Chapter 14: Managing Demand and Capacity

Chapter 15: Managing Demand and
Provider Gap 3: failure to deliver what was designed and
The fundamental issue underlying supply and demand
management in services is the lack of _________________
The lack of inventory capability in services is due to the
following service characteristics:
Managing Demand and Capacity
An unsold airline seat for a given flight cannot be
Simultaneous production and consumption:
Service cannot be provided in advance of customer
demanding the service; cannot be
one place to another
Ex: _______________________________
Managing Demand and Capacity
Compare a car repair service with an automobile
dealer in terms of inventory capability
Which service business is least likely to experience
wide fluctuations in demand?
Figure 15.1
Variations in Demand Relative to Capacity
4 Scenarios Involving Capacity and Demand
• Demand exceeds maximum capacity (excess demand):
• Demand exceeds optimum capacity: service quality
• Supply and demand are balanced at the level of
optimum capacity:
• Demand is below optimum capacity (excess capacity):
Capacity Constraints for Service Firms
(Table 15.2)
Time: businesses that sell time, advice,
counsel, personal services, etc. Lawyers,
consultants, doctors, accountants; more time
cannot be produced,
Labor: law firms, consulting firms, health
clinics - constrained by number of people
available to serve at a point in time
Capacity Constraints for Service Firms
Equipment: trucks, aircraft, utility; unless equipment
is used to capacity, revenue is severely affected
EX: ________________________________
Facilities: hotels, restaurants, hospitals, airlines,
schools, theaters, churches; facility has capacity,
beyond which service cannot be provided.
Capacity Constraints for Service Firms
: organization’s resources
employed at some ideal level; service quality consistently
delivered; customers are happy; employees are happy;
demand and supply are balanced
: organization’s resources are
used to their absolute maximum; every seat is full, every
minute and hour is used; cannot be supported over long
periods of time
Manage Fluctuating Demand for Service
Services (e.g., restaurants) face fluctuating demand.
What is the likely pattern of demand (season,
week, day, hour, etc)?
When is demand predictable? When is demand
Strategies for Matching Capacity and
Shifting demand to match capacity:
Shift customers away from periods in which
demand exceeds capacity
Flexing (adjusting) capacity to meet demand
Shift Demand to Match Capacity
Vary the service offering: ski resorts in winter - executive
training facility in
Communicate with customers:
Modify timing and delivery of service: changing banking
hours to include
Differentiate on price:
Flexing Capacity to Meet Demand
Stretch existing capacity: people, facilities, and
equipment are asked to work longer to meet
demand: EX:
Align capacity with demand fluctuations: use parttime employees, outsource, rent or share facilities,
Managing Demand and Capacity
Yield Management:
Process of allocating the right type of
capacity to the right kind of customer at the
right price so as to maximize capacity
Yield Management
Yield =
actual revenue
potential revenue
= actual capacity used x average actual price
total capacity x maximum price
Yield Management
Hotel: (Friday – Sunday)
Total capacity: 300 rooms
Maximum price: $150 per room
Actual capacity used: 100 rooms
Average actual price: $125 per room
Yield: 100 x $125 = 27.8%
300 x $150
Yield Management: Improving Yield for
Friday to Sunday
Hotel: (Friday – Sunday)
Total capacity: 300 rooms
Maximum price: $100 per room
Actual capacity used: 250 rooms
Average actual price: $90 per room
Yield: 250 x 90 = 75%
300 x 100
Waiting Line Strategies: When Demand
and Capacity Cannot be Aligned
: analyze operational processes to
remove any efficiencies
Installing ticket vending machines in train stations
to expedite the purchase of train tickets
Establish a
reduce long waits
: spread demand;
Waiting Line Strategies: When Demand
and Capacity Cannot be Aligned
: not all customers
need to wait the same length of time for the
service. EX: Express checkout lanes for
customers purchasing 10 items or less
Make waiting fun, or
: it is not the
actual time waiting that impacts customer
satisfaction - it is how customers feel about the
wait and their perceptions of it;
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