1

Chapter 9:

Balancing Demand
and Productive
Capacity
Variations in Demand Relative to
Capacity (Fig 9.1)
2
VOLUME DEMANDED
TIME CYCLE 1 TIME CYCLE 2
Maximum Available
Capacity
Optimum Capacity
(Demand and Supply
Well Balanced)
Low Utilization
(May Send Bad Signals)
Demand exceeds capacity
(business is lost)
Demand exceeds
optimum capacity
(quality declines)
Excess capacity
(wasted resources)
CAPACITY UTILIZED
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 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 time
3
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
4
Many firms use a mix of both approaches

5
Many Service Organizations
Are Capacity Constrained
Constraints on Capacity
Time
legal, consulting, accounting, medical
Labor
legal, consulting, accounting, medical
Equipment
delivery services, telecommunication, health club
Facilities
hotels, restaurants, hospitals, airlines, schools, theaters,
churches

6
Any of the service firms listed can be operating under multiple constraints.
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
7
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

8
9
Patterns and
Determinants of Demand
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

10
Identifying Variations in Demand
by Time Period
11
Season of Year
Off-peak Shoulder Peak
Weekday
Weekend
Morning
peak
Midday
Afternoon
peak




Evening/
night
Time of Day
Day of Week
Predictable Demand Patterns and Their
Underlying Causes (Table 9.1)

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)
12
Predictable Cycles
of Demand Levels
Underlying Causes of
Cyclical Variations
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)
13
What is the Nature of Demand Relative to
Supply?
14

Extent of demand fluctuations over time

Extent to which
supply is
constrained
Wide Narrow
Peak demand can
usually be met
without a major
delay
1
Electricity
Natural gas
Telephone
Hospital maternity unit
Police and fire
emergencies
2
Insurance
Legal services
Banking
Laundry and dry cleaning
Peak demand
regularly exceeds
capacity
4
Accounting and tax
preparation
Passenger transportation
Hotels and motels
Restaurants
Theaters
3
Services similar to those in
2 but which have
insufficient capacity for
their base level of business
15
Demand Levels Can Be
Managed
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
16
Marketing Strategies Can
Reshape Some Demand Patterns
1. Use price and other costs to manage demand

2. Change product elements

3. Modify place and time of delivery
No change
Vary times when service is available
Offer service to customers at a new location

4. Promotion and education

17
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

18
Potential Revenue
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
Seasonal Allocation of Rooms by
Service Class for Resort Hotel


First class


Standard


Budget

P
e
r
c
e
n
t
a
g
e

o
f

c
a
p
a
c
i
t
y

a
l
l
o
c
a
t
e
d

t
o

d
i
f
f
e
r
e
n
t

s
e
r
v
i
c
e

c
l
a
s
s
e
s

60%
50%
30%
20%
50%
Peak Shoulder Off-peak Shoulder
(30%) (20%) (40%) (10%)
Summer Fall Winter Spring

Percentage of capacity allocated to different seasons
30%
20% 20%
10%
30%
50%
30%
21
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
22
Why Do Waiting Lines Occur?
23
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
24
Alternative Queuing Configurations (Fig
9.5)
25
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)
Take a number (single or multiple servers)
28
29
21
20
24
23
30
25
31
26
27
32
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
26
27
Minimize Perceptions of
Waiting Time
Ten Propositions on Psychology of
Waiting Lines (1) (Table 9.3)
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
28
Ten Propositions on Psychology of
Waiting Lines (2) (Table 9.3)
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

29