Managing capacity and demand

1. Managing capacity and demand Week 10

2. 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.

3. 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.

4. 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.

5. Alternative supply and demand outcomes

6. Alternative supply and demand outcomes (cont.)

7. Demand versus Supply Source: C. H. Lovelock, “Classifying Services to Gain Strategic Marketing Insights,” Journal of Marketing 47, (Summer 1983): 17.

8. Time, labor, equipment, and facilities Optimal versus maximum use of capacity Charting demand patterns Predictable cycles Random demand fluctuations Demand patterns by market segment Understanding Capacity Constraintsand Demand Patterns Demand Patterns Capacity Constraints

9. Constraints on Capacity

10. 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. Advertise peak usage times and benefits of nonpeak use. Charge full price for the service—no discounts. Strategies for Shifting Demand to Match Supply Demand Too High 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.

11. Adjusting demand to meet supply

12. Adjusting demand to meet supply (cont.)

13. 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. Adjust Capacity Strategies for Adjusting Supply to Match Demand Demand Too High Demand Too Low • Perform maintenance, renovations. • Schedule vacations. • Schedule employee training. • Lay off employees.

14. Adjusting supply to meet demand

15. Adjusting supply to meet demand (cont.)

16. Challenges and Risks in UsingYield 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

17. 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 premium price • Make waiting fun, or at least tolerable

18. 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.

19. Issues to Consider in Making WaitingMore 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

20. 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

21. 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

22. Overview (cont.) • Demonstrate what value means to customers and the role that price plays in value • Describe strategies that companies use to price services

23. 3 key differences • Customer knowledge of service prices: • Service variability limits knowledge • Providers are unwilling to estimate prices • Individual customer needs vary • Collection of price information is overwhelming • Prices are not visible • Role of non-monetary costs: • Time costs • Search costs • Convenience costs • Psychological costs • Price as an indicator of service quality

24. Three Basic Marketing Price Structures and Challenges Associated with Their Use for Services P= DC+OC+Profit Challenges: 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. Small firms may charge too little to be viable. 2. Heterogeneity of services limits comparability. 3. Prices may not reflect customer value. Cost-based Competition- based Demand-based 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.

25. Four Customer Definitions of Value Value is everything I want in a service. Value is low price. Value is the quality I get for the price I pay. Value is all that I get for all that I give.

26. Pricing Strategies When the Customer Defines Value as Low Price Value is low price. • Discounting • Odd pricing • Synchro-pricing • Penetration pricing

27. 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

28. 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

29. 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

30. Summary of Service Pricing Strategies forFour 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 is all that I get for all that I give. • Value pricing • Market segmentation pricing • Price framing • Price bundling • Complementary pricing • Results-based pricing