1. Chapter 9:
Balancing Demand
and Productive
Capacity

2. Variations in Demand Relative to Capacity (Fig 9.1)
VOLUME DEMANDED
Demand exceeds capacity
(business is lost)
CAPACITY UTILIZED
Maximum Available
Demand exceeds
optimum capacity
Capacity
(quality declines)
Optimum Capacity
(Demand and Supply
Well Balanced)
Excess capacity
Low Utilization
(wasted resources)
(May Send Bad Signals)
TIME CYCLE 1
TIME CYCLE 2

3. From Excess Demand to Excess Capacity
Four conditions potentially faced by fixed-capacity services:
Excess demand
Too much demand relative to capacity 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
Excess capacity
Too much capacity relative to demand at a given time

4. Approaches to the Problem of Fluctuating Demand
Two options:
Manage supply (capacity management)
time, labor, equipment, facility constraints
watch carefully: employee satisfaction
Manage demand
market needs constraints
watch carefully: customer satisfaction
Many firms use a mix of both approaches

5. Many Service Organizations Are Capacity Constrained

6. Constraints on Capacity
Time
legal, consulting, accounting, medical
Labor
Equipment
delivery services, telecommunication, health club
Facilities
hotels, restaurants, hospitals, airlines, schools, theaters, churches
Any of the service firms listed can be operating under multiple constraints.

7. Alternative Capacity Management Strategies
Level capacity (fixed level at all times)
Stretch and shrink (Should be used for short period)
Offer inferior extra capacity at peaks (e.g., bus/train standees)
Vary seated space per customer (e.g., elbow room, leg room)
Extend/cut hours of service
Chase demand (adjust capacity to match demand)
Use part-time employees
Rent or share extra facilities and equipment
Ask customers to share
Outsourcing

8. Alternative Capacity Management Strategies
Invite customers to perform self-service
Cross-train employees
Schedule downtime during periods of low demand
Modify or move facilities and
Flexible capacity (Vary mix by segment)
Not all unsold capacity is wasted
Free trials for prospective customers
Free trials for intermediaries
Employee rewards
Bartering with firms own suppliers

9. Patterns and Determinants of Demand

10. Patterns and Determinants of Demand
To manage fluctuating demand it is necessary to have a clear understanding of-
Demand patterns
Cyclical Vs Random
Underlying causes of variations
Specific market segment responsible for the variation
Keep good records of transactions to analyze demand patterns
Sophisticated software can help to track customer consumption patterns

11. Identifying Variations in Demand by Time Period
Season of Year
Off-peak Shoulder Peak
Time of Day
Morning
peak
Midday
Afternoon
peak
Day of Week
Evening/
Weekday
night
Weekend

12. Predictable Demand Patterns and Their Underlying Causes (Table 9.1)
Predictable Cycles
of Demand Levels
Underlying Causes of
Cyclical Variations
day
week
month
year
other
billing or tax payments/refunds
pay days
school hours/holidays
seasonal climate changes
public/religious holidays
natural cycles
employment
(e.g., coastal tides)

13. 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)

14. What is the Nature of Demand Relative to Supply?

15. Demand Levels Can Be Managed

16. Alternative Demand Management Strategies (Table 9.2)
Take no action
Let customers sort it out
Reduce demand
Higher prices
Communication promoting alternative times
Increase demand
Lower prices
Communication, including promotional incentives
Vary product features to increase desirability
More convenient delivery times and places
Inventory demand by reservation system
Inventory demand by formalized queuing

17. Marketing Strategies Can Reshape Some Demand Patterns
Use price and other costs to manage demand
Change product elements
Modify place and time of delivery
No change
Vary times when service is available
Offer service to customers at a new location
Promotion and education

18. 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 yield or revenue.
Ratio of actual revenue to potential revenue for a particular measurement period.
Yield = Actual Revenue
Actual Revenue = Actual capacity used x Average actual price
Potential Revenue = Total capacity x Maximum price
Potential Revenue

19. Ideal Characteristics for Yield Management
Relatively Fixed Capacity
Ability to Segment Markets
Perishable Inventory
Product Sold in Advance
Fluctuating Demand
Low Marginal Sales Cost and High Capacity Change Cost

20. Seasonal Allocation of Rooms by Service Class for Resort Hotel
First class
Standard
Budget
20%
20%
20%
30%
50%
30%
50%
60%
Percentage of capacity allocated
to different service classes
50%
30%
30%
10%
Peak Shoulder Off-peak Shoulder
(30%) (20%) (40%) (10%)
Summer Fall Winter Spring
Percentage of capacity allocated to different seasons

21. Inventory Demand through Waiting Lines and Reservations

22. Waiting Is a Universal Phenomenon!
An average person may spend up to 30 minutes/day waiting in line—equivalent to over a week per year!
Almost nobody likes to wait
It's boring, time-wasting, and sometimes physically uncomfortable

23. Why Do Waiting Lines Occur?
Because the number of arrivals at a facility exceeds capacity of system to process them at a specific point in the process
Queues are basically a symptom of unresolved capacity management problems

24. Saving Customers from Burdensome Waits
Add extra capacity so that demand can be met at most times (problem: may increase costs too much)
Rethink design of queuing system to give priority to certain customers or transactions
Redesign processes to shorten transaction time
Manage customer behavior and perceptions of wait
Install a reservations system

25. Alternative Queuing Configurations (Fig 9.5)
Single line, single server, single stage 28 29 21 20 24 23 30 25 31 26 27 32
Single line, single servers, sequential stages
Parallel lines to multiple servers
Designated lines to designated servers
Single line to multiple servers (“snake”)
“Take a number” (single or multiple servers)

26. Criteria for Allocating Different Mkt Segments to Designated Lines
Urgency of job
Emergencies versus non-emergencies
Duration of service transaction
Number of items to transact
Complexity of task
Payment of premium price
First class versus economy
Importance of customer
Frequent users/high volume purchasers versus others

27. Minimize Perceptions of Waiting Time

28. Ten Propositions on Psychology of Waiting Lines (1) (Table 9.3)
Unoccupied time feels longer than occupied time
Pre- and post-process waits feel longer than in-process waits
Anxiety makes waits seem longer
Uncertain waits are longer than known, finite waits
Unexplained waits are longer than explained waits

29. Ten Propositions on Psychology of Waiting Lines (2) (Table 9.3)
Unfair waits are longer than equitable waiting
People will wait longer for more valuable services
Waiting alone feels longer than waiting in groups
Physically uncomfortable waits feel longer
Waits seem longer to new or occasional users