Services Marketing Chapter 9: Balancing Demand and Productive

Services Marketing Chapter 9: Balancing Demand and Productive

Services Marketing Chapter 9: Balancing Demand and Productive Capacity Slide 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 9 Page 1 Overview of Chapter 9 Services Marketing Fluctuations in Demand Threaten Service Productivity Managing Capacity Analyze Patterns of Demand Managing Demand Inventory Demand Through Waiting Lines and Queuing Systems Customer Perceptions of Waiting Time Inventory Demand Through Reservation Systems Slide 2010 by Lovelock & Wirtz Services Marketing 7/e

Chapter 9 Page 2 Services Marketing Fluctuations in Demand Threaten Service Productivity Slide 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 9 Page 3 Defining Productive Capacity? Services Marketing Productive capacity can take several forms in services Physical facilities designed to contain customers Physical facilities designed for storing or processing goods

Physical equipment used to process people, possessions, or information Labor Infrastructure Financial success in capacity-constrained business is a function of managements ability to use productive capacity as efficiently and profitably as possible. Slide 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 9 Page 4 From Excess Demand to Excess Capacity Slide 2010 by Lovelock & Wirtz

Services Marketing 7/e Services Marketing Chapter 9 Page 5 Variations in Demand Relative to Capacity Services Marketing VOLUME DEMANDED Demand > Capacity (business is lost) CAPACITY UTILIZED Maximum Available Capacity Optimum Capacity (Demand Supply) Low Utilization (may send bad signals) Demand > optimum capacity (quality declines)

Excess capacity (wasted resources) TIME CYCLE 1 Slide 2010 by Lovelock & Wirtz Services Marketing 7/e TIME CYCLE 2 Chapter 9 Page 6 Addressing Problem of Fluctuating Demand Services Marketing Two basic approaches of which most firms use a mix of: Adjust level of capacity to meet demand Need to understand productive capacity and how it varies on an incremental basis Manage level of demand

Use marketing strategies to smooth out peaks, fill in valleys Inventorying demand until capacity becomes available Slide 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 9 Page 7 Services Marketing Managing Capacity Slide 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 9 Page 8 Managing Capacity Services Marketing

Enables more people to be served at same level of capacity Stretch and shrink: Offer inferior extra capacity at peaks (e.g., bus/train standees) Use facilities for longer/shorter periods Reduce amount of time spent in process by minimizing slack time Adjusting capacity to match demand Rest during low demand Ask customers to share Cross-train employees

Create flexible capacity Use part-time employees Customers perform selfservice Rent/share facilities and equipment Slide 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 9 Page 9 Services Marketing

Analyze Patterns of Demand Slide 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 9 Page 10 Demand Varies by Market Segment Services Marketing Understand why customers from specific market segments select this service Keep good records of transactions to analyze demand patterns Sophisticated software can help to track customer consumption patterns Record weather conditions and other special factors that might influence demand Slide 2010 by Lovelock & Wirtz Services Marketing 7/e

Chapter 9 Page 11 Predictable Demand Patterns and Their Underlying Causes Predictable Cycles of Demand Levels day week month year

other Slide 2010 by Lovelock & Wirtz Services Marketing Underlying Causes of Cyclical Variations employment billing or tax payments/refunds pay days school hours/holidays seasonal climate changes public/religious holidays natural cycles (e.g., coastal tides) Services Marketing 7/e Chapter 9 Page 12 Causes of Seemingly Random Changes in Demand Levels

Services Marketing Question: Which of these events can be predicted? 1. Weather 2. Health problems 3. Accidents, Fires, Crime 4. Natural disasters Slide 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 9 Page 13 Services Marketing Managing Demand Slide 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 9 Page 14 Managing Demand

Services Marketing Take no action Let demand find its own levels Interventionist approach Reduce demand in peak periods Increase demand when there is excess capacity Inventorying demand until capacity becomes available Formal wait and queuing system Reservation system Slide 2010 by Lovelock & Wirtz

Services Marketing 7/e Chapter 9 Page 15 Marketing Mix Elements to Shape Demand Patterns Services Marketing Use price and other nonmonetary costs to manage demand Change product elements Modify place and time of delivery No change Vary times when service is available Offer service to customers at a new location Promotion and Education

Slide 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 9 Page 16 Hotel Room Demand Curves by Segment and Season Price per room night Bl Services Marketing Bh Th Bh = business travelers in high season Bl = business travelers in low season Th = tourist in high season Tl = tourist in low season Tl

Bl Bh Th Tl Quantity of rooms demanded at each price by travelers in each segment in each season Slide 2010 by Lovelock & Wirtz Services Marketing 7/e Note: hypothetical example Chapter 9 Page 17 Services Marketing Inventory Demand Through Waiting Lines and Queuing Systems Slide 2010 by Lovelock & Wirtz

Services Marketing 7/e Chapter 9 Page 18 Waiting Is a Universal Phenomenon! Services Marketing An average person may spend up to 30 minutes/day waiting in lineequivalent to over one week per year! Nobody likes to wait It's boring, time-wasting, and sometimes physically uncomfortable Slide 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 9 Page 19 Why Do Waiting Lines Occur? Services Marketing Because number of arrivals at a facility exceeds capacity of system to process them at a specific point in the process

Queues are basically a symptom of unresolved capacity management problems Not all queues take form of a physical waiting line in a single location Queues may be physical but geographically dispersed Some are virtual (e.g., phone) Slide 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 9 Page 20 Managing Waiting Lines Services Marketing Rethink design of queuing system

Install a reservations system Tailoring the queuing system to different market segments Manage customer behavior and perceptions of wait Redesign processes to shorten transaction time Slide 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 9 Page 21 Queuing Systems can be Tailored to Market Segments

Services Marketing Urgency of job Emergencies vs. non-emergencies Duration of service transaction Number of items to transact Complexity of task Payment of premium price Importance of customer Frequent users/high volume purchasers vs. others Slide 2010 by Lovelock & Wirtz Services Marketing 7/e

Chapter 9 Page 22 Services Marketing Customer Perceptions of Waiting Time Slide 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 9 Page 23 Ten Propositions on Psychology of Waiting Lines Services Marketing Feels longer than Unoccupied time Occupied time Solo waits Group waits

Physically uncomfortable waits Comfortable waits Pre- and post-process waits In-process waits Unexplained waits Explained waits Unfamiliar waits Known, finite waits Unfair waits Fair waits Anxious waits Calm waits Monotonous waits

Valued waits Sources: Maister; Davis & Heineke; Jones & Peppiatt Slide 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 9 Page 24 Services Marketing Inventory Demand Through Reservations System Slide 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 9 Page 25 Benefits of Reservations Services Marketing Saves customers from having to wait in line Helps to control and manage the demand (e.g., leave time

for emergency jobs) Pre-sells the service and can be used to prepare and educate the customer for the service encounter Data captured helps organizations to understand their demand patterns and to plan their operations and staffing levels Slide 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 9 Page 26 Characteristics of Well-Designed Reservations System Services Marketing Fast and user-friendly for customers and staff Responsive to customer queries and needs Offers options for self service (e.g., through an online reservations system) Accommodates preferences (e.g., room with a view) Deflects demand from unavailable first choices to alternative times and locations

Slide 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 9 Page 27 Reservations Strategies Should Focus on Yield Services Marketing Yield analysis helps managers recognize opportunity cost of allocating capacity to one customer/segment when another segment might yield a higher rate later Decisions need to be based on good information Detailed records of past usage Current market intelligence and good marketing sense Realistic estimate of the chances of obtaining higher rated business

When firms overbook to increase yield, Victims of overbooking should be compensated to preserve the relationship Slide 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 9 Page 28 Setting Hotel Room Sales Targets by Segment and Time Period Capacity (% rooms) Week 7 Week 36 (Low Season) 100%

Services Marketing (High Season) Out of commission for renovation Loyalty Program Members Loyalty Program Members Transient guests Weekend package 50% W/E package Transient guests Groups and conventions Groups (no conventions) Airline contracts Time

Nights: M Slide 2010 by Lovelock & Wirtz Tu W Airline contracts Th F S Su Services Marketing 7/e M Tu W

Th F S Su Chapter 9 Page 29 Creating Alternative Use For Otherwise Wasted Capacity Services Marketing Use capacity for service differentiation Reward your best customers and build loyalty Customer and channel development Reward employees Barter free capacity Slide 2010 by Lovelock & Wirtz Services Marketing 7/e

Chapter 9 Page 30 Information Needed for Demand and Capacity Management Strategies Slide 2010 by Lovelock & Wirtz Services Marketing 7/e Services Marketing Chapter 9 Page 31 Summary Services Marketing At any moment in time, a fixed-capacity service may face Excess demand Demand exceeding optimum capacity Demand and supply well-balanced at the level of optimum capacity Excess capacity

To balance demand and capacity, a firm can: Manage capacity Take no action and let demand find its own levels Reduce demand in peak periods Increase demand when there is excess capacity Inventory demand using wait & queuing, and reservation systems Capacity can be managed through: Stretching or shrinking capacity levels Adjusting capacity to match demand Creating flexible capacity Slide 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 9 Page 32 Summary Services Marketing Demand can be managed through

Analysis of patterns To be reshaped by marketing strategies Waiting is a universal phenomenon. Waits can be reduced by Rethinking and redesigning the queuing system Managing customers behavior and their perceptions of the wait Installing an effective reservation system focused on yield Slide 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 9 Page 33

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