MANAGING DEMAND AND
CAPACITY
Donna J. Hill, Ph.D.
Fall 2000
•
Objectives for Chapter 14:
Managing 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
Fundamental Issue

Lack of inventory
–
–
perishability (cannot store up)
simultaneous product and consumption (cannot
be transported from one place to another)
Managing Demand and Capacity

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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
Matching Supply and Demand




Determine demand
pattern.
Assess causes of
demand variations.
Develop methods for
managing capacity.
Develop methods for
managing demand.
Table 14-1
What is the Nature of Demand
Relative to Supply?
Extent of demand fluctuations over time
Extent to which
supply is
constrained
Wide
Peak demand can
1
usually be met
Electricity
without a major
Natural gas
delay
Telephone
Hospital maternity unit
Police and fire
emergencies
Peak demand
regularly exceeds
capacity
4
Accounting and tax
preparation
Passenger transportation
Hotels and motels
Restaurants
Theaters
Narrow
2
Insurance
Legal services
Banking
Laundry and dry cleaning
3
Services similar to those in
2 but which have
insufficient capacity for
their base level of business
Source: Christopher H. Lovelock, “Classifying Services to Gain Strategic Marketing Insights,” Journal of Marketing, 47, 3 (Summer 1983): 17.
Understanding Capacity
Constraints and Demand Patterns
Capacity Constraints


Time, labor,
equipment and
facilities
Optimal versus
maximal use of
capacity
Demand Patterns
• Charting demand
patterns
• Predictable cycles
• Random demand
fluctuations
• Demand patterns by
market segment
Table 14-2
What is the Constraint on Capacity?
Nature of the constraint
Type of service
Time
Legal
Consulting
Accounting
Medical
Labor
Law firm
Accounting firm
Consulting firm
Health clinic
Equipment
Delivery services
Telecommunication
Utilities
Health club
Facilities
Hotels
Restaurants
Hospitals
Airlines
Schools
Theaters
Churches
Managing Demand
Shift demand from
high to low demand
periods.
 Decrease demand
during peak
demand periods.
 Stimulate demand
during low demand
periods.

Figure 14-3
Strategies for Shifting Demand
to Match Capacity
Demand Too High
•
•
•
•
•
Shift Demand
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
•
•
•
•
•
Demand Too Low
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
Shifting Demand
Advantages



Business is not lost.
Service quality is not
adversely affected.
Increased efficiency.
Disadvantages


Customers may not
want to shift.
Customers may not
have control over
when they use the
service.
Reducing Demand
Advantages


Service quality is
normally improved.
Increased efficiency.
Disadvantages


Lost revenue.
Not a good strategy
for firms in the forprofit sector.
Stimulating Demand
Advantages



Increased efficiency.
Increased income.
Increased utilization
of facility.
Disadvantages


May not be
profitable.
May cause some
current customers to
shift usage.
Tools for Managing Demand
 Reservation
system.
 Differential pricing.
 Communication
Managing Capacity

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Part-time employees.
Employees work overtime.
Peak-time operating
procedures.
Cross-training of employees.
Increase customer
participation.
Shared facilities.
Outsourcing.
Figure 14-4
Strategies for Flexing Capacity
to Match Demand
Demand Too High
•
•
•
•
•
•
•
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
•
•
•
•
Demand Too Low
Perform maintenance
renovations
Schedule vacations
Schedule employee training
Lay off employees
Part-time Employees
Benefits


Reduce costs.
Increase capacity.
Concerns

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Less training.
Lower performance.
Lower productivity.
Poor attitude.
Less knowledgeable.
Less personalization.
Higher turnover.
Employees Work Over-time
Benefits




Employees
knowledgeable.
Employees know
customers.
Cost effective for
some services.
Increase capacity.
Concerns


Lower service quality
due to fatigue.
Higher costs.
Peak-time Operating Procedures
Benefits

Keep operations at
capacity.
Concerns



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Identifying peak
routines.
Lack of personal
attention.
Incomplete job.
Crowded facility.
Feeling of being
cheated.
Cross-Training of Employees
Benefits



Keep operation at
capacity.
Reduce bottlenecks.
Fill-in for absent
employees.
Concerns


Lower service quality.
Lower productivity.
Increased Customer Participation
Benefits



Increase productivity.
Maximize capacity.
Reduce costs.
Concerns

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Customers lack
expertise.
Conflict of scripts.
Lower service quality.
Sometimes decrease
productivity - if
customer too slow.
Shared Facilities or Equipment
Benefits


Reduce capital
investment costs.
Maximize facility
utilization.
Concerns



Efficient scheduling.
Access to facility or
equipment.
Customer confusion.
Outsourcing
Benefits


Expand capacity.
Expand supply.
Concerns

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
Level of service
quality.
Stealing of customers.
Conflicts as to who
was hired.
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

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.

Risks Associated with the Use of
Yield Management
The loss of competitive focus
 Customer alienation
 Incompatible incentive and reward systems
 Employee morale problems

Waiting Line Issues
and Strategies

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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