Lecture 5 Supply & Demand

28/02/2021
Chapter 7
Balancing
productive
capacity and
demand
Slide 1
Copyright © 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781486002702/Lovelock/Services Marketing 6e
Learning objectives
7.1 Describe what is meant by productive capacity in a service context

7.2 Explain and use capacity management techniques to meet variations
in demand
7.3 Explain and analyse patterns and determinants of demand for
different customer segments
7.4 Distinguish the different supply–demand situations that service firms
with fixed capacity may face
7.5 Identify the five basic demand management strategies and techniques
7.6 Apply the marketing mix elements to reduce fluctuations in demand
7.7 Explain the psychology of waiting and its implications for designing
queuing systems
7.8 Describe the importance of reservations systems to inventory demand
Slide 2
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The capacity challenge
Services are perishable and

cannot be stockpiled for sale at a
later date. This is a problem for
any capacity-constrained service
that faces wide swings in demand,
e.g., cinemas, theme parks,
fitness centres, golf courses
The goal should not be to utilise

staff, labour, equipment and
facilities as much as possible, but
rather to use them as
productively as possible
Slide 3
Defining productive capacity

1. Physical facilities designed to contain
customers, e.g., the number of seats in a
restaurant or on a plane or bus
2. Physical facilities designed for storing or
processing goods, e.g., car parks,
warehouses, cloakrooms
3. Service-provision equipment used to
process people, possessions or
information, e.g., airport scanners, cash
registers, ATMs
4. The number, experience and expertise of
personnel, e.g., HopSkipDrive
5. Infrastructure, e.g., congested airways,
traffic jams or power failures
Slide 4
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Two measures of capacity
The percentage of total

time facilities and
equipment are in use;
and
The percentage of the

physical space e.g.,
seats or cubic freight
capacity
Slide 5
The capacity challenge
• Stretch or shrink existing capacity levels

• Adjusting capacity to match demand
Slide 6
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Stretch or shrink existing capacity

levels
• Some capacity has an elastic
ability to absorb extra demand
(e.g., bus standing commuters in
peak hours), but the actual level
of capacity remains unchanged
• Extend opening hours, e.g.,
supermarkets, banks
• Reduce the amount of time that
customers or their possessions
spend in process, e.g., express
lunches, Express Climb
Slide 7
Courtesy of BridgeClimb Sydney
Climbers make it to the top after one hour of preparation
Slide 8
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Adjusting capacity to match demand (1)
Involves tailoring overall level of

capacity to match demand
• Schedule downtime during periods of

low demand: carry out data-
processing, repair and maintenance
activities
• Cross-train employees: employees
who can perform several functions
can be moved to bottleneck points
when needed, e.g., cinema,
restaurant, supermarket
• Use part-time and casual employees,
e.g., restaurants, tax consultants
Slide 9
Adjusting capacity to match demand

(2)
• Invite customers to perform self-
service (co-production), e.g., self-
service checkout at supermarkets,
self-check-in kiosks at the airport
• Ask customers to share, e.g., taxi,
restaurant table
• Create flexible capacity, e.g., push
two tables (for two) together,
reconfigure aeroplane seating or
hotel room
• Rent or share extra facilities and
equipment, e.g., Party People, Mt
Buller, Las Vegas hospital,
Melbourne Flower and Garden
Show
Slide 10
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Understanding the patterns and

determinants of demand
Predictability over a cycle of known duration, e.g., day (varies by

hour), week (varies by day), month (varies by day or week)
Causes of variation, e.g., school holidays, seasonal changes, public
holidays
Random changes in demand and related causes, e.g., weather, acts
of God
Can demand patterns for a particular service be disaggregated by
market segment?
Slide 11
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Slide 12
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Slide 13
13
Higher demand than maximum

available capacity
• Lost business, may

seek competitors’
offerings
• Resources under
enormous pressure
• Service quality
declines
• Overcrowding
Slide 14
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Higher demand than optimal supply

levels
• Optimal capacity
generally 70-90% of a
firm’s maximum
capacity
• All customers serviced
• Excess pressure on
resources
• Long waits and
queuing required
• Overcrowding
• Service quality suffers
Slide 15
15
Optimum capacity
• Productivity
ideal
• Quality
service
delivered
• Resources
utilised at
their optimum
rate
• No delays
Slide 16
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Lower demand than optimal supply

levels
• Productivity and,
therefore,
profitability decline
• Resources under-
utilised
• Excellent
individual service
• No waiting
• Lack of
atmosphere, e.g.,
rock concert
Slide 17
17
Using marketing mix elements

to shape demand patterns
Pricing strategies:
effective pricing
depends on the
marketing manager
having an
understanding of how
demand responds to
increases, or
decreases in the price
per unit
Slide 18
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• Product variations, e.g., Baby
Loves Disco; ski resort adds a dry
ski run, tax firm offers consulting
services in slack months,
restaurant provides entertainment
at different times of the day
• Modifying the timing and location
of delivery (place):
• vary the times when the service
is available, e.g., café,
shopping centres at Christmas
• offer the service to customers
at a new location, e.g., car
wash at shopping centre,
mobile library or blood bank
Slide 19
19

Communication efforts:
advertising, signage,
publicity and sales
messages to encourage
increased use in off-peak
times,
Short-term promotions,
e.g., Spirit of Tasmania,
cinemas, CBD (central
business district) hotels
Slide 20
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Inventorying demand through

queuing and reservations
• Waiting lines occur when the

number of arrivals exceeds the
capacity of the system to
process them
• Queue management requires
the collection of extensive
data on arrival patterns (some
predictable, some random)
• Solutions to queuing problems
need to tackle the root causes,
e.g., late arrival of ground
staff
Slide 21
21
Inventorying demand
through queuing and reservations
Managing waiting lines:
1. Rethinking the design of
the queuing system
2. Installing a reservations
system
3. Tailoring the queuing
system to different
market segments
4. Managing customer
behaviour and their
perceptions of the wait
5. Redesigning processes
to shorten the time of
each transaction
Slide 22
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Inventorying demand through queuing
Slide 23
23
Six types
of
queuing
system
1. Single
line/single
server/single
stage
Slide 24
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2. Single line sequential stage queues
Suitable for small waiting

time only, e.g., cafeteria
Slide 25
25
3. Parallel lines to multiple servers

Offers more than one serving station, e.g.,
supermarket, fast food restaurants
26 Slide 26
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4. Single line to multiple servers

(often a ‘snake’)
Preferred – multiple lines may not move at

the same speed, e.g., airport, bank
27 Slide 27
27
Single line to multiple servers
Single line
to
multiple
servers …
Slide 28
28
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Chinese Apple Store
Slide 29
29
5. Designated lines
Slide 30
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6. Take a number
A 'take a number' queue is often

seen at fast food shops, banks,
hospitals, state and federal
government department service
centres... No appointments are
taken, the ticket with number
tells you the approximate wait
time so you can go off and do
other things while you wait.
Slide 31
31

and reservations
• Virtual waits, e.g., hold someone’s spot; customer

provides a phone number
• Queuing systems can be tailored to market

segments, e.g., payment of a premium price at
hospitals/clinics, express service of documents
• Cultures and queues, e.g., Japan, Singapore, UK
Slide 32
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and reservations
Psychological considerations in waiting:
• Unoccupied time feels longer than occupied time
• Solo waits feel longer than group waits
• Physically uncomfortable waits feel longer than
comfortable waits
• Pre and post-process waits feel longer than in-
process waits
• Unfair waits are longer than equitable waits
• Unfamiliar waits seem longer than familiar waits
• Uncertain waits are longer than known, finite waits
• Unexplained waits are longer than explained waits
• Anxiety makes waits seem longer, e.g., cinema
queue
• The more important the service, the longer people
will wait, e.g., finals tickets
Slide 33
33
Inventory demand
through a reservation system
Benefits of a reservation system:
• Customer dissatisfaction due to excessive waits can

be avoided
• Reservations make it easier to control and smooth
out demand, e.g., earlier restaurant booking
• It enables revenue management and serves to pre-
sell a service to different customer segments, e.g.,
emergency car servicing
• Data from reservation systems also help
organisations to prepare operational and financial
projections for future periods, e.g., stage show
Slide 34
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Effective demand and capacity

management requires information
• Historical data on demand levels and composition, noting

responses to marketing variables
• Demand forecasts by segment under specified conditions
• Fixed and variable cost data to determine the relative
profitability of incremental unit sales to different
segments and at different prices
• Site-by-site demand variations, e.g., Groove Train
• Customer attitudes towards queuing
• Customer evaluations/opinions of quality at different
levels of capacity utilisation
Slide 35
35
Next week
Topic 6: Integrated services marketing communications

○Lovelock et al. (2015) Chapter 8
Slide 36
36
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Lecture 5 Supply &amp; Demand

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28/02/2021

7.1 Describe what is meant by productive capacity in a service context

The capacity challenge

Services are perishable and

The goal should not be to utilise

Defining productive capacity

Two measures of capacity

The percentage of total

The percentage of the

The capacity challenge

• Stretch or shrink existing capacity levels

Stretch or shrink existing capacity

Courtesy of BridgeClimb Sydney

Climbers make it to the top after one hour of preparation

Adjusting capacity to match demand (1)

Involves tailoring overall level of

• Schedule downtime during periods of

Adjusting capacity to match demand

Understanding the patterns and

Predictability over a cycle of known duration, e.g., day (varies by

Higher demand than maximum

• Lost business, may

Higher demand than optimal supply

Lower demand than optimal supply

Using marketing mix elements

Using marketing mix elements

Using marketing mix elements

Inventorying demand through

• Waiting lines occur when the

Inventorying demand through queuing

2. Single line sequential stage queues

Suitable for small waiting

3. Parallel lines to multiple servers

4. Single line to multiple servers

Preferred – multiple lines may not move at

Single line to multiple servers

Chinese Apple Store

A 'take a number' queue is often

Inventorying demand through queuing

• Virtual waits, e.g., hold someone’s spot; customer

• Queuing systems can be tailored to market

• Cultures and queues, e.g., Japan, Singapore, UK

Inventorying demand through queuing

Benefits of a reservation system:

• Customer dissatisfaction due to excessive waits can

Effective demand and capacity

• Historical data on demand levels and composition, noting

Topic 6: Integrated services marketing communications

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Lecture 5 Supply & Demand

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