MANAGING DEMAND AND CAPACITY Chapter 15

Objectives 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) flexing 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

Supply and Demand  Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship.  Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price.  The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand.

A. The Law of Demand B. The Law of Supply  A B

Equilibrium: When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium.

Pricing, Demand & Capacity Management in Services

Issue: Lack of Inventory Capability  Excess demand  Demand exceeds optimum capacity  Demand and supply are balanced at the level of optimum  Excess capacity

Constraint on Capacity

Understanding Capacity Constraints and Demand Patterns  Time, labor, equipment and facilities  Optimal versus maximal use of capacity Charting demand patterns Predictable cycles Random demand fluctuations Demand patterns by market segment Capacity ConstraintsDemand Patterns

Strategies for Shifting Demand to Match Capacity 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 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 Demand Too HighDemand Too Low Shift Demand

Strategies for Flexing Capacity to Match Demand 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 Demand Too High Demand Too Low Flex Capacity

Yield Management: Balancing capacity utilization, pricing, market segmentation, and financial return  Yield= Actual revenue/potential revenue  Actual revenue=actual capacity used*average actual price  Potential revenue = total capacity*maximum price  Implementing a yield management system  Challenges & Risks Loss of competitive focus Customer alienation Employee morale problems Incompatible incentive and reward system Lack of employee training Inappropriate organization of the yield management system

Waiting Line Strategies – When Demand and capacity cannot be Aligned  Employ Operational Logic  Establish a Reservation Process  Differentiate Customers Importance of the customers Urgency of the job Duration of the service transaction Payment of a premium price

Make Waiting Fun, or at Least Tolerable  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

END