Managing the Tug-Of-War Between Supply and Demand in the Service Industry - Bitran Mondschein

7/29/2019 Managing the Tug-Of-War Between Supply and Demand in the Service Industry - Bitran Mondschein

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~ Pe r g am o nEuropean Ma nageme nt Journal Vol . 15 , No . S , pp . 523 -536 , 1997

1997 Elsevier Science LtdAl l r igh t s reserved . Pr in ted in Grea t Br i t a in

P I I : S0263-2373(97)00032-7 0263-2373/97$17.00+0.00

M a n a g i n g t h e T u g - o f -W ar B e t w e e n S u p p l y an dDemand in the Serv iceIndustr iesG A B R I E L B I T R A N , M IT Sloan School of M anagement , BostonS U S A N A M O N D S C H E I N , University of Chile

I n a s e r v i c e o r g a n i z a t i o n , a n u m b e r o f m e c h a n i s m sm a y b e u s e d t o m a t c h a l i m i t e d s u p p l y o f s e r v i c e sw i t h a n u n p r e d i c t a b l e d e m a n d f o r t h o s e s e r v i c e s .T a c t i c a l a n d o p e r a t i o n a l m e c h a n i s m s , w h i c h a c t u a ll ye n h a n c e t h e o r g a n i z a ti o n ' s p e r f o r m a n c e , m a y e i t h e ri n c r e a s e a b s o l u t e c a p a c i t y a n d e f f i c ie n c y , o r s h i f t t h ed e m a n d f r o m p e a k p e r i o d s t o o f f - p e a k p e r io d s .T h e s e m e c h a n i s m s d i f f e r i n t h e c o m p l e x i t y o f th e i rd e s i g n a n d i m p l e m e n t a t i o n ; s o m e r e q u i r e o n l yq u a l i t a t i v e a n a l y s i s w h i l e o t h e r s c a l l f o r m a t h e -m a t i c a l m o d e l s o r a n a l y t i c t o o l s l i k e s i m u l a t i o n ,q u e u i n g t h e o r y , a n dm a t h e m a t i c a lp r o g r a m m i n g . \F i n a ll y , p e r c e p t u a l \ \m e c h a n i s m s , w h i c h \a l t e r o n l y t h e \c u s t o m e r ' s \p er ce pt io ns of th e ..- .~S :v-.:! .... ,. . ' ; ~ : ", ': ,o rg a n iz a ti o n 's .d \ ..:~:,~., ~'~p e r f o r m an c e , m ay ~ ~ ~G '. .~ ;~ ,~ /a l so b e u s e d t o i i ' : ~ " f ~ i : . : im ain ta in cu st om er v.:~.:. " "~. '~X :~sa t i s f ac t ion w he n .~. ,. ., ~ .~. .X . .~d e l a y s i n s e r v i c e / / '~' ,~';:. ' :; '~" \a r e u n a v o i d a b l e . \M o s t s e r v ic e f i rm sw i l l w a n t t o u s e a m i x o f t h e s em e c h a n i s m s ; a i r li n e c o m p a n i e sh a v e u s e d m a n y d i f f e r e n tm e c h a n i s m s w i t h f a v o r a b l e r e s u lt s . 1 9 9 7 E l s e v i e r S c i e n c e L t d

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I I n t r o d u c t i o nQueues ar e a lmos t unavo idab le in our l ives . Peop lespend an average o f approx imate ly f ive year s o f the i rl ives wait ing in l ines, according to a 1988 study byPr io r i ty Management .1 W e w ait at traffic lights, w e'hold ' for telephone l ines, and we stand in l ine atbanks, gro ce ry stores, and me dical centers. / /Que ues fo rm because ind iv idualbehav io r , whether o f

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MA NAG ING THE TU G-OF-W AR BETWEEN SUPPLY AND DEM AND IN THE SERVICE INDUSTRIES

humans or of machines, is unpredic table . For example ,many cus tomers may a r r ive s imul taneous ly a t a se rv icefacili ty , or a crucial piece of equip men t ma y break do wn;either may result in a long wait for service . Some of theunce r ta in t ie s tha t p roduce queues can be moree f fec t ive ly ma naged and min imized than o the rs .Prevent ive ma in tenance can s ign i f ican t ly r educeequipment ma l func t ions , bu t unevenness in the f low ofcus tomers o r se rv ice r eques ts can be pred ic ted on lycrudely, if at all.For service-o r iented businesses, wh ich include theservice industr ies - - such as transporta t ion, t ravel andlodgings , food , communica t ions , en te r ta inment , andpersonal services, including health care - - as well asa lmost any type of re ta i l ing, the abil i ty to match theavai lab le supply wi th the cur ren t dem and can be a m a jordeterminant of success. For tunate ly, a var ie ty ofmanagement techniques are available for solving suchproblems. Figures 1, 2, and 3 give a graphical illustrationof the important quanti ta t ive re la t ionships in queueformation.Str ic t ly speaking, qu eues are form ed when un predic tabledemands give r ise to conf l ic ts over the use of availablere sources . Moreove r , the r andom f luc tua t ions o f bo ththe arr ival t imes an d the sizes of the dem ands wil l causequeuing to occur even i f , on ave rage , the demands dono t exce ed the c apacity of th e service facili ty . Consider,for example , a s ingle facil i ty that receives an average of10 calls per hou r , each o f three min utes duration; if fourcalls are received dur ing a f ive-minute per iod, then aqueue of waiting calls will result.Two ma in mechanisms have been used to r educewait ing t ime (and idle capacity) , and therefore toincrease the quality of delivered services: (i) to increasethe ca pacity of the s ervice-providing sys tem an d ( i i) to

10 090

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0 . 2 0 . , 01 6 0 . , 1U ~ z ~ o n

The utilization rate is defined as the ratio between theaverage number of arrivals per unit time and theaverage capacity of the system per unit time. Aninteresting relationship can be observed betweenthe utilization rate of the system and the averagewaiting time: if the utilization rate increases, theeffect on the average waiting time depends largelyon the current utilization. In other words, the hig herthe utilization rate, the larger the increase inaverage waiting time Thus facilities that operateclose to their capacity are more unstable; a computerbreakdown or an employee's absence c a n c a u s egreat congestion. On the other hand, in facilities withlow utilization rates, the resulting delays may b enegligible. Clearly there is a trade-off betweenincreasing the efficiency of the system anddelivering consistently high-quality service, asmeasured by waiting times.

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F i g u r e t A v e r a g e W a i t i n g T i m e a s a F u n c t i o n o f t h eU t i l i z a t io n R a t eshift dem and from peak to off-peak per iods. The toolsavailable to operations managers for this purpose rangefrom the tradit ional ones of pr ic ing and promotionaltechniques that smooth the peaks and valleys of

I

= _' . . . Q O O O e o e ,tw o s c t ~ e p r ov id e r s, single 1me . . . . . . . . . . . . . .

2 4 2 6 2 8 3 0 3 2 3 4 3 6 38 40S e i w e t capacily ( c u . , t o m e ~ / h o u r )

The basic rela tionshi p between the utilization rate of thesystem and the average waiting time has importantimplications for the design of service facilities. Forexample, this figure shows the total time per call (waitingtime plus service time) for different service providercapacities, in a service facility that handles an arrival rateof 20 calls per hour (we consider all exponentialinterar rival time and an exponential service time). Theservice systems modelled consist of: a single serviceprovider; two service providers and two separate waitinglines (one for each service provider); and two serviceproviders and a single waiting line (calls are answered forthe first av ailab le service provider). The efficiency of th efacility increases dramatically w h e n a n additional serviceprovide r is available. For example, using a single serviceprovide r with a capacity of 25 customers per hour results ina total time per call of 12 minutes. However, the total time isreduced to less than 3 minutes when an extra serviceprovid er is added to the system, assuming a single waiti ng line in both cases. On the other hand, if our goal is to havean aver age total call time of less than 10 minutes, then we can either add a second service provid er or incre ase theproductivi ty of the first one. In the latter case, the service provider should reduce the average service time from 2.4

minutes to 2.26 minutes. We also obse rve from Figure 2 that it is more efficient to have a single queue, assuming thatall customers b elong to a single market s e g m e n t a n d therefore request similar services.F i g u r e g R e l a t i o n s h i p B e t w e e n T o t a l T i m e P e r C a l l a n d M o d e l l e d D i f f e r e n t S e r v i c e P r o v i d e r C a p a c i t i e s

524 European ManagementJournalVol 15 No 5 October 1997


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Capaci ty (u ) = 21 cuszomers /hour

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0 50 0.5 1 1.5 -coeff ic ien t o f var iauon

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The total time, in a single-service providersystem, v a r i e s a c c o r d i n g t o t h e c o e f f ic i e n t ofvariation of t h e s e r v i c e t i m e . T h e c o e f f i c i e n tof v a r i a t i o n i s a m e a s u r e o f t h e v a r i a b i l i ty oft h e s e r v i c e t i m e w i th r e s p e c t t o it s m e a n ; it i sd e f i n e d a s t h e q u o t i e n t o f t h e standardd e v i a t io n o f t h e s e r v i c e t i m e a n d t h e a v e r a g es e r v i c e time. The a v e r a g e s e r v i c e timeremains unchanged. Observe that the totalaverage time increases considerably whent h e r e i s m o r e v a r i a b i l i t y in the customers's e r v i c e t i m e s . In such situations, i t isp o s s i b l e to reduce the waiting time withouti n c r e a s i n g t h e number of s e r v i c e p r o v i d e r sby, for example, segmenting t h e c u s t o m e r saccording to t h e i r s e r v i c e t i m e s , s a y bye s t a b l i s h i n g d i f f e r e n t queues for higher andlower numbers o f t r a n s a c t i o n s p e r customer.

F i g u r e 3 R e l a t i o n s h i p B e t w e e n T o t a l T i m e i n a S i n g l e - s e r v i c e P r o v i d e r S y s t e m a n d t h e C o e f f i c i e n t o fV a r i a ti o n o f t h e S e r v i c e T i m edemand ove r t ime ; th rough new technolog ie s ,e spec ia l ly au tomat ion and in forma t ion sys tems , tha tim prov e eff ic iency and a dd v alue to the service; toquanti ta t ive facil i t ies design and planning methods,such a s y ie ld manag eme nt wi th i t s sophis t ica tedmathemat ica l unde rp inn ings . However , even when asystem's capacity has been increased to optimal levelsand demand has been shaped eff ic iently, people maysti l l have to wait . Under these c ircumstances, managersmay fa l l back on 'pe rcep t ion ' management techniquesthat allay the anxieties and dissatisfactions ofcus tomers wa i t ing to be se rved .The goal of this paper is to s tudy these mechanisms,analyzing the tools that are available to managers a ttactical and operational decision levels. For this purpose,we presen t an ex tens ive desc r ip t ion of thesemechanisms based on cases taken f rom real- l ife andreported in academic l i tera ture . Our analysis presents aunif ied view of this topic , enhancing the exist ingl i te ra ture wi th new mechanisms tha t have beendeve loped or implemented on ly r ecen t ly in the se rv iceindus t ry , such a s y ie ld management and sophis t ica tedinforma t ion sys tems .

II T h e D i s t i n c t i v e A t t r i b u t e s o fS e r v i c e O p e r a t i o n sServ ice-or iente d businesses, wh ile similar tomanufac tur ing bus inesses in many re spec ts , p roduce'projects ' with a t tr ibutes that are markedly dif ferent thanthose of th e m anufactu r ing sector , zIn the service industr ies , the prov ision and delivery ofthe produc t occur s imul taneous ly ; in o the r words ,se rv ices a re ' consumed ' the ins tan t they a re 'p roduced ' .

Customer service representa t ives take te lephone orderswhen c l ients want to buy. Medical doctors and nursesmu st be available wh en e mergen cies occur .

The intangibil i ty of services means that they cannot beinventor ied as tangible goods are . Thus servicemanagers are depr ived of an important buffer that theircoun terpar t in manu factur ing f irms ma y use to withs tandf luctuations in demand . This lack of inve ntory has tw oma in conseq uences . First, service facilities m ay b e idle forlong per iods: c i ty hote ls hav e low o ccupan cy ra tes onweeken ds, te lephon e operators receiv e few ca lls af term idnigh t, and air con ditio ner technicians are rarely calledduring winter months. Second, large queues may buildup at peak times; in that circumstance, the consequencesof insufficient capacity are dissatisfied customers andpoor perceptions of service quali ty, which in turn canlead to loss of prof its . This pheno m eno n can be ob servedin technical support centers a t computer companiesdur ing n ormal business hours, w ait ing l ists a t restaurantson S aturday nights, and cro wd ed re tai l s tores dur ing theChristmas season.

Managing supply and demand, then , mus t be a keytask of service managers. As sta ted by Sasser ,3 'whenservice managers plan, ra ther than react , they cansuccessfully f i t their capacity to the demand for theirproducts . ' Lovelock4 complements this idea by pointingout tha t

even wh ere the f luc tuat ions ( in dem and) are sharp, an dinventor ies cannot be used to ac t as a buf fer be tween supplyand dem and, i t ma y s t i ll be poss ib le to manag e capaci ty in aserv ice bus iness . . . BuL for a su bs tant ia l group o f serv iceorganizations , successfu l ly m ana ging dem and f luc tuat ionsthrough marketing actions is the key to profitabili ty.

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M A N A G I N G T H E T U G - O F - W A R B E T W E E N S U PP L Y A N D D E M A N D I N T H E SE RV IC E I ND US TR IE S

T a b l e 1 M e c h a n i s m s f o r M a t c h i n g S u p p l y a n d D e m a n dTac t ica l leve l Locat ion

M o d u l a r f a c i l i t y d e s i g nSharing capacityT e c h n o l o g yInformation s y s t e m sS t a n d a r d i z a t i o nF l o a ti ng s ta f f a n d p a r t - t i m e e m p l o y e e sC r o s s - t r a i n i n gExtend ing business hoursP r e p r o c e s s i n gP r e v e n t i v e m a i n t e n a n c eC o o p e r a t i o n w i th c o m p e t it o rsC o m p l e m e n t a r y s e r v i ce s

Pre-sellingDirect marketin gPrice differentiationInformation to customersPromotion and sa l esComplementary serv i cesP reven t i ve m a i n tenance o f users ' equ i pm ent

Operational l e v e l D o w n g r a d i n g o f productsO v e r b o o k i n gS e r v i c e lengthS c h e d u l i n gEngaging c u s t o m e r sBatching the s e r v i c e d e l i v e r y

PricingL o s s l e a d e r s

III M echan isms for M atching Supplya n d D e m a n dThe manager ' s goal in a serv ice o rgan iza t ion i s to keepcustom ers sat isf ied a t a reasonable cost . This goa l can beach ieved by f ir st imp rov ing the o rgan iza t ion so tha tbe t te r serv ice i s p rov ided wi th in accep tab le cos tconstraints , and then, i f possible, im prov ing thecus tomer ' s percep t ion o f the serv ice . In o the r words , i tis possible both to do b e t t e r an d t o seem better .

( A ) O p e r a t i o n s M a n a g e m e n t : H o w to D oB et t erT w o m a i n d y n am i cs can b e u s ed t o m a t ch a l i m i t edsupp ly o f serv ices w i th an unpred ic tab le demand , andthereby to enhance operat ional ef f iciency. The f irs tdynamic ca l l s fo r manag ing capaci ty , by means o fincreasing the ef f ic iency o f serv ice opera t ions o r theactual capacity of the service faci l i ty . The secondd ep en d s o n m an ag i n g d em an d , n o t ab l y b y s h i f t i n gdem and f rom peak per iods to o f f -peak per iods.Al though s t r a teg ic dec is ions can d i r ec t ly af f ec t serv icedel ivery , we are in ter es ted in exp lo r ing the r ange o ftact ical mechanisms and operat ional decis ions availablefo r use by manager s w i th in any g iven s t r a teg icf r amework . Therefo re , we s tudy the dynamic r esponsestha t serv ice companies can take in the me dium and shor tte rms to r espond to changes in deman d patte rns . Tab le 1summar izes the r esponses tha t a r e descr ibed be low.Th e applicabil ity of mos t of these respon ses relies onthe company ' s ab i l i ty to segment i t s market inh o m o g en eo u s g r o u p s . M ar k e t s eg m en t a t i o n a l l o w scompanies to inves t the i r l imi ted r esources moreef f ec t ive ly . For exam ple , the Parker House ho te l , had ,a t some po in t , segmented i t s cus tomers in to more than

11 categor ies , which al lowed the sales divis ion todirect i ts marketing ef for ts select ively according to thekno wn de ma nd prof ile. Thus, mini-vacation packag esand bus tour s were p romoted to tour i s t s fo r weekendsand fo r Ju ly and Augus t , when the demand f romcorpora te cus tomers was low. 'Cons ider New Englanddur ing the midd le o f October , ' exp la ined one manager .'For us success at that t ime is to have 100 percentwalk- in transient business at the rack rate - - and tohave r a i sed the r a te the day befo re . I t wou ldn ' t be inour bes t in ter es t to have booked a g roup f ar inad v an ce a t a v e r y l o w r a t e w h en w e k n o w w e ' r egoing to get excellent , h igh-rate t ransient business atthis t ime of the year .5On the o ther hand , i f the serv ice company does no tsegment i ts market , i t must sat isfy the needs ofheterogeneous customers with a s ingle set of services;under those circumstances, the best outcome that couldbe exp ected would be an average per fo rmance , which i snot suff icient to win in the long run. The trend that isnow observed i s the change f rom mass markets to micro -markets , e ven 'markets of one. ' In fact , in the au tomo bileindus t ry , manufac tu rer s somet imes p roduce as f ew as20,000 units of cer tain models o f car.The r esponses d i f f er in the complex i ty o f the i r des ignand implementat ion. Some, for example, cross- training,engag in g cus tomers in the de l ivery o f the service , a ndpreprocessing, usually require only qualitative analysisfor their design. Others require more sophist icatedme thod olog y. For example, the applicat ion of yieldmanagement techniques (see Box 1) requiresmathemat ica l models to de termine the appropr ia tepricing structures. A similar analysis is sometimesrequ i red whe n ex tend ing hour s o f serv ice o r schedu l ingem ployee s. Ana lytic tools l ike s imulat ion, queu ingtheory , o r mathemat ica l p rogramm ing can be veryuseful in these decision processes.

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MA NA GING T HE T UG-OF -WAR BE T WE E N S UP P L Y AND DE MA ND IN T HE S E RVICE INDUS T RIE S

1 . M a n a g i n g C a p a c i t y(a ) T ac t i ca l m e c h a n i s m sT h e r e a r e a n u m b e r o f m e d i u m - t e r m d e c i s io n s t h a t a r eu s e d t o m a n a g e t h e s u p p l y o f s e r v i c e s . W e d e s c r i b eb e l o w e x a m p l e s o f t a c t i c a l m e c h a n i s m s t h a t h a v e b e e nu s e d t o i n t r o d u c e f l e x i b i li t y in t h e s u p p l y o f s e r v ic e s o rto inc rease th e e f f i c i ency o f the s e rv ice fac il it ie s .( 1) L o c a t i o n : m o b i l e o r d i s t r i b u t e d s e r v i ce s : O n e o ft h e m o s t i m p o r t a n t d e c i s io n s t h a t s e rv i c e m a n a g e r s m u s tm ake i s w her e to loca te th e s e rv ice fac il ity . 'F lex ib il i ty ' o floca t io n can inc rease the u t i l i za t ion o f the s e rv ice fac il ity ,b y a l l o c a t i n g d y n a m i c a l l y t h e s u p p l y o f s e r v i c e s c l o s e rt o t h e p o t e n t i a l d e m a n d . T h i s m e c h a n i s m i s u s e f u l w h e nt h e d e m a n d v a r i e s g e o g r a p h i c a l l y o v e r a p e r i o d o f t i m e .F o r e x a m p l e , h o s p i t a l s d i s t r i b u t e t h e i r a m b u l a n c e s ,a c c o r d i n g t o t h e h i s t o r i c a l d e m a n d p a t t e r n s , i n d i f f e r e n ts i t e s o f t h e c i t y i n o r d e r t o b e c l o s e r t o t h e i r p o t e n t i a lc u s t o m e r s . F o o d t r u c k s a n d m o v i n g l i b r a r i e s a r e o t h e re x a m p l e s w h e r e a f l e x i b l e l o c a t i o n l e a d s t o h i g h e ru t i l i za t ion ra te s .(2 ) M o d u l a r f a c i l i t y d e s i g n : A n a l o g o u s t o' f l ex ib i l i ty ' i n the capac i ty o f th e s e rv ice fac il ity . D ur ingof f -peak hours , pa r t o f the fac i l i ty can be c losed , the rebyr e d u c i n g o p e r a t i o n a l c o s t s . M o d u l a r d e s i g n i s e f f e ct i v e i nsupe rm arke t s , po s t o f f ice s, and re ta i l s to re s , whe re o n ly af rac t ion o f c l e rks o r ca sh ie rs i s needed a t o f f -peak t imes .H o w e v e r , t h e f a c i l i t y m u s t b e d e s i g n e d t o a v o i dd a m a g i n g c u s t o m e r s ' p e r c e p t i o n s o f s e r v i c e q u a l i t y .T h e V i c e P r e s i d e n t , E m p l o y e e R e l a t i o n s o f t h e U n i t e dS t a t e s P o s t a l S e r v i c e n o t e d t h a t p a t r o n s c o m p l a i n e dw h e n t h e y s a w p o s t a l e m p l o y e e s w h o w e r e a t t h e i rw o r k s t a t i o n s b u t p e r f o r m i n g o t h e r t a s k s i n s t e a d o fh e l p i n g t h e p a t r o n s w h o w e r e w a i t i n g f o r s e r v i c e . 6 In awe l l -des igned fac i l i ty , cus tomers ' wi l l no t be d rawn tot h e t e m p o r a r i l y u n u s e d c a p a c i t y . P h o n e - b a s e d s e r v i c e s ,w h e r e a v a r y i n g n u m b e r o f r e p s c a n b e s c h e d u l e da c c o r d i n g t o t h e d a i l y d e m a n d p r o f i l e s , a r e t h e r e f o r epa r t i cu la r ly we l l - su i t ed to modula r fac i l i t i e s .( 3) S h a r i n g e q u i p m e n t : T h i s i s u s ef u l w h e n t h er e ise x p e n s i v e , u n d e r u t i l i z e d e q u i p m e n t , w h i c h c a n b e u s e da t d i f fe ren t t imes by d i f fe ren t f irms . Redb anc , the Chi leann e t w o r k o f t e l l e r m a c h i n e s , is a n e x a m p l e . B an k s h a v e t oins ta l l t e l l e r mach ines ove r a vas t geograph ica l a rea , bu tt h e y a r e v e r y e x p e n s i v e t o i n s t a l l a n d m a i n t a i n . T h u s ,C h i l e a n b a n k s h a v e c r e a t e d R e d b a n c , w h e r e e a c h b a n kc a n i n st a ll a n y n u m b e r o f t e l le r s p r o v i d e d t h a t t h e s e c a nb e u s e d b y c o m p e t i t o r s' c u s to m e r s . T h e b a n k t h a t o w n st h e m a c h i n e r e c e i v e s a f e e p r o p o r t i o n a l t o t h e n u m b e r o ft r a n s a c t i o n s c o n d u c t e d b y i t s c o m p e t i t o r s .(4 ) T e c h n o l o g y t o s a v e t i m e : T e c h n o l o g y c a ns ign i f i can t ly inc rease the e f f i c i ency o f the s e rv ice fac i li tya n d t h e r e f o r e e n l a r g e t h e a c t u a l c a p a c i t y o f t h e s y s t e m .F o r e x a m p l e , ba n k s a r e u s i n g t e c h n o l o g y t o m a k e t h e irf ron t -o f f i ce worke rs much more e f f i c i en t . C leve land ' sS o c i e t y N a t io n a l B a n k h as a u t o m a t e d r o u t i n e c u s t o m e r -s e r v i c e w o r k s o t h a t 7 0 % o f p h o n e c a l l s a r e h a n d l e d

t h r o u g h a v o i c e m a i l s y s t e m . T h i s h as f r e e d r e p s t o h e l pc u s t o m e r s w h o r e a ll y n e e d a s si st a n ce . 7 T e c h n o l o g y h a sa l so he lped F rank ' s Nurse ry and Cra f t s Inc . to reducel o n g c h e c k o u t l i n e s t h a t r e s u l t e d f r o m o b t a i n i n g c r e d i tca rd au thor iza t ions v ia t e l ephone ca l l s , ave rag ing 45seconds each , to a c red i t - repor t ing agency . Ins tead , thec o m p a n y i n s t a l l e d a $ 4 m i l l i o n s a t e l l i t e s y s t e m t h a tc o n n e c t e d i t s s t o r e s d i r e c t l y w i t h V i s a U S A I n c . a n dr e d u c e d t h e a u t h o r i z a t i o n t i m e t o o n l y s e v e n s e c o n d s , sF e d e r a l E x p r e s s h a s a l s o i n c o r p o r a t e d a u t o m a t i o n i nmany s teps o f i t s s e rv ice de l ive ry p roces s . As s t a ted inZ e m k e :9W ai t i ng a t a i r port s a r ound t he coun t r y i s F eder a l E xpr ess 'f l e e t o f m or e t ha n s i x teen t hous and com pu t e r- and r ad io -di spatched del i very vans , each one pr im ed to hand le the day 'sincoming del i ver i es by 10:30a.m. Us ing sophi s t i cated scan-ners , computer t erminal s , and on- l ine in format ion sys t ems ,Federal Express dri ver s can ma nag e thei r t ime an d routesef f ic i ent ly a nd accurate l y . O ne by-product o f t he computer s :dr ive r s can be m ade aw ar e o f over due accoun ts a nd s pec ia ldel i very condi t ions . The same sys t em al low s cus tomers to f indou t w h er e t he i r packages a r e w i t h i n t h i r t y m i nu te s . I f F edE xcan' t f i nd i t i n th i r t y minutes , i t ' s del i vered f r ee .(5 ) I n f o r m a t i o n s y s t e m s t o a d d v a l u e a n d i n c r e a s ee f f i c i e n c y : I n f o r m a t i o n t e c h n o l o g y h a s b e e n o n e o fF e d e r al E x p r es s ' m o s t i m p o r t a n t c o m p e t i t i v e a d v a n t a g e s .T h e m a i n v a l u e o f c u s t o m e r s e r v i c e s y s t e m s g e n e r a l l yl ie s in : ( i) p reproces s ing , wh ich inc reases th e e f f i c iency o fa s e rv ice fac i li ty by spee d ing up acces s to a l l in fo rm a t iontha t i s requ i red to de l ive r the s e rv ice , fo r examplec u s t o m e r s ' n a m e s , a d d r es s e s, p h o n e n u m b e r s , a n d r e l a t e dservice prefere nces and characteris t ics ; and ( i i) poin t-of-s e r v ic e a n a ly s e s , w h i c h b o o s t s al es r e v e n u e b y a l l o w i n gqu ick ana lys i s o f , fo r example , the cus tomer ' s pas th i s to ry .F e d E x ' s C O S M O S ( C u s t o m e r , O p e r a t i o n s , S e r v i c e ,M a s t e r O n - l i n e S y s t e m ) c o n s i s t s o f : a n o r d e r - e n t r ys y s t e m f o r c u s t o m e r s t o r e q u e s t p a c k a g e p i c k u p s ; ac o n t i n u o u s l y u p d a t e d r e c o r d o f e a c h p a c k a g e ' s p r o g r e ss ;f inanc ia l records fo r b i l l ing purposes ; and a re la t iona ld a t a b a s e o f c u s t o m e r t r a n s a c ti o n s . T h i s p o w e r f u l s y s t e m ,i n s t a l l e d i n 1 9 7 9 a n d c o n t i n u o u s l y u p d a t e d t o i n c r e a s ei t s c a p a b i l i t y , a l l o w s t h e c o m p a n y t o s p e e d u p o r d e rp r o c e s s in g , t o s e g m e n t i t m a r k e t s, a n d t o d e l i v e r b e t t e rqua l i ty s e rv ice . As a F edE x execu t ive exp la ins ,' E x a m i n i n g t h e o r d e r b l a n k t h a t a p p e a r e d o n t h e v i d e ot e r m i n a l s u s e d b y c u s t o m e r s e r v i c e a g e n t s , C O S M O Sc o u l d b e p r o g r a m m e d t o i d e n t i f y h i g h - v o l u m ec u s t o m e r s , ' i n f o r m a t i o n t h a t c o u l d b e u s e d t o g i v espec ial t rea tm ent to those cus tom ers , s (6 ) S t a n d a r d i z a t i o n ; d o i t their w a y : C o m p a n i e s th a ts e l l o n l y a f e w h i g h l y - s t a n d a r d i z e d p r o d u c t s h a v e a na d v a n t a g e w h e n i t c o m e s t o i n c r ea s i n g th e e f fi c ie n c y o ftheir serv ice facil i ties . This is because , f irs t, em plo ye es ing e n e r a l a re m o r e p r o d u c t i v e w h e n t h e i r ti m e i s a ll o c a t eda m o n g f e w e r t a sk s . S e c o n d , s t an d a r d i z a t i o n a l lo w s m o r eaccura te demand fo recas t ing , which i s pa r t i cu la r lyimpor tan t in s e rv ice indus t r i e s s ince t rad i t iona l inven-

European ManagementJournalV o l 1 5 N o 5 O c t o b e r 1 9 9 7 ,5 2 ., 7


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tor ies are not possible. Fast food chains are a goodexample o f serv ice s tandard iza t ion . McDonald ' s foodprepara t ion and de l ivery sys tem i s based on assembly-l ine techniques: cook a dozen burger pat t ies at a t ime,garn ish them iden t ica l ly , wrap them up , and keep themin a warming b in so cus tomers can walk up to thecoun ter o r s l ide th rough the d r ive- th rough and leavefas t . Cus tomers under s tand tha t the food p rov ider w i l la lso le t you ha ve i t ' your way ' , bu t yo u have to wai t. I nthe foo d service business , th e 'pr ior i ty ' custom ers are theones who r eques t the s tandard p roduct .(7 ) F loa t ing s ta f f a n d p a r t - t i m e e m p l o y e e s ; m o r ep e o p l e : Adjus t ing s ta f f ing levels to accommodatepeak demand is a useful al ternat ive for some businesses.The c ycle o f dem and peaks var ies by bus iness type , andmay cor r espond to cer ta in hour s o f the day ( te lephonecompanies, mass transi t system), cer tain days of thewe ek ( restaurants), cer tain weeks o f the mo nth (banks) orcer tain mo nths of the ye ar ( resor ts , Chr is tmas sales) . L.L.Bean , fo r example , employs approx imate ly 65% morepeop le dur ing the Chr i s tmas season , which fo r tha tcom pan y s tart s in the Fall .(8) C r o s s - t r a i n i n g ; m o r e s k i l l e d p e o p l e : Cross-t ra ining , which permi ts one em ploye e to per fo rm morethan one job, increases worker f lexibi l i ty . Cross- trainedem ployees can be sw i tched to bo t t leneck tasks dur ingpeak t imes, and then switched back to their regularact ivi ties a t of f -peak t imes. At Do min o's Pizza, wh ere80% of al l orders are placed dur ing 20% of the s tore 'sbus iness hour s , mos t employees can per fo rm more thanone of five crucial jobs: driver, order-taker, pizza-maker,oven- tender , and rou ter ( a rou ter de termines the mos teff icient routes for del ivery dr ivers to fol low) .(9) E x t e n d i n g o r r e d i s tr i b u t i n g b u s i n e s s h o u r s ; m o r et i m e : T o m ee t g r o w i n g d em an d w i t h o u t ex p an d i n gphysical capacity , businesses can adjust their workinghours . I t is an at tract ive al ternative when increases indem and are tem porary . Ex tend ing work ing hour s i s a lsoan a l te rna t ive to cap tu re cus tomers who are no t ab le toaccess the service dur ing regular business hours .Frequently , companies adjust their schedules for theirconven ience , and no t the i r cus tomers ' . LovelockHment ions f ive main f ac to r s tha t a r e d r iv ing the movetowa rd ex tende d hour s . These ar e ( i) economic p ressurefrom consum ers, ( i i) chan ges in legis lat ion, ( i ii ) econ om icince ntive s to im pro ve asset utilization, (iv) availability o femployees for 'unsocial ' hours , and (v) growth ofautomated self -service faci l i t ies . A growing number ofbusinesses are using this mecha nism; for example,supermarkets , banks th ro ugh au tom ated te l le r mach ines,retai l s tores , and customer suppor t services. An exampleof exte nde d services is of fered by a Chilean bank (Bancode Cr6dito e Inversiones) , which provides information,consultat ion, and services that are available wor ld-wide,around- the-clock, via the Internet .(10) P r e p r o c e s s i n g : The natu re o f some serv icesal lows the execution of cer tain tasks before the servicei s ac tua lly de l ivered . These p reprocessed par t s bec om e a

buffer to face peak t imes. The feasibil ity o f preproce ssingis h igh ly cor r e la ted wi th the degree o f s tandard iza t ion o fproduc ts and processes. M an y service com panies use thepreprocess ing o f in fo rmat ion to shor ten the serv ice t ime.For example , every t ime cus tomers ca l l P izza Hut toplace an order , their telephone numbers are the onlyinformation req uired for co mp lete identification, includ-ing of their previous order . Similar examples are foun d inhospitals, courier services, and repair companies.( 11 ) P r e v e n t i v e m a i n t e n a n c e o f e q u i p m e n t i nfa c i l i t i e s : Preven t ive main tenance dur ing o f f -peakdemand per iods i s an ind i r ec t method fo r increas ingthe capaci ty o f the sys tem dur ing peak demand , s implyby r educing the number o f b reak-downs .(12) C o o p e r a t i o n w i t h o t h e r c o m p e t i t o r s ; c o s t -a v e r a g i n g : I t is common to f ind s i tuat ions in theserv ice indus t ry where com pet i to rs make agreem ents tosa t i s fy the excess demand f aced by one o f thecompanies. In this process both parties gain: oneincreases the prof i t and the other decreases the tangibleand in tang ib le cos t s o f tu rn ing down cus tomers . Forexample, manager s w i th overb ooked ho te l s usual ly sendcus tomers , whose r eques t s canno t be served , to o therho te l s in the c i ty . As a manager o f the Parker Househo te l po in ted ou t , 'when gues t s were tu rned awaybecause o f overbook ing , they were r ef er r ed to Bos ton ' sbest hotels , such as the Ritz, the C ople y Plaza, and theHyatt Regency, the lat ter across the r iver in Cambridge.M ore pr ice-sensi tive guests we re directed to middle-rankho te l s o r motor lodges . '(13) C o m p l e m e n t a r y s e r v i c e s : This mechanism,especially suitable for high ly seasonal services, permitstwo o r mo re p roducts to be o f f ered a t d i f f eren t times o fthe year in o rder to es tab l i sh a more homogeneousdemand . For example , equ ipment main tenancecompanies may offer air condit ioning services dur ingsummer and heating services dur ing winter .

( b) O p e r a t i o n a l D e c i s i o n sThe fo l lowing are examples o f m echan isms usual ly usedto m anage the capaci ty o f the sys tem in the shor t run torespond e f f ec t ive ly to var ia t ions in dem and .(1) D o w n g r a d i n g o f p r o d u c t s ( o r e q u i v a l e n t l y ,u p g r a d i n g o f c u s t o m e r s ): This is the case when thereexists a natural order ing of al l products , so that everyservice is an acceptable subst i tute for those that are'worse ' than i t . A good example of this s i tuat ion can befound in the hotel industry, where sui tes can besubs t i tu ted fo r de luxe and s tandard rooms , and de luxerooms are an acceptable subst i tute for s tandard rooms.This feature adds f lexibi li ty to th e def ini t ion of capacitywhere the availabil i ty of an individual product can beseen as the ag grega ted capaci ty o f al l p roducts tha t havethe same or a higher quali ty than i t . Bitran andM o n d s ch e i n12 developed a methodo logy to ef f ic ien t lyrent hotels rooms to dif ferent classes of customers

528 European ManagementJournalVo115No 5 October 1997


7/14


=.w

2 .

I00-

90

80

70

6O

5O

4O

30

2O

I0

00 5 10 t5

Rate of no-shows (%)20

F i g u r e 4 A M o d e l o f M o t e l O v e r - b o o k i n gcons ider ing the poss ib i l i ty o f downgrad ing . Us ing r ea ldata f rom a med ium-size hotel , i t is possible to ob tainincreases o f approx imate ly 15% in p ro f i t s when us ingth is mechan ism.

(2 ) O v e r b o o k i n g : W h en r e s e rv a t io n s a r e a l l ow ed an dthe show -up r a te i s less than 1 00% overbook ing i s aviable mechanism for increasing the actual ut i l izat ion.Serv ice man ager s wh o deal w i th overboo k ing f ace t r ade-o f fs be tw een a dd i t ion cost s: the cos t o f tu rn ing aw ay theoverbookecl cus tome rs wh o c anno t be served , and theoppor tun i ty cos t s o f id le capaci ty . Usual ly overbook ingma y be used in con junct ion wi th o ther mechan isms , suchas cu s t o m er co m p en s a t i o n o r d o w n g r ad i n g o f p r o d u c ts ,in order to decrease i ts associated costs .

4 0R a l e o f n o - s h o w s = 5 %

35

~- 3Ou

~ 20N 156

Z~- 10

;~ 540 0 5 10 15

No. of walked people (Wp)F i g u r e 5 P r o b a b i l it y o f T u r n i n g A w a y a t l e a s t aG i v e n N u m b e r o f C u s t o m e r s f o r a N o - s h o w R a t e o f 5p e r c e n t(3) S e r v i c e l e n g t h : In many businesses, serviceprov ider s can con t ro l , to some ex ten t , the dura t ion o fthe services rendered. Thus, services ca n be cu r tai ledwhen there ar e too many cus tomers wai t ing , o rexte nde d to m aintain higher ut il izat ion of the faci l ity .Benihana, a chain of Japanese restaurants , has masteredthe ar t o f manag ing the d ura t ion o f serv ice accord ing todemand. In these restaurants dinner is del ivered as a'show' , which the chefs serving the dinner control ,accord ing to the number o f cus tomers wai t ing in thecocktail loun ge. Hairdressers, restaurants, and sig ht-see ing tour s a r e o ther examples o f serv ice companieswhich can ad jus t the leng th o f the i r serv ices accord ing tothe w ork load .

~,.o./ "


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MAN AGING T HE T UG-OF -WAR BE T WE E N S UP P L Y AND DE MA ND IN T HE S E RVICE INDUS T RIE S

(5 ) E n g a g i n g t h e c u s t o m e r s i n t h e d e l i v e r y o f t h es e r v ic e : Rafael i ~3 obse rve s tha t th i s i s the m os tp r o a c t i v e s t r a t e g y a s e r v i c e e m p l o y e e c a n a d o p t . A nexpe r ienced cash ie r a t a supe rmarke t s ays , ' I s imply t e l lt h e c u s t o m e r w h a t t o d o . T h e y d o n o t m i n d it b e ca u s et h i n g s se e m t o m o v e q u i c k er . A n d i t h el p s m e t o d o m yw o r k . ' A n o t h e r a l t e r n a t i v e f o r e n g a g i n g c u s t o m e r s i nse rv ice de l ive ry i s to a sk them to f i l l ou t neces sa ryp a p e r w o r k w h i l e t h e y a r e w a i t i n g t o b e s e r v e d . F o re x a m p l e , t r a v e le r s u s u a l l y m u s t f i ll o u t f o r m s w h e n t h e ya r e s t a n d i n g i n l i n e t o b e s e r v e d b y i n t e r n a t i o n a l p o l i c ea t a i r p o r ts , a n d p a t i e n t s m u s t f i l l o u t m e d i c a l f o r m sb e f o r e s e e i n g t h e i r d o c t o r s .(6 ) B a t c h i n g t h e s e r v i c e d e l i v e r y : 'Ba tch ing ' s e rv icesi s an exce l l en t way to inc rease e f f i c i ency and f l ex ib i l i tyw h e n t h e s e r v i c e c a n b e d e l i v e r e d s i m u l t a n e o u s l y to ag r o u p o f c u s to m e r s . M o r e o v e r , s o m e s e rv i ce c o m p a n i e shave the f l ex ib i l i ty to inc rease the ba tch s i ze to re spondt o s u r g e s i n d e m a n d . F o r e x a m p l e , t a x i s a t a i r p o r t s c a ns e r v e s e v e r a l c u s t o m e r s a t t h e s a m e t i m e d u r i n g s o m e' e m e r g e n c i e s ' . O t h e r e x a m p l e s o f b a t c h p r o c e s s i n g t h a tt ake . advan tage o f the c lea r economies o f s ca le inc ludet o u r s o f m u s e u m s o r h i s t o r i c s i t e s , w h i c h d o n o t s t a r tu n t i l a s u f f i c i e n t l y l a r g e g r o u p h a s g a t h e r e d , a n dt r a n s p o r t a t i o n t o a i r p o r t s , w h e r e b u s e s p i c k u p p e o p l ea t d i f f e r e n t p la c e s b e f o r e d e p a r t i n g .2. Managing Demand(a ) T ac t i ca l m e c h a n i s m sS e v e r a l m e d i u m - t e r m m e c h a n i s m s a t t e m p t t o c h a n g ed e m a n d p a t t e r n s b y m o d i f y i n g t h e b e h a v i o r o fc u s t o m e r s . T h e s u c c e s s o f t h e s e t e c h n i q u e s r e l i e ss t r o n g l y o n d e m a n d e l a s t i c i t y ; t h u s a p r i c e d i f f e r e n t i a lw i l l h a v e a n i m p a c t o n t h e d e m a n d p a t t e r n o n l y i fc u s t o m e r s h a v e t h e f l e x i b il i ty o f r e q u e s t i n g t h e s e r v i c e a td i f f e r e n t m o m e n t s i n t i m e . W e d e s c r i b e b e l o w s o m e o ft h e m o s t f r e q u e n tl y u s e d m e c h a n i s m s .(1 ) Pr e -s e l l ing : P r e - s el l in g t h e p r o d u c t i v e c a p a c i t y o fa s e rv ice fac i l i ty can be s een a s bu i ld ing up ' i nven to r ie so f c u s t o m e r s ' . E x ce ss d e m a n d a t o n e t i m e p e r i o d c a n b es h i f t e d b y m o v i n g i t t o a n o t h e r p e r i o d . R e s e r v a t i o ns y s t e m s , w h i c h r e d u c e s o m e o f t h e u n c e r t a i n t y i ndemand , a re f requen t ly used in a i r l ines , re s tau ran t s ,ho te l s , r en ta l ca r compan ie s , ha i rd re s se rs , and o the rsw h o d e a l w i t h t i m e - s e n s i t i v e ' p e r i s h a b l e ' s e r v i c e s . O fc o u r s e , t h e m a j o r p r o b l e m w i t h r e s e r v a t i o n s y s t e m s i s' n o - s h o w s ' , c u s t o m e r s w h o m a k e r e s e r v a t i o n s t h a t t h e yd o n o t h o n o r , o f t e n w i t h o u t i n c u r r i n g a n y c o s t . S e r v i c ec o m p a n i e s w h o d e p e n d o n r e s e r v a t i o n s w i l l a l s o u s u a l l yove rbook the i r fac i l i t i e s , and run the a t t endan t r i sk o fh a v i n g t o t u r n d o w n p a y i n g c u s t o m e r s .(2 ) E x t e n d i n g t h e m a r k e t p l a c e i n t o t h e h o m e :I n c r e a s i n g l y , c o m p a n i e s a r e a b l e t o p u r s u e p r o s p e c t i v ec u s t o m e r s d i r e c tl y i n t o t h e i r h o m e s o r o f f ic e s b y m e a n s o fca ta logs , pho ne ca ll s o r t e l ev i s ion adve r t i s em ents . In fact ,t h e c a t a l o g s a l e s i n d u s t r y i s o n e o f t h e f a s t e s t g r o w i n gs e g m e n t s w i t h i n A m e r i c a n b u s i n e s s . A d a i l y a v e r a g e o f

30 mi l l ion ca ta logs were s en t dur ing 1991 , s e l l ing $50b i l l ion (US ) dur in g th a t yea r . x4 Us in g d i rec t ma rke t ing ,c a t a l o g c o m p a n i e s c a n s h a p e t h e d e m a n d b y c o n t r o l l i n gt h e t i m i n g a n d t h e q u a n t i t y o f t h e i r m a i li n g s , i .e . , w h e na n d h o w m a n y c a t a l o g s t o m a i l e v e r y w e e k . I n o t h e rw o r d s , t h e y s m o o t h t h e d e m a n d b y s h i f ti n g i t i n ti m e . sD i r e c t m a r k e t i n g c a n a l s o b o o s t d e m a n d i n o f f - p e a kpe r iods by o f fe r ing coupo ns , g i f ts , o r spec ial d i s coun t s . It sapp l i ca t ion t ranscends the ca ta log s a le s indus t ry and canb e f o u n d i n a v a r i e t y o f s e r v i c e c o m p a n i e s i n c l u d i n gbanks , fas t food chains , and re ta i lers .(3 ) P r i c e d i f f e r e n t i a t i o n : s m o o t h i n g d e m a n d o v e rt i m e v i a p r i c e i n c e n t i v e s : T h i s s t r a t e g y i s fr e q u e n t l yu s e d t o s h i f t d e m a n d f r o m o n e p e r i o d t o a n o t h e r .M a n a g e r s u s e a d i f fe r e n ti a l p r i c i n g s c h e m e t o e n c o u r a g epeop le to use the s e rv ice fac i l i ty a t o f f -peak t imes . T h i sm e c h a n i s m h a s b e e n i m p l e m e n t e d i n a C h i l ea nte lemarke t , E uropa , tha t s e l l s supe rmarke t p roduc t s byp h o n e . B e c a u s e m o s t C h i le a n s a re p a i d a t t h e e n d o f t h em o n t h , p e a k d e m a n d o c c u r s d u r i n g t h e f i r st h a lf o f e v e r ym o n t h . I n o r d e r t o s m o o t h t h e d e m a n d , E u r o p a b e g a no f f e r i n g a 5 % d i s c o u n t o n o r d e r s p l a c e d d u r i n g t h e l a s tt w o w e e k s o f t h e m o n t h . W i t h t h i s s i m p l e s t r a t e g y ,E u r o p a i m p r o v e d t h e q u a l i ty o f i t s s e r v ic e , r e d u c i n g t h ep e r c e n t a g e o f b u s y t e l e p h o n e l i n e s a n d t h e n u m b e r o fc o m p l a i n t s f o r n o t d e l i v e r i n g o r d e r s o n t i m e .F u r th e r m o r e, E u ro p a c a n n o w m e e t d e m a n d w i t h f e w e rt r u c k s a n d e m p l o y e e s .T h e e f f e c t i v e n e s s o f p r i c e d i f f e r e n t i a t i o n m e c h a n i s m sd e p e n d s h i g h l y o n t h e p r i c e e l a s t i c i t y o f d e m a n d .D i s c o u n t f ar es f o r r o o m s d u r i n g w e e k e n d s i n c it y h o t e l s ,n igh t ra te s fo r long-d i s t ance t e l ephone ca l l s , and spec ia lma t inee p r i ce s fo r movies a re a l l examples o f e f fec t iveuses o f th i s mech an i sm . But the low er the p r i ce e la s t i c ity ,t h e l o w e r i t s i m p a c t o n d e m a n d . F o r e x a m p l e , a p r i c ed i f f e re n t i a ti n g s c h e m e w a s r e c e n t l y i m p l e m e n t e d i n t h eC h i l e a n s u b w a y s y s t e m f o r t h e p u r p o s e o f r e d u c i n g t h eh i g h l e v e l o f c o n g e s t i o n a t p e a k t i m e s . T h e m e a s u r e w a sv e r y c o n t r o v e r s i a l b e c a u s e s o m e e x p e r t s b e l i e v e d t h a tt h e e f f ec t o n r e d i s t r ib u t i n g t h e d e m a n d w o u l d b e l i m i t e dd u e m a i n l y t o t h e l o w f l e x i bi l it y in c o m m u t e r s ' j o b a n dschoo l s chedu le s . T he subway au thor i t i e s c l a im tha t th i sme asure w as succes sfu l.F inal ly , th i s m echan i sm can a l so boos t dem and . P o ten t i a lc u s t o m e r s m a y b e g i n u s i n g t h e s e r v i c e a t l o w e r p r i c epo in t s , inc reas ing the u t i l i za t ion ra te o f the s e rv icefacility.(4 ) I n f o r m i n g c u s t o m e r s a b o u t w o r k l o a d : T h i ss i m p l e m e c h a n i s m a t te m p t s t o ' e d u c a t e ' c u s t o m e r s a b o u tthe p ro f i l e o f u t i l i za t ion o f the s e rv ice fac il i ty so th ey canm o d i f y t h e i r p u r c h a s i n g b e h a v i o r a n d , w h e n e v e r p o s s i b le ,to reques t the s e rv ice dur ing low u t i l i za t ion pe r iods . F ore x a m p l e , a f e w y e a r s a g o , w h i l e F i d e l i t y I n v e s t m e n t sb r o k e r a g e w a s u p g r a d i n g i t s f a c i l i t i e s , t h e y p r o v i d e dc u s t o m e r s w i t h i n f o r m a t i o n a b o u t t h e d i s t r i b u t i o n o f c a ll sr e c e i v e d d u r i n g t h e d a y , s o t h e y h a d t h e o p t i o n o f c al l in ga t a d i f f er e n t t i m e w h e n t h e q u e u e s m i g h t b e s h o r t e r . T h i sw a s a s u c c e ss f u l t e m p o r a r y m e a s u r e .

530 European ManagementJournalV o 1 1 5 N o 5 0 c t o b e r 1 99 7


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F i g u r e 6 M o d e l o f P r o b a b i l i ty t h a t a C u s t o m e r R e q u e s t i n g S e r v i c e w i l l h a v e to W a i t , A s s u m i n g D i f f e r e n tL e v e l s o f P r e v e n t i v e M a i n t e n a n c e

(5) P r o m o t i o n s a n d s a l e s : Retai l s tores usually planthe i r b ig sa les and p romot ions a t the beg inn ing o f theseason , even though they s t i l l do no t know whichproducts w i l l be on sa le and a t what p r ices . However ,u s i ng p a s t ex p e r i en ce t h ey k n o w t h a t b o o s t i n g d em an dis required for som e f ract ion of produ cts th at wil l not sellwel l . Promot ions and sa les a r e more necessary fo rseasonal or per ishable products , such as high-fashionclothing, special foods for holidays, and airline tickets.(6) C o m p l i m e n t a r y s e r v i c e s ; a l t e r n a t i v e t o p r i c edi f f erent ia t i on: A n o t h e r m ech an i s m f o r s m o o t h i n gdem and by a t t r ac t ing cus tomers dur ing o f f -peak per iodsis to o ffer com plim enta ry services. F or example, mallscan o f f er ch i ld care dur ing week days , o r a pa r ty o f tw opays on ly fo r the more expens ive main cour se in ar e s tau r an t fr o m M o n d a y s t o T h u r s d ay s .( 7) P r e v e n t i v e m a i n t e n a n c e o f u s e r s ' e q u i p m e n t :This mechan ism i s used to r educe the demand a t peaktimes. For instance, service comp anies that repair heat in gand a i r cond i t ion ing sys tems fo r a f ixed annual chargeusual ly per fo rm preven t ive main tenance to thecus tomers ' equ ipm ent b reakdow ns fo r the f irm to hand leeff iciently wil l occur . Consid er for exam ple anorgan iza t ion wi th f ive employe es and an average ar riva lo f four job r epai r s per day . An employee spends onaverage one day to f ix the p rob lem. We assume tha t i ft h e co m p an y p e r f o r m s p r ev en t i v e m a i n t en an ce t o acer tain f ract ion of customers ' equipment, then the ar r ivalrate of jobs wil l decrease in the same f ract ion. Figure 6shows the p robab i l i ty tha t a cu s tome r r eques t ing theservice will have to w ait , assuming d if ferent levels ofp r ev en t i v e m a i n t en ance .16 For example, i f there is no

preven t ive main tenance , then on average 44% ofcus tomers have to wai t . However , w i th p reven t ivemain tenance p rov ided to 20% of cus tomers , then , onaverage, only 18% of customers have to wait . Thispercen tage i s r educed to on ly 2% i f p reven t ivemain tenance i s per fo rmed fo r 50% of a l l cus tomers.

(b) Operat iona l dec i s i onsSome examples o f shor t t e rm mechan isms inc ludepr icing and daily specials .(1) Pricing: Pr ic ing i s one o f the mos t commonmechan isms fo r in f luencing demand . There ar e twopr icing policies tha t are usually implem ented for yieldman agem ent ( see Box 1 ). F i r s t, dynamic p r ic ing s t r a tegythat depends on the r emain ing capaci ty (o r inven to ry ) ,the t ime lef t unti l the end of the planning hor izon, andthe futu re dem and (which is, in general , a functio n of thepr ice path) . Of ten, this policy is refer red to as 'h iddenpr ice ' because the manager does no t know thecustom ers ' reservation pr ices, i .e . , the m axim um pr ice acus tom er is w i l ling to pay fo r the p roduct . Therefo re , shefaces the trad e-off betw een losing the custo me r surplusdue to a low pr ice and losing a potential sale due to ahigh pr ice. 17 The secon d strategy , kn ow n as ' revealedpr ice ' , as sumes tha t the demand can be segmentedaccord ing to the maximum pr ice tha t cus tomers ar ewil l ing to pay for the product . For example, there maybe d i f f er en t f ees depend ing on whether the cus tomer i san em ployee o f a f i rm tha t has a spec ia l ag reement , thecusto me r uses a par ticular credit card, or th e c ustom er isa g o v e r n m en t em p l o y ee . G i v en t h e m ar k e t

I '

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segmenta t ion , p r ices a r e kep t cons tan t dur ing thep lann ing hor izon . Thus, the go al o f the serv ice manager si s to se t the ta rge t l eve ls fo r each o f the marketsegments , which can be f ixed o r dyn amical ly upda ted intime.(2) Loss leaders: This includes al l special promotionstha t a r e des igned in the shor t t e rm e i ther to ge t r id o funsuccessful products or to at tract people to the s tores .For example , supermarkets usual ly o f f er a f ew productsa t v e r y l o w p r i ce s ( m an y t i m es t h ey l o s e m o n ey o nthose p roducts ) to increase the f low of cus tomers in tothe s tore.

(B ) P e r c e p t i o n s M a n a g e m e n t : H o w t o S e e mB e t t e rGiven that , even in a 'well-designed ' faci l i ty , people wil lhave to wai t a t l eas t some o f the t ime, percep t ionmanagement mechan isms can be va luab le . Thesemechan isms 'manage ' the t ime percep t ion o f cus tomerswai t ing to be served . A cus tomer ' s percep t ion o f a t en -minu te wai t can be very d i f f er en t depend ing on theenv i ron me nt in which the wa i t t akes place . For example ,Katz, Larson, an d L arson ~s repo r ted the impac t that anelectronic news b oard, instal led in a bank, had o ncus tomers ' percep t ions o f the i r wai t ing exper ience; thenews b oard m ade the t ime spen t in l ine m ore pa latable,in teres t ing , and r e lax ing . A su rvey sho wed tha t overa l lsa t i s f ac t ion wi th the serv ice r ece ived f rom the bankincreased wh en the new s boa rd was p resen t . Sasser,O l s en an d W y ck o f f 9 g i v e t h e ex am p l e o f ' a w e l l- k n o w nhote l g roup tha t r ece ived compla in t s f rom gues t s abou texcessive wait ing t imes for elevators . Af ter an analysiso f how the e levato r serv ice migh t be improved , i t wassugges ted tha t m i r ro r s be ins ta l led wh ere gues t s wai ted .The na tu ra l t endency o f peop le to check the i r per sonalappearance substantial ly reduced complaints , al thoughthe ac tua l wai t fo r the e levato r s was unchanged . 'M a i s t e r2 establishes eight proposit ions of thepsycho logy o f queues , which are :1 . Uno ccup ied time fee ls longer than occup ied t ime.2. Pre-process waits feel long er than in-process waits.3 . An xie ty makes wai t s seem longer .4 . Unc er tain waits are long er than known , f ini te waits.5 . Unexp la ined wai t s a re longer than exp la ined wai ts .6 . Unfair waits are long er than equitable waits .7 . The m ore valuable the service, the longer I wil l wait .8 . Solo wa it ing feels long er than group wait ing.Customers ' behavior and perception are context-specif ic;they are inf luenced, for example, by cultural aspects ,expecta t ions , and t ime when the serv ice i s needed . Forexample , s tud ies show tha t a ' r easonab le ' wai t fo rcus tomers depend s on w hen t hey r eques t the serv ice ; a tpeak t imes they are wil l ing to wait longer . Culturalaspects a r e a l so impor tan t because the y in f luence thewa y peop le perce ive t ime. A s tud y mad e by R. Lev ine , ap ro fessor o f psycho logy a t Cal i fo rn ia S ta te Univer s i ty ,and r epor ted in Across the B oard z l in 1992, f inds that the

pace of l i fe and perception of t ime dif fer widely inAm er ican c i ti es . This s tudy measures the amou nt o f t imetaken by cer tain act ivi t ies in 36 American ci t ies (ninec i t i es in each o f the four r eg ions de termined by thecensus: the Northeast , Midwest , South, and West) andconcludes that ci t ies can be classif ied as type A wherethere is a sense of t ime urgency, host i l i ty , andcompeti t iveness, and as type B where there is a s lower ,and more r e laxed a t t i tude . In th i s s tudy Bos ton i sclassif ied with the largest index of pace of l i fe ( t imeurgency) and Los Angeles w i th the lowes t index .Therefo re , every so lu t ion shou ld be tes ted befo reimplementing i t in the service faci l i ty , because therecou ld be som e h idden ef f ec t s tha t a r e no t cons idered inadvance. For example, Ka tz , Larson, and Larson 22repor ted on the ef fects of an electronic clock instal ledin a bank, which, by means of an 'electr ic eye' at theen t r ance and ex i t o f the queue , es t imated the leng th o fwaits . In this s tudy, the authors hyp othe size d that 'a waitwhere the leng th i s known in advance would be lesss tr essfu l than an op en-ended wai t , ' so they h oped tha tthe clock-phase respondents would have a lower s tresslevel . However , control-phase and clock-phaserespon dents d id not rate dif ferently ei ther their s tresslevels or their overall satisfaction with the servicereceived. The authors explain that ' th is may be becausethe c lock made r esponden ts more aware o f the t imewasted s tanding in l ine. '

I V F i n d i n g t h e M o s t E f f e c t iv e M i xW hat i s the bes t mix o f mechan isms fo r a f i rm? Toanswer this quest ion, service managers have tounderstand the nature of their service organizat ions. Inwhat fo l lows we p resen t four d imens ions tha t mus t beconsidered when making this decis ion.

A W h a t D r i v e s t h e D e m a n d ?I t is impor tan t to under s tand the under ly ing causes tha tde termine the demand f luc tua t ions over t ime. Thesef luctuations are due to a co mbin ation of unc er tainty inthe cus tomers ' pu rchas ing pa t tem and inheren tseasonalities of the service.I Custo mers ' habitsW hen the dem and pat te rn i s l a rge ly in f luenced bycus tomers ' u sual p rac t ice and no t by c lear economicreasons , there may be many oppor tun i t ies to managedemand p roact ive ly . Because cus tomers do no t haveexogenous cons t r a in t s tha t p reven t them f rommodifying their behavior , pr ice f l i f ferentat ion,com plim entary services, prom otions a nd sales, andin fo rming cus tomers abou t work load may p rove to besu i tab le mechan isms to smooth the demand over theplanning hor izon. Customers can benef i t ( save t ime,money or receive a bet ter quali ty service) just byreques t ing the serv ice a t ano the r mom ent in t ime.

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MA NA GI NG THE TUG- OF- WAR BETWEEN SUPPLY AND DEMA ND I N THE SERVICE I NDUSTRIES

2 Actions by third partiesM a n y t i m e s t h e c u s t o m e r s ' p u r c h a s i n g p a t t e r n i sd e t e r m i n e d b y o t h e r p e o p l e o r o r g a n iz a t io n s t h a te s tab l i sh c lea r cons t r a in t s on when the s e r v ice wi l l ber equi r ed . For example , peak t imes in publ ict r a n s p o r t a t i o n a r e u s u a ll y d e t e r m i n e d b y w o r k a n ds c h o o l s c h e d u l e s , s o m e p e a k t i m e s a t b a n k s a r ed e t e r m i n e d b y t a x p a y m e n t s , a n d r et a il s t o re s ' d e m a n di s h i g h e r a f t e r w o r k i n g h o u r s a n d d u r i n g w e e k e n d s . I nthese cases , i t is eas ie r to im plem ent me chan isms tom a n a g e t h e s u p p l y o f s er v i ce s - - t h a t is , t o m a n a g ec a p a c i t y t h r o u g h b o t h t a c t i c a l a n d o p e r a t i o n a l m e a n s - -r a t h e r t h a n t o s h i f t t h e d e m a n d . T h u s , e x t e n d i n g o rr e d i s t r i b u t i n g b u s i n e s s h o u r s , s h a r i n g e q u i p m e n t ,m a n a g i n g t h e s e r v i c e l e n g t h , a n d d y n a m i c s c h e d u l i n gc a n b e g o o d a l t e r n a t i v e s t o s a t i s f y t h e d e m a n d . I f t h ed e g r e e o f c o n t r o l f r o m t h i r d p a r t i e s i s l o w , t h e n s o m ed e m a n d m a n a g e m e n t m e c h a n i s m s m a y a l s o b ea p p r o p r i a t e ; f o r e x a m p l e , i n f o r m i n g c u s t o m e r s a b o u tw o r k l o a d a n d o f f e r i n g c o m p l i m e n t a r y s e r v i c e s .3 Unp redictable eventsA l m o s t a l l t y p e s o f d e m a n d c a r r y a d e g r e e o fu n c e r t a i n t y . T h e i m p o r t a n c e o f t h i s u n c e r t a i n t y i n t h ed e s i g n o f a s e r v i c e i s a m a t t e r o f d e g r e e . F o r e x a m p l ehosp i ta l s , and f i r e and po l ice s ta t ions a r e s e r v iceo r g a n i z a t i o n s w h e r e t h i s f e a t u r e i s o n e o f t h e m o s ti m p o r t a n t c o n s i d e r a t i o n s i n t h e d e s i g n o f t h e s e r v i c ef ac il it y. T h e p r o b l e m o f m a t c h i n g s u p p l y a n d d e m a n d i nthese cases i s addr es sed , in pa r t , by des ign ing the sys temt o s a t i s f y t h e d e m a n d i n s t a n t a n e o u s l y w i t h h i g hp r o b a b i l i t y ; q u e u e s o r r e s e r v a t i o n s y s t e m s a r e n o tp o s s i b l e . T h e s e o r g a n i z a t i o n s h a v e o n l y l i m i t e dp r o s p e c t s f o r m a n a g i n g d e m a n d i n t h e s h o r t t e r m . T om a t c h t h e s u p p l y w i t h t h e n o n - p r e d i c t a b l e d e m a n d , t h e yu s e m e c h a n i s m s l i k e l o c a t i o n , a u t o m a t i o n , m o d u l a rfaci l i t ies , cross- tra ining, and share capaci ty withc o m p e t i t o r s .

B W h a t C o n s t r a i n s t h e D e l i v e r y o f S e r vi ce ?T h e d e l i v e r y o f a s e r v i c e m a y r e q u i r e a c u s t o m e r t o b ephy s ica l ly p r ese n t in the s e r v ice f ac i li ty f o r a l l , some , o rn o n e o f t h e s e r v i c i n g .I Custom er present throughout the delivery of the serviceExamples inc lude r e s taur an ts , ha i r d r es se r s , andt r anspor ta t ion sys tems . Fac tor s l ike loca t ion , l ayout ,a n d d e g r e e o f a u t o m a t i o n p l a y a c e n t r a l r o l e i n t h edes ign of the s e r v ice f ac i l i ty . The mechanisms ofm a n a g i n g t h e p e r c e p t i o n s o f w a i t i n g t i m e , a n d t h e u s eo f r e s e r v a t i o n s y s t e m s ' t o i n v e n t o r y c u s t o m e r s ' a r ee f f ec t ive f o r such se r v ices .2 Customer present for par t of del iveryFor s e r v ices such a s ca r r epa i r s , wher e the cus tomerleaves the ca r to be s e r v iced , and medica l t e s t s , wher espec imens a r e co l lec ted f o r l a te r l abor a tor y ana lys i s , thec u s t o m e r n e e d s t o p r e s e n t o n l y f o r p a r t o f t h e t i m e .U n d e r t h e s e c i r c u m s t a n c e s , t h e r e c e p t i o n o f c u s t o m e r sb e c o m e s m o s t i m p o r t a n t , a n d s e r v i c e m a n a g e r s m a y , f o r

i n s t a n c e , m a k e u s e o f i n f o r m a t i o n s y s t e m s c o n t a i n i n gc u s t o m e r s ' p e r s o n a l i n f o r m a t i o n , a n d m a y c h o o s ec o n v e n i e n t l o c a t i o n s . E x t e n d e d b u s i n e s s h o u r s f o rcus tomer s e r v ice , a s we l l a s the use o f pa r t - t imeemployees to inc r ease the capac i ty o f the f r on t o f f icea t m o m e n t s o f h i g h d e m a n d , a re a l so e f f e ct iv e .3 C u s t o m e rnot presentCata log sa le s , and te lec om mu nica t ions a r e examples o ft h i s t y p e o f s e r v i c e o r g a n i z a t i o n . A u t o m a t i o n o ft e l e p h o n e s t e p s , s c h e d u l i n g , a n 3 b a t c h i n g t h e d e l i v e r yo f t h e s e r v ic e p r o v i d e a l t e rn a t iv e s t o m a n a g e t h e s u p p l ya n d d e m a n d .

C W h a t Em p lo y e e S k i l ls A r e N e e d e d ?Ser v ice ope r a t ions can a l so be c la s si fi ed accor d in g to thedegr ee o f qua l i f i ca t ion r equ i r ed by the i r employees .Thus , in companies r equ i r ing le s s educa t ion orspec ial iza tion, the sup ply of s e rv ices m ay be m ana gedby c r os s - tr a in ing , pa r t - t ime em ploy ees , and f loa t ing s ta f fp r o v i d e . O n t h e o t h e r h a n d , c o m p a n i e s t h a t d e p e n d o nhigh ly- sk i l l ed l abor , usua l ly p r of es s iona l s e r v ices , a r ec o n s t r a i n e d b y m o r e r i g id s u p p l ie s a n d , t h e r e fo r e , m u s tt u rn t o d e m a n d m a n a g e m e n t t e ch n i qu e s .

D H ow Spec ia l ized i s the Equipment?T h e a l t e r n a t i v e s o f s h a r i n g c a p a c i t y , a n d m a n a g i n gd e m a n d a r e t h e m o s t s u i t a b l e m e c h a n i s m s t o u s e i nse r v ice companies tha t r equ i r e expens ive and spec ia l i zede q u i p m e n t .

V A S t ud y : A i r l in e C o m p a n i e s U s eM u l t i p l e M e c h a n i s m sT o a c h i e v e t h e g o a l o f d e l i v e ri n g q u a l i t y s e rv i c e w h i l emaximiz ing pr of i t s , a i r l ine companies mus t cons tan t lydea l , in the shor t r un , wi th ma tch ing the unce r ta ind e m a n d f o r f l i g h ts w i t h t h e i r fi x e d c a p a c i ty ( n u m b e r o fp lanes and n um ber o f s ea t s in a p lane ). I n the p r o ces s o fpur cha s ing the s e rv ice , a cu s tom er faces d i f f e r en t s t agesw h e r e h e m u s t i n t e r a c t s o m e h o w w i t h t h e a i r l i n e o rt r a v e l a g e n c y . S o m e o f t h e s e a r e t h e r e s e r v a t i o n a n dpur chas ing of t i cke t s , the check- in , the p r eboar d ing , thef l igh t , and the check- ou t . I n a l l these in te r ac t ionscus tomer s eva lua te the qua l i ty o f the s e r v ice . Hence ,each of these s tages mus t be ca r e f u l ly des igned .Th e f ir st con tac t tha t the c us tom er has wi th th e a i r line o rt r av e l a g e n c y i s w h e n h e d e c i d e s t o m a k e a r e s e r v a t i o nf or a f l igh t . The acces s to the sys tem p lays a key r o le int h e p u r c h a s i n g p r o c e s s; b u s y t e l e p h o n e l in e s d u r i n g p e a kh o u r s c a n p r e v e n t c u s t o m e r s f r o m b u y i n g t h e s e r v i c e .T h e r e f o re , s c h e d u l i n g t h e a p p r o p r i a t e n u m b e r o f p e o p l eto answer the phones can be a s c r uc ia l a s hav ingdepar tu r es and a r r iva l s on t ime .

. : . . , .

European ManagementJournalVo115 N o 5 Oc tober 1997 .533


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MAN AGING T HE T UG-OF-WAR BE T WE E N SUPPL Y AN D DE MA ND IN T HE SE RVICE INDUST RIE S

L a t e r o n , i n t h e c h e c k - i n p r o c e s s , t h e q u e u i n gp h e n o m e n o n i s o b s e r v e d a g a i n . A t t h i s s ta g e , p a s se n g e r sd o n o t h a v e a n a l t e r n a t i v e t o w a i t i n g i n l i n e t o b es e r v e d . D u r i n g t h e p r e b o a r d i n g p r o c e s s , ' c a p t i v e 'c u s t o m e r s m u s t w a i t t o b o a r d t h e f l i g h t . O c c a s i o n a l l y ,t h e y e x p e r i e n c e d e l a y s d u e t o b a d w e a t h e r c o n d i t i o n s , o rm e c h a n i c a l a n d p e r s o n n e l p r o b l e m s . F o r e x a m p l e , i n t h eU n i t e d S t a t e s i n 1 9 9 1 , f l i g h t s a v e r a g e d a 3 4 - m i n u t ed e l a y p r io r t o b o a r d i n g a n d o v e r 3 0 0 f l i g ht s a d a y w e r ed e l a y e d .23 T ay lo rz 4 s h o w s t h a t d e l a y s c a n h a v e an e g a t i v e e f f e c t o n c u s t o m e r e v a l u a t i o n s o f s e r v i c e a n ds u g g e s t s t h a t s e r v i c e p r o v i d e r s s h o u l d a t t e m p t t o e i t h e rs h o r t e n d e l a y s f o r s e r v ic e o r c h a n g e t h e c o n s u m e r ' s w a i te x p e r i e n c e s o t h a t i t r e s u lt s i n l es s u n c e r t a i n t y a n d a n g e r .F i l l i n g a f l i g h t w i t h t h e ' r i g h t ' c u s t o m e r s i s o n e o f t h eha rdes t t a sks tha t manage rs in the a i r l ine indus t ry face .N o t i c e t h e d i f f e r e n c e b e t w e e n a p l a n e t h a t t a k e s o f f w i t hh a l f i t s s e a t s e m p t y a n d a f u r n i t u r e c o m p a n y t h a t i n ag i v e n m o n t h f a c es a d e m a n d e q u a l t o h a l f i ts p r o d u c t i o n .T h e e x c e s s f u r n i t u r e p r o d u c t i o n c a n b e i n v e n t o r i e d t os a t i s f y t h e d e m a n d i n f u t u r e p e r i o d s , b u t t h e e x c e s sp a s s e n g e r c a p a c i t y h a s z e r o v a l u e a f t e r t h e t a k e - o f f .A c k n o w l e d g i n g t h i s c h a l l e n g e , A m e r i c a n A i r l i n e s h a sd e v e l o p e d a d e c i s io n s u p p o r t s y s t e m ( s ee B o x 1 ) f o r t h er e s e r v a t i o n p r o c e s s f o r e a c h f l i g ht ; t h e s y s t e m m a x i m i z e sr e v e n u e b y c o n t r o l l i n g r e s e r v a t i o n a v a i l a b il i ty v i a t h r e em a j o r f u n c t i o n s : o v e r b o o k i n g , d i s c o u n t a l l o c a t i o n s , a n dt ra ff ic m a n a g e m e n t . A s s t a t e d b y t h e m a n a g e r s o fA m e r i c a n A i r li n e s,2 5 w h e n c o m p a r i n g t h e r o l e o f y i e l dm a n a g e m e n t t o t h e i n v e n t o r y c o n t r o l f u n c t io n fo r am a n u f a c t u r i n g c o m p a n y , ' t h e n a t u r e o f t o d a y ' s m a r k e t -p l a c e i n t h e a i r l i n e i n d u s t r y m a k e s y i e l d m a n a g e m e n tabso lu te ly e s sen t i a l to p ro f i t ab le ope ra t ions . '

F ina l ly , a t the check-ou t s t age , cus tomers have to wa i tfo r the i r baggage . T he re i s an in te re s t ing ca se 2 6 w h e r ec u s t o m e r s c o m p l a i n e d v e h e m e n t l y a b o u t l e n g t h yl u g g a g e h a n d l i n g d e l a y s , a l t h o u g h c u s t o m e r s n e v e re x p e r i e n c e d a w a i t i n g t i m e l o n g e r t h a n e i g h t m i n u t e s ,which i s an accep tab le s t anda rd in indus t ry . A c r i t i c a la n a l y s i s s h o w e d t h a t t h e w a i t i n g t i m e c o n s i s t e d o f o n e -m i n u t e w a l k i n g t i m e f r o m t h e p l a n e t o t h e l u g g a g ec a r o u s el a n d s e v e n - m i n u t e w a i t i n g t i m e a t t h e c a r o u s e l .T h e m o s t l i k e l y e x p l a n a t i o n a b o u t t h e c u s t o m e r s 'd i s s a t i s fac t ion i s the pe rcep t ion o f in jus t i ce becausep a s s e n g e r s w h o a r r i v e d e v e n a f t e r t h e m b u t w i t h o u tb a g g a g e c o u l d s ta r t t h e w o r k i n g d a y b e f o r e t h e m . T h es o l u t i o n t o t h i s p r o b l e m c o n s i s t e d o f d e l i b e r a t e l yi n s e r t i n g d e l a y s i n t h e s y s t e m s o a l m o s t a l l p a s s e n g e r sw o u l d l e a v e t h e a i r p o r t t o g e t h e r . W i t h t h i s p u r p o s e , t h eau thor i t i e s moved the a i rc ra f t d i s embark ing a rea fa ra w a y f r o m t h e l u g g a g e m a i n a r e a s o t h e w a l k i n g t i m ew a s i n c r e a s e d f r o m o n e t o s ix m i n u t e s ( t h e t o ta l w a i t i n gt i m e r e m a i n e d u n c h a n g e d ) . A f t e r t h i s c h a n g e t h e n u m b e r6 f c o m p l a i n t s d r o p p e d d r a m a t ic a l ly . M a r t i n , 27 w h orepor ted th i s ca se , ca l l s the so lu t ion an example o f' p e r c e p t i o n m a n a g e m e n t . '

V I C o n c l u s i o n s a n d C o m m e n t s

I n a n y s e r v i c e o r g a n i z a t i o n , a n u m b e r o f m e c h a n i s m sm a y b e u s e d t o m a t c h a l i m i t e d s u p p l y o f s e r v ic e s w i t han unpred ic tab le demand fo r those s e rv ice s . T ac t i ca l ando p e r a t i o n a l m e c h a n i s m s , w h i c h a c t u a l l y e n h a n c e t h eo r g a n i z a t i o n 's p e r f o r m a n c e , m a y e i t h e r i n c re a s e a b s o l u t ecapac i ty and e f f i c i ency , o r sh i f t the demand f rom peakB o x I Y i e ld M a n a g e m e n tY i e l d m a n a g e m e n t i s a t e c h n i q u e th a t h a s b e e n c r e a t e da n d d e v e l o p e d i n t h e l a s t 2 0 y e a r s w i t h s e v e r a ls u c c e s s f u l a p p l i c a t i o n s . T h i s t e c h n i q u e i s s u i t a b l ew h e n t h r e e f e a t u r e s a r e p r e s e n t :4 ' T h e p r o d u c t o r s e r v i c e i s p e r i s h a b l e : a f t e r a m o m e n t

i n t i m e i t i s n o t a v a i l a b l e o r i t a g e s ( f or e x a m p l e ,h o t e l r o o m s , f l i g h t s e a t s , a n d s e a s o n a l a n d f a s h i o nc l o t h i n g ) ,

. t h e r e i s a f i x e d c a p a c i t y o r i n v e n t o r y th a t c a n n o t b em o d i f ie d i n t h e s h o r t r u n , a n d

, d i f fe r e n t m a r k e t s e g m e n t s a r e w i l l i n g t o p a yd i f f e r e n t p r i c e s f o r t h e s a m e p r o d u c t .

S e v e r a l d e f i n i t io n s o f y i e l d m a n a g e m e n t h a v e b e e n g i v e n

P e r i s h a b l e -A s s e t R e v e n u e M a n a g e m e n t ( P A R M ) - - - a n dd e f i n e i t m o r e b r o a d l y ' t o b e t h e o p t i m a l r e v e n u em a n a g e m e n t o f p e r i s h a b l e a s s e t s t h ro u g h p r i c es e g m e n t a t io n . ' T h e k e y q u e s t i o n s t h a t P A R M a t t e m p t st o a n s w e r o n a u n i t - b y - u n i t b a s i s a r e :~ , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

v a r i o u s p r i c e l e v e l s ? * H o w s h o u l d t h i s a v a i l a b i l i t y o f u n i t s c h a n g e o v e r

t i m e a s t h e t i m e o f a c t u a l a v a i l a b i l i t y a p p r o a c h e s ;t h a t i s , w h e n s h o u l d c e r t a i n p r i c e l e v e l s b e c l o s e do u t o r o p e n e d u p ?

S e v e r a l s u c c e s s f u l a p p l i c a t i o n s o f y i e l d m a n a g e m e n th a v e b e e n r e p o r t e d i n t h e l i te r a t u r e , F o r e x a m p l e ,

i n t h e l i t e r a t u r e . A m e r i c a n A i r l i n e s o f f i c i a l s d e s c r i b e i t a s A m e r i c a n A i r l in e s , o n e o f t h e l e a d in g u s e rs o f y i e ld' s e l l i n g t h e r i g h t s e a t s t o t h e r i g h t c u s t o m e r s a t t h e r i g h tp r i c e s . '2 8 B e l o b a b a 2 9 d e f i n e s y i e l d m a n a g e m e n t a s t h ee f f o r ts t o m a n a g e , u s i n g b o t h p r i c i n g a n d s e a t i n v e n t o r yc o n t r o l, th e r e v e n u e m i x o f p a s s e n g e r s c a r r i e d . T h e s e a ti n v e n t o r y c o n tr o l p r o b l e m i s ' to d e t e r m i n e t h e n u m b e r o fs e a t s t o m a k e a v a i l a b l e t o e a c h fa r e c l a s s f ro m a c o m m o no r s h a r e d i n v e n t o r y ( i . e . , t h e c o a c h c a b i n o f t h e a i r c r a f t)s o a s to m a x i m i z e t o ta l e x p e c t e d r e v e n u e s fo r as c h e d u l e d f u t u r e f li g h t l e g d e p a r t u r e . '

W e a t h e r f o r d a n d B o d i l y 3 p r e s e n t a n e x t e n s i v e r e v i e wo f y i e l d m a n a g e m e n t . T h e y p r o p o s e a n e w n a m e

m a n a g e m e n t , e s t i m a t e s t h a t t h i e a c c o u n ts f o r a b o u t 5 %( o r $ 5 0 0 m i l li o n ) o f a n n u a l r e v e n u e s , a l D u k e U n i v e r s i t yD i e t a n d F i t n e s s C e n t e r ( D F C ) i n D u r h a m , N o r t hC a r o l i n a , h a s a l s o r e p o r t e d i m p o r t a n t g a i n s u s i n g t h i sm e t h o d t o i n c r e a s e c a p a c i t y u t i l i z a t i o n b y k n o w i n gw h e t h e r a n d w h e n t o a p p l y d i s c o u n t s a n d h o w t om a n a g e c a p a c i t y a n d i m p r o v e r e v e n u e y i e ld s b e y o n d1 0 0 % . A t th e ti m e t h e s y s te m w a s i m p l e m e n t e d , D F Cp r o j e c te d a n i n c r e a s e i n r e v e n u e o f 1 0 % b e c a u s e o f t h ey i e l d m a n a g e m e n t t e c h n i q u e s . 3 2 O t h e r a p p l i c a ti o n sh a v e b e e n r e p o r t e d i n th e h o t e l i n d u s t r y a n d r e t a i l i n g .

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M A N A G I N G T H E T U G - O F - W A R B E T W E E N S U P PL Y A N D D E M A N D I N T H E S E R V IC E I N DU S T RI ES

p e r i o d s t o o f f - p e a k p e r i o d s . T h e s e m e c h a n i s m s d i f f e r i nt h e c o m p l e x i t y o f t h ei r d e s i g n a n d i m p l e m e n t a ti o n ; s o m er e q u i r e o n l y q u a l i t a t i v e a n a l y s i s w h i l e o t h e r s c a l l f o rm a t h e m a t i c a l m o d e l s o r a n a l y t i c t o o l s l i k e s i m u l a t i o n ,q u e u i n g t h e o r y , a n d m a t h e m a t i c a l p r o g r a m m i n g . F i n a l l y ,p e r c e p t u a l m e c h a n i s m s , w h i c h a l t e r o n l y t h e c u s t o m e r ' sp e r c e p t i o n s o f t h e o r g a n i z a t i o n ' s p e r f o r m a n c e , m a y a l s ob e u s e d t o m a i n t a i n c u s t o m e r s a t i s f a c t i o n w h e n d e l a y s i ns e r v i c e a r e u n a v o i d a b l e . M o s t s e r v i c e f ir m s w i ll w a n t t ou s e a m i x o f t h e s e m e c h a n i s m s ; a i r l i n e c o m p a n i e s h a v eu s e d m a n y d i f f e r e n t m e c h a n i s m s w i t h f a v o r a b l e r e s u l t s .T h e q u a l i t y o f s e r v i c e t h a t a f i r m c a n p r o v i d e w i l ld e p e n d o n m a n a g e m e n t ' s s k i l l i n c h o o s i n g t h e r i g h t m i xo f m e c h a n i s m s f o r i t s o w n p a r t i c u l a r b u s i n e s se n v i r o n m e n t , a n d t h e c a r e f u l ne s s w i t h w h i c h t h e c h o s e nm e a s u r e s a re i m p l e m e n t e d . O n e v e r y i m p o r t a n to v e r a r c h i n g p r i n c i p l e s h o u l d u n i f y w h a t e v e r m e a s u r e sa f ir m p u t s i n t o p l a c e : c u s t o m e r s n e e d t o b e a w a r e ,a l w a y s , t h a t t h e i r s a t i s f a c t i o n d r i v e s y o u r m a n a g e m e n td ec i s i o n s .

N o t e s1. Priority Ma nagem ent, Pittsburgh, PA, 1988.2 . See , fo r example:

Sasser, W. (1976) Match Supply and Demand in ServicesIndustries. Harv ard B usiness School, 44-51;Lovelock, C. (1983) Classifying Services to Gain StrategicMarketing Insights. ]ournal of Market ing, 47, 9--20;Bowen, D. and C umm ings, T. (1990) Suppose We T ookService Seriously. In Service Manag emen t Effectiveness,ed. D . Bow en, R. Chase, T. Cumm ings (Jossey-Bass),1-14;Flipo, J. (1991) On the S trategic Implications of Tang ibleElem ents in the Ma rketing of Industrial Services. InService Quali ty , Mult idiscipl inary and Mult inat ionalPerspectives, ed. S. B rown , E. Gumm esson, B.Edvarsson, and B. Gustavsson (New York:Lexington Books), 123-134;Bitran, G. and Lojo, M. (1993) A Framework for AnalyzingService Operations. European Management ]ournal ,11(3), September, 271-282.3. Sass er, W. (197 6) Match Supply and Demand in ServiceIndustries. Harvard Business Review, November-December,44-51 .

4 . Lovelock ,C. (1983) Classifying Services to Gain StrategicMarketing Insights. Journal of Market ing, 47, 9-20.5. Th e Parker House (B), Harva rd Business School Case, 0-580-I52, I983.6. W illiam Henderson, Vice President, Employee Relations ofthe United States Postal Se rvice . Ta lk 's t i t le: 'ServiceImproving S trategies of the United States Pos tal Service',at MIT Symposium Service s Industries: Decision Technologiesto Achieve Productivi ty Improvement , Bos ton, 1993.7 . Gleckman,H. (1993) The T echno logy Payoff. Business We ek,June 14, 57-68.8. Ibid.9. Ze m ke , R. with Schaaf, D. (19 89) The Service Edge: I0 ICompanies T ha t Pro f i t f rom Cus tomer Care, (New York:Penguin Bo oks USA), 479.

I0. For an extensive review of the FedEx case, see Lovelock, C.(1994) Product Plus: How Product + Service = Com petitiveAdvantage, (New York: McG raw-Hill , Inc), 121-141.11. Ib id , 285-286.12. Bitran , G. and M ondschein, S. (1995) An Application ofYield Management to the Hotel Industry, ConsideringMultiple Night Stays. Opera tions Research, 43(3), May-June,

427-443.13. Rafaeli , A. (19 89) When Cashiers Me et C ustomers: AnAnalysis of the Role of Superm arket Cashiers. Academy o fManagement Journal, 32(2), 245-273.14. Holiday Hopes of the Catalog Industry: Me rrier Christmas,Happier New Year. The Wa ll Street Journal, December 2,1992.15. For an extensive desc ription , see Bitran, G. andMondschein, S. (1995) A Comparative Analysis ofDecision M ak ing Procedures in the Catalog SalesIndustry. (Cam bridge, Massachusetts: MIT Sloa n Schoolof M anagement, Working Paper).I6. W e assume that the interarrival time of jobs and the servicetime are exponentially distributed.17. Se e, for examp le, Bitran, G. and M ondschein, S. (in press)Periodic Pricing of Sea sona l Products in Retailing.Management Science.18. K atz , K., Larson, B. and Larson, R. (1991) Prescription forthe W aiting-in-Line Blues: Entertain, Enlighten, and Engage.Sloan Managem ent Review, Winter , 44-53 .19. Sasser , W .E. , Olsen , J . and Wyckoff, D .D . (I979)Ma nagem ent of Service Operations: Tex t, Cases and Readings(New York: Allyn and Bacon).20. M aister, D.H . (1984) The Psychology of Waiting in Lines.Harvard Business School Note 9-684-064, Re v. May.21. The Fastest City in Am erica. Across the Board, April I992,52-53 .22. K atz , K., Larson, B. and L arson, R. (1991) Prescription forthe Waiting-in-LineBlues: Entertain, Enlighten, and Engage.Sloan Managem ent Review, Winter, 44-53.23. Air Transportation Association, 1992.24. Taylor, S. (19 94) Wa iting for Service: the Re lationshipBetween Delays and Evaluations of Service. Journal ofMarket ing, 58, April, 56-69.25 . Homer, P. (I99I) The B est in MS. O R ~ M S T o d a y , August,42 .26. Larson,R. (I987) Pe rspectives on Q ueues: Social Justice andthe Psychology of Queuing. Operations Research, 35(6),November-December, 895-905.27. Martin,A. (1983) Perception and V alue Management. ThinkPreactive, 85-101.28. Homer, P. (1991) The Best in MS. O R ~ M S T o d a y , August,42 .29. Belobaba , P. (1989) Application of a Probabilistic DecisionModel to A irline S ea t Inventory Control. OperationsResearch, 37(2), March-April, 183-197.30. Weatherford, L. and Bodily, S. (1992) A Taxo nom y andResearch Overv iew of Per ishab le-Asse t RevenueManagem ent: Y ie ld Managem ent, Overbooking, andPricing. Operations Research, 40(5), September-October,831-844.3I. Homer, P. (1991) Eye s on the Prize. OR~MS Today , August,34-38.32. Chapman, S. and Carmel, J. (1992) Dem and/CapacityManagem ent in H ealth Care: An App lication of YieldManagement. Heal th C are Manage Rev , 17(4), 45-54 .

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MAN AGING THE TUG-OF-W AR BETWEEN SUPPLY AN D DE MA ND IN THE SERVICE INDUSTRIES

G A B R I E L B I T R A N , SloanSchool of M anagement E53-390, Massachusetts Instituteof Technology, Cambridge,Massachusetts 02139, U SA.~ Ga briel Bitran is Professor ofManagem ent Science at M ITSIoan School ofMan agement. He is theEditor-in-Chief ofManagement Sc i ence and amember of the editorial boards of several managementjournals inc luding the European Management Journa l .His research interests lie in the field o f operationsmana gement in m anufacturing and the service industry,and he has pu blished and consulted wide ly in operationsmanagement.

S U S A N AM O N D S C H E I N ,Depa rtment of Indu strialEngineering, U niversity o fChile, P.O. Box 2777,Santiago, Chile.Susana Mo ndschein isAssista nt Professor ofOperations M anage men t inthe Ind ustrial EngineeringDepartment of the Universityof Chile. Her research interests include the st ud y o foptimal decision-making und

Managing the Tug-Of-War Between Supply and Demand in the Service Industry - Bitran Mondschein

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