MANAGING%20DEMAND%20AND%20CAPACITY

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MANAGING DEMAND AND CAPACITY

• Donna J. Hill, Ph.D.
• Fall 2000

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Objectives for Chapter 14Managing Demand and
Capacity

• Explain
• the underlying issue for capacity-constrained
  services
• the implications of capacity constraints
• the implications of different types of demand
  patterns on matching supply and demand
• Lay out strategies for matching supply and demand
  through
• shifting demand to match capacity or
• flexing capacity to meet demand
• Demonstrate the benefits and risks of yield
  management strategies
• Provide strategies for managing waiting lines

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Fundamental Issue

• Lack of inventory
• perishability (cannot store up)
• simultaneous product and consumption (cannot be
  transported from one place to another)

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Managing Demand and Capacity

• No buffer for services from demand.
• Demand volatile
• Goal supply and demand balanced at optimum
  capacity
• Under utilizing when demand is below optimum
  capacity
• If demand is above capacity then quality may
  suffer

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Matching Supply and Demand

• Determine demand pattern.
• Assess causes of demand variations.
• Develop methods for managing capacity.
• Develop methods for managing demand.

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Table 14-1 What is the Nature of Demand Relative
to Supply?
Source Christopher H. Lovelock, Classifying
Services to Gain Strategic Marketing Insights,
Journal of Marketing, 47, 3 (Summer 1983) 17.
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Understanding Capacity Constraints and Demand
Patterns
Demand Patterns
Capacity Constraints

• Time, labor, equipment and facilities
• Optimal versus maximal use of capacity

• Charting demand patterns
• Predictable cycles
• Random demand fluctuations
• Demand patterns by market segment

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Table 14-2 What is the Constraint on Capacity?
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Managing Demand

• Shift demand from high to low demand periods.
• Decrease demand during peak demand periods.
• Stimulate demand during low demand periods.

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Figure 14-3Strategies for Shifting Demand to
Match Capacity
Demand Too High
Demand Too Low
Shift Demand

• Use sales and advertising to increase business
  from current market segments
• Modify the service offering to appeal to new
  market segments
• Offer discounts or price reductions
• Modify hours of operation
• Bring the service to the customer

• Use signage to communicate busy days and times
• Offer incentives to customers for usage during
  non-peak times
• Take care of loyal or regular customers first
• Advertise peak usage times and benefits of
  non-peak use
• Charge full price for the service--no discounts

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Shifting Demand
Advantages
Disadvantages

• Business is not lost.
• Service quality is not adversely affected.
• Increased efficiency.

• Customers may not want to shift.
• Customers may not have control over when they use
  the service.

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Reducing Demand
Advantages
Disadvantages

• Service quality is normally improved.
• Increased efficiency.

• Lost revenue.
• Not a good strategy for firms in the for-profit
  sector.

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Stimulating Demand
Advantages
Disadvantages

• Increased efficiency.
• Increased income.
• Increased utilization of facility.

• May not be profitable.
• May cause some current customers to shift usage.

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Tools for Managing Demand

• Reservation system.
• Differential pricing.
• Communication

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Managing Capacity

• Part-time employees.
• Employees work overtime.
• Peak-time operating procedures.
• Cross-training of employees.
• Increase customer participation.
• Shared facilities.
• Outsourcing.

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Figure 14-4 Strategies for Flexing Capacity to
Match Demand
Demand Too High
Demand Too Low
Flex Capacity

• Stretch time, labor, facilities and equipment
• Cross-train employees
• Hire part-time employees
• Request overtime work from employees
• Rent or share facilities
• Rent or share equipment
• Subcontract or outsource activities

• Perform maintenance renovations
• Schedule vacations
• Schedule employee training
• Lay off employees

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Part-time Employees
Benefits
Concerns

• Reduce costs.
• Increase capacity.

• Less training.
• Lower performance.
• Lower productivity.
• Poor attitude.
• Less knowledgeable.
• Less personalization.
• Higher turnover.

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Employees Work Over-time
Benefits
Concerns

• Employees knowledgeable.
• Employees know customers.
• Cost effective for some services.
• Increase capacity.

• Lower service quality due to fatigue.
• Higher costs.

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Peak-time Operating Procedures
Benefits
Concerns

• Keep operations at capacity.

• Identifying peak routines.
• Lack of personal attention.
• Incomplete job.
• Crowded facility.
• Feeling of being cheated.

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Cross-Training of Employees
Benefits
Concerns

• Keep operation at capacity.
• Reduce bottlenecks.
• Fill-in for absent employees.

• Lower service quality.
• Lower productivity.

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Increased Customer Participation
Benefits
Concerns

• Increase productivity.
• Maximize capacity.
• Reduce costs.

• Customers lack expertise.
• Conflict of scripts.
• Lower service quality.
• Sometimes decrease productivity - if customer too
  slow.

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Shared Facilities or Equipment
Benefits
Concerns

• Reduce capital investment costs.
• Maximize facility utilization.

• Efficient scheduling.
• Access to facility or equipment.
• Customer confusion.

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Outsourcing
Benefits
Concerns

• Expand capacity.
• Expand supply.

• Level of service quality.
• Stealing of customers.
• Conflicts as to who was hired.

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Yield Management

• The process of allocating the right type of
  capacity to the right kind of customer at the
  right price so as to maximize revenue.
• Yield Actual revenue/Potential revenue
• Where actual revenue actual capacity used
  times average actual price
• and Potential revenue total capacity times
  maximum price

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What does it mean?

• Yield can be raised by increasing capacity used
  or by increasing price.
• It is basically a differential capacity
  allocation and pricing strategy
• Yield management strategy is most profitable when
  those who arrive early or reserve early are more
  price sensitive than those who reserve or arrive
  late.

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Risks Associated with the Use of Yield Management

• The loss of competitive focus
• Customer alienation
• Incompatible incentive and reward systems
• Employee morale problems

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Waiting Line Issues and Strategies

• unoccupied time feels longer
• preprocess waits feel longer
• anxiety makes waits seem longer
• uncertain waits seem longer than finite waits
• unexplained waits seem longer
• unfair waits feel longer
• longer waits are more acceptable for valuable
  services
• solo waits feel longer