Balancing Demand and Productive Capacity

Overview Fluctuations in Demand Threaten Service Productivity

Capacity-Constrained Service Organizations

Patterns and Determinant of Demand

Managing Demand Levels

Inventory Demand through Waiting Lines and Reservations

Minimize Perceptions of Waiting Time

Create an Effective Reservations System

Fluctuations in Demand Threaten Service Productivity

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 Demand exceeds optimum 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

Addressing Problem of Fluctuating Demand

Two basic approaches: Adjust level of capacity to meet

demand Need to understand productive capacity

and how it varies on an incremental basis

Manage level of demand

Variations in Demand Relative to Capacity

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

Variations in Demand Relative to Capacity

Use marketing strategies to smooth out peaks, fill in valleys

Many firms use a mix of both approaches

Many Service Organizations Are Capacity Constrained

Defining Productive Capacity in Services

Physical facilities to contain customers

Physical facilities to store or process goods

Physical equipment to process people, possessions, or

information

Labor used for physical or mental work

Public/private infrastructure

Alternative Capacity Management Strategies

Level capacity (fixed level at all times)

Stretch and shrink

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)

Flexible capacity (vary mix by segment)

Adjusting Capacity to Match Demand

Schedule downtime during periods of low demand

Use part-time employees Rent or share extra facilities and

equipment Ask customers to share Invite customers to perform self-

service Cross-train employees

Patterns and Determinants of Demand

Predictable Demand Patterns and Their Underlying Causes

day week month year

employment billing or tax

payments/refunds pay days school hours/holidays seasonal climate

changes public/religious

holidays

Predictable Cycles

of Demand Levels

Underlying Causes of

Cyclical Variations

Causes of Seemingly Random Changes in Demand Levels

Weather Health

problems Accidents, Fires,

Crime Natural

disastersQuestion: Which of these events can be predicted?

Analyzing Drivers of Demand

Understand why customers from specific market segments select this service

Keep good records of transactions to analyze demand patterns Sophisticated software can help to

track customer consumption patterns Record weather conditions and

other special factors that might influence demand

Demand Levels Can Be Managed

Alternative 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 Inventory demand by formalized queuing

Hotel Room Demand Curves by Segment and Season

Bh = business travelers in high season

Bl = business travelers in low season

Th = tourist in high season

Tl = tourist in low season

Bh

Bh

Bl

Bl

Th

Th

Tl

Tl

Price per room night

Quantity of rooms demanded at each price by travelers in each segment in each season

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

Saving Customers from Burdensome Waits

Add 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

Alternative Queuing Configurations

Single line, single server, single stage

Single line, single servers, sequential stagese.g. - airport

Parallel lines to multiple serverse.g.- Billing counter at mall

Designated lines to designated serverse.g.- bank

Single line to multiple servers (“snake”)e.g.- akashardam

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

21

20

24

23

30 25

3126

2732

Minimize Perceptions of Waiting Time

Ten Propositions on Psychology of Waiting Lines

Unoccupied time feels longer than occupied time Pre- and post-process waits feel longer than in-

process waits Anxiety makes waits seem longer Uncertain waits are longer than known, finite waits Unexplained waits are longer than explained waits Unfair waits are longer than equitable waiting People will wait longer for more valuable services Waiting alone feels longer than waiting in groups Physically uncomfortable waits feel longer Waits seem longer to new or occasional users

Create An Effective Reservation System

Benefits of Reservations Controls and smoothes demand Pre-sells service Informs and educates customers in

advance of arrival Saves customers from having to wait

in line for service (if reservation times are honored)

Data captured helps organizations Prepare financial projections Plan operations and staffing levels

Characteristics of Well-Designed Reservations System

Fast and user-friendly for customers and staff

Answers customer questions Accommodates preferences (e.g., room

with view) Deflects demand from unavailable first

choices to alternative times and locations Includes strategies for no-shows and

overbooking Canceling unpaid bookings after designated

time Compensating victims of over-booking

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

Segment-by-segment data Fixed and variable cost data, profitability of

incremental sales Meaningful location-by-location demand variations Customer attitudes toward queuing Customer opinions of quality at different levels of

capacity utilization

Summary: Balancing Demand and Productive Capacity

At any moment in time, a fixed-capacity service may face

Excess demand Demand exceeding optimum capacity Demand and supply well-balanced at the level of

optimum capacity Excess capacity

Productive resources are used for creating goods and services; when facing capacity constraints, firms can consider

Stretching or shrinking capacity levels Adjusting capacity to match demand Creating flexible capacity

To determine what factors govern demand, firms need to

Understand patterns of demand Analyze drivers of demand Divide demand by market segments

In nutshell: Balancing Demand and Productive Capacity

Demand levels can be reshaped by marketing strategies Use price and other costs to manage demand Change product elements Modify place and time of delivery Use promotion and education

Waiting is a universal phenomenon. Waits can be reduced by

Rethinking the design of the queuing system Redesigning the processes to shorten the time of each

transaction Managing customers’ behavior and their perceptions of

the wait Installing a reservation system

An effective reservations system

Enables demand to be controlled and smoothed in manageable way

Should focus on yield Requires information