MEASURING AND MANAGING CAPACITY - Principles of service marketing management

Many service organizations are capacity constrained. There's an upper limit to their capacity to serve additional customers at a particular point in time. They may also be constrained in terms of being unable to reduce their productive capacity during periods of low demand.

In general, organizations that engage in physical processes like people processing and possession processing are more likely to face capacity constraints than those that engage in information-based processes. A radio station, for instance, may be constrained in its geographic reach by the strength of its signal. But within that radius, any number of listeners can tune in to a broadcast.

Defining Productive Capacity

What do we mean by productive capacity? The term refers to the resources or assets that a firm can use to create goods and services. In a service context, productive capacity can take at least five potential forms.

  1. Physical facilities designed to contain customers that are used for delivering people processing or mental stimulus-processing services. Examples include medical clinics, hotels, passenger aircraft, buses, restaurants, swimming pools, movie theaters, concert halls, executive education facilities, and college classrooms. In these situations, the primary capacity constraint is likely to be defined in terms of furnishings like beds, rooms, seats, tables, or desks. In some cases, local regulations may set an upper limit in the interest of health or fire safety.
  2. Physical facilities designed for storing or processing goods that either belong to customers or are being offered to them for sale. Examples include supermarket shelves, pipelines, warehouses, parking lots, freight containers, or railroad freight wagons.
  3. Physical equipment used to process people, possessions, or information may embrace a huge range of items and be very situation specific machinery, telephones, hair dryers, computers, diagnostic equipment, airport security detectors, toll gates, cooking ovens, bank ATMs, repair tools, and cash registers are among the many items whose absence in sufficient numbers for a given level of demand can bring service to a crawl (or a complete stop).
  4. Labor is a key element of productive capacity in all high-contact services and many low-contact ones. It may be used for both physical and mental work. Staffing levels for customer-contact personnel, from restaurant servers to nurses to telephone customer service personnel, need to be sufficient to meet anticipated demand otherwise customers are kept waiting or service is rushed. Human beings tend to be far more variable than equipment in their ability to sustain consistent levels of output over time. One tired or poorly trained employee staffing a single station in an assembly-line service operation like a cafeteria restaurant or a motor vehicle license bureau can slow the entire service to a crawl. Professional services are especially dependent on highly skilled staff to create high value-added, information-based output. Abraham Lincoln captured it well when he remarked, "A lawyer's time and expertise are his stock in trade."
  5. Access to sufficient capacity in the public or private infrastructure is critical in order for many organizations to deliver quality service to their own customers. Capacity problems related to infrastructure may include busy telephone circuits, electrical power failures (or "brown outs" caused by reduced voltage), congested airways that lead to air traffic restrictions on flights, and traffic jams on major highways.

Stretching and Shrinking the Level of Capacity

Measures of capacity utilization include the number of hours (or percentage of total available time) that facilities, labor, and equipment are productively employed in revenue operation, and the percentage of available space (e.g., seats, cubic freight capacity, telecommunications bandwidth) that is actually utilized in revenue operations. Some capacity is elastic in its ability to absorb extra demand.

A subway car, for instance, may offer 40 seats and allow standing room for another 60 passengers with adequate handrail and floor space for all. Yet at rush hours, when there have been delays on the line, perhaps 200 standees can be accommodated under sardine-like conditions. Service personnel may be able to work at high levels of efficiency during these short periods of time, but they would tire quickly and begin providing inferior service if required to work that fast all day long.

Even where capacity appears fixed, as when it's based on the number of seats, there may still be opportunities to accept extra business at busy times. Some airlines, for example, increase the capacity of their aircraft by slightly reducing legroom throughout the cabin and cramming in another couple of rows. A restaurant may add extra tables and chairs. Upper limits to such practices are often set by safety standards or by the capacity of supporting services, such as the kitchen.

Another strategy for stretching capacity within a given time frame is to utilize the facilities for longer periods. Examples of this include restaurants that are open for early dinners and late meals, universities that offer evening classes and summer semester programs, and airlines that extend their schedules from 14 to 20 hours a day. Alternatively, the average amount of time that customers (or their possessions) spend in the process may be reduced.

Sometimes this is achieved by minimizing slack time, as when the bill is presented promptly to a group of diners relaxing at the table after a meal. In other instances, it may be achieved by cutting back the level of service like offering a simpler menu at busy times of day.

Chasing Demand

  • Another set of options involves tailoring the overall level of capacity to match variations in demand. This strategy is known as chase demand. There are several actions that managers can take to adjust capacity as needed:
  • Schedule downtime during periods of low demand. To ensure that 100 percent of capacity is available during peak periods, repairs and renovations should be conducted when demand is expected to be low. Employee holidays should also be taken during such periods (e.g., Cape Cod restaurant owner’s vacation in Florida during the quiet winter months).
  • Use part-time employees. Many organizations hire extra workers during their busiest periods. Examples include postal workers and retail store clerks during the pre-Christmas season, extra staff in tax preparation firms at the end of the financial year, and additional hotel employees during holiday periods and major conventions.
  • Rent or share extra facilities and equipment. To limit investment in fixed assets, a service business may be able to rent extra space or machines at peak times. Firms with complementary demand patterns may enter into formal sharing agreements.
  • Cross-train employees. Even when the service delivery system appears to be operating at full capacity, certain physical elements and their attendant employees may be under-utilized. If employees can be cross-trained to perform a variety of tasks, they can be shifted to bottleneck points as needed to help increase total system capacity. In supermarkets, for instance, the manager may call on stockers to operate cash registers when checkout queues start to get too long. During slow periods, the cashiers may be asked to help stock shelves.

Creating Flexible Capacity

Sometimes the problem is not in the overall capacity but in the mix that's available to serve the needs of different market segments. For example, on a given flight, an airline may have too few seats in economy even though there are empty places in the business class cabin.

A hotel may find itself short of suites when there are standard rooms still available. One solution to this problem is to design physical facilities to be flexible. Some hotels build rooms with connecting doors. With the door between two rooms locked, the hotel can sell two bedrooms. With the door unlocked and one of the bedrooms converted into a sitting room, the hotel can now offer a suite.

The Boeing Co. received what were described, tongue-in-cheek, as "outrageous demands" from prospective customers in terms of flexible capacity when it was designing its new 777 airliner. The airlines wanted an aircraft in which galleys and lavatories could be relocated, plumbing and all, almost anywhere in the cabin within a matter of hours. Boeing gulped but solved this challenging problem (it was facing stiff competition from Airbus Industries at the time). Airlines can rearrange the passenger cabin of the "Triple Seven" within hours, reconfiguring it with varying numbers of seats allocated among one, two, or three classes.

Another good example of highly flexible capacity comes from an eco-tourism operator in the South Island of New Zealand. During the spring, summer, and early autumn months the firm provides guided walks and treks, and during the snow season it offers cross-country skiing lessons and trips. Bookings all year round are processed through a contracted telephone-answering service.

Guides and instructors are employed on a part-time basis as required. The firm has negotiated agreements to use national parks, huts, and cabins, and it has an exclusive arrangement with a local sports goods store that allows clients to purchase or rent equipment at reduced rates. As needed, the company can arrange charter bus service for groups. The firm has the capacity to provide a wide range of services, yet the owners' capital investment in the business is remarkably low.

Not all unsold productive capacity is wasted. Many firms take a strategic approach to disposition of anticipated surplus capacity, allocating it in advance to build relationships with customers, suppliers, employees, and intermediaries. Possible applications include free trials for prospective customers and for intermediaries who sell to end users, customer or employee rewards, and bartering with the firm's own suppliers. Among the most widely traded services are advertising space or airtime, airline seats, and hotel rooms.

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