Mpel-05-Balancing Demand and Productive Capacity

CHA P TER 9
Balancing Dem and

and Prod u ctive
Capacity
Balancing the supply and demand sides of a ser vice industry
is n ot easy, and whether a manager does it well or not makes
all the difference.
EARL SASSER
They also ser ve who only stand an d wait.

JOHN M ILTON
LEARNING OBJECTIVES (LO s)

By the end of this ch ap ter, the read er sh ou ld
LO1 Understan d what is meant by
capacity in a service con text.
LO2 Know the d ifferen t d eman d supply situations that fixed cap acity firms may face.
LO3 Use capacity m anagement techniques to m atch variations in
dem and.
LO4 Recognize th at d eman d v aries by
segment, and p red ict segmen tspecific variation s in d eman d an d
their causes.
LO5 Be familiar w ith th e five basic
ways to m an age d emand .
b e ab le to:
LO6 Use marketing mix elemen ts to
smooth ou t fluctuations in deman d.
LO7 Know h ow to in ventory d em and
th rough waitin g lines and qu euing
systems.
LO8 Und erstand how custom ers perceiv e waits and h ow to make waitin g less bu rd ensome for them .
LO9 Know h ow to in ventory d em and

th rough reservation s systems.
LO10 Be familiar with the data requirements for d esign ing effective
strategies to manage d emand and
capacity.
227
228 Part III Man agin g the Cu stomer Interface
Summer on the Ski Slopes

It used to be that ski resorts sh ut d ow n once the sn ow melted and th e slop es becam e u nskiable.
The chairlifts stopp ed operating, the restau rants closed , and the lod ges were locked and shu ttered u ntil w inter ap proached an d the snows fell again. In time, h ow ever, some ski op erators
recognized that a moun tain offers su mm er pleasures, too, and kept lod ging and restau rants
open for hikers and picnickers. Some even bu ilt Alpin e slid escurving tracks in which
w heeled toboggans cou ld run from the su mm it to the baseand thus created d em and for tickets on the ski lifts. With the constru ction of condomin ium s for sale, d em and in creased for warm
w eath er activities as the ow ners flocked to the mou ntains in sum mer and early fall (Figu re 9.1).
Th e arrival of the m oun tain bikin g craze created op portu nities for equ ip m ent rentals as
w ell as chairlift rid es. Killington Resort in Vermont has long encouraged sum m er visitors to
rid e to th e sum m it, see the view, an d eat at th e m oun taintop restau rant. Bu t now it also enjoys
a booking bu siness in ren ting m oun tain bikes and related equip m en t (su ch as helmets).
Besid e the base lod ge, w here in winter skiers w ould find rack after rack of skis for ren t, the
sum m er visitor can now ch oose from rows of m oun tain bikes. Bikers tran sp ort th eir vehicles
u p to th e su mm it on sp ecially equ ip ped chairlifts, and then rid e them d ow n d esignated trails.
Seriou s hikers reverse the p rocess, clim bing to the su mm it via trails that seek to avoid d escend in g bikesgettin g refreshm ents at the restau rant, and th en taking th e chairlift back
d own to the base. On ce in a w hile, a biker w ill actu ally ch oose to rid e his or h er bike u p the
m ou n tain , bu t su ch glu tton s for pu nish m en t are few an d far between .
Most large ski resorts look for a variety of ad d itional w ays to attract gu ests
to their h otels and rental h om es d u rin g
the su mm er. Mont Tremblant, Qu ebec,
for in stance, is located besid e an attractive lake. In ad dition to sw im ming an d
other w ater sports on the lake, the resort
offers visitors su ch activities as a champ ion sh ip g olf cou rse, ten nis, rollerbla d ing, and a childrens d aycam p . An d
hikers and mou ntain bikers com e to rid e
the lifts u p th e m oun tain. Th is is a won d er fu l exam ple of h ow service d evelopFIGURE 9.1 Riding the Chairlift Up M ont Tremblant m en t an d marketing gen erated d eman d
for otherw ise idle service capacity!
to Hike and Bike Rather Than Ski
FLUCTUATIONS IN DEM A ND THREATEN PROFITA BILITY

Flu ctu atin g d em and is a major challenge for m any types of cap acity-constrained service organizations, includ in g airlines, restau rants, vacation resorts, courier services,
consu lting firms, th eaters, and call centers. These d em an d fluctuations may range in
frequ en cy from as long as a season of th e year as discussed in the open ing v ign ette to
as sh ort as an h ou r, and th ey p lay havoc with efficient u se of productive assets, th u s
erod ing p rofitability. By w orkin g collaboratively with managers in operation s and
h u man resources, service marketers m ay be able to develop strategies to bring d em and an d cap acity into balan ce in ways that create ben efits for customers as w ell as
imp roving finan cial return s for the business.
Defi ning Pr oduct i ve Capacit y
What do we mean by prod u ctive cap acity? The term refers to th e resources or assets that
a firm can emp loy to create good s and services. In a service context, productive capacity
can take several forms:
1. Physical facilities designed to contain customers and u sed for delivering peoplep rocessing services or mental stimulus p rocessing services. Examp les inclu d e
med ical clin ics, hotels, passenger aircrafts, and college classrooms. The primary cap acity con straint is likely to be d efined in terms of such fu rnish in gs as beds, rooms,
Chapter 9 Balancing Dem and and Prod u ctive Capacity 229
or seats. In some cases, for h ealth or safety reasons, local regulations m ay set an
upper limit to the n um ber of p eop le allow ed in for health or safety reasons.
2. Physical facilities designed for storing or processing goods that either belong to customers
or are being offered to them for sale. Examples include p ip elines, warehouses, parking lots, and railroad freight wagons.
3. Physical equipment used to process people, possessions, or information may em brace a
huge range of item s and may be very situation sp ecificdiagnostic equip ment,
airport secu rity d etectors, toll gates, bank ATMs, an d seats in a call cen ter are
among the m an y item s w hose absence in sufficient n um bers for a given level of
demand can bring service to a craw l (or even a comp lete stop ).
4. Labor is a key elem ent of p rodu ctive cap acity in all high -con tact services and m an y
low-contact ones. Staffin g levels for restaurant servers, and nu rses and call center
staff need to be sufficient to m eet anticip ated demand otherw ise cu stomers are
kept waiting or service is ru shed . Professional services are especially dep end ent on
highly skilled staff to create high valu e-ad d ed, information -based outpu t.
Abraham Lincoln cap tu red it well when he remarked that A lawyer s time and
expertise are h is stock in trad e.
5. Infrastructure. Many organizations are d ependent on access to sufficient cap acity
in the public or p rivate infrastru ctu re to be able to d eliver quality service to their
own customers. Cap acity problem s of this n ature may in clud e congested airways
that lead to air traffic restriction s on flights, traffic jams on major h igh ways, and
power failu res (or brown ou ts cau sed by redu ced v oltage).
Financial su ccess in cap acity-con strain ed businesses is, in large measu re, a function of managemen ts ability to u se p rod u ctive cap acitylabor, equipment, and facilitiesas efficiently and as profitably as possible. In practice, however, its d ifficult to
achieve this ideal all th e time. N ot on ly d o d eman d lev els vary, often randomly, bu t th e
tim e and effort required to p rocess each p erson or thing may v ary w idely at any point
in the process. In general, p rocessin g times for peop le are more variable than for objects
or things, reflecting varying levels of p repared ness (Ive lost my cred it card), argu m entative versus coop erative p ersonalities (If you wont give m e a table with a view,
Ill have to ask for you r su p ervisor), and so forth. Fu rthermore, service tasks are not
n ecessarily homogeneou s. In both p rofessional services and repair jobs, diagnosis and
treatment times vary accord in g to the n atu re of the cu stom ers problem s.
Fr om Excess Dem and t o Ex cess Capaci t y
Most services are p erishable and norm ally cann ot be stockpiled for sale at a later
d ate, posing a challenge for any cap acity -con strained service that faces w id e swin gs
in demand. The p roblem is most acu te for organization s th at engage in p hysical
processes such as p eop le or p ossession p rocessing, bu t it also affects labor-intensive,
inform ation-p rocessin g services th at face cyclical shifts in deman d. Accou n tin g and
tax preparation are cases in p oin t.
For fixed cap acity firm s, the p roblem is a familiar one. Its either feast or famine
for us! sighs the manager. In p eak p eriod s, were d isap p ointing prospective customers
by turning them aw ay. And in low p eriod s, our facilities are id le, our emp loyees are
standing around looking bored , and w ere losin g money. In other w ord s, d emand and
supply are not in balance.
Effective use of p rod u ctiv e capacity is one of the secrets of su ccess in such bu sinesses. The goal shou ld not be to u tilize staff, labor, equipmen t, an d facilities as much
as possible, but rath er to use them as productively as possible. At the same time, th e
search for productivity m ust n ot be allow ed to und ermine service qu ality and d egrad e
the custom er exp erience.
At any given momen t, a fixed -cap acity service may face one of four cond itions
(see Figure 9.2):
Excess demandThe level of demand exceed s m axim um available cap acity with
the result that some cu stom ers are d enied service and bu siness is lost.

VOLUME DEMANDED
Demand Exceeds Capacity
(business is lost)
CAPACITY UTILIZED
Demand Exceeds
Optimum Capacity
(quality declines)
Maximum Available
Capacity
Optimum Capacity
(well-balanced
demand and supply)
FIGURE 9.2 Implications of

Var iations in Demand Relat ive
to Capacity
Excess capacity
(wasted resources)
Low Utilization
(may send bad signals)
Time Cycle 1
Time Cycle 2
Demand exceeds optimum capacityNo one is tu rned aw ay, bu t cond itions are
crowd ed an d cu stomers are likely to perceive a deterioration in service quality
and m ay feel dissatisfied .
Demand and supply are well balanced at the level of optimum cap acity. Staff and
facilities are busy withou t being overworked an d customers receive good service
w ithout d elays.
Excess capacityDem and is below optimum cap acity and prod u ctive resources
are u nd eru tilized , resulting in low prod uctivity. Low usage also poses a risk that
cu stomers may find the experien ce disapp ointing or have d oubts about th e viability of the service.
Sometimes optimum and maximum capacities are one and the same. At a live
theater or sp orts performance, a fu ll house is grand, since it stimu lates the players and creates a sense of excitement and aud ience p articip ation. The net result? A more satisfying exp erience for all. With most other services, however, you probably feel that you get better
service if the facility is not op erating at fu ll capacity. The qu ality of restaurant service, for
instance, often d eteriorates when every table is occupied, becau se the staff is rushed and
there is a greater likelihood of errors or delays. And if you are traveling alone in an aircraft
with h igh-d ensity seating, you tend to feel more comfortable if the seat next to you is
emp ty. When repair and maintenance shops are fu lly sched uled , delays may result if there
is no slack in the system to allow for u nexpected problems in completing p articular jobs.
There are two basic ap proach es to the p roblem of fluctuating demand. One is to
adjust the level of capacity to meet variations in demand. This ap proach requires an
u nderstand ing of what constitutes p rod uctive capacity and how it may be increased or
d ecreased on an incremental basis. The second app roach is to manage the level of d emand ,
u sing marketin g strategies to smooth out the peaks and fill in the valleys so as to generate
a more consisten t flow of requests for service. Many firms u se a mix of both app roaches.1
Measu res of capacity utilization inclu d e: th e nu mber of hou rs (or p ercen tage of
total available time) th at facilities, labor and equip ment are p rod uctively employed in
reven u e op eration, and the u nits or percen tage of available space (e.g., seats, cu bic
freigh t cap acity, telecommu nications bandwid th ) that is utilized in revenue operations.
H um an bein gs tend to be far more variable than equ ipm ent in their ability to sustain
consisten t levels of outpu t over time. One tired or poorly trained employee staffing
a single station in an assem bly-line service operation like a cafeteria restaurant or a
m otor veh icle license bureau can slow the entire service to a crawl.
Many services, such as health care or repair and maintenance, involve multiple
actions d elivered sequentially. What th is means is that a service organizations cap acity to
satisfy d emand is constrained by one or more of its p hysical facilities, equ ipment, p ersonnel, and the number and sequence of services provided. In a well-planned , well-managed
service operation, th e capacity of the facility, supporting equipment and service personn el
will be in balance. Similarly, sequential operations will be designed to minimize the likelihood of bottlenecks at any p oint in the p rocess.
M A NA GING CAPA CITY

Although service firm s m ay en cou nter capacity limitations because of varying demand ,
there are a n um ber of w ays in w hich cap acity can be adju sted to redu ce th e problem.
Capacity can be stretched or shrun k, and the overall capacity can be adju sted to match
demand.
Capaci t y Level s Can Som et im es Be St r et ched or Shr unk
Some capacity is elastic in its ability to absorb extra demand. Here, the actu al level of
capacity remains unchanged , and more p eop le are being served with the same level of
capacity. For example, th e normal capacity for a subway car may offer 40 seats and allow
standing room for an other 60 passengers with adequate handrail and floor sp ace for all.
Yet at rush hours perhaps u p to 200 stand ees can be accommod ated under sard ine-like
conditions. Similarly, the capacity of service p ersonnel can be stretched and may be able to
work at high levels of efficiency for short p eriods of time. However, staff would quickly
tire and begin provid ing inferior service, if they h ad to work that fast all day long.
Another strategy for stretch in g cap acity is to utilize the facilities for longer periods. For example, som e banks exten d their op ening h ours d u ring w eekdays and even
open on weekend s. Universities may offer evenin g classes, an d w eekend an d su mmer
semester programs.
Lastly, the average amou nt of time cu stomers (or their possessions) spend in process
may be reduced. Sometimes, this is achieved by minimizing slack time. For example, a
restaurant can bu zz tables, seat arriving d iners and present men us fast, and the bill can
be presented promp tly to a group of d iners relaxing at the table after a meal.2 In other
instances, it may be achieved by cutting back the level of servicesay, offering a simpler
menu at busy times of the d ay.
A djust ing Cap aci t y t o M at ch Dem and
Unlike the previou s op tion , this set of op tions involves tailorin g the overall level
of capacity to match v ariations in d em an d a strateg y th at is also kn own as chasing
demand. Th ere are several action s th at man agers can take to adju st capacity as
need ed .3 These action s start from th e easiest to imp lem en t, to the m ore d ifficu lt.
Schedule downtime during periods of low demand. To ensure that 100 percent of
capacity is available d uring p eak p eriods, m aintenance, rep air, and renovations
should be cond u cted w hen d eman d is exp ected to be low. Emp loyee vacations
should be taken d u ring su ch p eriod s.
Cross-train employees. Even when the service d elivery system ap pears to be op erating
at full capacity, certain physical elementsand their attend ant employeesmay be
underutilized . If emp loyees can be cross-trained to perform a variety of tasks, they
can be shifted to bottleneck points as n eeded , thereby increasing total system
capacity. In su permarkets, for in stance, the manager may call on stockers to op erate
cash registers w hen lines become too long. Likewise, d uring slow p eriod s, the
cashiers may be asked to help stock shelves.
Use part-time employees. Many organizations hire extra w orkers d urin g their bu siest
periods. Examp les inclu d e p ostal w orkers and retail store associates d uring the
Christm as season, extra staff for tax p reparation service firms in th e sp ring, and
additional hotel em ployees d urin g vacation period s and for major conventions.
Invite customers to perform self-service. If th e number of emp loyees is limited, capacity
can be increased by involving customers in co-production of certain tasks. One way
to do this is by add ing self-service technologies su ch as electronic kiosks at the
airport for airline ticketing an d check-in (Figure 9.3) or automated check-out
stations at sup ermarkets.
FIGURE 9.3 Airlines Boost Checkin Capacity by Installing SelfService Ticketing M achines at
Airports
Ask customers to share. Cap acity can be stretched by asking custom ers to share a unit
of capacity normally d edicated to on e ind ividual. For instance, at busy airports and
train stations, where the su pp ly of taxis is sometimes insufficient to meet d eman d,
travelers going in the same direction may be given the option of sh aring a ride at a
redu ced rate.
Create flexible capacity. Sometimes, the problem lies not in the overall capacity but in
th e m ix available to serve the need s of d ifferent market segments. One solu tion lies
in d esigning p hysical facilities to be flexible. For example, the tables in a restaurant
can be all two-seaters. Wh en necessary, two tables can be combined to seat four, or
th ree tables combined to seat six. In the airline context, an airline may have too few
seats in economy even though there are empty seats in the business class cabin on a
given flight. Boeing, facin g stiff competition from Airbus, received what were d escribed, tongue-in-cheek, as outrageou s d eman ds from p rosp ective customers
wh en it was d esigning its 777 airliner. The airlines wan ted an aircraft in which galleys and lavatories could be relocated, plum bing and all, almost anywhere in the
cabin within a m atter of hours. Boeing gu lp ed bu t solved this challenging problem.
Airlines can rearrange the passenger cabin of the Trip le Seven within hours, reconfigurin g it with varying nu mbers of seats allocated among d ifferent classes.
Rent or share extra facilities and equipment. To limit investment in fixed assets, a service
business may be able to rent extra sp ace or machin es at peak times. Firms with
complementary d emand patterns may enter into formal sharing agreements.
A NA LYZE PATTERNS OF DEM A ND

N ow lets look at the other side of th e equ ation. In ord er to effectively man age d emand
for a p articu lar service, managers need to u nd erstand th at d emand often differs by
m arket segment.
Dem and Var ies by M ark et Segm ent
Ran d om flu ctu ations usu ally are caused by factors beyond managemen ts control.
H ow ever, an alysis w ill sometimes reveal th at a p red ictable d eman d cycle for on e segm ent is concealed w ithin a broad er, seemingly random p attern. Th is fact illu strates the
imp ortance of breaking down demand on a segment-by-segm ent basis. For instance, a
rep air an d maintenance shop that services in d ustrial electrical equ ipm ent may already
kn ow a certain proportion of its w ork consists of regularly schedu led contracts to
p erform p rev entive m ainten an ce. Th e balance may come from walk-in bu siness and
emergency rep airs. Althou gh it might seem h ard to p red ict or con trol the tim in g and
volu me of such work, furth er analysis might show that walk-in business w as more
p revalent on some d ays of th e week than oth ers and th at emergen cy repairs were
frequently requested following damage sustained d uring thun derstorms (which tend
to be seasonal in natu re and often forecast a day or tw o in advance). Und erstand ing
d emand p atterns allows th e firm to sched ule less p rev entive maintenan ce work on
d ays with high anticip ated d em and of typ ically more profitable emergency repairs.
No strategy for smoothing demand is likely to succeed unless it is based on an
u nd erstanding of why cu stomers from a sp ecific market segment choose to use the service
when th ey d o. Its difficult for hotels to convince bu siness travelers to remain on Saturd ay
nights since few execu tives d o business over the weekend . Instead, hotel managers may
d o better to p romote weekend use of their facilities for conferences or p leasure travel.
Attemp ts to get commuters to shift th eir travel to off-peak periods will probably fail, since
su ch travel is determined by peop les employment hou rs. Instead , efforts shou ld be
d irected at emp loyers to p ersu ad e them to adop t flextime or staggered working hou rs.
These firms recognize th at no amou nt of price d iscoun ting is likely to d evelop business
out of season. However, summer resort areas like Cape Cod may have good op portunities
to build bu siness d uring the should er seasons of spring and fall (which some consider
the most attractive times to visit the Cape) by promoting different attractionssu ch as
hiking, bird watching, visitin g museu ms, and lookin g for bargains in antique storesand
altering the mix and focus of services to target a different typ e of clientele.
Un derst anding Pat t er ns of Dem and

To understand th e p attern s of d em an d by segment, research sh ould begin by getting
som e answers to a series of im portant qu estion s about the p atterns of dem an d and their
underlying causes4 (Table 9.1).
As you think abou t som e of the seem ingly rand om cau ses, consid er h ow rain
an d cold affect the u se of in d oor and ou td oor recreation al or en tertainm en t services.
Then reflect on how heart attacks and births affect the d emand for h osp ital services.
Im agine w hat it is like to be a p olice officer, firefighter, or am bu lance d riveryou n ever
kn ow exactly where your next call w ill com e from or w h at the natu re of th e em ergency
w ill be. Finally, consid er the im pact of natu ral d isasters su ch as earth qu akes, tornad oes,
an d hu rrican es, n ot on ly on em ergency services but also for disaster recovery sp ecialists
an d in su ran ce firm s.
Most period ic cycles influ encin g d emand for a p articular service vary in length
from one day to 12 month s. In many instan ces, mu ltiple cycles may operate simultaneously. For example, d emand levels for p ublic transport may vary by time of day (highest
d uring com mute hou rs), day of week (less travel to work on weekend s but more leisu re
travel), and season of year (more travel by tou rists in su mmer). The d em and for service
d uring the peak p eriod on a Mond ay in su mmer is likely very different from the level
d uring the peak period on a Satu rd ay in w in ter, reflecting day-of-w eek and seasonal
variations jointly.
Keeping good record s of each transaction help s enormously when it com es to
analyzing demand p attern s based on p ast experience. Best p ractice qu euing systems
supported by sop h isticated software can track cu stom er consu mption patterns by date
and tim e of day au tomatically. Where it is relevant, its also usefu l to record w eather
conditions and oth er sp ecial factors (a strike, an accid ent, a big convention in town, a
p rice change, lau nch of a com p etin g service, etc.) that m ight have in fluenced demand .
TABLE 9.1 Quest ions about Demand Pat t erns and Their Underlying Causes
1. Do demand levels f ollow a predict able cycle?
If so, is the duration of the demand cycle
One day (varies by hour)
One week (varies by day)
One month (varies by day or by week)
One year (varies by month or by season or reflects annual public holidays)
Another period
2 . What are the underlying causes of t hese cyclical variat ions?
Employment schedules
Billing and tax payment/refund cycles
Wage and salary payment dates
School hours and vacations
Seasonal changes in climate
Occurrence of public or religious holidays
Natural cycles, such as coastal tides
3. Do demand levels seem t o change randomly?
If so, could the underlying causes be
Day-to-day changes in the weather
Health events whose occurrence cannot be pinpointed exactly
Accidents, fires, and certain criminal activities
Natural disasters (e.g., earthquakes, storms, mudslides, and volcanic eruptions)
4. Can demand f or a part icular service over t ime be disaggregated by market segment
t o refl ect such component s as
Use patterns by a particular type of customer or for a particular purpose
Variations in the net profitability of each completed transaction
M A NA GING DEM AND

On ce we have und erstood the d emand p atterns of the d ifferent market segments, we can
manage d emand . There are five basic app roaches to managing d emand . The first, which
has the virtu e of simp licity but little else, involves taking no action and leaving demand to
find its own levels. Eventually, cu stom ers learn from exp erience or w ord -of-m outh wh en
th ey can expect to stand in line to u se the service and w hen it will be available withou t
d elay. The trouble is, they may also learn to find a more responsive comp etitor, and low
off-p eak utilization can not be improved unless action is taken. More interventionist
app roaches involve influencing the level of d emand at any given time by taking active
steps to reduce demand in peak periods and to increase demand when there is excess capacity.
Two m ore ap proaches to man aging dem and involv e inventorying demand until
capacity becomes available. A firm can accomp lish this eith er by creating formalized wait
and queu ing systems, or by introdu cing a booking or reservations system that p rom ises
cu stom ers access to cap acity at specified times (or by a com bination of the tw o).
Table 9.2 lin ks these five ap p roaches to the two p roblem situations of excess
d emand and excess capacity. Many service businesses face both situations at d ifferen t
p oin ts in the cycle of deman d and shou ld consid er u se of the interventionist strategies
d escribed . Next in this section w e will d iscu ss how marketing mix elements can h elp to
shap e d eman d levels, followed by tw o sections on how to inventory d emand first
throu gh waiting lines an d queu ing systems and then through reservation systems.
M ar ket i ng M i x Elem ent s Can Be Used t o Shape Dem and Pat t er ns
Several marketing mix variables have roles to play in stim ulating dem and du rin g p eriod s of excess cap acity and in d ecreasin g or shifting d emand durin g p eriods of insu fficien t cap acity. Price often is the first variable to be prop osed for bringin g d em and
TA BLE 9.2 Alt er nat ive Demand-Management St rategies f or Dif f erent Capacit y Situat ions
Capacity Sit uat ion
Approaches t o
Manage Demand
Insuf fi cient Capacit y

(Excess Demand)
Excess Capacit y
(Insuf fi cient Demand)
Take no act ion
Unorganized queuing results (may irritate customers

and discourage future use)
Higher prices will increase profits
Communication can encourage use in other time
slots (can this effort be focused on less profitable
and less desirable segments?)
Take no action unless opportunities exist to stimulate (and give priority to) more profitable segments
Capacity is wasted (customers may have a disappointing experience for services such as theater)
Take no action (but see preceding)
Reduce demand
Increase demand
Invent ory demand

by f ormalized
w ait and queuing
syst em
Invent ory demand

by reservat ion
syst em
Match appropriate queue configuration to service process

Consider priority system for most desirable segments
and make other customer shift to off-peak period
Consider separate queues based on urgency, duration, and premium pricing of service
Shorten customers perceptions of waiting time and
make their waits more comfortable
Focus on yield and reserve capacity for less price
sensitive customers
Consider a priority system for important segments
Make other customer shift to off-peak period
Lower prices selectively (try to avoid

cannibalizing existing business; ensure that all
relevant costs are covered)
Use communications and variation in products
and distribution (but recognize extra costs, if
any, and make sure that appropriate trade-offs
are made between profitability and use levels)
Not applicable
Clarify that capacity is available and let

customers make reservation at their preferred
time slot
and supply into balance, bu t chan ges in prod u ct, d istribution strategy, and comm unication efforts can also play an imp ortan t role. Alth ough each element is discu ssed
separately, effective d emand man agement efforts often requ ire changes in tw o or m ore
elements jointly.
USE PRICE AND NONM ONETARY COSTS TO M ANAGE DEM A ND. One of the m ost d irect
ways to balance su p ply and dem and is the u se of pricing. N onmonetary costs, too, m ay
have a sim ilar effect. For in stance, if custom ers learn they are likely to face increased time
and effort costs d urin g peak periods, th ose w ho d islike spend in g tim e waiting in crow d ed
and un pleasant con ditions w ill try to com e during less busy tim es. Similarly, the lure of
ch eaper p rices an d an exp ectation of no w aiting m ay en cou rage at least som e peop le to
chan ge the tim ing of their behavior, whether it is for shop p ing, travel, or send ing in
equ ip men t for repair.
For the monetary p rice of a service to be effective as a deman d man agement tool,
managers must have some sense of the shape and slop e of a products d emand curve
that is, how the qu antity of service d emand ed responds to increases or d ecreases in
the price per unit at a particu lar p oint in time. Its important to determine wheth er the
d emand curve for a sp ecific service varies sh arply from one time period to another.
For instance, will the same p erson be willing to pay more for a weekend stay in a hotel on
Cape Cod in summer than in winter (when the weath er can be freezing)? The answer is
p robably yes. If so, significantly d ifferent pricing sch emes may be needed to fill
capacity in each tim e p eriod.
Com plicating m atters fu rther, separate d em and cu rves typically exist for d ifferent
segmen ts w ith in each tim e p eriod (e.g., busin ess travelers u sually are less p rice sensitive
than tourists). (Figure 9.4 sh ow s a sam ple d em and cu rve for tw o segm ents in differen t
seasons.)
One of the most d ifficu lt task s facin g service mar keters is d etermin ing the n ature of all the different d em and cu rves. H istorical data (often from revenu e managem ent system s), research, trial an d error, an d analysis of p arallel situation s in oth er
locations or in com p arable services, are all w ays of obta inin g an un derstand ing of
the situation . Man y service bu sinesses exp licitly recognize the existen ce of differen t
d em and cu rves by d esign in g d istin ct p rod u cts w ith p hysical and n onphy sical d esign elements (or rate fences) for th eir key segm ents, each priced at levels app rop riate to the dema nd cu rve of a p articu lar segment. In essen ce, ea ch segment receives a
v ariation of the basic p rod u ct, w ith valu e ad d ed to the core service th rou gh supp lem entary services to ap p eal to h igh er p a ying segm ents. For instance, in com pu ter
and printing serv ice firm s, p rod u ct en h ancem en t takes the form of faster tu rnarou nd
and m ore specialized serv ices. In each case, th e objectiv e is to maximize the revenues receiv ed from each segm en t.
When capa city is lim ited , h ow ev er, th e g oa l in a p rofit-seeking bu sin ess shou ld
be to ensure that as mu ch cap acity a s p ossible is u tilized by th e m ost p rofitable segm ents available at an y giv en time. Airlin es, for instance, hold a certain num ber of
Bl
Key
Bh
Bh = Business Traveler in High Season
Price per Room-Night
Th
Bl = Business Traveler in Low Season

Tl
Th = Tourist in High Season

Tl = Tourist in Low Season
Bl
Bh
Th
Tl
Quantity of Rooms Demanded at Each Price

by Travelers in Each Segment in Each Season
FIGURE 9.4 Hotel Dem and

Curves by Segm ent and by
Season
seats for bu siness p assenger s payin g full fare an d p lace restrictiv e con dition s on excu rsion fa res for tourists (u sing n onphysical rate fen ces su ch as requ iring a dvance
p u rch ase and a Saturd ay night stay) in ord er to p revent business trav elers from tak in g ad van tag e of ch eap fares design ed to attract tou rists w ho can h elp fill th e
aircraft. Pricin g strategies of this n atu re are kn own a s revenue managemen t and are
d iscu ssed in Chap ter 6.
CHANGE PRODUCT ELEM ENTS. Sometimes, p ricing alone will be ineffective in m anaging
d emand . The op ening vign ette is a good point in casein th e absence of skiing opportu nities, no skiers would buy lift tickets for use on a mid summer d ay at any price. Similar
th inking prevails at a variety of other seasonal bu sinesses. Thu s, ed ucational institutions
offer weekend and summer programs for ad ults and senior citizens, and small p leasu re
boats offer cru ises in th e su mmer and a docksid e venu e for p rivate functions in w inter
months. These firms recognize that no amou nt of price discounting is likely to develop
bu siness ou t of season, and a new service p rodu ct targeted at different segments is
need ed to encou rage d emand.
Du ring the course of a 24-h ou r p eriod , th ere can be p rod uct variations. Som e
restaurants p rovid e a good examp le of this, marking th e passage of the h ours w ith
chan gin g men u s and levels of service, variation s in lighting and decor, op en ing and
closin g of th e bar, and the p resence or absence of entertainmen t. The goal is to ap p eal to
d ifferent need s within the same grou p of cu stomers, to reach out to different customer
segments, or to d o both , accord in g to the tim e of d ay.
M ODIFY PLACE AND TIM E OF DELIVERY. Rather than seeking to modify d em and for a
service th at con tinu es to be offered at the same time in the same place, firms can also
resp ond to market needs by m odifying the time and place of delivery. Th e following
basic op tions are available:
No change. Regard less of th e level of demand, th e service continu es to be offered

in the sam e location at th e same times.
Varying the times when the service is available. This strategy reflects changing customer p reference by day of week, by season , and so forth . Theaters and cinema
com plexes often offer m atinees on weekend s wh en p eop le have more leisure time
th roughou t the day; durin g th e summ er, cafes and restau rants may stay op en later
becau se of the general inclination of p eople to enjoy long, balmy evenings outd oors; an d sh op s may extend their hours in the lead -u p to Christm as or d uring
school holid ay p eriod s.
Offering the service to customers at a new location. One approach is to operate mobile
u nits th at take th e service to customers, rather than requiring them to visit fixed site service locations. Travelin g libraries, mobile car wash services, in -office tailoring services, home-delivered m eals and catering services, and vans equ ipp ed
w ith p rimary care m edical facilities are examp les of this. A clean ing and repair
firm that w ishes to generate business du ring low d em and p eriods m ight offer
free p icku p and delivery of portable item s th at need servicing. Altern atively,
service firms wh ose prod uctive assets are mobile may choose to follow th e
market w hen that, too, is m obile. For instance, som e car rental firms establish
seasonal branch offices in resort commu nities. In these new locations, they often
change th e sched ule of service hours (as well as certain p rod u ct featu res) to
conform to local need s and p references.
PROM OTION AN D EDUCATION. Even if the oth er variables of th e marketin g mix rem ain u n chan ged , com mu n ication efforts alone may be able to help sm ooth d em and.
Signage, ad vertisin g, p ublicity, and sales m essag es can be used to ed u cate cu stomers
abou t th e timin g of peak p eriod s an d en cou rage them to avail themselves of the service at off-p eak tim es when there w ill be few er d elays.5 Examp les inclu de U.S. Postal
Serv ice requ ests to Mail Early for Ch ristmas, p u blic transport m essages u rging
n oncom mu terssu ch as shop p ers or touriststo avoid the cru sh cond itions of th e
com mute hours, an d com mu n ication s from sales reps for ind ustrial maintenan ce
firm s ad vising cu stomers of p eriod s w hen p reven tive maintenance w ork can be done
q uickly. In addition , man agem en t can ask service p erson nel (or in term ediaries su ch
as travel agents) to en cou rage cu stom ers w ith d iscretion ary schedules to favor offp eak periods.
Changes in p ricing, prod uct characteristics, and distribution mu st be comm unicated clearly. If a firm w ants to obtain a sp ecific resp onse to variations in m arketing mix
elements it must, of cou rse, in form customers fully about their options. As discussed in
Chapter 7, short-term p romotion s, combining both pricing and commun ication elements
as w ell as other incentives, may provid e cu stom ers with attractive incentives to shift the
timing of service u sage.
N ot all deman d is desirable. In fact, some requests for service are inapprop riate
and make it difficu lt for the organ ization to respond to the legitimate needs of its target
customers. As discussed in Best Practice in Action 9.1, many calls to emergency numbers
such as 911 are not really p roblems that fire, police, or am bu lance services shou ld be
d ispatched to solve. Discou raging u nd esirable demand such as this throu gh marketin g
campaigns or screenin g p roced ures will not, of course, eliminate rand om fluctuations in
the remaining demand . It m ay, h ow ever, help to keep peak d emand levels with in the
service capacity of the organ ization.
BEST PRACTICE IN ACTION 9.1

Discouraging Demand for Nonemergency Calls
Have you ever wondered what its like to be a dispatcher for an emergency telephone service
such as 911? People differ widely in what they consider an emergency.
Imagine yourself in the huge communications room at police headquarters in New York. A
gray-haired sergeant is talking patiently to a woman on the phone who has dialed 911 because her
cat has run up a tree and shes afraid its stuck there. Maam, have you ever seen a cat skeleton in
a tree? the sergeant asks her. All those cats get down somehow, dont they? After the woman
hangs up, the sergeant turns to a visitor and shrugs. These kinds of calls keep pouring in, he
says. What can you do? The trouble is, when people call the emergency number with complaints
about noisy parties next door, pleas to rescue cats, or requests to turn off leaking fire hydrants, they
may be slowing response times to fires, heart attacks, or violent crimes.
At one point, the situation in New York City got so bad that officials were forced to develop
a marketing campaign to discourage people from making inappropriate requests for emergency assistance through the 911 number. The problem was that, what might seem like an emergency to
the callera beloved cat stuck up a tree, a noisy party preventing a tired person from getting
needed sleepwas not a life (or property) threatening situation of the type that the citys emergency services were poised to resolve. So a communications campaign, using a variety of media,
was developed to urge people not to call 911 unless they were reporting a dangerous emergency.
For help in resolving other problems, they were asked to call their local police station or other city
agencies. The ad shown in Figure 9.5 appeared on New York buses and subways.
FIGURE 9.5
Ad Discouraging Nonemergency Calls to 911
INVENTORY DEM A ND THROUGH WA ITING LINES

A ND QUEUING SYSTEM S
On e of the challenges of services is that they can not normally be stored for later u se.
A hairstylist cannot prepackage a haircu t for the following day: it must be done in real
time. In an ideal world , nobody wou ld ever have to wait to cond uct a service transaction.
However, firms cannot afford to provid e extensive extra capacity that wou ld go unu tilized most of the time. As we have seen, there are a variety of procedures for bringing
d emand an d su p ply into balance. But whats a manager to do when the p ossibilities
for shap ing d emand and adjusting cap acity h ave been exhau sted and yet supp ly and
d emand are still out of balance? Not taking any action an d leaving customers to sort
th ings ou t is no recipe for customer satisfaction. Rather than allowing matters to d egenerate into a rand om free-for-all, customer-oriented firms try to develop strategies for ensuring ord er, p red ictability, and fairness. In businesses in which d emand regularly exceed s
su p ply, man agers often can take step s to inventory deman d. This task can be achieved in
one of two ways: (1) by asking customers to wait in lineu sually on a first-come, firstserved basisor by offering custom ers more advanced queuing systems and (2) by offering cu stom ers th e opportunity of reserving or booking space in advance. We will discu ss
th e wait line an d queuing systems in this section and reservation systems in the next.
Wai t i ng Is a Uni v er sal Phenom enon
Its estimated that American s sp end 37 billion hours a year (an average of almost 150
h ou rs each) waiting in lin es, d u rin g w hich time they fret, fid get, and scowl, according to The Washington Post.6 Similar (or w orse) situations seem to prevail around th e
w orld . Nobod y likes to be kep t waiting (Figu re 9.6). Its boring, time-wastin g, and
som etimes ph ysically u ncomfortable, especially if there is n owhere to sit or you are
ou td oors. And yet waiting for a service process is an almost universal ph enom enon:
Almost every organization faces the problem of w aiting lines somew here in its operation. Peop le are kept waiting on th e phone, listening to recorded messages like your
call is imp ortant to us; they line up w ith their su p ermarket carts to check out th eir grocery p u rchases; an d they wait for their bills after a restauran t meal. They sit in their cars
w aitin g to enter d rive-in car washes and to p ay at toll booths.
A national survey of 1,000 adu lts in the United States revealed that the w aiting lines
m ost d readed by Am ericans are those in doctors offices (cited by 27 p ercent) and in
governm ent dep artments that issu e m otor vehicle registrations and drivers licenses (26 p ercent), followed by grocery stores (18 percent) and airports (14 percent).7 Situ ations that m ake
it even w orse at retail check-ou ts includ e slow or inefficient cashiers, som eone changing
their m ind abou t an item that has already been rung up , and a p erson who leaves the line to
run back for an item . It d oesnt take long before peop le start to lose their cool: One third of
Am ericans say they get frustrated after w aiting in line for 10 m inutes or less, althou gh
w om en report more p atience than m en and are m ore likely to chat w ith others to pass the
tim e w hile w aiting.
Physical and inanimate objects wait for processing, too. Customers emails sit in
cu stomer service staffs in boxes, app liances wait to be rep aired , an d ch ecks wait to be
cleared at a bank. In each instance, a cu stom er m ay be waiting for the outcome of that
w orkan an swer to an email, an ap p lian ce that is w orking again, and a check credited
to a customer s balance.
Why Wait in g Li nes Occur
Waiting linesknown to op erations researchers (and the British) as queuesoccur
w henever th e nu mber of arrivals at a facility exceeds the cap acity of th e system to
p rocess th em. In a very real sense, qu eu es basically are a symp tom of un resolved cap acity management p roblems. Analysis and mod eling of queues is a well-established
bran ch of op erations management. Queu ing theory has been traced back to 1917, when
a Danish telep hone en gineer was charged with d etermining h ow large th e sw itching
u nit in a teleph one system h ad to be to keep the nu mber of busy signals w ithin reason.8
FIGURE 9.6 Hertz Helps Its

Customers to Avoid the Time and
Hassle of Waiting in Line
Source: 2003 The Hertz Corporation. All Rights Reserved.
As the teleph one example suggests, not all qu eues take the form of a physical
waiting line in a single location . Wh en cu stomers deal with a service sup plier at arms
length, as in information-processing services, th ey call from home, office, or college using
telecommunication channels such as voice telep hone or the Internet. Typically, calls are
answered in the order received , often requiring customers to wait their turn in a virtu al
line. Some physical qu eues are geograp hically dispersed. Travelers wait at man y d ifferen t
locations for the taxis they have ord ered by p hone to arrive and p ick them up.
Many w ebsites now allow p eople to d o things for themselves, su ch as obtaining information or makin g reservations that formerly requ ired making telephon e calls or visiting a service facility in p erson . Comp anies often promote the time savings th at can be
achieved. Although accessing th e Web can be slow som etimes, at least the wait is conducted w hile the cu stomer is comfortably seated and able to attend to oth er m atters.
M an ag ing Wai t i ng Lines
The problem of red ucin g cu stomer w aiting time often requ ires a mu ltipronged strategy,
as evidenced by the app roach taken by a Ch icago bank (Best Practice in Action 9.2).
Increasing capacity simp ly by ad d ing more sp ace or more staff is not always th e op timal solution in situ ations in which custom er satisfaction m ust be balanced against

Cut t ing t he Wait f or Ret ail Banking Cust omers
How should a big retail bank respond to increased competition from new financial service
providers? A large bank in Chicago decided that enhancing service to its customers would be an
important element in its strategy. One opportunity for improvement was to reduce the amount
of time customers spent waiting in line for service in the banks retail branchesa frequent
source of complaints. Recognizing that no single action could resolve the problem satisfactorily,
the bank adopted a three-pronged approach.
First, technological improvements were made to the service operation, starting with introduction of an electronic queuing system that not only routed customers to the next available teller
station but also provided supervisors with online information to help match staffing to customer
demand. Meantime, computer enhancements provided tellers with more information about their
customers, enabling them to handle more requests without leaving their stations. And new cash
machines for tellers saved them from selecting bills and counting them twice (yielding a time savings
of 30 seconds for each cash withdrawal transaction).
Second, changes were made to human resource strategies. The bank adopted a new job
description for teller managers that made them responsible for customer queuing times and for
expediting transactions. It created an officer-of-the-day program, under which a designated officer
was equipped with a beeper and assigned to help staff with complicated transactions that might
otherwise slow them down. A new job category of peak-time teller was introduced, paying premium wages for 1218 hours of work a week. Existing full-time tellers were given cash incentives
and recognition to reward improved productivity on predicted high-volume days. Lastly, management reorganized meal arrangements. On busy days, lunch breaks were reduced to half-hour
periods and staff received catered meals; in the meantime, the bank cafeteria was opened earlier to
serve peak-time tellers.
A third set of changes centered on customer-oriented improvements to the delivery system.
Quick-drop desks were established on busy days to handle deposits and simple requests, while
newly created express teller stations were reserved for deposits and check cashing. Lobby hours
were expanded from 38 to 56 hours a week, including Sundays. A customer brochure, How to
Lose Wait, alerted customers to busy periods and suggested ways of avoiding delays.
Subsequently, internal measures and customer surveys showed that the improvements had
not only reduced customer wait times but also increased customer perceptions that this bank was
the best bank in the region for minimal waits in teller lines. The bank also found that adoption of
extended hours had deflected some of the noon rush to before-work and after-work periods.
Source: Leonard L. Berry and Linda R. Cooper, Competing with Time-Saving Service, Business, .40,
No. 2, 1990, 37.
cost con sideration s. Like the bank, managers should consider a variety of alternatives,
inclu d ing:
1. Reth in kin g the d esign of th e qu eu ing system.
2. Installing a reservation s system .
3. Tailoring th e queu ing system to different m arket segm ents.
4. Managin g cu stom ers behavior and their percep tions of the w ait.
5. Red esigning p rocesses to shorten the time of each tran saction.
Poin ts 1 to 4 are d iscu ssed in su bsequent sections of this ch apter, and for point 5, refer
to Ch ap ter 8 on cu stomer service process red esign.
Dif f erent Queue Con fi gur at i ons
Th ere are a variety of d ifferent types of qu eu es an d the challenge for m anagers is to select the most ap p ropriate p roced ure. Figure 9.7 shows diagrams of several types you
h av e p robably exp erienced you rself.
In single line, sequential stages, customers proceed through several serving operations, as in a cafeteria. Bottlenecks may occu r at any stage where the process takes
longer to execute than at previous stages. Many cafeterias have lines at th e cash

Single Line/Single Server/Single Stage
Single Line/Single Servers at Sequential Stages
Parallel Lines to Multiple Servers
Designated Lines to Designated Servers
Single Line to Multiple Servers (snake)
28
31
26
27
32
21
20
25
30
Take a Number (single or multiple servers)
29
24
23
register becau se the cashier takes longer to calcu late how mu ch you ow e and to
m ake change th an th e servers take to slap food on your p late.
Parallel lines to multiple servers offer more than one serving station, allowing cu stomers to select on e of several lin es in which to wait. Banks and ticket win dows
are comm on examp les. Fast food restau ran ts u su ally have several serving lines
in operation at bu sy times of d ay, w ith each offering the fu ll m en u. A p arallel
system can have either a single stage or multip le stages. Th e d isad van tage of
this design is that lines may not move at equ al sp eed . How many tim es have you
chosen what looked like the sh ortest line on ly to watch in fru stration as the lin es
either side of you m oved at twice the sp eed of you rs, becau se someone in your
line has a comp licated transaction ?
A single line to mu ltiple servers, comm only know n as a Snake. Th is type of
w aiting lin e solves th e p roblem of the p arallel lines to multiple servers m ovin g
at d ifferent sp eeds. Th is ap p roach is encoun tered frequen tly at p ost offices and
airport check -in s.
Designated lines involve assigning d ifferent lines to specific categories of cu stomer.
Examples inclu d e exp ress lines (for in stance, 12 item s or less) and regular lines at
supermarket ch eck-ou ts, an d d ifferen t check-in stations for first class, business
class, and econ omy class airline p assengers.
Take a number saves cu stom ers the n eed to stan d in a qu eue, becau se th ey know
they will be called in sequ ence. This p roced u re allow s them to sit d own and relax
FIGURE 9.7 Alternative Queue

Confi gurations
(if seating is available) or to gu ess how long the wait will be and do something
else in the meantimebu t at the risk of losing their p lace if earlier customers are
served faster th an exp ected. Users of this app roach in clu de large travel agen ts,
governm ent offices, ou tp atien t clinics in hospitals, an d superm arket departmen ts
su ch as the d eli or bakery.
Wait list. Restaurants often have wait lists where p eople pu t their names down
and wait until their name is announced. Th ere are four common ways of wait
listing: (1) p arty size seating, where th e number of p eop le is matched to th e size
of the table; (2) VIP seating, which involves givin g special rights to favored
customers; (3) call-ahead seatin g, which allows peop le to telephon e before arrival
to hold a p lace on the wait list; and (4) large party reservations. If cu stomers are
familiar with wait listing techniqu es, they are likely to view them to be fair. If n ot,
large p arty reservations are viewed as slightly unfair, and VIP seating is viewed as
esp ecially u nfair by gu ests wh o dont enjoy the p riority treatment.9
H ybrid ap p roach es to qu eue configuration also exist. For in stan ce, a cafeteria
w ith a single serving line might offer two cash register stations at the final stage.
Sim ilarly, p atients at a sm all medical clinic migh t visit a sin gle reception ist for registration, proceed sequ entially th rou gh m ultiple chan nels for testing, diagn osis, and treatm ent, an d conclu de by returnin g to a single line for p ayment at th e recep tion ists desk.
Research suggests that selectin g th e most approp riate typ e of queue is imp ortant
to customer satisfaction. An at Rafaeli and her colleagu es foun d that the w ay a w aiting
area is structured can produce feelings of injustice an d un fairness in customers.
Cu stom ers w ho waited in parallel lines to m ultiple servers reported significantly
h igh er agitation and greater dissatisfaction w ith the fairness of the service d elivery
p rocess than cu stomers wh o waited in a single line (snake) to access m ultip le servers,
even thou gh both groups of cu stomers waited an identical amou nt of time and were
involved in com pletely fair service p rocesses.10 The issue of perceived fairness arises as
w aitin g cu stom ers often are very consciou s of their own p rogress toward getting
served . Perh aps youve watched resentfully as other diners w ho arrived at a bu sy
restaurant later than you w ere given priority an d leap frogged the line. It d oesn t seem
fairesp ecially when you are hu ngry!
Vi rt ual Wai t s
One of the problem s associated w ith w aitin g in line is the w aste of time th is involves
for customers. Th e virtual-queu e strategy is an inn ov ative way of taking th e p hysical
w aitin g ou t of the w ait altogether. Instead, custom ers register their place in line on a
comp u ter, w hich estim ates the tim e at which they w ill reach th e fron t of the virtu al line
and should retu rn to claim their place.11 Best Practice in Action 9.3 d escribes the virtu al
qu eu ing system s u sed in two v ery d ifferent industries: a theme park and a call center.
Th e concep t of virtu al qu eues h as man y potential app lications. Cruise sh ips, allinclu sive resorts, and restau ran ts can all use this strategy if customers are w illing to
p rovid e th eir cell p hone n u mbers or remain w ithin buzzing range of a firm -op erated
p ager system.
Queuing Sy st em s Can Be Tai lored t o M ar ket Segm ent s
Although th e basic ru le in most qu euing system s is first com e, first served, not all
qu eu ing systems are organized on this basis. Market segmentation is sometimes u sed
to d esign qu eu ing strategies that set d ifferen t priorities for different typ es of customers.
Allocation to separate queuing areas may be based on any of th e follow ing:
Urgency of t he job. At m an y hosp ital emergency units, a triage nu rse is assign ed
to greet incoming patients an d decide w hich on es requ ire p riority medical treatment and wh ich can safely be asked to register and th en sit d own w hile they wait
their tu rn.
Dura tion of service tra nsa ction. Banks, su p ermarkets, and other retail services
often in stitu te express lanes for shorter, less complicated tasks.

Waiting in a Virtual Queue
Disney is well known for its efforts to give visitors to its theme parks information on how long
they may have to wait to ride a particular attraction and for entertaining guests while they are
waiting in line. However, the company found that the long waits at its most popular attractions
still represented a major source of dissatisfaction and so created an innovative solution.
The virtual-queue concept was first tested at Disney World. At the most popular attractions,
guests were able to register their place in line with a computer and were then free to use the wait
time visiting other places in the park. Surveys showed that guests who used the new system spent
more money, saw more attractions, and had significantly higher satisfaction. After further refinement, the systemnow named FASTPASSwas introduced at the five most popular attractions at
Disney World and subsequently extended to all Disney parks worldwide. It is now used by more
than 50 million guests a year.
FASTPASS is easy to use. When guest s approach a FASTPASS attraction, they are given
two clear choices: Obtain a FASTPASS ticket there and ret urn at a designat ed time, or wait in
a standby line. Signs indicate how long the wait is in each instance. The wait time for each
line tends to be self-regulating, because a large difference between the two will lead to increasing numbers of people choosing the short er line. In practice, the virt ual wait tends t o be
slightly longer than the physical one. To use the FASTPASS option, guests insert their park admission ticket into a special turnstile and receive a FASTPASS ticket specifying a ret urn t ime.
Guests have some f lexibility because the syst em allows them a 60-minute window beyond the
print ed return time.
Just like the FASTPASS system, call centers also use virtual queues. Many vendors sell
different types of virtual queuing systems designed for call centers. The first-in, first-out queuing
system is very common. When callers call in, they will hear a message that informs them of the
estimated wait time for the call to be taken by an agent. The caller can (1) wait in the queue and
get connected to an agent when his turn arrives, or (2) choose to receive a call back. When the
caller chooses this option, he has to enter his telephone number and tell his name. He then
hangs up the phone. However, his virtual place in the queue is maintained. When he is nearly at
the head of the queue, the system calls the customer back and puts him at the head of the
queue where an agent will attend to him next. In both situations, the customer is unlikely to
complain. In the first situation, it is their choice to wait in the queue, and the person can still do
something else as he already knows the estimated wait time. In the second situation, the person
does not have to wait for very long before reaching an agent. The call center also benefits
because there are fewer frustrated customers that may take up the valuable time of the agents
by complaining about how long they have to wait. In addition, firms also reduce aborted or
missed calls from customers.
Source: Duncan Dickson, Robert C. Ford, and Br uce Laval, M anaging Real and Virt ual Waits in
Hospitalit y and Service Or ganizations, Cornell Hotel and Restaurant Administr ation Quar terly 46,
February 2005, 5268; Virtual Queue, Wikipedia, www.en.wikipeidao.org/wiki/virtual_queuing,
accessed June 2, 2009.
Pa yment of a premium price. Airlines usu ally offer sep arate ch eck-in lin es for
first-class and econ omy-class p assen gers, w ith a higher ratio of personnel to p assengers in th e first-class line, resu lting in red uced waits for those w ho have paid
m ore for their tickets. At som e airp orts, p remium passen gers may also enjoy
faster lanes for the secu rity check.
Importa nce of the cust omer. A sp ecial area m ay be reserved for members of frequent user clu bs. Airlin es often p rovid e lou nges, offering n ewspapers an d free
refreshments, where frequent flyers can w ait for their fligh ts in greater com fort.
CUSTOM ER PERCEPTIONS OF WA ITING TIM E

Research shows th at people often th in k they have waited longer for a service than they
actually did. Stud ies of p ublic transp ortation u se, for instance, h ave sh own that travelers perceive tim e sp ent w aiting for a bu s or train as passing one and a half to seven
tim es more slow ly th an the tim e actually spent traveling in the vehicle.12 People dont
like w asting their time on unp rod uctive activities any more than th ey like wasting
m on ey. Cu stomer d issatisfaction with d elays in receiving service often can stimu late
strong emotion s, even anger.13
The Psy cholog y o f Wai t i ng Tim e
Th e noted ph ilosop her William James observed, Bored om results from being attentive
to th e passage of time itself. When in creasing capacity or sh ifting deman d is simp ly
n ot p ossible or su fficient, service firm s should try to be creative and look for w ays to
m ake waitin g more p alatable for cu stomers. Doctors and den tists stock their waiting
rooms with p iles of m agazines for p eop le to read while waiting. Car rep air facilities
m ay have a television for cu stom ers to watch . On e tire d ealer goes even further, p roviding customers with free pop corn, soft drinks, coffee, and ice cream wh ile th ey wait for
their cars to be serviced.
An exp erimen t at a large bank in Boston found that installing an electronic news
d isp lay in the lobby led to greater custom er satisfaction, but it d id nt redu ce the p erceived tim e sp en t waiting for teller service.14 In some locations, tran sit op erators erect
h eated sh elters equipp ed w ith seats to make it less u np leasant for travelers to w ait for a
bu s or train in cold weath er. Restau ran ts solve the w aiting problem by inviting d in ner
gu ests to have a drink in th e bar until their table is ready (that approach makes m on ey
for the hou se as well as keep in g th e customer occupied ). In similar fashion, guests
w aitin g in lin e for a sh ow at a casino may fin d them selves queuin g in a corridor lin ed
w ith slot-mach in es.
Th e d oorm an at one Marriott Hotel h as taken it up on h imself to bring a com bin ation barometer/ thermometer to w ork each d ay, h ang in g it on a p illar at th e hotel
entran ce w h ere gu ests w aiting can spend a momen t or tw o examining it while th ey
w ait for a taxi or for th eir car to be delivered from the valet parking.15 Theme p ark
op erators cleverly d esign their w aiting areas to make the w ait look shorter th an it really is, fin d in g ways to give cu stomers in line the imp ression of constant p rogress,
an d m ake time seem to pass more quickly by keeping cu stom ers amu sed or d iverted
w hile th ey wait.
Does it help to tell peop le how lon g they are likely to have to w ait for service?
Common sense w ould suggest that this is u sefu l inform ation for cu stom ers, because it
allow s them to make d ecisions as to whether th ey can afford to take the tim e to wait
n ow or come back later. It also enables them to p lan th e use of their tim e while waiting.
An experimental stud y in Canada looked at how stu dents responded to waits while
cond u cting tran saction s by computera situ ation similar to w aiting on hold on the
telep hone, in that there are no visu al clu es as to the probable wait time.16 The stu dy
examined d issatisfaction with waits of 5, 10, or 15 minu tes under three cond itions:
(1) th e stu d ent su bjects were told noth ing, (2) th ey were told how long the wait was
likely to be, or (3) they were told what th eir p lace in line was. The results su ggested that
for 5-m in u te waits, it was n ot necessary to p rovid e in formation to im prove satisfaction.
For waits of 10 or 15 m inutes, offering information appeared to improve customers
evalu ations of service. How ever, for longer waits, the researchers su ggest that it may be
m ore p ositive to let people know h ow th eir place in line is changing rather than letting
them kn ow h ow m uch tim e rem ains before they will be served. One conclu sion we
m igh t d raw is that when the w ait is longer, p eop le p refer to see (or sen se) that the line
is moving, rather than to watch the clock.
Savvy service m arketers recognize that custom ers exp erience waiting time in d ifferent w ays, d epending on the circum stan ces. David Maister and other researchers
h av e th e follow in g su ggestions on h ow to u se the psychology of w aitin g to m ake waits
less stressfu l and u npleasant:17
Unoccupied time feels longer t han occupied time. When you are sitting arou nd
with n oth ing to d o, time seems to crawl. The challenge for service organizations is
to give cu stomers something to do or to distract them while waitin g. For examp le,
BMW car owners can wait in comfort in BMW service centers wh ere waiting areas
are furnished with d esign er fu rnitu re, p lasma TVs, Wi-Fi hotspots, magazines, and
freshly brewed cap p uccino. Man y cu stom ers even bring their own entertainm ent
in the form of a cell phone w ith messaging and games, an MP3 p layer, or a p ersonal
play station .
Solo w ait s feel longer t ha n group wa its. Waiting with on e or more p eople you
know is reassu ring. Conversation with friend s can help to p ass th e time, bu t not
everyone is com fortable talking to a stranger.
Physica lly uncomfort a ble w ait s feel longer tha n comfort a ble wa it s. My feet are
killing me! is one of the most frequ ently heard comments when p eop le are
forced to stand in lin e for a lon g time. And whether they are seated or standing,
w aiting seems m ore bu rd ensome if the tem perature is too hot or too cold , if its
drafty or wind y, or if th eres no protection from rain or snow.
Pre- a nd post-process wa its feel longer tha n in-process w ait s. Waiting to buy a
ticket to enter a th eme p ark is d ifferen t from waiting to rid e on a roller coaster
once youre in th e p ark.
Unfa ir wa it s a re longer tha n equit a ble wa its. Perceptions abou t w hat is fair or
unfair sometim es vary from on e cu ltu re or country to another. In the United
States, Can ad a, or Britain , for exam ple, people exp ect everybody to wait th eir
turn in line and are likely to get irritated if they see others jumping ah ead or
given priority for app arently no good reason.
Unfamilia r wa it s seem longer t ha n familia r ones. Frequ en t users of a service
know what to exp ect and are less likely to worry while w aiting. New or occasional
users, by contrast, often are nervou s, won d ering not only about the probable
length of the wait bu t also abou t what happens next.
Uncerta in w aits a re longer t han known, finit e wa it s. Althou gh an y wait m ay be
frustrating, we usually can ad ju st men tally to a wait of a know n length . Its the u nknown that keep s us on ed ge. Imagine waitin g for a d elayed fligh t and not being
told how long the d elay is goin g to be. You dont know wh ether you have the time
to get up an d walk abou t in the terminal or whether to stay at the gate in case the
flight is called any m in ute.
Unexpla ined w a its a re longer t ha n expla ined wa it s. Have you ever been in a
subway or an elev ator that has stop p ed for n o ap parent reason, without anyon e
telling you w hy? In ad d ition to u ncertainty abou t the length of the w ait, th eres
add ed worry abou t w hat is going to h ap pen. Has there been an accident on th e
line? Will you be stu ck for h ou rs in close p roxim ity w ith stran gers?
Anxiet y ma kes wa it s seem longer. Can you rem ember waiting for som eone to
show at a ren d ezvous, an d worryin g about w hether you had gotten the time or
location correct? While w aitin g in u nfam iliar location s, especially ou td oors and
at night, people often worry abou t their p ersonal safety.
The more va lua ble or import a nt t he service, t he longer people w ill w ait . Peop le
w ill queue u p overn igh t un d er u n comfortable cond ition s to get good seats to a
m ajor concert or sports even t exp ected to sell out fast.
INVENTORY DEM AND THROUGH RESERVATIONS SYSTEM S

As an alternative, or in ad d ition to, waiting lin es, reservation s systems can be u sed to
inventory deman d. Ask someon e what services come to mind when you talk abou t
reservations and most likely they will cite airlines, hotels, restaurants, car rentals, and
theater seats. Use synonyms like bookin gs or ap p oin tments and they m ay add
haircuts, visits to p rofession als su ch as doctors and consu ltants, vacation rentals, and
service calls to fix an ything from a broken refrigerator to a neurotic laptop . There are
m any benefits in having a reservations system :
Custom er d issatisfaction d u e to excessive waits can be avoided. On e aim of reservations is to guarantee that service will be available wh en customers w ant it.
Custom ers w ho hold reservations shou ld be able to coun t on avoiding a queu e,
because they h ave been guaranteed serv ice at a sp ecific tim e.
Reservations allow d em an d to be controlled and smooth ed ou t in a more manageable way. A w ell-organized reservations system allows the organization to d eflect
d em an d for service from a first-ch oice tim e to earlier or later times, from one class
of service to another (up grad es and downgrades), and even from first-choice
locations to alternative ones, and thereby overall contribu ting to higher capacity
u tilization.
Reservations system s en able reven ue man agement an d serve to presell a serv ice to d ifferent customer segmen ts (see Chap ter 6 on rev enu e managem en t).
For examp le, requirin g reservations for n ormal repair and main ten ance allow s
m anagemen t to make su re th at some tim e w ill be kept free for hand lin g emergency jobs. Sin ce these are u np redictable, hig her prices can be ch arged and
these brin g with them higher m arg ins.
Data from reservation systems also help organizations to prep are operation al and
financial projections for future periods. Systems vary from a sim ple app oin tmen ts
book for a d octor s office, using hand w ritten entries, to a central, compu terized
d ata bank for an airlines global op erations.
The challenge in d esigning reservation systems is to make them fast and u ser-friendly
for both staff and customers. Many firms now allow customers to make their own reservations on a self-service basis via their websites. Whether talking with a reservations agent or
making their own bookings, customers want quick answers about whether a service is
available at a preferred time and at what price. They also appreciate it if the system can provid e fu rther information about the typ e of service they are reserving. For instance, can a hotel assign a sp ecific room on request? Or at least, can it assign a room with a view of the lake
rather than one with a view of the p arking lot and the nearby power station? Some bu sinesses now in fact charge a fee for making a reservation (see Service Perspective 9.1).
Northwest Airlines charges $15 to reserve some of the most d esirable economy class seats,
and Air Canad a charges $12 for advanced seat reservations on certain flights.18
SERVICE PERSPECTIVE 9.1

PAY TO GET THAT HARD-TO-GET TABLE RESERVATION!
PrimeTimeTables is an exclusive online company that helps customers to get table reservations.
What is so special about that? Well, PrimeTimeTables is able to get reservations at the most popular dining spots, where only people who are somebody, or have the right connections can secure
a table. Many of those reservations are not open to the ordinary diner. The company is able to get
a table on a specific dayand on short notice. Currently, the company focuses on areas where it
is difficult to get reservations, namely New York City, Philadelphia, and the Hamptons. Individuals
pay a membership fee of $500 to join and $45 for each reservation made.
Pascal Riffaud, the entrepreneur behind this idea, is the president of Personal Concierge
International, a leading company providing exclusive concierge service in the United States.
During his work experience as president of Personal Concierge, Riffaud built a large network of
contacts with exclusive restaurants, enabling him to obtain those hard-to-get reservations.
His clients were delighted with his service and kept flooding him with requests for reservations. However, there have been protests from restaurant owners who feel he is upsetting their
reservations management systems and selling their tables. Even though Riffaud does cancel unsold
reservations, restaurant owners feel these could have been sold to other customers who really
wanted a table. Restaurants may have to rethink the way they handle reservations!
Source: K. Severson, Now, for $45, An Insiders Access to Hot Tables, The New York Times, 31,
January 2007, available: ht tp://www.pr imetimetables.com, accessed September 9, 2009.
Of course, p roblems arise when cu stomers fail to show or when service firms overbook. Marketing strategies for d ealing with these operational problem s include requ irin g
a deposit, canceling nonp aid reservations after a certain time, and providing compensation to victims of over-booking were discu ssed in Chapter 6 on revenue managemen t.
Reser vat i ons St rat egies Shoul d Focus on Yiel d
Service organizations often u se p ercentage of capacity sold as a measure of op eration al
efficiency. Transp ort services talk of th e load factor ach ieved, hotels of their occu pancy rate, and hosp itals of their cen su s. Similarly, professional firms can calculate
w hat proportion of a p artn er s or an emp loyees tim e is classified as billable hours, and
repair sh ops can look at u tilization of both equip ment an d labor. By th emselves,
how ever, these p ercentage figu res tell u s little of the relative p rofitability of th e
business attracted , since h igh u tilization rates may be obtain ed at the exp ense of heav y
discountingor even ou trigh t giveaways.
More and more, service firms are looking at their yield that is, the average
revenue received p er u nit of capacity. The aim is to maximize this yield in order to im prove profitability. As noted in Ch apter 6, revenu e managem ent strategies d esigned to
achieve this goal are w id ely u sed in su ch cap acity-constrain ed industries as p assenger
airlines, hotels, and car rentals. Revenu e managem ent systems based on mathematical
m odeling are of greatest value for service firms th at find it expen sive to m odify th eir
capacity but incur relatively low costs when they sell another unit of available capacity.19 Other characteristics en cou ragin g use of such programs inclu de fluctu ating
demand levels, ability to segment markets by exten t of price sen sitivity, and sale of
services well in ad van ce of u sage.
Yield analysis forces m anagers to recognize the op portu nity cost of sellin g capacity for a given d ate to a cu stom er from one market segm ent when anoth er might
subsequently yield a h igh er rate. Consid er the following problems facing sales m an agers for different types of capacity-constrained service organizations:
Should a hotel accep t an ad van ce bookin g from a tou r group of 200 room nights
at $140 each when some of th ese same room nights m igh t possibly be sold later at
short notice to busin ess travelers at th e full posted rate of $300?
Should a railroad with 30 emp ty freight cars at its d isposal accep t an imm ediate
request for a ship men t worth $1,400 p er car or hold the cars idle for a few m ore
days in the h op e of getting a p riority shipment th at wou ld be twice as valu able?
Should a prin t sh op p rocess all jobs on a first-come, first-served basis, with a
guaranteed d elivery time for each job, or sh ould it charge a premium rate for
rush work, and tell cu stomers with standard jobs to exp ect some variability
in completion d ates?
Decisions on problem s d eserve to be h and led with a little more sophistication
than just resorting to th e bird in the h and is worth tw o in the bu sh form ula. Good inform ation, based on d etailed recordkeep ing of past usage an d su p ported by cu rrent
m arket intelligence, is the key to allocating the inven tory of capacity am ong differen t
segments. The decision to accep t or reject bu sin ess sh ou ld be based on realistic estim ates of the probabilities of obtaining higher rated bu siness and awareness of th e need
to maintain established (an d d esirable) cu stom er relationship s. Managers w ho d ecid e
on the basis of guessw ork an d gu t feel are little better th an gamblers who bet on rolls
of the dice.
Figure 9.8 illu strates cap acity allocation in a hotel setting, w here demand from d ifferent types of custom ers varies not on ly by d ay of the week bu t also by season . These
allocation decisions by segment, captured in reservation d atabases that are accessible
w orldwid e, tell reservation s p ersonnel when to stop acceptin g reservations at certain
prices, even thou gh m an y rooms may still remain un booked. Loyalty p rogram members, primarily busin ess travelers, are obviously a p articularly desirable segment.

Capacity (% rooms)
100%
Week 7
(low season)
Week 36
(high season)
Out of Commission for Renovation
Loyalty Program Members
Loyalty Program
Members
Transient Guests
Weekend
Package
50%
W/E
Package
Transient Guests
Groups and Conventions
Groups (no conventions)

Airline Contracts
FIGURE 9.8 Set ting Capacity
Allocation Targets by Segment
for a Hotel
Nights: M
Tu
Airline Contracts
Th
Sa
Su
Tu
Th
Sa
Su
Tim e
Sim ilar charts can be constru cted for m ost cap acity-constrained businesses. In
som e in stances, capacity is measured in term s of seats for a given perform ance, seatm iles, or room n ights; in others, it may be in terms of m achine tim e, labor tim e, billable p rofessional h ours, vehicle miles, or storage volu mew hichever is the scarce resou rce. Un less its easy to divert bu sin ess from one facility to a sim ilar altern ative,
allocation p lann ing decisions w ill have to be mad e at the level of geographic operating
u n its. So each hotel, rep air and m ain tenance cen ter, or compu ter service bu reau may
n eed its own p lan . On the other hand, tran sp ort vehicles rep resen t a mobile capacity
that can be allocated across any geograph ic area the vehicles are able to serve.
Cr eat e Al t er nat i ve Use f o r Ot her w i se Wast ed Capacit y
Even after professional m anagement of cap acity and demand , most service firms will
still experience p eriod s of excess capacity. However, not all unsold prod uctive capacity
h as to be w asted as alternative demand can be created by innovative firms. Many
firms take a strategic ap proach to d isposition of anticipated su rplus cap acity, allocating
it in ad vance to build relationsh ips w ith customers, su ppliers, emp loyees, an d in term ed iaries.20 Possible u ses for free capacity in clu d e:
Use capacity for service differentiation. Wh en cap acity u tilization is low, service
emp loyees can go all the w ay to truly w ow th eir customers. A firm that w ants
to bu ild cu stomer loyalty and market share sh ould u se spare tim e in operation s
to focu s on outstand ing customer serv ice. This can inclu d e extra attention p aid
to th e cu stom er, allocation of p referred seating, an d the like.
Reward your best customers and build loyalty. This can be d one th rou gh special
p romotion s as p art of a loyalty program , wh ile en su rin g that existing revenu es
are n ot can n ibalized .
Customer and channel development. Provide free or heavily d iscou nted trials for
p rosp ective cu stom ers and for intermed iaries who sell to en d custom ers.
Reward employees. In certain ind u stries su ch as restaurants, beach resorts, or
cru ise lin es, cap acity can be u sed to reward emp loyees an d th eir families to
bu ild loyalty. This can im prove employee satisfaction and p rovid e employees an
u n d erstand in g of the serv ice as experienced from the customer s persp ective,
thereby raisin g performan ce.
Barter free capacity. Service firms often can save costs and increase capacity utilization
by bartering cap acity with their own su ppliers. Among the most wid ely bartered
services are advertising space or airtime, airline seats, and hotel rooms.
Ef f ect ive Dem and and Capaci t y M anagem ent Requi res Inf or m at i on
Managers require su bstantial information to h elp them d evelop effective strategies to
m anage demand an d capacity and th en monitor subsequent p erformance in the marketplace. The following are some imp ortant categories of inform ation for this purp ose.
Historical data on the level and com p osition of d em and over time, includin g responses to chan ges in p rice or other marketing variables.
Forecasts of th e level of d emand for each major segment un der specified cond itions.
Segment-by-segment data to help m anagement evalu ate the imp act of periodic
cycles and ran d om d emand flu ctu ation s.
Cost data to enable th e organization to distinguish between fixed and variable
costs and to d etermine the relative p rofitability of incremental unit sales to d ifferent segments an d at d ifferent p rices.
Meaningful variations in demand levels and composition on a location-by-location basis
(in multisite organ izations).
Customer attitudes toward qu eu ing u nd er varyin g conditions.
Customer opinions on w hether the qu ality of service d elivered varies with different
levels of cap acity u tilization.
Where m igh t all this information come from? Many large organizations w ith expensive fixed cap acity have im plem ented revenue managem ent systems (d iscussed in
Chapter 6). For organ izations w ithou t su ch systems, m uch of the n eeded data probably
are already being collected with in the organ izationnot necessarily by marketers
and new studies can be cond u cted to obtain add ition al data. A stream of information
comes into most service bu sin esses, n otably con cern ing in dividual cu stom er transactions. Sales receip ts alone often contain vast d etail. Service bu sinesses n eed to collect
detailed information for op erational an d accounting p urposes and can frequ ently associate specific custom ers with sp ecific transactions.
Unfortunately, the marketing value of su ch d ata often is overlooked , an d they are
not always stored in ways th at p erm it easy retrieval and analysis by m arketers.
N evertheless, collection an d storage of cu stomer transaction d ata can be reformatted to
provide at least som e of the d esired inform ation, includ ing how existing segm ents have
responded to past ch an ges in m arketin g mix variables.
Other inform ation m ay have to be collected throu gh special stud ies, such as custom er surveys or review s of analogou s situ ations. It may also be n ecessary to collect
inform ation on comp etitive performance, because changes in the cap acity or strategy of
competitors m ay requ ire corrective action .
When new strategies are und er consid eration, operations researchers often can contribute u seful insights by developing simu lation models of the effect of changes in different
variables. Such an app roach is p articularly usefu l in service network environments, su ch
as theme parks and ski resorts, where customers can choose between multiple activities at
the same site. Mad eleine Pullman and Gary Thompson modeled cu stomer behavior at a ski
resort, where skiers can choose between d ifferent lifts and ski ru ns of varying lengths and
levels of difficulty. Throu gh analysis, they were able to d etermine the p otential future effect
of lift capacity upgrades (bigger or faster chair lifts), capacity expansion in the form of extended skiing terrain, ind ustry growth, d ay-to-d ay price variations, cu stomer response to
information about wait times at d ifferent lifts, and changes in the customer mix.21
CONCLUSION
Because many cap acity-constrained service organizations have heavy fixed costs, even
modest improvements in cap acity u tilization tend to have a significant effect on the
bottom line. In this chap ter, we have shown how managers can manage p roductive cap acity and demand and improve customers waiting and qu euing experience. Managing
capacity and demand for a service at a particular p lace and time closely links back to what
weve learned in p ast chap ters, inclu ding d ecisions on product elements and tiering of service
(Chapter 4), place and time of service delivery (Chapter 5), revenue management (Chap ter 6),
and promotion and education (Chap ter 7).
Chapt er Summary
LO1 There are several d ifferent forms of p roductive
capacity in services: p hysical facilities for processing
customers; physical facilities for processing goods;
physical equipment for processing p eop le, possessions or information; an d labor and infrastructure.
LO2 At any one time, a firm with limited capacity can
face different d emand -sup ply situations: excess demand, demand thats more than id eal cap acity, wellbalanced demand and su pp ly, or excess cap acity.
When demand and sup p ly are n ot in balance,
firms will hav e id le cap acity d uring low p eriods,
but have to tu rn aw ay cu stomers d u ring peak
periods. This situ ation imp ed es the efficient u se
of productive assets an d erod es profitability.
Firms therefore need to try an d balan ce d emand
and supply throu gh ad ju sting cap acity and / or
demand.
LO3 Capacity can be man aged in a nu mber of w ays,
including:
Stretching cap acitysome cap acity is elastic an d
more peop le can be served w ith the sam e cap acity
through crowd ing (e.g., in a su bway car), extending operatin g hours, or speed ing u p cu stomer
processing times.
Scheduling d ow ntime d uring low period s.
Cross-training employees, use part-time employees.
Inviting custom ers to p erform self-service.
Asking customers to sh are cap acity.
Designing capacity to be flexible.
Renting or sharing extra facilities and equ ipment.
LO4 To manage demand effectively, firms n eed to und erstand demand p atterns and drivers by market segment. Different segments often exhibit d ifferent
demand patterns (e.g., rou tine mainten an ce versus
emergency rep airs). Once firms h ave an und erstanding of the demand p atterns of their market
segments, they can use m arketing strategies to reshape those patterns.
LO5 Dem and can be man aged in th e follow in g five basic w ays:
Take no action , and leave d em an d to find its own
levels.
Reduce demand d u ring peak p eriod s.
Increase demand d u rin g low p eriod s.
Inventory d emand throu gh w aitin g lines and
queuing systems.
Inventory dem and throu gh reservation systems.
LO6 The follow ing marketin g mix elements can be used
to help smooth ou t flu ctu ation s in d em an d :
Use price an d n on monetary cu stomer costs to
m anage dem an d .
Change product elements to attract different segments at different times.

Modify the place and time of delivery (e.g.,
through extended op ening hours).
Promotion and ed ucation (e.g., m ail early for
Christmas).
LO7 When d esign ing waiting line and queuing systems,
firms need to bear in mind that there are d ifferent
typ es of qu eues with their respective advantages
and applications. Qu euing systems includ e sin gle
line with sequential stages, parallel lines to multiple
servers, single line to multiple servers, designated
lines, taking a nu mber, and wait list.
Not all queuing system s are organized on a first
come, first served basis. Rather, good systems often segment w aitin g custom ers by:
Urg en cy of th e job (e.g., hosp ital emergency
u nits).
Du ration of the service tran saction (e.g., express
lanes).
Premium serv ice ba sed on a p rem ium price
(e.g., first-class check-in coun ters).
Importance of the customer (e.g., frequen t travelers get priority check-in).
LO8 Customers d ont like wasting their tim e waiting.
Firms n eed to understand th e p sych ology of w aiting and take active step s to make waiting less
frustrating. We d iscu ssed 10 possible steps, in clu d ing keeping custom ers occup ied or entertained
while waitin g, informing customers how lon g th e
wait is likely to be, p rovid ing them with an exp lanation of w hy they h ave to w ait, and avoid ing p erception s of u nfair waits.
LO9 Effective reservations systems inv entory d emand
and offer several ben efits. They:
H elp to redu ce or even avoid cu stomers waiting
in queu es and th ereby avoid dissatisfaction d u e
to excessive w aits.
Allow the firm to control dem and an d smooth
it out.
Enable the u se of revenu e managemen t to focu s
on increasin g yield by reserving scarce capacity
for high er-payin g segments, rather than just selling off cap acity.
LO10 Substantial information is requ ired for design ing
effective strategies to manage deman d and capacity
inclu ding h istorical data, forecasts, segm ent-bysegment d ata, cost data, location or branch-specific
variations in demand, an d customer attitud es toward waiting and different utilization levels.

Mpel-05-Balancing Demand and Productive Capacity

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CHA P TER 9

Balancing Dem and

They also ser ve who only stand an d wait.

LEARNING OBJECTIVES (LO s)

LO9 Know h ow to in ventory d em and

228 Part III Man agin g the Cu stomer Interface

Summer on the Ski Slopes

FLUCTUATIONS IN DEM A ND THREATEN PROFITA BILITY

Chapter 9 Balancing Dem and and Prod u ctive Capacity 229

230 Part III Man agin g the Cu stomer Interface

FIGURE 9.2 Implications of

Chapter 9 Balancing Dem and and Prod u ctive Capacity 231

M A NA GING CAPA CITY

232 Part III Man agin g the Cu stomer Interface

A NA LYZE PATTERNS OF DEM A ND

Chapter 9 Balancing Dem and and Prod u ctive Capacity 233

Un derst anding Pat t er ns of Dem and

234 Part III Man agin g the Cu stomer Interface

M A NA GING DEM AND

Insuf fi cient Capacit y

Take no act ion

Unorganized queuing results (may irritate customers

Invent ory demand

Invent ory demand

Match appropriate queue configuration to service process

Lower prices selectively (try to avoid

Clarify that capacity is available and let

Chapter 9 Balancing Dem and and Prod u ctive Capacity 235

Bh = Business Traveler in High Season

Price per Room-Night

Bl = Business Traveler in Low Season

Th = Tourist in High Season

Quantity of Rooms Demanded at Each Price

FIGURE 9.4 Hotel Dem and

236 Part III Man agin g the Cu stomer Interface

No change. Regard less of th e level of demand, th e service continu es to be offered

Chapter 9 Balancing Dem and and Prod u ctive Capacity 237

BEST PRACTICE IN ACTION 9.1

Ad Discouraging Nonemergency Calls to 911

238 Part III Man agin g the Cu stomer Interface

INVENTORY DEM A ND THROUGH WA ITING LINES

Chapter 9 Balancing Dem and and Prod u ctive Capacity 239

FIGURE 9.6 Hertz Helps Its

240 Part III Man agin g the Cu stomer Interface

BEST PRACTICE IN ACTION 9.2

Chapter 9 Balancing Dem and and Prod u ctive Capacity 241

Single Line/Single Servers at Sequential Stages

Parallel Lines to Multiple Servers

Designated Lines to Designated Servers

Single Line to Multiple Servers (snake)

Take a Number (single or multiple servers)

FIGURE 9.7 Alternative Queue

242 Part III Man agin g the Cu stomer Interface

Chapter 9 Balancing Dem and and Prod u ctive Capacity 243

BEST PRACTICE IN ACTION 9.3

CUSTOM ER PERCEPTIONS OF WA ITING TIM E

244 Part III Man agin g the Cu stomer Interface

Chapter 9 Balancing Dem and and Prod u ctive Capacity 245

INVENTORY DEM AND THROUGH RESERVATIONS SYSTEM S

246 Part III Man agin g the Cu stomer Interface

SERVICE PERSPECTIVE 9.1

Chapter 9 Balancing Dem and and Prod u ctive Capacity 247

248 Part III Man agin g the Cu stomer Interface

Out of Commission for Renovation