Balancing Demand and Productive Capacity

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

Four conditions potentially faced by fixed-capacity services: Excess demand

Demand exceeds optimum capacity Optimum capacity

given time

 Too much demand relative to capacity at a given time  Upper limit to a firm s ability to meet demand at a  Point beyond which service quality declines as more

Excess capacity

customers are serviced

 Too much capacity relative to demand at a given time

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

VOLUME DEMANDED
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)

Excess capacity

TIME CYCLE 1

TIME CYCLE 2

 Use marketing strategies to smooth out peaks, fill

in valleys

Many firms use a mix of both approaches

Many Service Organizations Are Capacity Constrained

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

Level capacity (fixed level at all times) Stretch and shrink

 Offer inferior extra capacity at peaks (e.g., bus/train

standees) room)

 Vary seated space per customer (e.g., elbow room, leg  Extend/cut hours of service

Chase demand (adjust capacity to match demand) Flexible capacity (vary mix by segment)

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 Cycles of Demand Levels

 day  week  month  year

Underlying Causes of Cyclical Variations

 employment  billing or tax    

payments/refunds pay days school hours/holidays seasonal climate changes public/religious holidays

Weather Health problems Accidents, Fires, Crime Natural disasters

Question: Which of these events can be predicted?

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

Demand Levels Can Be Managed

Take no action Reduce demand

 Let customers sort it out  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

Price per room night Bl Bh

Th
Tl

Bh = business travelers in high season Bl = business travelers in low season Th = tourist in high season Tl = tourist in low season

Bl

Bh

Th Tl

Quantity of rooms demanded at each price by travelers in each segment in each season

Inventory Demand through Waiting Lines and Reservations

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

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

Single line, single server, single stage Single line, single servers, sequential stages e.g. - airport Parallel lines to multiple servers e.g.- Billing counter at mall Designated lines to designated servers e.g.- bank Single line to multiple servers (snake) e.g.- akashardam
28 29 25 26 27 32 23 21 20 24

Take a number (single or multiple servers)

30 31

Minimize Perceptions of Waiting Time

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 Unfair waits are longer than equitable waiting People will wait longer for more valuable services Waiting alone feels longer than waiting in groups Physically uncomfortable waits feel longer Waits seem longer to new or occasional users

Create An Effective Reservation System

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

Fast and user-friendly for customers and staff Answers customer questions 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
 Canceling unpaid bookings after designated time  Compensating victims of over-booking

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

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

To determine what factors govern demand, firms need to

 Stretching or shrinking capacity levels  Adjusting capacity to match demand  Creating flexible capacity  Understand patterns of demand  Analyze drivers of demand  Divide demand by market segments

Demand levels can be reshaped by marketing strategies

Waiting is a universal phenomenon. Waits can be reduced by

   

Use price and other costs to manage demand Change product elements Modify place and time of delivery Use promotion and education

 Rethinking the design of the queuing system  Redesigning the processes to shorten the time of each

An effective reservations system

transaction  Managing customers behavior and their perceptions of the wait  Installing a reservation system
 Enables demand to be controlled and smoothed in

manageable way  Should focus on yield  Requires information