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Chapter 15: Managing Demand Capacity Provider Gap 3: failure to deliver what was designed and specified The fundamental issue underlying supply and demand management in services is the lack of _________ The lack of inventory capability in services is due to the following service characteristics: __________________________________
Managing Demand Capacity Perishability: An unsold airline seat for a given flight cannot be Simultaneous production and consumption: Service cannot be provided in advance of customer demanding the service; cannot be from one place to another Ex: ________________
Managing Demand Capacity Exercise: Compare a car repair service with an automobile dealer in terms of inventory capability Which service business is least likely to experience wide fluctuations in demand?
Figure 15. 1 Variations in Demand Relative to Capacity
4 Scenarios Involving Capacity and Demand • Demand exceeds maximum capacity (excess demand): • Demand exceeds optimum capacity: service quality declines; • Supply and demand are balanced at the level of optimum capacity: • Demand is below optimum capacity (excess capacity):
Capacity Constraints for Service Firms (Table 15. 2) Time: businesses that sell time, advice, counsel, personal services, etc. Lawyers, consultants, doctors, accountants; more time cannot be produced, Labor: law firms, consulting firms, health clinics - constrained by number of people available to serve at a point in time
Capacity Constraints for Service Firms Equipment: trucks, aircraft, utility; unless equipment is used to capacity, revenue is severely affected EX: ________________ Facilities: hotels, restaurants, hospitals, airlines, schools, theaters, churches; facility has capacity, beyond which service cannot be provided.
Capacity Constraints for Service Firms : organization’s resources employed at some ideal level; service quality consistently delivered; customers are happy; employees are happy; demand supply are balanced : organization’s resources are used to their absolute maximum; every seat is full, every minute and hour is used; cannot be supported over long periods of time
Manage Fluctuating Demand for Service Firms Services (e. g. , restaurants) face fluctuating demand. What is the likely pattern of demand (season, week, day, hour, etc)? When is demand predictable? When is demand random?
Strategies for Matching Capacity and Demand Shifting demand to match capacity: Shift customers away from periods in which demand exceeds capacity Flexing (adjusting) capacity to meet demand
Shift Demand to Match Capacity Vary the service offering: ski resorts in winter - executive training facility in Communicate with customers: Modify timing and delivery of service: changing banking hours to include Differentiate on price:
Flexing Capacity to Meet Demand Stretch existing capacity: people, facilities, and equipment are asked to work longer to meet demand: EX: Align capacity with demand fluctuations: use parttime employees, outsource, rent or share facilities, etc.
Managing Demand Capacity Yield Management: Process of allocating the right type of capacity to the right kind of customer at the right price so as to maximize capacity
Yield Management Yield = actual revenue potential revenue = actual capacity used x average actual price total capacity x maximum price
Yield Management Hotel: (Friday – Sunday) Total capacity: 300 rooms Maximum price: $150 per room Actual capacity used: 100 rooms Average actual price: $125 per room Yield: 100 x $125 = 27. 8% 300 x $150
Yield Management: Improving Yield for Friday to Sunday Hotel: (Friday – Sunday) Total capacity: 300 rooms Maximum price: $100 per room Actual capacity used: 250 rooms Average actual price: $90 per room Yield: 250 x 90 = 75% 300 x 100
Waiting Line Strategies: When Demand Capacity Cannot be Aligned Employ : analyze operational processes to remove any efficiencies Installing ticket vending machines in train stations to expedite the purchase of train tickets Establish a reduce long waits : spread demand;
Waiting Line Strategies: When Demand Capacity Cannot be Aligned Differentiate : not all customers need to wait the same length of time for the service. EX: Express checkout lanes for customers purchasing 10 items or less Make waiting fun, or : it is not the actual time waiting that impacts customer satisfaction - it is how customers feel about the wait and their perceptions of it;