Chapter

14

Managing Demand
and Capacity

The Underlying Issue: Lack of Inventory

Capability
Understanding Capacity Constraints
Understanding Demand Patterns
Strategies for Matching Capacity and
Demand
Yield Management
Waiting Line Strategies

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Objectives for Chapter 14:

Managing Demand and Capacity
Explain the underlying issue for capacity-constrained
services: lack of inventory capacity.
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) flexing capacity to meet demand.
Demonstrate the benefits and risks of yield management
strategies.
Provide strategies for managing waiting lines.
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Figure 14.1

Variations in Demand
Relative to Capacity

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Understanding Capacity Constraints and

Demand Patterns
Capacity Constraints

Demand Patterns

Time, labor, equipment,

and facilities
Optimal versus maximal
use of capacity

Charting demand patterns

Predictable cycles
Random demand
fluctuations
Demand patterns by
market segment

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Table 14.1

Demand vs. Supply

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Table 14.2

Constraints 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

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Figure 14.3

Strategies for Shifting Demand

to Match Capacity
Demand Too High

Shift Demand

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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Demand Too Low

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.

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Figure 14.4

Strategies for Flexing Capacity

to Match Demand
Demand Too High

Flex Capacity

Stretch time, labor, facilities and equipment.

Cross-train employees.
Hire part-time employees.
Request overtime work from employees.
Rent or share facilities.
Rent or share equipment.
Subcontract or outsource activities.
Outsource.

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Demand Too Low

Perform maintenance,
renovations.
Schedule vacations.
Schedule employee training.
Lay off employees.

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Waiting Issues

unoccupied time feels longer

preprocess waits feel longer
anxiety makes waits seem longer
uncertain waits seem longer than finite waits
unexplained waits seem longer
unfair waits feel longer
longer waits are more acceptable for valuable
services
solo waits feel longer
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Waiting Strategies

Employ operational logic to reduce wait

Establish a reservation process
Differentiate waiting customers
Make waiting fun, or at least tolerable

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Figure 14.5

Waiting Line Strategies

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Figure 14.6

Waiting Line Configurations

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