Balancing Demand and Capacity
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
How Should We Match Demand and Productive Capacity? How do we define our productive capacity? (e.g., buildings, physical space, machines, brawn, brains?) What are demand levels for our service and do they exceed capacity at any time? What explains variations in demand? What strategies can we employ to match demand and capacity? How should we design waiting lines and reservations systems?
Relating Demand to Capacity: Four Key Concepts Excess demand: too much demand relative to capacity at a given time Excess capacity: too much capacity relative to demand at a given time Maximum capacity: upper limit to a firm’s ability to meet demand at a given time Optimum capacity: point beyond which service quality declines as more customers are serviced
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
What is the Constraint on Capacity?
Predictable Demand Patterns and Their Underlying Causes Predictable Cycles of Demand Levels day week month year other Underlying Causes of Demand Variations employment billing or tax payments/refunds pay days school hours/holidays seasonal climate changes public/religious holidays natural cycles (e.g. coastal tides)
Causes of Seemingly Random Changes in Demand Levels Weather Health problems Accidents, Fires, Crime Natural disasters Question: Which of these events can be predicted?
Strategies 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
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
Information Needed to Develop and Monitor Demand Historical data on demand level and composition, noting responses to marketing variables Demand forecasts by segment under specified conditions Fixed and variable cost data, profitability of incremental sales Site-by-site demand variations Customer attitudes towards queuing Customer evaluations of quality at different levels of capacity utilization
Analyzing Demand by Market Segment Different customers have different demand patterns by day or by season (e.g., business travelers vs. tourists) Some users have little choice in timing of demand, others are flexible (e.g. commuters vs. shoppers) Some demand is undesirable and should be discouraged (e.g., inappropriate calls to emergency services)
Balancing Demand & Supply Answer the following questions for your industry: 1. Do demand levels follow a predictable cycle? What is the duration of the demand cycle? 2. What are the underlying causes of these cyclical variations? 3. Do demand levels seem to change randomly? What are the underlying causes? 3. What strategies would you suggest for flexing capacity to match demand? 4. What strategies would you suggest for shifting demand to Match Capacity