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Balancing Demand and Productive Capacity

Fluctuations in Demand Threaten Service Productivity

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

Demand exceeds optimum capacity
Upper limit to a firms 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



Addressing Problem of Fluctuating Demand

Two basic approaches: Adjust level of capacity to meet demand
Need to understand productive capacity and how it

varies on an incremental basis

Manage level of demand

Variations in Demand Relative to Capacity

Use marketing strategies to smooth out peaks, fill in valleys
Demand exceeds capacity (business is lost)
CAPACITY UTILIZED Maximum Available Capacity Optimum Capacity (Demand and Supply Well Balanced) Demand exceeds optimum capacity (quality declines)

Low Utilization (May Send Bad Signals)

(wasted resources) TIME CYCLE 1

Excess capacity


Many Service Organizations Are Capacity Constrained

Forms of Productive Capacity in Services

Physical facilities to contain customers Physical facilities to store or process goods Physical equipment to process people,

possessions, or information
Labor used for physical or mental work
Public/private infrastructure

Alternative Capacity Management Strategies

Level capacity (fixed level at all times) Stretch and shrink Offer inferior extra capacity at peaks (e.g., bus/train


Vary seated space per customer Extend/cut hours of service Chase demand (adjust capacity to match demand) Flexible capacity (vary mix by segment)

Adjusting Capacity to Match Demand

Schedule downtime during periods of low

demand Use part-time employees Rent or share extra facilities and equipment Ask customers to share Invite customers to perform self-service Cross-train employees

Patterns and Determinants of Demand

Predictable Demand Patterns and Their Underlying Causes

Predictable Cycles of Demand Levels
day week

Underlying Causes of Cyclical Variations

employment billing or tax payments/refunds pay days school hours/holidays seasonal climate changes public/religious holidays natural cycles (e.g., coastal tides)

year other

Causes of Seemingly Random Changes in Demand Levels

Weather Health problems Accidents, Fires, Crime Natural disasters
Question: Which of these events can be predicted?

Demand Levels Can Be Managed

Alternative Demand Management Strategies

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

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

Inventory Demand through Waiting Lines and Reservations

Waiting Is a Universal Phenomenon!

An average person may spend up to 30 minutes/day waiting in lineequivalent to over a week per year! Almost nobody likes to wait It's boring, time-wasting, and sometimes physically uncomfortable

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

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

Alternative Queuing Configurations

Single line, single server, single stage

Single line, single servers, sequential stages

Parallel lines to multiple servers Designated lines to designated servers Single line to multiple servers (snake)
28 29 25 26 27 32 23 21 20 24

Take a number (single or multiple servers)

30 31

Criteria for Allocating Different Market Segments to Designated Lines Urgency of job
Emergencies versus non-emergencies

Duration of service transaction

Complexity of task

Payment of premium price

First class versus economy

Importance of customer
Frequent users/high volume purchasers versus others

Minimize Perceptions of Waiting Time

Ten Propositions on Psychology of Waiting Lines

1. Unoccupied time feels longer than occupied time 2. Pre- and post-process waits feel longer than in-process waits 3. Anxiety makes waits seem longer 4. Uncertain waits are longer than known, finite waits 5. Unexplained waits are longer than explained waits 6. Unfair waits are longer than equitable waiting 7. People will wait longer for more valuable services 8. Waiting alone feels longer than waiting in groups 9. Physically uncomfortable waits feel longer 10. Waits seem longer to new or occasional users

Create An Effective Reservation System

Benefits of Reservations
Controls and smoothes demand Pre-sells service Informs and educates customers in advance of arrival Saves customers from having to wait in line for service (if reservation times are honored) Data captured helps organizations
Prepare financial projections Plan operations and staffing levels

Characteristics of Well-Designed Reservations System

Fast and user-friendly for customers and staff Answers customer questions Offers options for self service (e.g., the Web) Accommodates preferences (e.g., room with view)

Deflects demand from unavailable first choices to alternative times and locations
Includes strategies for no-shows and overbooking
Requiring deposits to discourage no-shows Canceling unpaid bookings after designated time Compensating victims of over-booking