Chapter 9:

Balancing Demand and Capacity

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 Overview of Chapter 9

 Fluctuations in Demand Threaten Service Productivity

 Managing Capacity

 Analyze Patterns of Demand

 Managing Demand

 Inventory Demand Through Waiting Lines and Queuing Systems

 Customer Perceptions of Waiting Time

 Inventory Demand Through Reservation Systems

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 From Excess Demand to
Excess Capacity

Too much demand relative to maximum

Excess demand capacity resulting in some customers being
denied service

Demand exceeds No one is turned away, but conditions are

optimum crowded and service quality is perceived to
capacity have deteriorated

Optimum Staff is not overworked and customers

capacity receive good service

Too much capacity relative to demand.

Excess capacity Customers may find the experience
disappointing or have doubts about its viability

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 Variations in Demand Relative to
Capacity

VOLUME DEMANDED
Demand > Capacity
(business is lost)
CAPACITY UTILIZED

Maximum Available Demand >

Capacity optimum capacity
(quality declines)
Optimum Capacity
(Demand ≈ Supply)

Excess capacity
Low Utilization (wasted resources)
(may send bad signals)

TIME CYCLE 1 TIME CYCLE 2

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 Addressing Problem of
Fluctuating Demand

Two basic approaches of which most firms use a mix of:

 Adjust level of capacity to meet demand

 Need to understand productive capacity and how it can be
increased/decreased on an incremental basis

 Manage level of demand

 Use marketing strategies to smooth out peaks, fill in valleys
 Inventorying demand until capacity becomes available

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 Defining Productive Service
Capacity

 Productive capacity can take

several forms in services
1. Physical facilities designed to
contain customers and for storing
or processing goods e.g. clinics,
hotels, classrooms, parking lots

Limit on number of people allowed

inside a facility for health or safety
reasons as in fire emergencies

2. Physical equipment used to

process people, possessions, or
information e.g. airport security
detectors, ATMs, toll gates
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 Defining Productive Service
Capacity

 Productive capacity can take several forms in services

3. Labor (staff level) is key element of productive capacity of all high contact
and some low contact services
4. Infrastructure: Organizations are dependent on access to sufficient
capacity in the public/private infrastructure e.g. congested airways, traffic
jams limit travel
 Financial success in capacity-constrained business is a function of
management’s ability to use productive capacity as efficiently and
profitably as possible.
 Processing times for people are more varied than for objects or things,
due to different levels of preparedness (“I’ve lost my credit card.”) and
arguments (“If you won’t give me a table with a view, I’ll have to ask for
your supervisor.”)

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 Managing Capacity

 Number of ways in which capacity can be adjusted to reduce the problem

 Stretch and shrink:
 Offer inferior extra capacity at peaks (e.g., handrails in bus/train)
 Capacity of service personnel can be stretched (e.g. evening/weekends classes
in universities)
 Reduce amount of time spent in process by minimizing slack time (in a
restaurant, seating and menu presentation done fast)
 Adjusting capacity to match demand
 Schedule downtime during periods of low demand. Maintenance, repair, and
renovations should be conducted when demand is expected to be low. Employees
should also take their holidays during such periods
 Cross-train employees. If employees can be cross-trained to perform a variety of
tasks, they can be shifted to bottleneck points whenever needed

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 Managing Capacity

 Adjusting capacity to match demand

 Use part-time employees. Many organizations hire extra workers during their
busiest periods
 Invite customers to perform self-service. Add self-service technologies such
as electronic kiosks at the airport for airline ticketing and checkin, or automated
checkout stations at supermarkets
 Ask customers to share. At busy airports and train stations, where the supply
of taxis is sometimes insufficient to meet demand, travelers going in the same
direction may be given the option of sharing a ride at a reduced rate
 Create flexible capacity. One solution lies in designing physical facilities to be
flexible. E.g. In a restaurant, when necessary, two tables can be combined to
seat four, or three tables combined to seat six
 Rent or share extra facilities and equipment. Two firms with complementary
demand patterns may enter into formal sharing agreements. E.g. university’s
hostels rent out student accommodation to conference participants
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 Understand Patterns of Demand

 Managers need to understand that demand often differs by market

segment.
 Random fluctuations are usually caused by factors beyond
management’s control

 Analysis sometimes reveal that a

predictable demand cycle for
one segment
 A repair and maintenance shop
that services industrial electrical
equipment knows that a
proportion of its work consists
of regularly scheduled contracts
to perform preventive
maintenance
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 Understand Patterns of Demand

 Analysis might show that walk-in business is more prevalent on some

days of the week than others

 Most cycles influencing demand for a particular service vary in length

from 1 day to 12 months (E.g. demand levels for public transport may
vary according to the time of the day, hotels in Swat have high demand
during summer vacations)

 Keep good records of transactions to analyze demand patterns

 Sophisticated software can help to track customer consumption patterns

 Record weather conditions, strikes, conventions, congregations in town

and other special factors that might influence demand

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 Questions about Demand
Patterns and Their Underlying
Causes

Predictable Cycles Underlying Causes of

of Demand Levels Cyclical Variations
 employment
 day
 billing or tax
 week payments/refunds
 pay days
 month
 school hours/holidays
 year  seasonal climate changes
 other  public/religious holidays
 natural cycles
(e.g., coastal tides)

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 Questions about Demand
Patterns and Their Underlying
Causes

Do demand levels seem to change randomly?

If so, could the underlying causes be:

1. Day-do-day changes in weather
2. Health events whose occurrence cannot be pinpointed
exactly (hospital visits due to Covid outbreak)
3. Accidents, fires, and certain criminal activities
4. Natural disasters (e.g., earthquakes, storms, mudslides,
and volcanic eruptions)

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 Managing Demand

Four approaches to manage demand

1. Take no action
 Let demand find its own levels
 Customers learn from experience or word-of-mouth when they can expect
to stand in line to use a service
2. Interventionist approach
 Reduce demand in peak periods
Higher prices will increase profits
Modify time and place of delivery (extend opening hours)
Don’t offer time consuming services
Communication can encourage in other time slots
 Increase demand when there is excess capacity
Lower prices selectively
Use communications and variation in products

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 Managing Demand

3. Inventorying demand using a queuing system

 Excess Demand
Match appropriate queue configuration to service process
Consider separate queues based on urgency, duration and pricing
 Insufficient Demand
Not applicable

4. Inventory demand using a reservation system

 Excess Demand
Focus on yield and reserve capacity for less price-sensitive customers
Consider a priority system for important segments
Make other customers shift to off-peak periods
 Insufficient Demand
Clarify that capacity is available and let customers make reservations

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 Marketing Mix Elements to
Shape Demand Patterns

 Use price and other nonmonetary costs to manage demand

 Quantity of the service demanded responds to the increases or decreases
in the price per unit at a particular point in time
 Customers who dislike waiting for a service come at less busy times
 Historical data (often from revenue management systems), research, trial
and error, and analysis of parallel situations in other locations apprise us
of demand
 With limited capacity, the goal in a profit seeking business should be to
ensure that it is utilized as much capacity as possible by the most
profitable segments (e.g. business class seats in airlines)
 Change product elements to appeal different segments
 Educational institutions offer weekend and summer programs for adults
and senior citizens
 Restaurants may give different menus during different times
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 Marketing Mix Elements to
Shape Demand Patterns

 Modify place and time of delivery

 Vary times when service is available: Strategy focuses on changing customer
preference by day of week, season, and so forth (E.g. many restaurants stay
open till sehri during Ramazan)
 Offer service to customers at a new location: mobile units that take the
service to customers (Mobile carwash, home delivered catering)
 Promotion and Education
 Signage, advertising, publicity, and
sales messages can be used to
educate customers about peak
periods and encourage them to use
the service

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 Inventory Demand Through
Waiting Lines and Queuing
Systems

 Demand can be inventoried in two ways:

 By asking customers to wait in line (first come, first served basis)
 By offering customers the opportunity of reserving or booking service
capacity in advance

 Waiting Is a Universal Phenomenon

 Nobody likes to wait
 It's boring, time-wasting,
and sometimes
physically uncomfortable

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 Inventory Demand Through
Waiting Lines and Queuing
Systems

 Why Do Waiting Lines Occur?

 Because 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

 Not all queues take form of a physical waiting line in a

single location
 Physical and inanimate objects wait for processing too.
Customers’ emails sit in customer service staffs’ inboxes, and
mortgage applications are queued for processing at a bank
 Some are virtual (e.g., phone)
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 Managing Waiting Lines

 Rethink design of queuing system (i.e., queue configuration and virtual

waits)

 Tailoring the queuing system to different market segments (e.g., by

urgency, price, or importance of the customer)

 Manage customer behavior and perceptions of wait (i.e., use the

psychology of waiting to make waits less unpleasant)

 Installing a reservation system (e.g., use reservations, booking, or

appointments to distribute demand)

 Redesign processes to shorten transaction time (e.g., by installing self-

service machines)

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 Different Queue Configurations

 Single line, single servers at sequential stages

 Customers proceed through several serving
operations as in a cafeteria/passport office

 Parallel lines to multiple servers

 More than one serving station, allowing customers
to select one of several lines in which to wait
(Ticket windows)

 Designated lines to designated servers

 Different lines to specific categories of customers
(express lines for five items or less at
supermarkets)

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 Different Queue Configurations

 Single line to multiple servers (“Snake”)

 E.g. airport check-ins
 Service employees tend to work slower

 Taking a number
 Saves customers the need to stand in a
queue (Banks, NADRA office)

 Wait lists
 People put their names down and wait until their name is announced
(Restaurants). 3 ways of wait listing
1. Party size seating, where the number of people is matched to size of the table
2. VIP seating, which involves giving special rights to favored customers
3. Call-ahead seating, which allows people to phone before arriving on

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 Queuing Systems can be
Tailored to Market Segments

 Urgency of job
 Emergencies vs. non-
emergencies
 Duration of service transaction
 Banks, supermarkets have
express lanes for shorter tasks
 Payment of premium price
 Airlines check-in lines for first-, business-, and economy-class
passengers (less wait for those who paid more)
 Importance of customer
 Frequent flyer clubs get priority wait listing (next available seat is
given to a platinum cardholder of loyalty program)
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 Ten Propositions on
Psychology of
Waiting Lines

Feels longer than

Unoccupied time Occupied time
Solo waits Group waits
Physically uncomfortable waits Comfortable waits
Pre- and post-process waits In-process waits
Unexplained waits Explained waits
Unfamiliar waits Known, finite waits
Unfair waits (people given priority) Fair waits
Anxious waits (for a meeting) Calm waits
Monotonous waits Valued waits (for a sports event)

Sources: Maister; Davis & Heineke; Jones & Peppiatt

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 Inventory Demand Through
Reservation Systems

 Reservations used to inventory demand (Hotels, shuttle,

doctor etc.)
 Benefits of Reservations
 Customers’ dissatisfaction from having to wait in line avoided
 Helps to control and manage the demand (Allows the organization to
deflect demand for service from a first-choice time to earlier or later
times, from one class to another (upgrades))
 Enable the implementation of revenue management and pre-sells the
service to other segments. Having reservations for normal repair, makes
sure that some capacity is free for emergency service
 Data from reservation systems also helps organizations to prepare
operational and financial projections for future periods

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 Characteristics of Well-
Designed Reservations System

 Fast and user-friendly for customers and staff

 Responsive to customer queries and needs
 Offers options for self service (e.g., through an online reservations
system)
 Customers require quick answers regarding if a service is available at
preferred time and at what price
 Problems occur when customers don’t show up or when service
overbooks
 Marketing strategies to deal with these problems include
 requiring a deposit,
 canceling nonpaid reservations after a certain time,
 and providing compensation to victims of overbooking
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 Reservations Strategies Should
Focus on Yield

 Yield analysis helps managers recognize opportunity cost of

allocating capacity to one customer/segment when another
segment might yield a higher rate later
 Should a hotel accept an advance booking from a tour group of 200 room
nights at $140 each, when some of these same room nights might possibly be
sold later at a short notice to business travellers at $250 per night
 Decisions need to be based on good information
 Detailed records of past usage
 Current market intelligence and good marketing sense required to allocate
inventory to different market segments
 Decision to accept/reject a business should be based on realistic estimate
of the chances of obtaining higher rated business

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 Creating Alternative Use For
Otherwise Wasted Capacity

 Use capacity for service

differentiation
 Way for firms to truly “wow” their
customers and build loyalty when
capacity is less
 Includes attention paid to the
customer, allocation of preferred
seating, and the likes

 Reward your best customers and

build loyalty
 Special promotions as part of loyalty
programs
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 Creating Alternative Use For
Otherwise Wasted Capacity

 Customer and channel development

 Free or heavily discounted trials for prospective customers and
intermediaries who sell to end customers
 Reward employees
 In services like restaurants, beach resorts, or cruise lines, capacity can
be used to reward employees and their families to build loyalty
 Improves employee satisfaction and gives them an understanding of
the service from the customer’s perspective
 Barter free capacity
 Save cost and increase capacity by bartering capacity with the
suppliers
 Bartered services are advertising space, airline seats and hotel rooms
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