Managing Demand and Capacity in Services

INTRODUCTION

MODEL

DEMAND SUPPLY
STRATEGIES STRATEGIES

Partitioning Increasing
Developing demand customer
Sharing participation
complementary
capacity
services Establishing
Scheduling
Developing price Cross- work shifts
reservation incentives training
systems employees Creating
Promoting
off-peak Using adjustable
demand part-time capacity
employees
Yield
management

Demand Strategies
Developing complementary services

While customer waits for primary service, a complimentary service can be provided
simultaneously. This will have double advantage, first consumer waiting time will be passed and
second extra revenue can be earned. For example having a Bar at a restaurant allows consumer
to have some drink before the table gets vacant.
In case of a cinema hall most of the people take a ticket well before time of screening. If a video
game parlor or a gift shop is in the vicinity of the cinema hall then customers can spend some
time there and may buy something.

However sometime secondary services become so attractive to the consumer that primary
service loses its business. This may result in to cannibalization of the business line. In case of
video game parlor if customer gets entertained there then they will start visiting there only
rather than cinema hall.

Developing reservation systems

Booking services at the pre-sell level always avoid waiting and disappointment for the
customer. This is a proven model in case of industries such as Hotels, Airlines, and Doctors.
However this can be only used if business has established brand or business is a monopoly.
Then only customer is ready to put an extra effort for reservation.

Partitioning demand

Sometime services are partitioned into many types of demands such as appointments versus
walk-ins. Cinemas are typical example where few of the tickets are done through telephone and
internet, and at the same time ticket can bought from counters.

Establishing price incentives

Managing demand is effectively done by having flexible prices. In case of clubs and restaurants
some time weekend and night rates are different. For pub and bar happy hours has become a
common policy. Airlines have an old age policy of Early-bird pricing.

Promoting off-peak demand

Some of the businesses are heavily depended on the seasons. Hotels and Resorts come into this
category. Therefore off-season rates are always highly subsidized in such businesses. Resort
offers business retreats for the customer at off-season.

Supply Strategies
Sharing capacity

Sharing of capacity is an effective way to avoid excess. For example airlines share gates, ramps,
baggage-handling equipment, and even ground personnel.

Cross-training employees
Training of employees in the service industry is costly. Supermarkets and fast food restaurants
avoid this by doing cross training of employees. This is an effective way if industry is similar and
employees are expected to perform in uniform way.

Using part-time employees

Using part-time and contract employees is becoming very popular. Banks use extra tellers in
case of rush. Hospitals are hiring on-call doctors. However the use of part-time employees has
many downsides. Conflict with permanent employees, leakage of internal data and
deteriorated services can be some of the possible problems.

Increasing customer participation

Increasing customer participation is a very effective way to limit capacity constraint. Buffets in
restaurants and self-service pump-gas are some successful model of business. But downside is
that there could be waste, moreover customer need to be well aware of the usage.

Creating adjustable capacity

By anticipating the rush period sometime way to deliver services are changed also. Restaurants
are rearranged for buffets sometime before New Year bash party. Airlines reconfigure the
aircrafts to accommodate more seats.

Yield Management
Yield management is most appropriate for services with the following characteristics:

1. Fixed capacity - Hotels and Airlines are constrained by fixed capacity.

2. Ability to segment markets –Seasonal resort and hotels with Saturday-night stay are the
examples.
3. Perishable inventory - Standby passengers are a typical example. Since they have high
chance to deflect.
4. Product sold in advance - Demand control for a hotel is an example.
5. Fluctuating Demand - This is a common problem across service industry. Revenue is
increased when demand is high.
6. Low marginal sales cost and High capacity change cost - selling airline snack vs. cost on
bigger aircraft.

Ultimate aim of the yield management is to eventually dilute the effect fixed prices. However
yield management need to handle carefully as it can have negative effects on customer
relations.
EXAMPLE