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  Time,

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

Demand Patterns  Charting

demand

patterns  Predictable cycles  Random demand fluctuations  Demand patterns by market segment

Constraints on Capacity Nature of the Constraint

Type of Service

Time

Legal Consulting ing Medical

Labor

Law firm ing 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 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. peak usage times and benefits of nonpeak use. Charge full price for the service—no 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

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.

• • • •

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

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 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

 Articulate

the 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: 

   



Role of non-monetary costs:  

 



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

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 low price.

Value is everything I want in a service.

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 everything I want in a service.

Value is low price. • • • •

Discounting Odd pricing Synchro-pricing Penetration pricing

• 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