Coping with Fluctuating Demand for Services: Strategies and Challenges

1. Chapter 14 Coping with Fluctuating Demand for Services

2. Objectives • To show why demand management is a significant problem for services marketing • To explain the nature of the service demand • To explore chasing demand with service capacity • To examine smoothing demand to fill services capacity • To discuss the distinction between maximum and optimum capacity

3. Outline • Introduction • Why Is Services Demand a Problem? • The Nature of Service Demand • Chasing Demand with Service Capacity • Soothing Demand To Fill Service Capacity • Maximum Versus Optimum Capacity • Summary and Conclusion

4. Why Is ServicesDemand a Problem? • Demand cycles – Services must often cope with the ebb and flow of demand that is often deeply ensconced in customers’ behavioral patterns. • Perishability – Services usually exist only for the time during which they are performed --- unused service capacity is not available for later use when demand is great. • One of the most troublesome aspects of services for practitioners— • Too much demand and customers are turned away • Not enough demand and resources go unused.

5. The Nature of Service Demand • Random fluctuation occurs without warning and is hard to accommodate • Predictable fluctuation occurs when customer demand follows a pattern that repeats itself over time • The key is to identify the pattern and the reasons for it. • Such information will help organizations determine what they can do to address demand swings. • Demand cycles can vary across different time frames

6. The Nature ofService Demand (cont’d)

7. Chasing Demandwith Service Capacity • Service capacity comes in three forms • The physical facility in which the service is performed or rendered, e.g., the number of rooms in a hotel • The personnel whose labor and skill level create the service, e.g., the number and skill level of workers available • The equipment that enables the service to occur, e.g., the technology and apparatus associated with the service provision

8. Chasing Demandwith Service Capacity(cont’d) • Successful service organizations strike a balance between capacity and demand • One way to accomplish that is by Chasing Demand with the organization’s productive capacity (facilities, labor, equipment) • Stretch Capacity to accommodate high demand (e.g., add part time workers) • Shrink Capacity in response to low demand (e.g., schedule facility improvements)

9. Smoothing Demand toFill Service Capacity • A balance between capacity and demand can also be attempted by efforts aimed at Smoothing Demand • shifting patronage to times when a service's productive capacity is underused • deflecting or discouraging patronage when it is oversubscribed. • Smoothing Demand is accomplished by using the elements of the marketing mix, e.g., heavy promotion to encourage patronage or higher prices to deflect patronage to other times.

10. Inventorying Demand • Organizations can Inventory Demand, i.e., gain knowledge of customer demand that needs to be accommodated by: • Formal Queuing—using a system to organize the demand • Reservation Systems—scheduling the demand to fit the capacity

11. Inventorying Demand(cont’d)

12. Do Nothing • One option an organization has is to Do Nothing about fluctuating demand. • Ideally, customers will adjust to the situation by staying away when there is no capacity and patronizing when known capacity exists. • Somewhat risky approach, however. • Instead, astute organizations will attempt to Chase Demand and Smooth Demand, often a the same time, to bring a balance between capacity and demand

13. Demand Strategies

14. Maximum VersusOptimum Capacity • Optimum Capacity is the number of customers that can be effectively handled under ideal conditions • Maximum Capacity is when all of the capacity is utilize • Typically, Optimum Capacity is not Maximum Capacity • Creating demand greater than maximum capacity may result in negative experiences • Maximum capacity does not always mean maximum profits

15. Maximum VersusOptimum Capacity(cont’d) • When demand exceeds even maximum capacity two possible responses are the customers have to wait or the customers leave • If they leave, they may go to competitors or at the very least be disappointed • If they wait, it’s a good idea to make the wait tolerable • Most customers do not enjoy waiting • A poorly managed wait can put customers in a bad mood, potentially creating negative consequences once they gain entry to the service delivery system • Principles of Waiting provide insights

16. Maximum VersusOptimum Capacity(cont’d)

17. Web Sites • Hooters (http://www.hooters.com), p. 212 • U.S. Postal Service (http://www.usps.com), p. 220