SM

Chapter 13

MANAGING DEMAND
AND CAPACITY
Dr. Shamsun Nahar Momotaz, SBE, IUB

23-Dec-20 MKT350, SNM 1

 Objectives for Chapter 13:
Managing Demand and Capacity
• 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)
adjusting capacity to meet demand.

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The service performance gap can
occur when organizations fail to
smooth the peaks and valleys of
demand, overuse their capacities,
attract an inappropriate customer Provider GAP 3
mix in their efforts to build demand,
or rely too much on price in
smoothing demand.

CUSTOMER

Service Delivery
COMPANY
GAP 3
Customer-Driven
Service Designs and
Standards

23-Dec-20
Part 4 Opener MKT350, SNM 3
 Fundamental Issue of Demand-Supply
Management
Lack of Inventory Capability.
• Perishability & Simultaneous production and
consumption.
• Service can’t be stored/saved.
• Service cannot be transported from one place to
another or transferred from one person to
another.
The lack of inventory capability combined with fluctuating demand leads to
a variety of potential outcomes, as illustrated in Figure 13.1.

23-Dec-20 MKT350, SNM 4

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 Variations in Demand Relative to
Capacity
• Excess demand: the level of demand exceeds max
capacity.
– Some customers will be turned away.
– For customers who do receive service, quality may be lacking
because of crowding or overtaxing of staff and facilities
• Demand exceeds optimum capacity.
– No one is turned away, but quality may still suffer.
– quality of service may still suffer because of overuse,
crowding, or staff being pushed beyond their abilities to
deliver consistent quality.

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 Variations in Demand Relative to
Capacity
• Demand and supply are balanced at optimum
capacity.
– Staff and facilities are occupied at an ideal level.
– No one is overworked, facilities can be maintained, customers
are receiving quality without undesirable delays.
• Excess capacity: demand is below optimum.
– Productive resources in the form of labor, equipment and
facilities are underutilized resulting in lower profits.
– Customers may receive excellent quality on an individual level
but may be disappointed or may worry that they have chosen
an inferior service provider.

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 Demand fluctuations:
•Some service providers will experience wide fluctuations in
demand such as hospitals, transportation, restaurants etc.

•Some service providers will experience narrow fluctuations in

demand such as insurance, laundry, banking, hotels etc.

•For some, peak demand can usually be met when demand

fluctuates. Example: Electricity, natural gas, Internet services.

•For some, peak demand may frequently exceed capacity. Example:

Hospital emergency, restaurants near a football stadium, hotel next
to universities.

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 Understanding Capacity Constraints
and Demand Patterns

Capacity Constraints Demand Patterns

• Time, labor, equipment • Charting demand
and facilities patterns
• Optimal versus maximal
use of capacity • Predictable cycles
• Random demand
fluctuations
• Demand patterns by
market segment
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 Capacity Constraints:
• Time: Lawyer, Consultant, Teacher, Beautician, psychological
counselor all primarily sell their time. If the service provider is
not available or his or her time is not used productively, profits
are lost. If there is excess demand at a specific time, additional
time cannot be created to satisfy it.
• Labor: Law Firm, Consulting Firm, a university department,
repair and maintenance contractor may all face the reality that
at certain times demand for their organization’s services cannot
be met because the staff is already operating at peak capacity..
• Equipment: Health Club, Parcel Service, Telecom, Internet
service providers represent their capacity constraints. For
trucking or air-freight delivery services, the trucks or airplanes
needed to service demand may be the capacity limitation.
• Facilities: Hotel, Airplane, educational institutions, restaurants
are constrained by facility. MKT350, SNM
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 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
 Optimal versus Maximum use of capacity

Optimal Capacity:
• Resources are fully employed/not overused.
Customers are receiving quality service.
Maximum Capacity:
• Absolute limit of service availability.
• Services can be both
Optimum capacity < Maximum Capacity
Optimum capacity = Maximum Capacity
When an individual service provider’s maximum capacity has been exceeded, the
result is likely to cause decreased service quality, customer dissatisfaction, and
employee burnout and turnover, but these outcomes may not be immediately
observable, even to the employee.
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 Demand Patterns:
• Charting of demand patterns: Chart the level of demand over
relevant time periods. Daily, weekly, and monthly demand levels should be
tracked, and if seasonality is a suspected problem, graphing should be done
for data from at least the past year.
• Predictable cycles: Predictable cycles such as including daily
(variations occur by hour), weekly (variations occur by day), monthly
(variations occur by day or week), and/or yearly (variations occur according
to months or seasons). The underlying causes should be identified.
• Random demand fluctuations: There is no apparent predictable
cycles-demand appear to be random. Yet even in this case, causes can often
be identified like weather, health-related events like accidents, heart
attacks and birth, natural disasters such as floods, fires and hurricanes.
• Demand patterns by market segment: Disaggregate demand
by market segment, revealing patterns within patterns. Demand for one
segment is predictable, whereas demand from another segment is
relatively random.
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 STRATEGIES FOR MATCHING CAPACITY AND
DEMAND
When an organization has a clear grasp of its capacity constraints
and an understanding of demand patterns, it is in a good
position to develop strategies for matching supply and demand.
There are two general approaches for accomplishing this match.
The first is to smooth the demand fluctuations themselves by
shifting demand to match existing capacity. This approach
implies that the peaks and valleys of the demand curve (Figure
13.1) will be flattened to match as closely as possible the
horizontal optimal capacity line.
The second general strategy is to adjust capacity to match
fluctuations in demand. This implies moving the horizontal
capacity lines shown in Figure 13.1 to match the ups and downs
of the demand curve.
23-Dec-20 MKT350, SNM 14
 Strategies for Shifting Demand
to Match Capacity

Demand Too High Shift Demand Demand Too Low

• 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
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• 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
MKT350, SNM 15
 1. Reduce demand during peak times
• Communicate with customers-inform the peak
time and persuade them to use the service at
alternative times and avoid crowding or delays.
• Modify timing and location of service delivery-
adjust hours and days of service to more
directly reflect customer demand. Now U.S.
banks open early, stay open until 6:00 p.m.
many days, and are open on Saturdays.

23-Dec-20 MKT350, SNM 16

• Offer Incentives for Nonpeak usage- offer
incentives to encourage customers to shift
their use of the service to other times like free
diving board, larger pool at non-peak time

• Set priorities- prioritize who is served by taking

care of loyal or high-need customers first

• Charge full price-no discount at peak time

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 2. Increase demand to match capacity
• Educate customers- Advertising and sales messages can be
used to inform customers about times when demand is low.
air-conditioning firms often promote their preventive
maintenance services in early spring, before temperatures get
too high.
• Vary how the facility is used- change how the service facility is
used, depending on the season of the year, day of the week,
or time of day. day of the week, season of the year, time of
the day. Hospital rents its facilities to film production crews
who need realistic hospital settings for movies or television
shows, Movie theaters rented during weekdays by business
groups and on Sunday mornings by church groups who have
no building of their own.
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• Vary the service offering-changing nature of
the service offering. McDonald’s offers food
delivery as a way to increase demand for its
service.
• Differentiate on price-discount the price of the
service during periods of slow demand. the
lower summer prices attract considerable
numbers of families and local guests who
want an opportunity to experience a luxury
hotel but are not able to afford the rooms
during peak season.
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 Strategies for Adjusting Capacity
to Match Demand

Demand Too High Flex Capacity Demand Too Low

• Stretch time, labor, facilities and
equipment • Perform maintenance
• Cross-train employees renovations
• Hire part-time employees • Schedule vacations
• Request overtime work from
employees
• Schedule employee training
• Rent or share facilities • Lay off employees
• Rent or share equipment
• Subcontract or outsource activities

23-Dec-20 MKT350, SNM 23

 1. Increase capacity temporarily
• Stretch people, facilities and equipment temporarily-extend
hour of service temporarily to accommodate demand. A
health clinic might stay open longer during flu season, retailers
are open longer hours during the holiday shopping season,
and accountants have extended appointment hours (evenings
and Saturdays) in the weeks just before tax deadlines. Facilities
such as theaters, restaurants, meeting facilities, and
classrooms can sometimes be expanded temporarily by the
addition of tables, chairs, or other equipment needed by
customers
• Use part-labor resources are being aligned with demand.
Retailers hire part-time employees during the holiday rush
time.
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• Cross-Train employees shift among tasks, filling in
where they are most needed. Many airlines cross-
train their employees to move from ticketing to
working the gate counter to assisting with baggage if
needed.
• Outsource activities- outsource the service during
temporary peak in demand for internal services.
Temporarily hire people outside.
• Rent or share facilities and equipment- rent
additional equipment or facilities during periods of
peak demand. For example, express mail delivery
services rent or lease trucks during the peak holiday
delivery season.
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 2. Adjust use of resources
• Schedule downtime during periods of low demand-If
people, equipment, and facilities are being used at
maximum capacity during peak periods, then it is
imperative to schedule downtime during off-peak periods.
Software upgradation time on holiday of banks
• Perform maintenance and renovations-during period of
slow demand, service, facilities, and equipment need to be
repaired and maintained periodically. Such scheduling
should take place during periods of slow demand, as should
renovations. Universities, frequently arrange for the
painting of classrooms or restriping of parking lots to be
done when students are on a break.

23-Dec-20 MKT350, SNM 26

• Schedule vacations and employee training
strategically- employee vacations and training
should take place during periods of slow demand.
• Modify or move facilities and equipment –to meet
demand fluctuations adjust, move, or creatively
modify existing capacity. Hotels utilize this
strategy by reconfiguring rooms—two rooms with
a locked door between can be rented to two
different parties in high demand times or turned
into a suite during slow demand.

23-Dec-20 MKT350, SNM 27

 Yield Management
Definition
“The process of allocating the right type of capacity to the right
kind of customer at the right price so as to maximize revenue
or yield.”

Actual revenue
YIELD = Potential revenue

Where Actual revenue = actual capacity x average actual price

Potential revenue = total capacity x maximum price

Most effective when: 1) different segments make reservations at different times

and 2) customers who arrive/reserve early are more price sensitive than those
who arrive/reserve late.

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 Yield Management Example
• 200-room Hotel
• Max room rate = $100/night
– Potential Revenue = 200 x $100 = $20,000

• All rooms sold at discounted rate ($50/night)

– Yield = 200 x $50 /$20,000 = $10,000 = 50%
• Full rate charged, but only 80 rooms sold
– Yield = 80 x $100/$20,000 = $8,000 = 40%
• Full rate charged for 80 rooms, discount for remaining
120 rooms
– Yield = [(80 x $100) + (120 x $50)]/$20,000 = $14,000= 70%
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 Challenges and Risks in Using
Yield Management
• Loss of competitive focus

• Customer alienation

• Overbooking

• Incompatible incentive and reward systems

• Inappropriate organization of the yield management

function

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 Waiting Line Strategies
• Employ operational logic to reduce wait
– How to configure the queue?
• Multiple Queue
• Single Queue
• Take a Number

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Waiting Line Configurations

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 Waiting Line Strategies
• Establish a reservation process
• Differentiate waiting customers
– Importance of the customer
– Urgency of the job
– Duration of the service transaction
– Payment of a premium price

• Make waiting more pleasurable

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 Issues to Consider in Making Waiting
More Pleasurable
• Unoccupied time feels longer than occupied time.
• Preprocess waits feel longer than in-process waits.
• Anxiety makes waits seem longer.
• Uncertain waits seem longer than known, finite
waits.
• Unexplained waits seem longer than explained waits.
• Unfair waits feel longer than equitable waits.
• The more valuable the service, the longer the
customer will wait.
• Solo waits feel longer than group waits.
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