Services Marketing

Chapter 8 : Managing Demand and Capacity

Concept of Demand

Contraction and Recession
Expansion or Boom
Technological Developments
Demographics
Natural and other Disasters
Demand Patterns
Sketching Demand Patterns
Foreseeable Cycles
Random Demand Variations
Demand Patterns by Market Segment

Capacity Constraints

Strategies to Match Demand and Capacity

Demand Shift
Adjusting Capacity to Meet Demand

Creating a Demand Inventory

Queuing System
Reservation Systems

Yield Management

Yield Management Process
Application Areas of Yield Management
Benefits of Yield Management

Chapter Summary

The perishable and intangible nature of services makes it impossible for service companies to store them in order to use them during peak demand periods. On the other hand, demand for services depends on many factors like the phase in which the economy operates i.e., whether the economy is in a recession or expansion; demographic factors, natural disasters, and the technological developments in the market.

Organizations should understand the basics of how and why demand for a service fluctuates in order to design strategies to manage demand. Charting out the patterns of demand will help organizations find some predictable cycles. If predictable cycles do not exist and the demand patterns are random, organizations should further find the reasons for such random demand and try to form strategies to reduce the same.

Understanding demand is not sufficient to manage demand fluctuations. It also involves the organization's capacity to fulfill the demand. Therefore, it is imperative for an organization to understand its capacity constraints in terms of time, labor, equipment, and facilities. A clear understanding of demand patterns and capacity constraints will help an organization design suitable strategies to match them both.

Demand and capacity can be matched either by shifting demand and stretching or aligning capacity to meet demand. Shifting demand involves varying original offer to meet the current demand, communicating the periods of peak and low demand to the customers, altering timings of service delivery to spread the demand across the peak and slack periods, and finally adopting price differentiation strategy to meet the demand fluctuations.

Capacity can be managed to meet the demand by stretching the four primary resources namely time, labor, equipment, and facilities. Further, when it is not possible to stretch these factors, an organization can vary the basic mix and use these resources creatively to meet the demand fluctuations. This strategy is popularly known as ‘chase demand'.

This can be done by hiring part-time employees, outsourcing activities, sharing or modifying facilities, renting or moving equipment, cross-training employees and finally by scheduling downtime delivery periods of low demand. Apart from matching demand and capacity, an organization may also try to create a demand inventory.

The first step is to deal with the waiting line or queue at the time of service delivery. One way is to adopt the first-come first-serve principle. When it is not possible to do so, organizations can solve the problem through market segmentation. Other strategies involve serving those customers who require the services on an emergency basis first, reducing the time of transaction, serving important customers first, or by serving customers who contribute the most to the organization's profits.

Organizations should consider the psychological feelings of the customers while they are waiting and make the process more tolerable for them. This can be achieved by keeping customers busy while waiting, involving them in activities related to the service, reducing their anxiety by informing them about the current situation and the duration of waiting. Customers have to be explained the reasons why the service delivery was taking so long and why some of them were served first.

Organizations should understand the customers'tendency to wait for longer periods depending on the value of the service and their irritability while waiting alone. Additionally, by adopting reservation systems, organizations can spread the demand equally across peak and slack periods.

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