DEMAND AND CAPACITY MANAGEMENT

Originally two strategies were suggested for managing demand and capacity: the first would involve adjusting
capacity to match demand (defined as 'chasing demand') and the second, altering demand to match available
capacity (known as 'level capacity')

1. ADJUSTING CAPACITY TO MATCH DEMAND

(i) Extend the opening hours - This is not an option open to all service organizations. Where it is possible it is
likely to occur only when demand levels are regarded as particularly excessive.

(ii) Encourage employees to work harder - The requirement here is usually that of processing more customers
per hour or per day. Although a mark of efficiency (more output from existing staff), service quality for
customers may deteriorate.

(iii) Cross-train employees - Enables organizations to operate with fewer staff. Instead of being confined to
handling few responsibilities staff are equipped to manage a variety of tasks and activities. It amounts to a
move in the direction of job enlargement and some might say job enrichment, increasing employee motivation,
satisfaction and morale. Not all employees will welcome it, particularly where there is seen to be little increase
in commensurate rewards. The type of service and the organizational culture will be two prominent factors that
need to be taken into account prior to such a move.

(iv) Recruiting part-time employees - This is an option low in cost and potentially one that can be achieved
quickly. Organizations should, of course, ensure that part-time employees be given the same support and
encouragement as given to full-time staff.

(v) Add facilities - Usually in the form of table, chairs or other equipment. Just how much scope there is for this
will depend on the initial configuration and layout designed to communicate a specific atmosphere and/or level
of service. Adding facilities may change both.

(vi) Hire or share facilities or equipment - May be in the form of additional physical space or vehicles required
either on a temporary or recurring basis. Using customers as productive resources - up to this point all attempts
at adjusting capacity have involved manipulating internal resources and assets. However some have suggested
that organizations should regard customers as 'partial employees' and make a contribution to productive
capacity.

(vii) Outsourcing - For small to medium-sized organizations, in particular, calling on outside assistance is a
valuable option in trying to meet market demand. Typical areas for outsourcing are technological and
marketing support, employee recruitment and training, and Web development. Large organizations also
outsource. Consider the recent case of British Airways and the outsourcing of its inflight catering to Gate
Gourmet. Competitive pressures in the airline industry had forced this move. Unfortunately, the demand for
lower costs led to industrial action by Gate Gourmet employees. The above options, then, are aimed at
increasing capacity to absorb demand.

2. ALTERING DEMAND TO MATCH AVAILABLE CAPACITY

(i) Manipulate price - This will be discussed in more detail in the following section on "Revenue Management'.
The central role of price is to discourage too many customers from using the service during 'peak demand"
periods and encourage more customers to select 'off-peak periods. On price alone this strategy will only work if
enough customers can be attracted by the lower prices available during low demand periods. Leisure,
hospitality and transportation services would appear suited to this approach. However this strategy of price
differentiation is, it is argued, not without risk. Customers may become acclimatized to the lower prices and
expect them whenever the service is used. Equally there is risk to the organization's image in that lower prices
may attract undesirable customers. This would be particularly relevant for a service that regards itself as more
upmarket or exclusive.

(ii) Offer a mobile service - For a number of reasons consumers have welcomed the emergence of mobile
services where the provider takes the service to the customer rather than or in addition to the customer having
to visit the provider in some fixed location. Libraries have used this approach
for many years, the service being particularly valued by the disabled and those living in remote locations. Other
services that have found mobility an effective method of managing demand include breakdown and
maintenance, blood donation and catering.

(iii) Communicating with customers - The provision of information as to when demand is, or is likely to be, high
appears to be a strategy not well adopted by service organizations. In particular for customers in our 'call centre
society' it can be especially frustrating. Waiting is a feature of modern day society and will be addressed later in
the chapter.

(iv) Changing the service offer - For most organizations this is not an option. What they offer remains fixed.
Where services with a sizeable facility like hotels experience significant seasonal fluctuations however, action
may be taken to encourage varied usage of the facility when capacity is under- utilized.

DEMAND FORECASTING
Planning is the primary work of management. The base of planning is forecasting. Forecasting is required in
planning in respect of every department of the organization may be it sales and marketing, or production
planning or manpower planning.

According to Fayol, “Forecasting is the essence of management. Its techniques are used in every type of
organization may it be government or private, production or service and social or religious”.

Combining the aspect of forecasting with demand, it serves with the future projections regarding the quantity
demanded in precise.

Certain questions like – Which product will be in demand? What will be the quantity demanded? Where will be
the demand? are basically answered by demand forecasting.

It also helps in developing relation between the demand and price along with the price of the substitutes that
are available. The change in demand as a result of change in any of these factors is also revealed.

According to Pynes,"Demand forecasting is the anticipation of the leadership and workforce that will be
needed to accomplish future functional requirements carry out the mission of the organisation".

According to Cundiff and Still,"Demand forecast is an estimate of sales during A specified future period which is
tied a proposed marketing plan and which assumes a particular set of uncontrollable and competitive forces".

According to Evan J. Douglas,"Demand estimation (forecasting) may be defined as a process of finding values
for demand in future time periods."

Demand forecasting enables an organization to take various business decisions, such as planning the
production process, purchasing raw materials, managing funds, and deciding the price of the product. An
organization can forecast demand by making own estimates called guess estimate or taking the help of
specialized consultants or market research agencies.
SIGNIFICANCE OF DEMAND FORECASTING:

(i) Fulfilling objectives - Implies that every business unit starts with certain pre-decided objectives. Demand
forecasting helps in fulfilling these objectives. An organization estimates the current demand for its products
and services in the market and move forward to achieve the set goals.

For example, an organization has set a target of selling 50, 000 units of its products. In such a case, the
organization would perform demand forecasting for its products. If the demand for the organization's products
is low, the organization would take corrective actions, so that the set objective can be achieved.

(ii) Preparing the budget - Plays a crucial role in making budget by estimating costs and expected revenues. For
instance, an organization has forecasted that the demand for its product, which is priced at Rs. 10, would be 10,
00, 00 units. In such a case, the total expected revenue would be 10* 100000 Rs. 10, 00, 000. In this way,
demand forecasting enables organizations to prepare their budget.

(iii) Stabilizing employment and production - Helps an organization to control its production and recruitment
activities. Producing according to the forecasted demand of products helps in avoiding the wastage of the
resources of an organization. This further helps an organization to hire human resource according to
requirement. For example, if an organization expects a rise in the demand for its products, it may opt for extra
labor to fulfill the increased demand.

(iv) Expanding organizations - Implies that demand forecasting helps in deciding about the expansion of the
business of the organization. If the expected demand for products is higher, then the organization may plan to
expand further. On the other hand, if the demand for products is expected to fall, the organization may cut
down the investment in the business.

(v) Taking Management Decisions - Helps in making critical decisions, such as deciding the plant capacity,
determining the requirement of raw material, and ensuring the availability of labor and capital.

(vi) Evaluating Performance - Helps in making corrections. For example, if the demand for an organization's
products is less, it may take corrective actions and improve the level of demand by enhancing the quality of its
products or spending more on advertisements.

(vii) Helping Government - Enables the government to coordinate import and export activities and plan
international trade.

(viii) Production Planning - Demand forecasting is necessary for the production planning of the business firm.
The demand of the product will decide whether increase in the output of the business should be done or not. If
proper planning is not done than overproduction will be done which will lead to loss in the business.

OBJECTIVES OF DEMAND FORECASTING

1.SHORT-TERM OBJECTIVES

(i) Formulating production policy - Helps in covering the gap between the demand and supply of the product.
The demand forecasting helps in estimating the requirement of raw material in future, so that the regular
supply of raw material can be maintained. It further helps in maximum utilization of resources as operations are
planned according to forecasts. Similarly, human resource requirements are easily met with the help of demand
forecasting.

(ii) Formulating Price Policy - Refers to one of the most important objectives of demand forecasting. An
organization sets prices of its products according to their demand. For example, if an economy enters into
depression ar recession phase, the demand for products falls. In such a case, the organization sets low prices of
its products.
(iii) Controlling Sales - Helps in setting sales targets, which act as a basis for evaluating sales performance. An
organization make demand forecasts for different regions and fix sales targets for each region accordingly.

(iv) Arranging finance - Implies that the financial requirements of the enterprise are estimated with the help of
demand forecasting. This helps in ensuring proper liquidity within the organization.

2. LONG-TERM OBJECTIVES

(i) Deciding the production capacity - Implies that with the help of demand forecasting, an organization can
determine the size of the plant required for production. The size of the plant should conform to the sales
requirement of the organization.

(ii) Planning long-term activities - Implies that demand forecasting helps in planning for long term. For
example, if the forecasted demand for the organization's products is high, then it may plan to invest in various
expansion and development projects in the long term.

FACTORS INFLUENCING DEMAND FORECASTING:

(i) Types of Goods - Affect the demand forecasting process to a larger extent Goods can be producer's goods,
consumer goods, or services. Apart from this, goods can be established and new goods. Established goods are
those goods which already exist in the market, whereas new goods are those which are yet to be introduced in
the market.

Information regarding the demand, substitutes and level of competition of goods is known only in case of
established goods. On the other hand, it is difficult to forecast demand for the new goods. Therefore,
forecasting is different for different types of goods.

(ii) Competition Level - Influence the process of demand forecasting. In a highly competitive market, demand
for products also depends on the number of competitors existing in the market. Moreover, in a highly
competitive market, there is always a risk of new entrants. In such a case, demand forecasting becomes difficult
and challenging.

(iii) Price of Goods - Acts as a major factor that influences the demand forecasting process. The demand
forecasts of organizations are highly affected by change in their pricing policies. In such a scenario, it is difficult
to estimate the exact demand of products.

(iv) Level of Technology - Constitutes an important factor in obtaining reliable demand forecasts. If there is a
rapid change in technology, the existing technology or products may become obsolete. For example, there is a
high decline: in the demand of floppy disks with the Introduction of compact disks (CDs) and pen drives for
saving data in computer. In such a case, it is difficult to forecast demand for existing products in future.

(v) Economic Viewpoint - Play a crucial role in obtaining demand forecasts. For example, if there is a positive
development in an economy, such as globalization and high level of investment, the demand forecasts of
organizations would also be positive.

METHODS OF FORECASTING
QUALITATIVE FORECASTING METHODS
1. Consumer Survey Methods: Survey method is the most commonly used direct method in short run for
the projection of the demand. Under this, different surveys are organised in routine to gather the
information about the likes and the dislikes of the buyers and the probable future purchases. Survey
method includes:

i) Complete Enumeration Survey: The survey is done by visiting all the houses during the forecast and
all the household opinions are taken into consideration.

Advantages of Complete Enumeration Survey

a) Quite accurate as it surveys all the consumers of a product.

b) It is simple to use.
c) It is not affected by personal biases.
d) It is based on collected data.

Disadvantages of Complete Enumeration Survey

a) It is costly.
b) It is time consuming.
c) It is difficult and practically impossible to survey all the consumers.
d) The size of the data increases the chances of faulty recording and
wrong interpretation.
e) Useful only for products with limited consumers.

ii) Sample Survey and Test Marketing: Rather than contacting all the households, some households are
selected randomly and their opinions are sought. One underlying assumption is considered that the
sample is the true indicator of the population. As a result of the sample survey, test marketing has
evolved. Under this, the product is handed over to the different users on random basis for specified
time and their responses are noted down. As a outcome of their response, the future demand is
projected.

Advantages of Sample Survey

a) An important tool especially for short-term projections

b) It is simple and does not cost much.
c) Since only a few consumers are to be approached, the method works quickly
d) The risk of erroneous data is reduced.
e) This method gives excellent results, if used carefully.

Disadvantages of Sample Survey

a) The conclusions are based on the view of only a few consumers and not all of them.
b) The sample may not be a true representation of the entire population.

iii) End-Use Method: Demand survey is conducted for the industries that are actively using the product
as an intermediate. The consumption of the intermediate product is considered as the base for the
future projection of the final product.

Advantages of End-Use Method

a) The method yields accurate predictions.

b) It provides sector wise demand forecast for different industries.
c) It is especially useful for producer's goods.

Disadvantages of End-Use Method

 a) It requires complex & diverse calculations.
b) It is costlier as compared to the other survey methods & is more time consuming too.
c) Industry data may not be readily available.

2. Sales Force Opinion Method: It is also termed as Collective Opinion Method. Under this, rather than
approaching the consumers for their opinions, the verdict of those affecting the sales are given the
priority i.e., the shopkeepers and the salesmen. The salespersons who are engaged with the company
are to make spate projections of their sales to the respective regions. These individual forecasts are put
forth for further study and final data for the organisation as a whole is prepared.

Advantages of Collective Opinion Method

i) perhaps the simplest of the forecasting methods.

ii) It is less costly.
iii) Collecting data from its own employees is easier for a firm than to do it from external parties.

Disadvantages of Collective Opinion Method

i) Consumer's tastes and preferences keep changing with time. What held well in the past may not
necessarily continue to do so in the future as well. The opinion of the sales force may thus be erroneous.
ii) The sales force may give biased views as the projected demand affects their future job prospects.

3. Delphi Technique: It comprises of the certain rounds of the structural surveys and those who participate
in the survey are the experts of their own field. This survey is conducted in different rounds and the
results of the initial rounds are given as feedback in the later round for the purpose
of follow-ups.

Advantages of Delphi Technique

i) It is simple to conduct.
ii) Can be used where quantitative data is not possible.
iii) The forecast is reliable as it is based on the opinion of people who know the product very well.
iv) It is inexpensive.
v) It takes less time.

Disadvantages of Delphi Technique

i) The results are based on mere hunch of one or more persons and not on scientific analysis.
ii) The experts may be biased.
iii) The method is subjective in nature and the forecast could be unfavourably influenced by persons
with vested interests.

4. Past Analogy: The forecast for the sale of new business depends upon the analogy of past sales of the
existing product. The new product can be a substitute of existing product, complementary products or
product related to consumer belonging to same income groups as being targeted by the existing
product.

For example, the expensive watches manufacturing company should study the customer's demand
pattern of expensive watches for launching a new watch in the market.

5. Executive Opinion: The experts of various departments of the company form a panel which have the
work of doing the sales forecast. The panel uses the data from all the departments for framing the plan
and also appoint a staff analyst for analyzing the data. The forecasts presented by expert are not
showing the extremes which could be happen if they had been made by the individuals.
 Advantages of Executive Opinion

i) the executives uses the basic functional areas of the firm.

ii) The executives have knowledge about various factors which affects the sales.
iii) The executives also help in giving accurate and timely forecast.

Disadvantages of Executive Opinion

i) there is lot of time required by the executives.

ii) It is not suitable for the firm which deal in large variety of products.
iii) There may be dominating people in the executives who may influence the process.

6. Nominal Group Technique: Nominal group technique is a structured problem-solving and decision-
making method. It was defined by Andrew Van de Ven.

Procedure of Nominal Group Technique

The process used in this technique is:

i) Generation of Ideas: In this process, the members of the groups note down the ideas concerning the
problem aroused by the mediator.
ii) Collection of Ideas: At this step, the members of group ideas are assembled and are noted on the flip
chart or blackboard that can be seen to all the members. In this step, no discussion is allowed.
iii) Discussion: In this step, every idea is analyzed and discussed. The ideas which are of same kind are
combined and discussed. The ideas are discussed according to their importance, clarity and logic. The
group members are free to make a short impersonal comment on the individual basis on every idea.
iv) Preliminary Voting: In this step, the best idea is chosen according to the preliminary vote. If there is
no agreement for the best idea, then the concerned idea is discussed further for getting the clear
meaning and logic.
v) Final Voting: In this step, the final voting is done. The idea getting maximum vote is chosen as a
solution for a forecast.

QUANTITATIVE FORECASTING METHODS

1. Linear Regression Analysis Method: Linear Regression Analysis is a method of forecasting that uses
historical data to predict future trends. This method is used when there is a relationship between two or
more variables. Regression Analysis involves analyzing historical data, identifying the relationship
between variables, and using this information to make predictions about the future. This method is
useful when the data is affected by external factors.

RELATION BETWEEN QUANTITY DEMANDED

DEPENDENT VARIABLE ‘Y’ INDEPENDENT VARIABLE ‘X’

This technique is helpful for estimating the equation that describes the relationship between two or
more independent variables.

Y = a + bX
 where, Y = dependent variable (Y-axis of the graph)
X = independent variable (X-axis of the graph)
‘a’ = intercept on the Y-axis, and
‘b’ = slope of regression line.

‘a’ & ‘b’ are constants.

*NUMERICAL WILL EXPLAIN IN CLASS.

2. Time – Series Analysis : It is a method of forecasting that uses historical data to predict future trends.
This method assumes that future patterns will resemble past patterns. It involves analyzing historical
data, identifying patterns & trends, and using this information to make predictions about the future.
This method is useful when there is a consistent pattern in the data and when the data is not affected by
external factors.

3. Econometric Modelling: It is a method of forecasting that uses economic data to predict future trends.
This method involves analyzing economic data, identifying patterns & trends, and using this information
to make predictions about the future. This method is useful when there are economic factors that can
affect the data.

COMPARISON BETWEEN QUALITATIVE & QUANTITATIVE FORECASTING

METHODS