Managing Demand and Capacity

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Managing Demand and Capacity
Chapter
15

• The Underlying Issue Lack of Inventory
  Capability
• Capacity Constraints
• Demand Patterns
• Strategies for Matching Capacity and Demand
• Yield Management Balancing Capacity Utilization,
  Pricing, Market Segmentation, and Financial
  Return
• Waiting Line Strategies When Demand and Capacity
  Cannot Be Matched

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The Underlying Issue

• Simultaneous production and consumption
• Cant be inventoried/ perishable/ idle capacity

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Figure 15.1Variations in Demand Relative to
Capacity
Source C. Lovelock, Getting the Most Out of
Your Productive Capacity, in Product Plus
(Boston McGraw Hill, 1994), chap. 16, p. 241.
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Four Basic Conditions

• Excess Demand- business lost and lower servqual
• Demand Exceeds Optimum- all served but quality
  suffers
• Demand and Supply Balanced-no idle capacity,
  quality maintained
• Excess Capacity- Lost Productivity

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Understanding Capacity Constraintsand Demand
Patterns

• Firms vary on the
• Extent of Constraint (capacity)
• Variability of Demand

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Table 15.1Demand versus Supply
Source C. H. Lovelock, Classifying Services to
Gain Strategic Marketing Insights, Journal of
Marketing 47, (Summer 1983) 17.
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Capacity Constraints

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

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Demand Patterns

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

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Table 15.2 Constraints on Capacity
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Strategies for Shifting Demand to Match Capacity

• Back to 14.1- level or fill
• aka Shifting, Shaping, or Smoothing

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Strategies for Shifting Demand to Match Capacity

• Price or other user costs
• A. Peak and Off Peak Pricing
• B. Variable Demand Curves
• C. Time and Effort Costs
• Pros and Cons

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Strategies for Shifting Demand to Match Capacity

• 2. Change the service offering
• Seasonal, Cyclical
• Alternative Services
• Alternative Segments
• Inc/Dec Supplemental Services
• Pros and Cons

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Strategies for Shifting Demand to Match Capacity

• 3. Modify Time and Place
• 4. Communication

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Figure 15.3Strategies 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
  nonpeak times.
• Take care of loyal or regular customers first.
• Advertise peak usage times and benefits of
  nonpeak use.
• Charge full price for the serviceno discounts.

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Strategies for Adjusting Capacity to Match Demand

• Stretching/ Shrinking
• Time
• Labor
• Facilities
• Equipment

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Strategies for Adjusting Capacity to Match Demand

• 2. Chasing Demand
• a. Part time
• b. Outsourcing
• c. Efficiency Systems
• d. Cross Training
• e. Flex capacity

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Figure 15.4Strategies for Adjusting Capacity to
Match Demand
Demand Too High
Demand Too Low

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

• 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.

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Reservations

• Benefits
• Smooth Demand
• Adjust Capacity
• Communication- e.g., expectations
• Problems
• No Shows
• Overbooking

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Yield Management

• Yield versus capacity utilization
• The basic idea
• Examples

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Challenges and Risks in UsingYield Management

• Loss of competitive focus
• Customer alienation
• Employee morale problems
• Incompatible incentive and reward systems
• Lack of employee training
• Inappropriate organization of the yield
  management function

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Figure 15.6Waiting Line Configurations
Source J. A. Fitzsimmons and M. J. Fitzsimmons,
Service Management, 4th ed. (New York
Irwin/McGraw-Hill, 2004), chap. 11, p. 296.
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Waiting Line Strategies

• Employ operational logic
• modify operations
• adjust queuing system
• Establish a reservation process
• Differentiate waiting customers
• importance of the customer
• urgency of the job
• duration of the service transaction
• payment of a premium price
• Make waiting fun, or at least tolerable

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Issues to Consider in Making WaitingMore
Tolerable

• unoccupied time feels longer than occupied time
• preprocess waits feel longer than in-process
  waits
• anxiety makes waits seem longer
• uncertain waits seem longer than known, finite
  waits
• unexplained waits seem longer than explained
  waits
• unfair waits feel longer than equitable waits
• the more valuable the service, the longer the
  customer will wait
• solo waits feel longer than group waits

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Objectives for Chapter 15Managing Demand and
Capacity

• Explain the underlying issue for
  capacity-constrained services lack of inventory
  capability.
• Present the implications of time, labor,
  equipment, and facilities constraints combined
  with variations in demand patterns.
• Lay out strategies for matching supply and demand
  through (a) shifting demand to match capacity or
  (b) adjusting capacity to meet demand.
• Demonstrate the benefits and risks of yield
  management strategies in forging a balance among
  capacity utilization, pricing, market
  segmentation, and financial return.
• Provide strategies for managing waiting lines for
  times when capacity and demand cannot be aligned.