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Chapter 9:

Balancing Demand and Productive Capacity

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VOLUME DEMANDED

TIME CYCLE 1 TIME CYCLE 2

Maximum Available Capacity

Optimum Capacity (Demand and Supply Well Balanced)

Low Utilization (May Send Bad Signals)

Demand exceeds capacity (business is lost)

Demand exceeds optimum capacity (quality declines)

Excess capacity (wasted resources)

CAPACITY UTILIZED

From Excess Demand to Excess Capacity

Four conditions potentially faced by fixed-capacity services:

Excess demand Too much demand relative to capacity 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

Excess capacity Too much capacity relative to demand at a given time

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Approaches to the Problem of Fluctuating Demand

Two options:Manage supply (capacity management)

time, labor, equipment, facility constraints watch carefully: employee satisfaction

Manage demand market needs constraints watch carefully: customer satisfaction

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Many firms use a mix of both approaches

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Many Service Organizations Are Capacity

Constrained

Constraints on CapacityTime

legal, consulting, accounting, medical

Labor legal, consulting, accounting, medical

Equipmentdelivery services, telecommunication, health club

Facilitieshotels, restaurants, hospitals, airlines, schools,

theaters, churches

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Any of the service firms listed can be operating under multiple constraints.

Alternative Capacity Management Strategies

Level capacity (fixed level at all times)

Stretch and shrink (Should be used for short period)

Offer inferior extra capacity at peaks (e.g., bus/train standees)

Vary seated space per customer (e.g., elbow room, leg room)

Extend/cut hours of service

Chase demand (adjust capacity to match demand)

Use part-time employees

Rent or share extra facilities and equipment

Ask customers to share

Outsourcing7

Alternative Capacity Management Strategies

Invite customers to perform self-service

Cross-train employees

Schedule downtime during periods of low demand

Modify or move facilities and

Flexible capacity (Vary mix by segment)

Not all unsold capacity is wasted

Free trials for prospective customers

Free trials for intermediaries

Employee rewards

Bartering with firms own suppliers 8

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Patterns and Determinants of Demand

Patterns and Determinants of DemandTo manage fluctuating demand it is necessary

to have a clear understanding of-Demand patterns

Cyclical Vs RandomUnderlying causes of variationsSpecific market segment responsible for the

variation

Keep good records of transactions to analyze demand patternsSophisticated software can help to track

customer consumption patterns10

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Season of Year

Off-peak Shoulder Peak

Weekday

Weekend

Morning peak

Midday

Afternoon peak

Evening/ night

Time of Day

Day of Week

Predictable Demand Patterns and Their Underlying Causes (Table 9.1)

day week month year other

billing or tax payments/refunds

pay days school hours/holidays seasonal climate

changes public/religious

holidays natural cycles employment (e.g., coastal tides)

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Predictable Cycles

of Demand Levels

Underlying Causes of

Cyclical Variations

Analyzing Demand by Market SegmentDifferent customers have different demand

patterns by day or by season (e.g., business travelers vs. tourists)

Some users have little choice in timing of demand, others are flexible (e.g. commuters vs. shoppers)

Some demand is undesirable and should be discouraged (e.g., inappropriate calls to emergency services)

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Extent of demand fluctuations over time

Extent to whichsupply isconstrained

Wide Narrow

Peak demand canusually be metwithout a majordelay

1ElectricityNatural gasTelephoneHospital maternity unitPolice and fireemergencies

2InsuranceLegal servicesBankingLaundry and dry cleaning

Peak demandregularly exceedscapacity

4Accounting and taxpreparationPassenger transportationHotels and motelsRestaurantsTheaters

3Services similar to those in2 but which haveinsufficient capacity fortheir base level of business

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Demand Levels Can Be Managed

Alternative Demand Management Strategies (Table 9.2)Take no action

Let customers sort it outReduce 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 systemInventory demand by formalized queuing

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Marketing Strategies CanReshape Some Demand Patterns

1. Use price and other costs to manage demand

2. Change product elements

3. Modify place and time of delivery No change Vary times when service is available Offer service to customers at a new location

4. Promotion and education17

Yield ManagementThe process of allocating the right type of

capacity to the right kind of customer at the right price so as to maximize yield or revenue.

Ratio of actual revenue to potential revenue for a particular measurement period.

Yield = Actual Revenue

Actual Revenue = Actual capacity used x Average actual price

Potential Revenue = Total capacity x Maximum price

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Potential Revenue

Ideal Characteristics for Yield Management

Relatively Fixed CapacityAbility to Segment MarketsPerishable InventoryProduct Sold in AdvanceFluctuating DemandLow Marginal Sales Cost and High Capacity

Change Cost

Seasonal Allocation of Rooms by Service Class for Resort Hotel

First class

Standard

Budget

Per

cent

age

of c

apac

ity a

lloca

ted

to d

iffer

ent s

ervi

ce c

lass

es

60%

50%30%

20%

50%

Peak Shoulder Off-peak Shoulder (30%) (20%) (40%) (10%)Summer Fall Winter Spring

Percentage of capacity allocated to different seasons

30%20% 20%

10% 30%

50% 30%

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Inventory Demand through Waiting Lines

and Reservations

Waiting Is a Universal Phenomenon!An average person may

spend up to 30 minutes/day waiting in line—equivalent to over a week per year!

Almost nobody likes to wait

It's boring, time-wasting, and sometimes physically uncomfortable

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Why Do Waiting Lines Occur?

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•Because the number of arrivals at a facility exceeds capacity of system to process them at a specific point in the process

•Queues are basically a symptom of unresolved capacity management problems

Saving Customers from Burdensome WaitsAdd extra capacity so that demand can be met at

most times (problem: may increase costs too much)

Rethink design of queuing system to give priority to certain customers or transactions

Redesign processes to shorten transaction time

Manage customer behavior and perceptions of wait

Install a reservations system

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Single line, single server, single stage

Single line, single servers, sequential stages

Parallel lines to multiple servers

Designated lines to designated servers

Single line to multiple servers (“snake”)

“Take a number” (single or multiple servers)28 29

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Criteria for Allocating Different Mkt Segments to Designated Lines

Urgency of job Emergencies versus non-

emergencies

Duration of service transaction Number of items to transact Complexity of task

Payment of premium price First class versus economy

Importance of customer Frequent users/high volume

purchasers versus others

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Minimize Perceptions of Waiting Time

Ten Propositions on Psychology of Waiting Lines (1) (Table 9.3)

1. Unoccupied time feels longer than occupied time

2. Pre- and post-process waits feel longer than in-process waits

3. Anxiety makes waits seem longer4. Uncertain waits are longer than known, finite

waits5. Unexplained waits are longer than explained

waits

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Ten Propositions on Psychology of Waiting Lines (2) (Table 9.3)

6. Unfair waits are longer than equitable waiting 7. People will wait longer for more valuable

services8. Waiting alone feels longer than waiting in

groups9. Physically uncomfortable waits feel longer10. Waits seem longer to new or occasional users

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