Balancing Demand and Capacity

Demand to Capacity:Four Key Concepts

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

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

Capacity Management Strategies

Level capacity (fixed level at all times)

Stretch and shrinkoffer inferior extra capacity at peaks (e.g. bus/metro

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

room)extend/cut hours of service

Chase demand (adjust capacity to match demand)schedule downtime in low demand periods use part-time employeesrent or share extra facilities and equipmentcross-train employees

Flexible Capacity (vary mix by segment)

Predictable Demand Patterns and Their Underlying Causes Predictable Cycles of Demand Levels

dayweekmonth yearother

Underlying Causes of Cyclical Variations

employmentbilling or tax

payments/refundspay daysschool hours/holidaysseasonal climate changespublic/religious holidaysnatural cycles (e.g. coastal tides)

Causes of Seemingly Random Changes in Demand Levels

WeatherHealth problemsAccidents, Fires,

CrimeNatural disastersQuestion: which of

these events can be

predicted?

Alternative Demand Management StrategiesTake no action

let customers sort it out

Reduce demand higher pricescommunication promoting alternative times

Increase demandlower pricescommunication, including promotional incentivesvary product features to increase desirabilitymore convenient delivery times and places

Inventory demand by reservation systemInventory demand by formalized queueing

Avoiding Burdensome Waits for Customers

Add extra capacity so that demand can be met at most times (problem: may add too many costs)

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

Single line, single server, single stage

Single line, single servers at 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

21

20

24

23

30 25

3126

2732

Tailoring Queuing Systems to Market Segments: Criteria for Allocation to Designated Lines

Urgency of jobemergencies vs. non-emergencies

Duration of service transactionnumber of items to transactcomplexity of task

Payment of premium priceFirst class vs. economy

Importance of customerfrequent users/loyal customers vs. others

Propositions on the Psychology of Waiting Lines

1. Unoccupied time feels longer 2. Preprocess/post process waiting feel longer than in-

process3. Anxiety makes waiting seem longer4. Uncertain waiting is longer than known, finite waiting5. Unexplained waiting seems longer6. Unfair waiting is longer than equitable waiting 7. People will wait longer for more valuable services8. Waiting alone feels longer than in groups9. Physically uncomfortable waiting feels longer10. Waiting seems longer to new or occasional users

Benefits of Effective Reservations Systems

Controls and smoothes demandPre-sells serviceInforms and educates customers in advance of

arrivalCustomers avoid waiting in line for service (if

service times are honored)Data capture helps organizations prepare

financial projections

Information Needed for Demand and Capacity Management Strategies

Historical data on demand level and composition, noting responses to marketing variables

Demand forecasts by segment under specified conditions

Fixed and variable cost data, profitability of incremental sales

Site-by-site demand variations

Customer attitudes towards queuing

Customer evaluations of quality at different levels of capacity utilization