THE INDIAN INSTITUTE OF PLANNING AND MANAGEMENT

NEW DELHI

REPORT ON

MANAGING CAPACITY & DEMAND

SUBJECT: SERVICES MARKETING

For IVth TRIMESTER

SUBMITTED TO: PROF. (DR.) ANIL SARIN

SUBMITTED BY: STUDENTS OF SECTION P2

EKTA MALHOTRAKAMAKSHI KOTHIWAL

NALIN KUMAR PANTSHEIKH ABDUL RAZZYAK

SHILPI BARUAVISHAL BEHANI

ACKNOWLEDGEMENT

We are greatly indebted to

Prof. (Dr.) Anil Sarin, Member of Faculty, The Indian Institute of Planning &

Management for giving us the much required impetus to take up the topic of

Managing Capacity & Demand.

We would like to bring to light the constant inspiration which we gained from our family

members, at several junctions, without whom we wouldn’t have been able to accomplish

the project.

We would also like to take this opportunity and mention the contribution of our fellow

group members and friends without whom the report wouldn’t have been what it is right

now.

Ekta Malhotra

Kamakshi Kothiwal

Nalin Kumar Pant

Sheikh Abdul Razzyak

Shilpi Barua

Vishal Behani

Managing Demand & Capacity

Demand – DefinitionThere can be various definitions of the word ‘Demand’ based on the various approaches that we take. For an economist, the word might mean something completely different than to one who takes it in literal sense. But in services marketing, it means the willingness and ability of a person to purchase a commodity or service at a specific price and at a given point of time to satisfy his desire.

Capacity – DefinitionSimilarly, the definition of the word ‘Capacity’ is ‘the potential or suitability for holding, storing or accommodating any ‘commodity’ so that it meets the requirements of a needy when it is required the most’.

Demand PatternsThere can be various patterns of demand based on various situations that might arise from time to time. There are different demand patterns. Four of them are mentioned herein.

Charting Demand Patterns: Under this case, charts of various demand patterns are prepared and analyzed to understand the fluctuation in demand pattern. With this sort of charts an organization would be able to measure the present situation and determine the extent to which they need to produce and provide the services.

Predictable Cycles: Here we study the frequency of the fluctuation or the variation in the demand pattern. Most of the times, organizations predict the future demand with the help of the past performances. We can take the example of a jewellery store like Tanishq – every year they plan for the biggest business ‘day’, Dhanteras and having 100 stores in 77 cities across India, it gets next to easier to determine the quantum of business that the stores would do and the revenue that would be generated. This year, the boutique in Jaipur did a business of Rs. 1.20 crores (which until date is the highest for that store which opened in October 1998). This was possible only due to the timely prediction of the spate in demands over the past years business.

Random Fluctuation: Under this case random fluctuations are studied where the demand for a commodity goes-up suddenly. One such instance is that of AT&T when they faced a steep demand increase during the Gulf War. The reason was due to the fact that the soldiers were summoned even before letting them know that they were being sent to the Gulf.

Market Segment Demand: There is also a need to segregate the market on the basis of the demand of the various segments that co-exist in the market. A detailed profile of the customers’ buying behaviour should be maintained by the organizations so that the organizations can cater to the needs of the various segments of the market.

Components of CapacityJust talking about the demand patterns doesn’t mean the solutions to the peoples’ demands have been met. It is also important to note the components of capacity. The components of capacity include the following –

Equipment & Tools – These can become a capacity constraint in case of delivery service – related organizations. For instance, UPS, Federal Express face this constraint during Christmas Season when there is a need to service demand of delivering the consignments in time to all the people who are at the receiving end.

Time – From the point of view of those people, for who time is the primary constraint, like that of a psychological counsellor, a lawyer, a hairdresser, etc. if their time is not used productively, profits are lost. And if there exists, an excess demand, time can’t be created to satisfy it.

Facilities – Many organizations face a constraint brought about by their limited facilities. For instance, hotels have a limited number of rooms, and airlines a limited number of seats to fulfil the demands of the innumerable people approaching them for accommodation. This acts as the constraint in both the cases.

Customer Participation – The extent to which the organizations are open to customer participation can be seen in this scenario. There are many instances when the companies have taken customer feedback to arrive at a new service. Take for example the case of Singapore Airlines when they were due to take the delivery of the A380.

Alternate Sources – what are the chances of moving to alternate sources if the result is not met with the existing set of sources.

Maximum Capacity Vs. Optimum Capacity

Maximum Capacity – The ‘total’ limit of available services, as the resources have been fully utilized. For example, in a hotel, the rooms are limited. In case of a hotel, the maximum capacity of the hotel is the total number of rooms that exist and once all the rooms are occupied, we can say that the maximum capacity of the hotel has been utilized. For any instance if a new customer comes to the hotel, it wouldn’t be possible to accommodate the new guest in the room of his choice.

Optimum Capacity – The resource fully employed but not fully ‘used’ and the customers are still getting quality service in an apt way. We can take up the example of a lecture session by a professor in a university. Even though if some of the seats are empty in the class, the professor would give the same lecture that he would have given in case the entire classroom would have been occupied. So we can say

that the students sitting in the class are getting the optimum of the lecturer.

Adjusting Capacity To Match Demand Use Part – Time Employees – This is a time-tested procedure

where organizations hire part time employees to perform jobs that otherwise would have been undone. We can take the example of the recently concluded Vodafone Delhi Half Marathon. The general public was invited to volunteer at the various levels during the half – marathon as the organiser didn’t have the man-power to fill-in the empty positions.

Cross – Train Employees – Many organizations take to cross-training their employees to perform other jobs during shortages of capacity. One such example can be taken of a jewellery store, Tanishq – The Jeweller where the security guard was trained to perform his duties as a Retail Sales Officer during Dhanteras (the busiest day for any jeweller).

Vary The Services Offered – In this case, organizations vary the services that are offered by them. The example of Mont Tremblant Ski Resort, Canada can be cited. As the name of the resort implies, it is a resort where tourists come during winters to enjoy skiing. But the resort didn’t want to sit idle during summers, so it invited adventure bikers to stay there and enjoy the hospitality and at the same time provided them a new adventure of riding down the terrain in the afternoons. This got them enough people during the summers as well and it was able to maintain a decent capacity even during ‘off-season’.

Modify Time / Location of Service Delivery – As the point suggests it means to amend the time or location of service delivery.

o For example, most of the times it happens that when the demand in the upcountry areas rises and the organizations are unable to meet their demands with the existing set of capacities. If we take the example of jewellery based company, Tanishq – The Jeweller, Jaipur organized ‘road shows’ to meet the requirements of nearby areas like Udaipur, Jodhpur where the boutique didn’t have any outlet.

o In case of modifying ‘time’, we can take an instance of what the consumer would like to have once he enters a shop on a hot afternoon. He wouldn’t appreciate a cup of tea in that scenario. But a glass of lemonade might work wonders for him. Over here, we see a change in demand due to seasonal change.

Differentiate on Price – We have seen instances where the demands have been met when the prices have been reviewed. For example, the airlines industry is flooded with this kind of practice to meet the demand. We can see that prices are made lucrative on a particular flight but where as on the other the

same airline places a high price tag as there is a high demand in the market for the seats on that flight.

Flex Capacity To Meet Demand – Many organizations choose to flex their capacities like time, labour, etc. to meet the demand that prevails in the market.

Rent / Share Extra Facilities & Equipments – The option of renting or sharing extra facilities & equipments is usually common in sectors like education, delivery – related services etc. We can take the example of United Postal Services, USA which rents its delivery vehicles during that time of the year when it has excess demand and less capacity. The trucks if purchased would be rendered useless for the remaining part of the year.

Communicate With Customers – It is very important to communicate with the customers if the organization is unable to match the demand and capacity at any point of time. Usually this can be seen in industries like that of automobiles when a particular brand of car is doing well in the market and there is a sudden rise in the demand. We can also see the same scenario in the USA where the 911-emergency hotline had to inform the residents that they should not call for 911 in case of trivial emergency situations like noisy neighbourhood due to a party, house-heating not working, etc.

CASE LET

A leading airline at Boston's Logan International Airport, USA wanted to streamline its check-in service. For this they turned to Prof. Richard Larson of MIT who heads QED, a consulting firm. The technicians from QED installed pressure-sensitive rubber mats on the floor in front of the ticket counter to record the waiting time of the passengers at the counter. They did this for a considerable amount of time to study various activities – the waiting time at the counter, the length of each transaction, how many passengers waited for a longer duration (on what day & at what time of the day), how many bailed out of the long line, etc. They also studied average waiting time at the counter.

In this case, we can see that when the airline sought the need to find out how long a passenger had been waiting at the check-in counter at the airport. Instead of having a person keep track of the entire going-on, they turned to a consulting firm QED led by Prof. Richard Larson of MIT. It is seen from the case that there were instances when the passengers bailed out of a long line. To counter this situation of a Waiting In Line, let us discuss how to avoid losing out on the demand during this case of a Waiting Line with examples from the real-life scenario from organizations from across the globe.

Employ Operational Logic – In case of First National Bank of Chicago in its effort to reduce customer waiting and improve service, modifications were made in the existing operational system. The bank developed a computer-based customer information system to allow tellers to answer questions more quickly, implemented an electronic queuing system, etc. Collectively these efforts reduced customer wait-time, increasing productivity and improving customer satisfaction.

Establish A Reservation Process – When waiting cannot be avoided, a reservation system can be put into place to avoid the customers waiting in line. Restaurants and a number of service providers use reservation system to minimise long waits. The idea behind a reservation system is to guarantee that the service will be available when the customer arrives.

Differentiate Waiting Customers – Not all customers necessarily need to wait the same length of time for service. There are organizations which have been able to make distinction between the different types of customers coming to their outlet to avail of their services. The best example can be seen in case of airline passengers who travel various classes. It is seen that the passengers travelling First Class are always given priority over Economy Class passengers. Well, the distinction in this case is made not on the basis of that the First Class passengers are sent

on a different aircraft, but on the mere fact that since they have paid a premium for travelling, they obtain what is due to them.

Make Waiting Fun – In the case study we saw that there were many passengers who bailed out of a long queue, as they did not want to keep waiting. There are similar instances in the restaurants and a various other places. For an instance in a restaurant, while the customers are waiting, their kids can be given mental-games like ‘Find The Words’, ‘Jigsaw Puzzles’, etc. so that the parents and the kids both of them are at ease even while they wait.

Yield ManagementIt is the process of allocating the right type of capacity to the right kind of customer at the right price to maximize revenue or yield. We can explain this with the help of the following cases from real-life cases

Capacity Utilization – The hotel industry has also begun to embrace the concepts of yield management, and Marriott Hotels has been the leader. Guests at Marriott Hotel, Munich who stayed an extended period before or after the peak days (during Oktoberfest) got rooms at a comparative lesser rate. Due to this, the occupancy went up by 20%. The daily rate was reduced by 11.7% to accommodate the guests. The revenue rose by 12.3%.

Pricing – American Airlines is the pioneer and still the king of yield management. Beginning with Super Saver Fares in the mid-1970s, American depends on systems developed by Sabre to support an extremely complex system of fares. American allocates seats on every one of its flights. The objective is to ‘sell the right seats to the right customers at the right price’. In few instances, the prices of seats on certain flights were made less-expensive so as to provide the seats to the more ‘needy’ who otherwise wouldn’t have been able to afford the flight.

Market Segment – Yellow Transportation (formerly Yellow Freight) has been able to segregate its market based on the kind of business that they get from their clients. They have segmented their clients on the basis of the quantum of business that is generated by them. They have even come up with a new time-definite delivery service – Exact Express which targets a particular segment of customers who are willing to pay for guaranteed, time-definite delivery.

Financial Return – Austrian Airlines has been one of the most consistently profitable airlines in Europe. It had foreseen the need to develop a competitive edge over other airlines and so it invested into a revenue management decision support system, which would be able to monitor flights even 250 days in advance. It made a 2-year database of bookings made to monitor the flights in future. Significant improvement increase in passengers and revenue resulted and until date, it is the undisputed leader in terms of growth and revenue.

CONCLUSIONTo conclude, I would like to quote W. Earl Sasser, Junior – “Balancing the Supply & Demand sides of a service industry is not easy, and whether a manager does it well or not makes all the difference”.