MANAGING DEMAND

AND CAPACITY
Chapters Objectives
Explain the underlying issues for capacity-
constrained services: lack of inventory capability.
Present the implication of time, labor, equipment,
and facilities constraints combined with variations in
demand patterns.
Lay out strategies for matching supply and demand.
Yield Management strategies
Provide strategies for managing waiting lines for
times when capacity and demand cannot be
aligned.
The Underlying Issue
Lack of Inventory capability.
Variation in demand relative to capacity
1.Excess demand 2. Demand exceeds
optimum capacity 3. Demand and supply are
balanced at the level of optimum capacity 4.
Excess capacity


What is the Nature of Demand Relative
to Supply?
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

Understanding Capacity
Constraints and Demand Patterns
Time, labor, equipment and facilities
Optimal versus maximal use of capacity
Capacity Constraints

What is the Constraint 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
Demand pattern
The Charting of demand patterns
Predictable Cycles
Random Demand Fluctuations
Demand Patterns by market Segment
Strategies for matching Capacity and Demand
Shifting demand to match capacity
Adjusting capacity to meet demand
Combining demand and capacity strategies
Strategies for matching capacity and
demand
Shifting demand to match capacity :

Vary the Service offering
Communicate with customers
Modify Timing and location Of Service
Delivery
Differentiate on Price


Strategies for Shifting Demand
to Match Capacity
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
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
Demand Too High Demand Too Low Shift Demand
Strategies for Adjusting Capacity to Match
Demand
Stretch Existing Capacity, Time, Labor, Facilities
and equipment

Align Capacity with Demand Fluctuation:
Use Part-Time Employees
Outsourcing
Rent or Share Facilities or Equipment

Schedule downtime during periods of low demand
Cross-Train Employees
Modify or Move Facilities and Equipment

Strategies for Flexing Capacity
to Match Demand
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
Perform maintenance
renovations
Schedule vacations
Schedule employee training
Lay off employees
Demand Too High Demand Too Low Flex Capacity
Yield Management

The process is allocating the right type of capacity to the right kind of
customer at the right price so as to maximise revenue or yield.

Using Yield management models, organisations find the best
balance at a particular point in time among the price charged, the
segments sold and the capacity used.

Yield=Actual revenue/ Potential revenue
Actual revenue=actual capacity used x average actual price
Potential revenue= total capacity x maximum price
Challenges and risk in using Yield management
Loss of competitive focus, Customer alienation, employee
morale problems, incompatible incentive and reward systems, Lack
of employee training and inappropriate organisation of the yield
management function
Waiting Line Strategies: When demand
and capacity cannot be matched
Sometimes it is not possible to manage capacity to
match demand or vice versa.
Organisation not find it economically feasible to add
additional facilities .
Demand may be very unpredictable and service
capacity very inflexible.
Strategy: Employ Operational logic
Establish reservation process
Differentiate waiting customers:
Importance of the customer, urgency of the job,
duration of the service transaction, payment of
premium price.
Waiting Line Issues and Strategies
Make Waiting Fun, or at least Tolerable
unoccupied time feels longer
preprocess waits feel longer
anxiety makes waits seem longer
uncertain waits seem longer than known,
finite waits
unexplained waits seem longer
unfair waits feel longer
longer waits are more acceptable for
valuable services
solo waits feel longer