Ch13.pptx

MANAGING DEMAND & SUPPLY Chapter 13 Objectives  The underlying issue: lack of inventory capability & fixed capacity  Capacity constraints: time, labour, equipment, and facilities  Demand patterns  Strategies for matching supply and demand  Yield management strategies: a balance among capacity u...

MANAGING DEMAND & SUPPLY Chapter 13 Objectives  The underlying issue: lack of inventory capability & fixed capacity  Capacity constraints: time, labour, equipment, and facilities  Demand patterns  Strategies for matching supply and demand  Yield management strategies: a balance among capacity utilization, pricing, market segmentation, and financial return.  Managing waiting lines How to Fill 1,590 Rooms 365 Days of the Year Variations in Demand Relative to Capacity Source: C. Lovelock, “Getting the Most Out of Your Productive Capacity,” in Product Plus (Boston: McGraw Hill, 1994), chap. 16, p. 241. Demand vs. Supply Source: C. H. Lovelock, “Classifying Services to Gain Strategic Marketing Insights,” Journal of Marketing 47, (Summer 1983): 17. Constraints on Capacity Nature of the Constraint Tim e Labour Equipment Facilities Type of Service Legal Consulting Accounting Medical Law firm Accounting firm Consulting firm Health clinic Delivery services Telecommunication Network services Utilities Health club Hotels Restaurants Hospitals Airlines Schools Theatres Churches Optimal vs. Maximum Use of Capacity   Optimal Use of Capacity  Resources are fully employed  Resources are not over used  Customers receive quality service in a timely manner Maximum Use of Capacity   The absolute limit of service availability Optimal & maximum capacity may or may not be the same for different services Demand Patterns  Charting demand patterns  By hour, day, week, month, or season  Predictable cycles  Random demand fluctuations   e.g., weather Demand patterns by market segment Strategies for Shifting Demand to Match Capacity Shift Demand Demand Too High  Use signage to communicate busy days and times.  Advertise peak usage times and benefits of nonpeak use.   Charge full price for the service—no discounts. Offer incentives to customers for usage during nonpeak times.  Take care of loyal customers first.  Extend hours of operation. Demand Too Low Use sales and advertising to increase business from current market segments. Modify the service offering to appeal to new market segments. Offer discounts or price reductions. Modify hours of operation. Strategies for Adjusting Capacity to Match Demand Adjust Capacity Demand Too High Demand Too Low  Stretch time, labor, facilities and equipment. Perform maintenance, renovations.  Request overtime work from employees. Schedule vacations. Schedule employee training. Lay off employees.  Hire part-time employees.  Cross-train employees.  Rent or share facilities & equipment.  Subcontract or outsource activities. Yield Management  Yield Management (revenue management):  A variety of methods matching demand and supply in capacity-constrained services  Balancing among prices, market segments, capacity usage, & revenue  Goal: max. revenue (yield)  Yield = Actual Revenue / Potential Revenue  Actual Revenue = Actual Capacity Used × Average Actual Price  Potential Revenue = Total Capacity × Maximum Price Duration & Pricing of Selected Service Industries Price Fixed Variable (ideal) Predictable (ideal) Duration Unpredictable Quadrant 1 Movies, Stadiums/Arenas, Convention Centers Quadrant 2 Airlines, Hotels, Rental Cars, Cruise Lines Quadrant 3 Restaurants, Golf Courses, ISP Quadrant 4 Hospitals, Continuing Care Managing Duration  Why duration?   Definition    Internal: overbooking based on forecasting External: deposit, penalties, no availability guarantee of late arrival Uncertainty of Duration    Time vs. Event (a meal, a round of golf) Uncertainty of Arrival (late arrival, no-show)   Goal: max. overall revenue across all time period rather than just during high-demand period Internal: forecasting early & late arrival & departure; forecasting by time of arrival, length of stay & customer characteristics External: penalties, deposits, restrictions Reduce Time between Customers (changeover time reduction) Managing Price  Proper Price Mix  Price elasticity of different market segments  Competitive pricing  Optimal pricing   Researching prices that are considered as cheap, expensive, too cheap to be of reasonable quality, too expensive to be considered Rate Fences – qualifications to receive discounts  Physical: room type, view, seat type, location, table location, free golf cart use with a higher price, free breakfast with a higher price, free soft drink at a movie theater, bundle/package  Non-physical: cancellation or change penalty, booking time, desired service duration, group membership or affiliation, time of use, VIP/loyalty status, events Good Better Best Pricing  Auto insurance industry had a assumption   Consumers are price sensitive and most buy the cheapest plan Allstate: many consumers worry about premium increase after accident  Value plan: -5%, no accident forgiveness [10%]  Gold plan: +5-7%, forgiveness [23% including platinum]  Platinum plan: +15%, multiple forgiveness  Price ladder   Gas station: 87, 89, 91 Gas station: 87, 89, 91, 93 Good Better Best Pricing  Creating high-end versions – sometimes 40% chose “best”   “Good” version can avoid discounts   UberX, UberPOOL (20%), UberBlack Branding through “best”    Theme parks: Wonderland Roca Patron tequilas offered a special tequilas - $69 Lower priced Patron tequila sales also increased Sale of complementary products  Apples’ SE phone  app store Good Better Best Pricing  Defense against your competitors  Estimate how many customers may leave  Discount applies to all the customers  No discount: the remaining will pay the full price  New low-cost competitors: offer a “good” price  clients didn’t really wanted to have lesser product/service Good Better Best Pricing  Consumer Psychology  Choice framing  One option: buy or don’t buy  Three options: which one to buy   Goldilocks effect: people tend to choose the middle option Source: HBR, Sep-Oct, 2018 Implementing Yield Management  Detailed data of past demand patterns by different market segment.  Methods of projecting current market demand.    e.g., math models, experts Requirement of dynamic pricing  Different market segments  Arrive or make reservation at different times Pricing approaches  Low  High  High  Low Waiting Line Strategies     Employ Operational Logic  Modify operations – any inefficiency?  Adjust queuing system Establish a Reservation Process  No-shows?  Overbooking? Differentiate Waiting Customers  Importance of the customer  Urgency of the job  Duration of the service transaction  Payment of a premium price Make Waiting Tolerable Waiting Line Configurations Source: J. A. Fitzsimmons and M. J. Fitzsimmons, Service Management, 4th ed. (New York: Irwin/McGraw-Hill, 2004), chap. 11, p. 296. How to Shorten ER Wait Times  Which waiting line configuration is better?  After registration  Pooled queue: all the patients are waiting for the first available doctor (c)  Dedicated queue: each patient is assigned to a specific doctor (a)  Measures  Wait time before seeing a doctor  Length of stay at the ER How to Shorten ER Wait Times  Which waiting line configuration is better?  Dedicated queue  Wait time: 9% decrease, 4 minutes  Length of stay: 17%, 39 minutes   Why? Source: http://knowledge.wharton.upenn.edu/article/shortening-er-wait-times/ Issues to Consider in Making Waiting More Tolerable   Unoccupied time feels longer than occupied time  Music & scent  TV Preprocess waits feel longer than in-process waits  Download delays in earlier stages of using a shopping web site is perceived to be longer than download delays in later stages of using the web site  Restaurants: entry wait (waiting for a table) at restaurants consistently influence quality perception  Anxiety makes waits seem longer   What about services that consumers trying to avoid? Uncertain waits seem longer than known, finite waits  Does providing wait duration help? Issues to Consider in Making Waiting More Tolerable  Unexplained waits seem longer than explained waits  Providing a provider-not-at-fault explanation led to the most positive customer reactions  Providing no explanation led to more positive reactions than a provider-at-fault explanation   Providing waiting duration estimates had only limited effects on customers’ reactions Unfair waits feel longer than equitable waits  Customers’ rule: first in first out  The more valuable the service, the longer the customer will wait  Solo waits feel longer than group waits Music & Scent  Favorable music & scent  more satisfaction, less rage  In a low-cost wait situation   Music likability  wait-length evaluation  Music likability  mood  overall experience Music tempo  Slow tempo music  shorter perceived wait time than the actual wait time  Slow tempo music  more positive feelings, e.g., relaxation, satisfaction Numbers or Apologies? Customer Reactions to Telephone Waiting Time Fillers  Location in the queue    e.g., you are fourth in line  lowest call abandonment, most positive call evaluation (compared with apologies, music) Why?   Sense of progress in the queue Rather than perceived waiting time Creating Competitive Advantage Through Reducing Wait in Retail Stores  Shared customers   Customer perception    Customers’ waiting time perceptions are independent across competing firms But, their waiting time satisfaction is interdependent Implications    Customers usually shop at several different retail stores, e.g., grocery shopping  improvement on waiting not only raises shared customers’ satisfaction with the focal retailer  it also concurrently lowers their satisfaction with the retailer’s competitors Implication for marketing research   Pre- & post measures Measurement of competitors Waiting for Negative Service  Negative Service   Waiting has the opposite effect?    Those consumers are trying to avoid, e.g., dental A longer wait results in higher stress for non-aversive events but less stress for aversive events Preliminary evidence suggests that desires for delay in a healthcare setting may differ depending on whether the source of stress is related to the process of a medical test or the outcome of the test When is waiting meaningful?   Customers find waiting more tolerable when they see the work being done on their behalf, and tend to value the service more. Labor illusion – the appearance of effort        Operational Transparency Duration heuristics – length of the service and the perceived value Drawbacks: the outcome needs to be at least decent   Kayak: showing each airline it searches Apple AVR (automated voice response system): pre-recorded sound of typing Spanish bank BBVA’s ABM: showing an animation of bills being counted Starbucks: steam milk for each drink individually “you went through all the work and got me this?” Source: “Think Customers Hate Waiting? Not So Fast…”, HBR, May 2011. Operational Transparency  Make your process visible to customers and your customers visible to employees     ATM  customers perceive low value, low satisfaction Let customers see the operations to help them understand and appreciate the value being added Witnessing the hidden work  more satisfaction, more willing to pay, more loyalty HBR, March-April 2019 Duration Heuristics  Locksmith  One day, you locked yourself outside your apartment and called a locksmith to open the door for you.  Locksmith A  He  Locksmith B  He  came after receiving you call and spent 5 minutes to open your door came after receiving you call and spent 15 minutes to open your door Suppose both A and B charged the same price  How reasonable was the price charged for the service?  How efficient was the service?