1. MKT3125 - Services Marketing Management
Lecture 10
Resource utilization
(Chapter 11)

2. Where are we?

3. Objectives
Explain how service operations can get the most out of their fixed resources – capacity management
Explain how operations try to ensure that each customer gets what they want, when they want it – operations planning and control
Describe how to manage bottlenecks and queues
Show how operations can deal with capacity peaks – when they enter the “coping zone”
Suggest ways in which operations can improve their resource utilization

4. CAPACITY - a definition
"the ability to deliver product outputs, generally measured in units of output per unit of time"
barrels of oil per day
patients treated per month
can also refer to the ability to receive or accommodate resource inputs
cubic meters of gravel stored
consultant hours available

5. Service Capacity
Service capacity is the maximum level of value added activity over a period of time that the service process can consistently achieve.
Examples:
The number of calls a customer service agent can handle in the course of a shift
The number of meals served by a restaurant during the lunch time period
The number of repair calls made by a computer service engineer in a day

6. Measuring Capacity To manage capacity we must be able to measure it.
Demand in a specified time period is a simple measure of capacity though not most accurate e.g. Courier company. A number of factors make capacity determination difficult:
Service product mix – call centre
Impact of the location –repair services in rural/cities
The extent of intangibility in the service product
Ease of identification of resource constraints.

7. Capacity and Demand
"the ability to deliver product outputs, generally measured in units of output per unit of time”
Excess demand: too much demand relative to capacity at a given time
Excess capacity: too much capacity relative to demand at a given time
Maximum capacity: upper limit to a firm’s ability to meet demand at a given time
Optimum capacity: point beyond which service quality declines as more customers are serviced

8. Long-Term Capacity Management
Location decisions
Supply-side factors
Land; labour; energy; transportation; government costs; social factors; working environment
Demand-side factors
Convenience to customers; labour skills; characteristics of the site; image
Capacity decisions: how big should the facility be?
Capability
Resilience or flexibility

9. Short- to medium-term capacity strategies
Level capacity
Chase capacity
Smooth demand

10. Capacity Management Strategies
Level capacity (fixed level at all times)
Scarce or expensive resource are maintained at constant level
The objective is to maximize utilisation of expensive fixed resources.
Ex. Airline ‘load factor’ target of 80% (to be profitable)
Chase demand (adjust capacity to match demand)
schedule downtime in low demand periods
employee flexibility
rent or share extra facilities and equipment
cross-train employees
buy-in or contract-out
Stretch and shrink Demand (Demand Management)
Varying pricing
Offer inferior extra capacity at peaks (e.g. standing in train)
Vary seated space per customer (e.g. elbow room, leg room)
Extend/cut hours of service

11. Daily demand profile Number of customers Time Staff scheduling
Time
Staff scheduling
Split shift
Split shift
Part- time
Core shift team 1
Core shift team 2
Figure 8.2 Chase capacity strategy for a fast-food restaurant

12. Demand Management Strategies
Take no action
let customers sort it out
Reduce demand
higher prices
communication promoting alternative times
Increase demand
lower prices
communication, including promotional incentives
vary product features to increase desirability
more convenient delivery times and places
Inventory demand
by reservation system
by formalized queuing

13. Operations planning and control
Capacity must be allocated to specific tasks for specific customers, using appropriate rules or algorithms e.g. FIFO; LIFO; most valuable customer; most critical first; least work content first; most work content
Control systems range from expensive ERP (enterprise resource planning) systems to simple appointment lists. The operations manager must choose the most appropriate mechanism.
Capacity may lie managed more effectively by ensuring that resources flow to meet the schedule e.g. clear customer flow; ensuring support resources are available

14. Objectives for Capacity Planning
1. CUSTOMERS SERVED IN TIME
2. HIGH UTILIZATION OF RESOURCES
3. NO QUALITY PROBLEMS
4. LOW UNIT PRODUCTION COSTS
5. NO EMPLOYEE PROBLEMS

15. Capacity - limiting factors
bottlenecks
product mix
changeovers
downtime & maintenance
use of inventories
employee effectiveness
facilities and equipment

16. The Coping Zone:
A point at which service managers find it difficult to cope with increasing demand
At these levels of resource utilisation things are just too busy – staff stressed, everything a problem, and perceived customer satisfaction declines along with revenues per customer (Clark and James, 1997, Armistead and Clark, 1994).

17. The Coping Zone: Break point generally before 100% for two reasons
Often not possible to run any resource at full capacity for any period of time e.g. staff in restaurant working “flat out”
Several resources may be involved and while staff might be working “flat out”, only 80% of the tables might be in use

18. Customer perceived quality
High
Break point
Coping zone
Customer perceived quality
Low
80%
100%
Resource utilisation
Figure 8.5 The coping zone in a high-quality restaurant
Johnston & Clark, Service Operations Management, 2nd edition © Pearson Education Limited 2005

19. Customer perceived quality
High
Break point
Customer perceived quality
Coping zone
Low
80%
Resource utilisation
Figure 8.6 The coping zone in a nightclub
Johnston & Clark, Service Operations Management, 2nd edition © Pearson Education Limited 2005

20. Managing the coping zone
Almost all service operations experience a point where demand outstrips supply: customers may perceive a fall in quality, and staff feel under increased pressure.
Organizations should develop coping strategies, given that all operations will be there sometimes.
It is important to develop actions to avoid being in the coping zone too much. This usually requires organization-wide approaches.

21. Managing the coping zone: Contd
Identify the service concept
Determine how resource utilization will be measured
Draw the outline profile (to establish relationship between cust. perceived quality and capacity utilisation)
Understand the nature and impact of the coping zone
Determine the ideal operating area
Understand why coping happens
Develop coping strategies

22. Coping Strategies Proactive customer management
Build employee flexibility
Communicate to staff and customers
Understand the difference between ‘Must do’s’ and ‘Nice to do’s’
Recruit ‘resilient’ staff for high stress situations
Manage end-to-end processes

23. Managing bottlenecks and queues
Key constraints (bottlenecks) define the capacity of the service process. It is critical to devote management attention to these aspects of operations.
It is important for service managers to understand where the bottlenecks are in the service process
Queues are inevitable in service operations. Developing 'waiting line' strategy will reduce potential customer dissatisfaction.
Queuing theory and computer simulations provide valuable means of understanding complex queuing situations.

24. Risk analysis – actuary (15/hr) Inform customer of decision (30/hr)
Proposal input (25/hr)
Risk analysis – actuary (15/hr)
Inform customer of decision (30/hr)
Figure 8.3a Original flow
(Johnston et. al., 2012, p.300)

25. Proposal input and credit score (22/hr)
Needs analysis (50%)
Definite yes/no (50%)
Risk analysis – actuary (15/hr)
Inform customer of decision (30/hr)
Figure 8.3b Revised flow
(Johnston et. al., 2012, p.300)

26. Queue Management
Queues may be lines of people visible/invisible to both employees and customers
Queuing theory is used to calculate the number of servers required to meet forecast demand, identify resource constraints and forecast inaccuracy in the demand forecast.

27. Queuing Psychology
1. Unoccupied time feels longer 2. Preprocess/post-process waiting feel longer than in-process 3. Anxiety makes waiting seem longer 4. Uncertain waiting is longer than known, finite waiting 5. Unexplained waiting seems longer 6. Unfair waiting is longer than equitable waiting 7. People will wait longer for more valuable services 8. Waiting alone feels longer than in groups 9. Physically uncomfortable waiting feels longer 10. Waiting seems longer to new or occasional users

28. Queues: Useful Terminology
Customer calling population – describes the customer base
Arrival process – arrival pattern of customers
Balking – customers don’t join the queue as they perceive the wait to be too long
Queue configuration – no. of queues and their location
Queue discipline – rules of queueing e.g. FIFO
Reneging - customers who join the queue, wait for a while then leave
Jockeying – customers who switch from one queue to another hoping to be served more quickly

29. Improving resource utilization
Four additional ways of improving resource utilization
Yield utilization
Building flexibility
Reducing capacity leakage
Getting organizational support for resource utilization.

30. Yield Management
A variable pricing strategy, based on understanding, anticipating and influencing consumer behaviour in order to maximize revenue or profits from a fixed, perishable resource (such as airline seats or hotel room reservations or advertising inventory).
“A set of demand-forecasting techniques used to determine whether prices should be raised or lowered and a reservation request should be accepted or rejected in order to maximise revenue" (American Hotel & Motel Association 1994).
Usually results in 3 to 5% revenue increase (Smith, 1992)

31. Building Flexibility
New service flexibility – introduce new services into an existing mix (ex. New house loan ‘products’ with different payment schemes)
Service mix flexibility – deliver more than one service (ex. A hotel for different types of guest profiles…business people, holiday travellers, etc.)
Delivery flexibility – change the timing of the activity (ex. Courier options for different speeds of delivery)
Volume flexibility – change level of output to meet demand

32. Reducing Capacity Leakage
Labour sickness and absenteeism
Labour underperformance
Scheduling losses – idle times
Costs of complexity – the broader the services, the more complex and higher risk of inefficiencies and rework
Quality failures

33. Organizational Support for Capacity Utilization
How is the service concept changing?
Visibility of future strategic direction to operations managers.
How well are the internal interfaces managed?
Successful organisations are often those that manage their internal relationships well.
How important is resource management in the culture of the company?
Resource mgt needs a “hero” to plan for the long-term and persuade the organisation to think differently about resource mgt

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