Chapter 14 Managing Demand and Supply

 Overuse or underuse of a service can directly contribute to gap 3: failure to delivery what
was designed and specified.
 The service performance gap can occur when organisations fail to smooth the peaks and
valleys of demand, overuse their capabilities, attract an inappropriate customer mix in
their efforts to build demand or rely too much on price in smoothing demand

The Underlying Issue: Lack of Inventory Capability

 Due to the perishability of services and their simultaneous production and consumption


o horizontal lines – service capacity (fixed)
o curved lines – customer demand for service (frequently fluctuates)
o areas in the middle represent 4 basic scenarios
 excess demand (demand> maximum capacity)
 demand exceeds optimum capacity
 demand and supply are balanced at the level of optimum capacity
 excess capacity (demand<optimum capacity)

Capacity Constraints
 nature of constraints: Time, labour, equipment, facilities
 important to know the differences between optimum and maximum capacity
o optimum and maximum capacity may not be the same
 optimum – resources are fully employed but not overused, and that
customers are receiving quality service in a timely manner
 maximum – absolute limit of service availability
 equipment or facilities constraint – maximum capability at any given time is obvious
 people’s time or labour constraint – maximum capacity is harder to specify because
people are more flexible than facilities and equipment

Demand Patterns
 needs to record the level of demand over relevant time periods (daily, weekly and
monthly – generate graphs if suspect seasonality)
 find out underlying causes of predictable cycles – daily (variations occur by hours),
weekly, month, and/or yearly
 identify causes for random demand fluctuations e.g. weather, accidents, natural disasters
 detailed records on customer transactions may be able to disaggregate demand by market
segment

2 Strategies for Matching Capacity and Demand

 Smooth the demand fluctuations themselves by shifting demand to match existing supply
– peaks and valleys of the demand curve will be flattened to match as closely as possible
the horizontal optimum capacity line


 Adjust capacity to match fluctuations in demand – moving the horizontal capacity lines to
match the ups and downs of the demand curve
o Either stretch existing capacity (no new resources are added) or align capacity
with demand fluctuations (‘chase demand’ strategy)


Revenue Management (also referred to as yield management)

 Goal: to produce the best possible financial return from a limited available capacity
 Defined as ‘the process of allocating the right type of capacity to the right kind of
customer at the right time at the right price so as to maximize revenue or yield.
 Involves a range of activities including pricing, segmentation, capacity allocation and
demand modelling


 Yield is a measure of the extent to which an organization’s resources (or capacities- time,
labour, equipment, facilities) are achieving their full revenue-generating potential
 Assuming the total capacity and maximum price cannot be changed, yield approaches as
actual capacity utilization increases or when a higher actual price can be charged for a
given capacity used.
 Ideally yield will approach the number 1, or 100%
 Catering to different market segments with different price sensitivities is the best overall
strategy in terms of maximizing revenue-generating capacity

Implementing a revenue management system

 Needs detailed data on past demand patterns by market segment as well as methods of
projecting current market demand
 Traditional revenue management approaches are most profitable when
o Relatively fixed capacity
o Perishable inventory
o Different market segments or customers, who arrive or make their reservations at
different times
o Low marginal sales costs and high marginal capacity change costs
o Product is sold in advance
o Fluctuating demand
o Customer who arrive or reserve early are more price sensitive than those who
arrive or reserve late

Challenges and Risks in using Revenue Management

 Loss of competitive focus – over-focus on profit maximization and inadvertently neglect
aspects of the service that provide long-term competitive success
 Customer alienation – perceive the pricing as unfair; customer education is essential
 Overbooking – customers denied service or downgrade
 Employee morale problems – take much guesswork and judgement in setting prices away
from sales and reservations people; either appreciate the guidance or resent the rules and
restrictions on their own discretion
 Incompatible incentive and reward systems – do not match incentive structures -
rewarded on the basis of either capacity utilization or average rate charged
 Lack of employee training – employees need to understand its purpose, how it works,
how they should make decisions, and how the system will affect their jobs
 Inappropriate organization of the revenue management function – smaller organizations
may have decentralized reservation systems and thus find it difficult to operate a revenue
management system effectively.

Measuring the effectiveness of revenue management activities

Hotel example
 Occupancy rate
 Average daily rate (ADR)
 RevPOR (Revenue per Occupied Room)
 RevPAR (Revenue per Available Room)
 Total RevPAR (Total Revenue per Available Room)
 GOPPAR (Gross Operating Profit per Available Room)

Queuing Strategies: When demand and capacity cannot be matched

 Employ Operational Logic
o First step is to analyse the operational processes to remove any inefficiencies
o Decide what kind of queuing system to use, or how to configure the queues
o Queue configuration – number of queues, their locations, their spatial requirement
and their effect on customer behaviour
 o
 Establish a reservation process
o To guarantee that the service will be available when the customer arrives
o Can potentially shift demand to less desirable time periods
o Challenge: “no show” – solved by overbooking or charging customers
 Differentiate Waiting Customers
o “queue discipline” – management policies regarding whom to select next for
service e.g. first time first served
o can be based on factors such as:
 importance of the customer
 urgency of the job
 duration of the service transaction
 payment of a premium price
 Make waiting pleasurable or at least tolerable
o Several principles about the psychology of queuing
 Unoccupied time feels longer than occupied time – e.g. solution: give
customers menus to look at while waiting in the restaurant
 Pre-process waits feel longer than in-process waits – e.g. solution: fill out
medical information while waiting to see doctor
 Anxiety makes waits seem longer – e.g. solution: use single line to
alleviate customer anxiety over having chosen the wrong line
 Uncertain waits are longer than known, finite waits – solution: give
customers information on the length of the anticipated wait or their relative
position in the queue
 Unexplained waits are longer than explained waits
 Unfair waits are longer than equitable waits – solution: first-come, first-
served
 The more valuable the service, the longer the customer will wait (e.g.
expensive restaurant)
 Solo waits feel longer than group waits