MANAGING DEMAND
(“It’s either feast or famine for us!” – manager of a servicing firm).
4I. “Inventory” is the major cause of inability to cope with fluctuations in demand.
Typically affected companies:
- transportation;
- lodging;
- food service;
- repair and maintenance;
- entertainment;
- health care…
(What is very typical for all these companies?)
2 ways out:
- tailor capacity to meet variations in demand (operations and human resource management);
- manage demand by marketing by generating consistent flow.
Managing capacity.
Equipment bottlenecks.
Two measures of capacity utilization:
- percentage of the total time that facilities and equipment are in revenue operation;
- percentage of the physical space (seats, cubic freight capacity) utilized during operations.
Labor constraints – inadequate staffing.
(People are more variable then equipment; both by capacity and by customer heterogeneity).
Tailoring the level of capacity.
- Elastic strategies: “simple” restaurant menu during peak times, less leg space and extra seats in
an airplane, etc.
- “Chase demand”: hire part-time people and rent more equipment at peak times; or scheduling
employee vacations, sending people to training programs, renting out equipment.
Actions that adjust capacity to match fluctuating levels of demand:
1. Schedule downtime during periods of low demand (set 100% capacity for peak time and plan
repair, vacations, etc. for low periods).
2. Use part-time employees. (e.g. Postal workers, hotel personnel).
3. Rent or share extra facilities and equipment. (Search for complementary businesses).
4. Cross-train employees. Shifting people to bottlenecks when necessary. (What businesses?).
Understanding the patterns and determinants of demand.
What factors govern demand?
1. Does demand follow predictable cycle and what are the underlying causes of cyclical
variations? (Employment, billing and tax payment, wage/salary, school hours, vacations,
climate, public/religious holidays, natural (coastal tides)).
2. Do demand levels seem to change randomly? (Due to weather, health issues (heart attacks and
births), accidents, criminal activities).
3. Can demand over time be disaggregated by market segment to reflect such components as:
- Use patterns by a particular type of customer or for a particular purpose?
- Variations in the net profitability of each completed transaction?
—1—
Services marketing. Managing demand
(MR statistical analysis may reveal correlations which can break apart seemingly random demand).
The same service can face simultaneous cycles in demand with different repeat period (e.g., day,
week, and season may matter).
Disaggregating demand by market segment.
No strategy for smoothing demand is likely to succeed unless it is based on an understanding of
why customers from specific market segment choose to use the service when they do. (E.g.
convincing business travelers to stay on a weekend is a futile effort; and convincing people to use
public transportation in off-peak times should be oriented onto employers, not employees).
Strategies for managing demand.
1.
2.
3.
4.
Demand exceeds capacity (business lost).
Demand exceeds optimum capacity (service quality declines).
Optimum capacity utilization (demand and supply are well balanced).
Excess capacity (wasted resources). (May be, customers find the experience disappointing or
have doubts about the viability of the service).
Maximum load sometimes is perceived beneficially (full opera), but frequently, unloaded capacity
is more desirable for customers (e.g., airplane).
A company must use the potential of segments sequentially, skimming cream from the most
attractive and then working with less profitable groups and even abandoning some unprofitable
segments. However, balance b/w high demand and low demand clientele profile limits this practice.
5 common approaches to managing demand.
Approach used to manage
demand
Take no action
Reduce demand
Increase demand
Capacity situation relative to demand
Sufficient capacity
Excess Capacity (insufficient
(satisfactory demand)
demand)
Capacity is fully utilized. (But
Capacity if wasted.
is this the most profitable mix
(Customers have a
of business?)
disappointing experience for
services like theater).
Pricing higher will increase
Take no action (but see
Take no action (but see
profits. Communication can be above).
above).
employed to encourage usage
in other time slots. (Can this
effort be focused on less
profitable/desirable
segments?)
Take no action, unless
Take no action, unless
Price lower selectively (try to
opportunities exist to stimulate opportunities exist to stimulate avoid cannibalizing existing
(and give priority to) more
(and give priority to) more
business; ensure all relevant
profitable segments
profitable segments
costs are covered). Use
communications and variation
in products / distribution (but
Insufficient capacity (excess
demand)
Unorganized queuing results.
(May irritate customers and
discourage future use).
—2—
Services marketing. Managing demand
Inventory demand by
reservation system
Inventory demand by
formalizing queuing
Consider priority system for
most desirable segments.
Make other customers shift:
outside peak period or
to future peak
Consider override for most
desirable segments. Seek to
keep waiting customers
occupied and comfortable. Try
to predict wait accurately.
Try to ensure most profitable
mix of business
Try to avoid bottleneck delays.
recognize extra costs, if any,
and make sure appropriate
trade-offs are made between
profitability and usage levels).
Clarify that space is available
and that no reservations are
needed.
Not applicable.
1. No action. Customers learn from experience or word-of-mouse when there is no delay in
servicing. However, the same causes turn customers to competitors.
2, 3. More interventionist approaches: reduce demand in peak periods or increase demand when
there is excess capacity.
4, 5. Inventory demand until capacity becomes available by reservations system that promises
customers access to capacity at specific times, or by creating formalized queuing systems (or
combination of the two).
Using marketing mix elements to shape demand patterns.
(Effective demand management efforts often require changes in two or more elements jointly).
Product. E.g. Restaurants, during 24 hours, can change menus and levels of service, vary lighting
and décor, open and close the bar, add/remove entertainment. The goal is to appeal to different
needs within the same group of customers, to reach out to different segments, or to do both
according to the time of the day.
Timing and location.
1. No change strategy (the service is offered at the same locations at the same time);
2. Varying the times (to reflect changes in customer preferences by day of week, season, and
so forth); e.g. theater matinees on weekends, siesta closing, etc.
3. New locations. Delivering services to customers. Installing seasonal resort rent-a-car sites.
Pricing strategies.
Figure: aggregate demand curve varies significantly given different time periods.
—3—
Services marketing. Managing demand
To complicate the matters further, there may be separate demand curves for different segments
within each time period, reflecting variations between segments in the need for the service or in
ability to pay.
One of the most difficult tasks facing service marketers is to determine the nature of all these
different demand curves. Research, trial and error, and analysis of parallel situations in other
locations or in comparable services are all ways of obtaining an understanding of the situation.
Companies try to offer service variations for different segments. The objective is to maximize the
revenues received from each segment. However, when capacity is constrained, the goal in a profitseeking business should be to ensure that as much capacity as possible is utilized by the most
profitable segments. For this reason, various usage conditions may have to be set to discourage
customers willing to pay top-of-the-line prices from trading down to less expensive versions of the
product. Airlines, for instance, insist that excursion tickets be purchased 21 days in advance and that
ticket holders remain at their destinations for at least one week before returning – conditions that are
too constraining for most business travelers.
Communication efforts.
E.g. short-term promotions, combining both pricing and communication elements as well as other
means, may provide customers with attractive incentives to shift the timing of service usage.
Inventory demand through queuing and reservations.
Strategies for ensuring order, predictability, and fairness in place of a random free-for-all.
Managing customer behavior through queuing systems.
Waiting line is a universal phenomenon.
Americans spend 37 billion hours a year (150 hours per capita) in waiting lines, “during which time
they fret, fidget, and scowl,” according to Washington Post.
Queues can be a symptom of unresolved capacity management problems.
Random vs. predicted arrivals.
Statistical arrival estimation methods? Exponential and Poisson distributions and produced output
data (average waiting time, average number in a queue, expected number of people in a queue in
95% of cases, etc.). Reference to operations.
A multi-pronged approach to reducing wait times.
E.g. Bank of Chicago approaches to reducing waiting time.
—4—
Services marketing. Managing demand
1. Improvement in the service operations. (Electronic system that routed customers to the next
available station and provided info on staffing to match demand; new cash machines saving 30
seconds per customer, etc.)
2. Changing in human resource strategies. (Revised job description for teller managers:
responsibility for customer queuing times and for expediting transactions; officer-of-the-day
position and assistance with complicated transactions; equipping personnel with beepers, etc.).
3. Customer-oriented improvements to the delivery system. (Quick drop desks were established on
busy days to handle deposits and simple requests, in addition to new express teller stations
reserved for deposits and check cashing; expanded lobby hours even to Sundays, a customer
brochure on how to avoid delays).
As a result – “the best bank in the region for minimal teller waits” opinion was obtained among
customers, becoming a new valid positioning statement.
Segmentation as an alternative to “first-come, first-served”.
Marketing may introduce priorities of service.
Allocation may be based on:
- Urgency of job (patients in hospital);
- Duration of service transaction (express lanes for quick transactions);
- Payment of a premium price (separate check-ins in airports);
- Importance of the customer (extras and privileges for valued customers).
Psychological considerations in waiting.
8 principles about waiting time:
- unoccupied time feels longer than occupied;
- pre-process waits feel longer than in-process waits;
- anxiety makes waits seem longer;
- uncertain waits are longer than known, finite waits;
- unexplained waits are longer than explained;
- unfair waits are longer than equitable;
- the more valuable the service, the longer people will wait;
- solo waits feel longer than group waits.
(Examples, how these statements can be taken into account).
Reservations.
Usually, about clients personally and owners of possessions; dealing with urgency outlines the
following approaches:
- advance fee for all reservations (not always feasible, though);
- canceling non-paid reservations after a certain time;
- providing compensation to victims of overbooking.
Information needs.
Development demand-management strategies requires informational help, which may include:
- Historical data on the level and composition of demand over time, including responses to
changes in price or other marketing variables.
- Forecasts of the level of demand for each major segment under specified conditions.
- Segment by segment data to help management evaluate the impact of periodic cycles and
random demand fluctuations.
- Good cost data to enable the organization to distinguish between fixed and variable costs and to
determine the relative profitability of incremental unit sales to different segments and different
prices.
—5—
Services marketing. Managing demand
-
In multisite organizations, identification of meaningful variations in the levels and composition
of demand on the site-by-site basis.
Customer attitudes toward queuing under varying conditions.
Customer opinions on whether the quality of service delivered varies with different levels of
capacity utilization.
Most of data comes from files on transactions.
Recommendation – the data should be stored in the retrievable form.
Database management becomes a critical issue.
—6—
Services marketing. Managing demand