Balancing Demand

and Productive
Capacity
Overview

 Fluctuations in Demand Threaten Service Productivity

 Capacity-Constrained Service Organizations

 Patterns and Determinant of Demand

 Managing Demand Levels

 Inventory Demand through Waiting Lines and Reservations

 Minimize Perceptions of Waiting Time

 Create an Effective Reservations System

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 time

 Demand exceeds optimum capacity

 Upper limit to a firm’s 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
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
VOLUME DEMANDED
 Many firms use a mix of both approaches
Demand exceeds capacity
(business is lost)
CAPACITY UTILIZED

Maximum Available Demand exceeds

Capacity optimum capacity
(quality declines)
Optimum Capacity
(Demand and Supply
Well Balanced)

Excess capacity
Low Utilization (wasted resources)
(May Send Bad Signals)

TIME CYCLE 1 TIME CYCLE 2

Many Service Organizations Are
Capacity Constrained
Defining 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 standees)

 Vary seated space per customer (e.g., elbow room, leg room)

 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
 month
 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?

Analyzing Drivers of Demand

 Understand why customers from specific

market segments select this service

 Keep good records of transactions to

analyze demand patterns
 Sophisticated software can help to track
customer consumption patterns

 Record weather conditions and other

special factors that might influence
demand
Overall Usage Levels Comprise
Demand from Different Segments

Marketing cannot smooth out random fluctuations

in demand
 Fluctuations caused by factors beyond organization’s control
(for example: weather)
 Detailed market analysis may reveal that one segment’s demand
cycle is concealed within a broader, random pattern
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

Hotel Room Demand Curves by
Segment and Season

Price per
room night
Bl Bh
Th Bh = business travelers in high season
Bl = business travelers in low season
Tl Th = tourist in high season
Tl = tourist in low season

Th
Bh
Bl Tl
Quantity of rooms demanded at each price
by travelers in each segment in each season
Inventory Demand through Waiting
Lines and Reservations
Waiting Is a Universal Phenomenon!

 An average person may spend up to 30 minutes/day

waiting in line—equivalent 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

Not all queues take form of a physical waiting

line in a single location
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”)

21
29
28
20
“Take a number” (single or multiple servers) 30
26
25
24
31 27
32 23
Criteria for Allocating Different Market
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
Minimize Perceptions of Waiting Time
Ten Propositions on Psychology of
Waiting Lines

 Unoccupied time feels longer than occupied time

 Pre- and post-process waits feel longer than in-process

waits

 Anxiety makes waits seem longer

 Uncertain waits are longer than known, finite waits

 Unexplained waits are longer than explained waits

Ten Propositions on Psychology of
Waiting Lines

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
 Setting Hotel Room Sales Targets by
Segment and Time Period
Capacity
(% rooms) Week 7 Week 36
(Low Season) (High Season)
100%
Out of commission for renovation Loyalty Program Members

Loyalty Program
Members
Transient guests
Weekend
package
50% W/E
package
Transient guests
Groups and conventions

Groups (no conventions)

Airline contracts Airline contracts

Time Nights: M Tu W Th F S Su M Tu W Th F S Su
Information Needed for Demand and
Capacity Management Strategies

 Historical data on demand level and composition, noting responses

to marketing variables

 Demand forecasts by segment under specified conditions

 Segment-by-segment data

 Fixed and variable cost data, profitability of incremental sales

 Meaningful location-by-location demand variations

 Customer attitudes toward queuing

 Customer opinions of quality at different levels of capacity

utilization
Summary of Chapter 9: Balancing
Demand and Productive Capacity (1)
 At any moment in time, a fixed-capacity service may face
 Excess demand
 Demand exceeding optimum capacity
 Demand and supply well-balanced at the level of optimum capacity
 Excess capacity
 Productive resources are used for creating goods and
services; when facing capacity constraints, firms can consider
 Stretching or shrinking capacity levels
 Adjusting capacity to match demand
 Creating flexible capacity
 To determine what factors govern demand, firms need to
 Understand patterns of demand
 Analyze drivers of demand
 Divide demand by market segments
Summary of Chapter 9: Balancing
Demand and Productive Capacity (2)

 Demand levels can be reshaped by marketing strategies

 Use price and other costs to manage demand
 Change product elements
 Modify place and time of delivery
 Use promotion and education
 Waiting is a universal phenomenon. Waits can be reduced by
 Rethinking the design of the queuing system
 Redesigning the processes to shorten the time of each transaction
 Managing customers’ behavior and their perceptions of the wait
 Installing a reservation system

 An effective reservations system

 Enables demand to be controlled and smoothed in manageable way
 Should focus on yield
 Requires information