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Strategies for Integrating Capacity With Demand in Service Networks

Colorado State University

Gary Thompson

Cornell University

Service managers face the problem of simultaneously developing and implementing both capacity and demand management strategies. Often they must chose between marketing options, for shifting or increasing demand, or operations management options such as adding additional capacity via more equipment or employees. The interaction of these two functional area strategies can have surprising, unintended, and often detrimental outcomes from a profit perspective. This article looks at the outcomes of various combinations of these decisions in a service network, a service with multiple activities within one site. We develop and apply an integrative model for determining the profit-maximizing capacity management strategy for a service network. We implement the model by combining a conjoint analysis-based optimal product design model from marketing with a simulation model investigating capacity and demand management strategies from operations management. We tested the model using data from an actual service network, a ski resort. Our results indicated that queue information signage was the most effective strategy for improving profitability. We also found that a decision that management believed would increase revenues—changing the customer class mix—actually decreased profitability substantially.

Key Words: capacity • choice models • ski resorts • hospitality • integrated models

Journal of Service Research, Vol. 5, No. 3, 169-183 (2003)
DOI: 10.1177/1094670502238913


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