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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.

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managing demand and capacity
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
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
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.

demand versus supply
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
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

strategies for shifting demand to match supply
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.
strategies for adjusting supply to match demand
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.
challenges and risks in using yield management
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
waiting line strategies
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
waiting line configurations
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
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
wait times cont
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
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
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
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
three basic marketing price structures and challenges associated with their use for services
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.

four customer definitions of value
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.

pricing strategies when the customer defines value as low price
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
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
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
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
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