THE UPS AND DOWNS OF DEMAND - Principles of service marketing management

Fluctuating demand for service, like that experienced by the retailers, movie theaters, motels, restaurants, ferries, and other establishments on Cape Cod, is not just found in vacation resorts. It's a problem for a huge cross-section of businesses serving both individual and corporate customers. These demand fluctuations which may be as long as a season of the year or as short as an hourly cycle play havoc with efficient use of productive assets.

Unlike manufacturing, service operations create a perishable inventory that cannot be stockpiled for sale at a later date. That's a problem for any capacity-constrained service that faces wide swings in demand. The problem is most commonly found among services that process people or physical possessions, like transportation, lodging, food service, repair and maintenance, entertainment, and health care.

It also affects labor-intensive information-processing services that face cyclical shifts in demand. University education and accounting and tax preparation are cases in point.

This chapter and the one that follows address the question, how should we match demand and productive capacity? The task starts with defining the nature of the firm's productive capacity, which may vary significantly from one industry to another. Managers also need to document how demand levels vary, what factors explain those variations, and under what circumstances demand exceeds available capacity. Armed with this understanding, they should then be in a position to develop strategies for matching demand and capacity.

From Excess Demand to Excess Capacity

At any given moment, a fixed-capacity service may face one of four conditions (see Figure):

  • Excess demand the level of demand exceeds maximum available capacity, with the result that some customers are denied service and business is lost.
  • Demand exceeds optimum capacity no one is actually turned away, but conditions are crowded and all customers are likely to perceive a decline in service quality.
  • Demand and supply are well balanced at the level oj optimum capacity staff and facilities are busy without being overtaxed, and customers receive good service without delays.
  • Excess capacity demand is below optimum capacity and productive resources are underutilized, resulting in low productivity. In some instances, this poses a risk that customers may find the experience disappointing or have doubts about the viability of the service.

You'll notice that we've drawn a distinction between maximum capacity and optimum capacity. When demand exceeds the maximum available capacity, some potential customers may be turned away and their business could be lost forever. When the demand level is between optimum and maximum capacity, all customers can be served but there's a risk that they may receive inferior service and thus become dissatisfied.

Sometimes optimum and maximum capacities are one and the same. At a live theater or sports performance, a full house is very desirable since it stimulates the players and creates a sense of excitement and audience participation. The net result is a more satisfying experience for all.

But with most other services, you probably feel that you get better service if the facility is not operating at full capacity. The quality of restaurant service, for instance, often deteriorates when every table is occupied. The employees are rushed and there's a greater likelihood of errors or delays. And if you're traveling by air you tend to feel more comfortable if the seat next to you is empty.

From Excess Demand to Excess Capacity

There are two basic solutions to the problem of fluctuating demand. One is to adjust the level of capacity to meet variations in demand. This approach, which involves cooperation between operations and human resource management, requires an understanding of what constitutes productive capacity and how it may be increased or decreased on an incremental basis.

The second approach is to manage the level of demand, using marketing strategies to smooth out the peaks and fill in the valleys to generate a more consistent flow of requests for service. Astute firms employ a mix of both strategies, which requires close collaboration between operations and marketing.


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