versus  Predictable cycles

maximum use of  Random demand

capacity fluctuations
 Demand patterns by

market segment
Constraints on Capacity
Nature of the Constraint Type of Service
Time Legal
Consulting
Accounting
Medical
Labor Law firm
Accounting firm
Consulting firm
Health clinic
Equipment Delivery services
Telecommunication
Network services
Utilities
Health club
Facilities Hotels
Restaurants
Hospitals
Airlines
Schools
Theaters
Churches
 Strategies for Shifting Demand to Match
Supply
Shift Demand
Demand Too High Demand Too Low
• Use signage to communicate busy days and • Use sales and advertising to
times.
• Offer incentives to customers for usage increase business from current
during nonpeak times.
market segments.
• Take care of loyal or “regular” customers
first. • Modify the service offering to
• Advertise peak usage times and benefits of
appeal to new market
nonpeak use.
• Charge full price for the service—no segments.
discounts.
• 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
• Stretch time, labor, facilities and equipment. • Perform maintenance,
• Cross-train employees. renovations.
• Hire part-time employees.
• Schedule vacations.
• Request overtime work from employees.
• Rent or share facilities. • Schedule employee training.
• Rent or share equipment. • Lay off employees.
• 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

 Differentiate waiting customers

 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

 Discussthree major ways that service prices

are perceived differently from goods prices by
customers

 Articulatethe key ways that pricing of services

differs from pricing of goods from a company’s
perspective
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
 Role of non-monetary costs:
 Time costs
 Search costs
 Convenience costs
 Psychological 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:
1. Costs difficult to trace.
Challenges: 2. Labor is more difficult to
1. Small firms may charge too Co price than materials.
little to be viable. st
-b 3. Costs may not equal the

d n-
2. Heterogeneity of services as value that customers

se tio
limits comparability. ed perceive the services are

ba eti
3. Prices may not reflect worth.
customer value.
mp
Co

d -b a sed
n
Dema

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
Value is low price.
I want in a service.

Value is the Value is all that

quality I get for I get for all
the price I pay. 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. Value is everything
I want in a service.
• Discounting
• • Prestige pricing
Odd pricing
• • Skimming pricing
Synchro-pricing
• Penetration pricing

Value is the quality Value is all that I get

I get for the price I pay. for all that I give.
• Value pricing • Price framing
• Market segmentation • Price bundling
pricing • Complementary pricing
• Results-based pricing