MANAGING DEMAND

&

CAPACITY

Services are perishable & normally cannot be stockpiled for sale at a later date.

BALANCING DEMAND AND CAPACITY

Balancing the supply & demand sides of a service industry is not easy, & whether a manager does it well or not makes all the difference - W. EARL SASSER, JR.

BALANCING DEMAND AND CAPACITY

They also serve who only stand & wait. - JOHN MILTON

FLUCTUATING DEMAND Fluctuating demand is a major challenge for many types of service organizations, including:
Restaurants, Vacation

resorts, Courier services, Consulting firms, Tax authorities, Call centers,

Transportation, Lodging, Food service, Entertainment, Health care, Repair & Maintenance.

FIXED-CAPACITY SERVICE PROBLEMS

FIXED-CAPACITY SERVICE PROBLEMS

1. EXCESS DEMAND.

The level of demand exceeds maximum available capacity, with the result that some customers are denied service & business is lost.

FIXED-CAPACITY SERVICE PROBLEMS

2. DEMAND EXCEEDS OPTIMUM CAPACITY.

No one is turned away, but conditions are crowded, & customers are likely to perceive a deterioration in quality of service & to feel dissatisfied.

FIXED-CAPACITY SERVICE PROBLEMS 3. DEMAND AND SUPPLY ARE WELL BALANCED.

This is the level of optimum capacity. Staff & facilities are busy without being overworked, & customers receive good service without delays.

FIXED-CAPACITY SERVICE PROBLEMS

4. Excess capacity. Demand is below optimum capacity, & productive resources are under utilized, resulting in low productivity. Low use also poses a risk that customers may find the experience disappointing or have doubts about the viability of the service.

FLUCTUATING DEMAND

FLUCTUATING DEMAND

At a live theater or sports

performance, a full house is grand, as it stimulates the players & creates a sense of excitement & audience participation. In case of other services like restaurants, air craft, maintenance & repair of vehicles, better service if the facility is not operating at full capacity.

BASIC APPROACHES TO MEET FLUCTUATING DEMAND

1. ADJUST THE LEVEL OF CAPACITY TO MEET

This approach requires an understanding of what constitutes productive capacity & how it may be increased or decreased on an incremental basis.
VARIATIONS IN DEMAND.

BASIC APPROACHES TO MEET FLUCTUATING DEMAND

2.MANAGE THE LEVEL OF DEMAND:

using marketing strategies to smooth out the peaks & fill in the valleys so as to generate a more consistent flow of requests for service. Many firms use a mix of both approaches.

VARIATIONS IN DEMAND RELATIVE TO CAPACITY

VOLUME DEMANDED

CAPACITY UTILISED
MAXIMUM AVAILABLE CAPACITY
OPTIMUM CAPACITY

Demand Exceeds
Capacity (business is lost)`

Demand Exceeds
Optimum Capacity (quality declines)

(well-balanced demand and supply)

LOW UTILIZATION

(may send bad signals)

Time Cycle1

EXCESS CAPACITY Wasted Resources

Time Cycle 2

PRODUCTIVE CAPACITY

PRODUCTIVE CAPACITY

Productive capacity refers to the resources or assets that a firm can use to create goods & services.

Direct Recipient of the Service Nature of the Service Act People Peoples bodies: Health care Passenger transportation Beauty salons Exercise clinics Restaurants Peoples minds: Education Broadcasting Information services Theaters Museums Things Physical possessions: Freight transportation Repair and maintenance Veterinary care Janitorial services Laundry and dry cleaning Intangible assets: Banking Legal services Accounting Securities Insurance

Tangible actions

Intangible actions

PRODUCTIVE CAPACITY CAN TAKE SEVERAL FORMS:

1.

2.

3.

4. 5.

Physical facilities designed to contain customers. Physical facilities designed for storing or processing goods. Physical equipment used to process people, possessions, or information. Labor Infrastructure

PRODUCTIVE CAPACITY CAN TAKE SEVERAL FORMS:

1.Physical facilities designed to contain customers and used for delivering people-processing services or mental stimulus processing services.
Medical clinics. Hotels.

Passenger aircrafts. College classrooms.

PRODUCTIVE CAPACITY CAN TAKE SEVERAL FORMS:

2. Physical facilities designed for storing or processing goods that either belong to customers or are being offered to them for sale.
Pipelines.

Parking lots, or Warehouses. Rail-road freight cars

PRODUCTIVE CAPACITY CAN TAKE SEVERAL FORMS:

3. Physical equipment used to process people, possessions, or information, which may embrace a huge
range of items and be very situation specific.
Diagnostic

equipment, Toll gates, Airport security detectors, Bank ATMs, Seats" in a call center are among the many items whose absence in sufficient numbers for a given level of demand can bring service to a crawl (or a complete stop).

PRODUCTIVE CAPACITY CAN TAKE SEVERAL FORMS:

4. Labor: a key element of productive capacity in all high-contact services & many low-contact ones. Staffing levels- whether for restaurant servers, nurses, or call center staff, need to be sufficient to meet anticipated demand; otherwise, customers are kept waiting or service is rushed.

PRODUCTIVE CAPACITY CAN TAKE SEVERAL FORMS:

5. Infrastructure: Many organizations are dependent on access to sufficient capacity in the public or private infrastructure to be able to deliver quality service to their own customers. In a well-planned, well-managed service operation, the capacity of the facility, supporting equipment, and service personnel will be in balance.

CHASING DEMAND

CHASING DEMAND

Tailoring the overall level of capacity to match variations in demand, a strategy also known as Chasing Demand.

ADJUSTING CAPACITY TO MATCH DEMAND

ADJUSTING CAPACITY TO MATCH DEMAND

A. Stretch Existing

Capacity: B. Align Capacity with Demand Fluctuations

ADJUSTING CAPACITY TO MATCH DEMAND

Stretch Existing Capacity The existing capacity of service resources can often be expanded temporarily to match demand. In such cases no new resources are added; rather the people, facilities, and equipment are asked to work harder and longer to meet demand.

ADJUSTING CAPACITY TO MATCH DEMAND

A. Stretch Existing Capacity:

Stretch

Time Stretch Labor Stretch Facility Stretch Equipments

ADJUSTING CAPACITY TO MATCH DEMAND

B. Align Capacity with Demand Fluctuations

This basic strategy is sometimes known as a "chase demand" strategy. By adjusting service resources creatively, organizations can in effect chase the demand curves to match capacity with customer demand patterns. Time, labor, facilities, and equipment are again the focus, this time with an eye toward adjusting the basic mix and use of these resources.

ADJUSTING CAPACITY TO MATCH DEMAND

B. Align Capacity with Demand Fluctuations

1.Schedule downtime during periods of low demand. 2. Use part-time employees. 3.Rent or share extra facilities and equipment. 4.Cross-train employees. 5.Designing physical facilities to be flexible. 6.Not all unsold productive capacity is wasted: 7. Outsourcing

ADJUSTING CAPACITY TO MATCH DEMAND

1.Schedule downtime during periods of low demand.

To ensure that 100 percent of capacity is available during peak periods, employee holidays, repairs and renovations should be conducted when expected demand is low.

ADJUSTING CAPACITY TO MATCH DEMAND

2. Use part-time employees.

Many organizations hire extra workers during their busiest periods: Postal workers Retail shop assistants at Christmas time, Extra staff in tax preparation service firms at the end of the financial year, and Additional hotel employees during holiday periods and major conventions.

ADJUSTING CAPACITY TO MATCH DEMAND

3.Rent or share extra facilities and equipment. To limit investment in fixed assets, a service business may be able to rent extra space or machines at peak times. Firms with complementary demand patterns may enter into formal sharing agreements.

ADJUSTING CAPACITY TO MATCH DEMAND

4.Cross-train employees.
Even when the service delivery system

appears to be operating at full capacity, certain physical elements and their attendant employees may be underutilized. Employees who can be cross-trained to perform a variety of tasks can be shifted to bottleneck points as needed, thereby increasing total system capacity.

ADJUSTING CAPACITY TO MATCH DEMAND

4.Cross-train employees.
In supermarkets, for instance, the

manager may call on stockers to operate cash registers when checkout lines start to get too long. Likewise, during slow periods, the cashiers may be asked to help stock shelves.

ADJUSTING CAPACITY TO MATCH DEMAND

5.Designing physical facilities to be flexible. Some hotels build rooms with connecting doors. With the door between two rooms locked, the hotel can sell two bedrooms; with the door-unlocked & one the bedrooms converted into a sitting room, the hotel can now offer a suite.

ADJUSTING CAPACITY TO MATCH DEMAND

6.Not all unsold productive capacity is wasted: Many firms take a strategic approach to disposition of anticipated surplus capacity, allocating it in advance to build relationships with customers, suppliers, employees, and intermediaries.

ADJUSTING CAPACITY TO MATCH DEMAND

7. Outsourcing: Firms that find they have a temporary peak in demand for a service that they cannot perform themselves may choose to outsource the entire service. For example, in recent years, many firms have found they do not have the capacity to fulfill their own needs for technology support, Web design, and software-related services.

ADJUSTING CAPACITY TO MATCH DEMAND

7. Outsourcing Rather than try to hire and train additional employees, these companies look to firms that specialize in outsourcing these types of functions as a temporary (or sometimes long term) solution.

STRATEGIES FOR ADJUSTING CAPACITY TO MATCH DEMAND

STRATEGIES FOR ADJUSTING CAPACITY TO MATCH DEMAND

DEMAND TOO HIGH 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

ADJUSTING CAPACITY

DEMAND TOO LOW

Perform maintenance, renovations. Schedule vacations. Schedule employee training. Layoff employees.

PATTERNS OF DEMAND AND THEIR UNDERLYING CAUSES

1. Do demand levels follow a predictable cycle? If so, is the duration of the demand cycle One day (varies by hour) One week (varies by day) One month (varies by day or by week) One year (varies by month or by season or reflects annual public holidays) Another period

PATTERNS OF DEMAND AND THEIR UNDERLYING CAUSES

2. What are the underlying causes of these cyclical variations?

Employment schedules Billing and tax payment/ refund cycles Wage and salary payment dates School hours and vacations Seasonal changes in climate Occurrence of public or religious holidays Natural cycles, such as coastal tides.

PATTERNS OF DEMAND AND THEIR UNDERLYING CAUSES

3. Do demand levels seem to change randomly? If so, could the underlying causes be Day-to-day changes in the weather Health events whose occurrence cannot be pinpointed exactly Accidents, fires, and certain criminal activities Natural disasters (e.g., earthquakes, storms, mudslides, and floods)

PATTERNS OF DEMAND AND THEIR UNDERLYING CAUSES

4. Can demand for a particular service over time be disaggregated by market segment to reflect such components as Use patterns by a particular type of customer or for a particular purpose Variations in the net profitability of each completed transaction

WAITING LINES

Waiting lines -known to operations researchers and the British as "Queues"-occur whenever the number of arrivals at a facility exceeds the capacity of the system to process them. Analysis and modeling of queues is a well-established branch of operations management.

QUEUE CONFIGURATIONS

SINGLE LINE/ SINGLE SERVER/ SINGLE STAGE

SINGLE LINE

SINGLE SERVER

SINGLE LINE/ SINGLE SERVER AT SEQUENTIAL STAGE

SINGLE LINE

SINGLE SERVER

SINGLE LINE/ SINGLE SERVER AT SEQUENTIAL STAGE

In single line sequential stages, customers proceed through several serving operations, as in a cafeteria.

PARALLEL LINES TO MULTIPLE SERVERS

PARALLEL LINES TO MULTIPLE SERVERS

Parallel lines to multiple servers offer more than one serving station, allowing customers to select one of several lines in which to wait. Banks and ticket windows

DESIGNATED LINES TO DESIGNATED SERVERS

DESIGNATED LINES TO DESIGNATED SERVERS

Designated lines involve assigning different lines to specific categories of customer. Examples include express lines and regular lines at supermarket checkouts, and different check-in stations for first-, business-, and economy-class airline passengers.

SINGLE LINE TO MULTIPLE SERVERS (SNAKE)

SINGLE LINE TO MULTIPLE SERVERS (SNAKE)

Customers who waited in parallel lines to multiple servers reported significantly higher agitation and greater dissatisfaction with the fairness of the service delivery process than did customers who waited in a single line ("snake") to access multiple servers, even though both groups of customers waited an identical amount of time and were involved in completely fair service processes.

TAKE A NUMBER SINGLE LINES OR MULTIPLE SERVERS

28

27

24

21

30

32

23

20

31

26

25

22

TAKE A NUMBER SINGLE LINES OR MULTIPLE SERVERS

Take a number saves customers the need to stand in a queue, because they know that they will be called in sequence. This procedure allows them to sit down and relax (if seating is available) or to guess how long the wait will be and do something else in the mean time-but at the risk of losing their place if earlier customers are served more quickly than expected. Users of this approach include large travel agents and Airline ticketing offices.

TAILORING QUEUING SYSTEMS TO MARKET SEGMENTS

1. Urgency of the job. At many hospital emergency units, a nurse is assigned to greet incoming patients and decide which ones require priority medical treatment and which can safely be asked to register and then sit down while they wait their turn.

TAILORING QUEUING SYSTEMS TO MARKET SEGMENTS

2 Duration of service transaction.

Banks, supermarkets, and other retail services often institute express lanes for shorter, less complicated tasks.

TAILORING QUEUING SYSTEMS TO MARKET SEGMENTS

3. Payment of a premium price.

Airlines usually offer separate check-in lines for first-class and economy-class passengers, with a higher ratio of personnel to passengers in the first-class line, resulting in reduced waits for those who have paid more for their tickets.

TAILORING QUEUING SYSTEMS TO MARKET SEGMENTS

4. Importance of the customer.

A special area may be reserved for members of frequent user clubs. Airlines often provide lounges, offering newspapers and free refreshments, where frequent flyers can wait for their flights in greater comfort.

THE PSYCHOLOGY OF WAITING TIME

The noted philosopher William James

"Boredom results from being attentive to the passage of time itself."

observed: Savvy service marketers recognize that customers experience waiting time in differing ways, depending on the circumstances.

THE PSYCHOLOGY OF WAITING TIME

When increasing capacity is simply not feasible, service providers should try to be creative and look for ways to make waiting more palatable for customers. Doctors and dentists stock their waiting rooms with piles of magazines' for people to read while waiting.

THE PSYCHOLOGY OF WAITING TIME

Car repair facilities may have a television for customers to watch. One tyre dealer even provides customers with free popcorn, soft drinks, coffee, and ice cream while they wait for their cars to be returned.

THE PSYCHOLOGY OF WAITING TIME

An

experiment at a large bank in Boston found that installing an electronic news display in the lobby led to greater customer satisfaction. Restaurants solve the waiting problem by inviting dinner guests to have a drink in the bar until their table is ready, which not only makes money for the house but also keeps the customers occupied.

THE PSYCHOLOGY OF WAITING TIME

The doorman at one Marriott Hotel has taken it upon himself to bring a combination barometer/ thermometer to work each day, hanging it on a pillar at the hotel entrance where guests waiting can spend a moment or two examining it while they wait for a taxi or for their car to be delivered from the valet parking.

CREATING AN EFFECTIVE RESERVATIONS SYSTEM

Reservations are supposed to guarantee that service will be available when the customer wants it. RESERVATIONS SYSTEMS A simple appointments book for a doctor's office, using handwritten entries. To a central, computerized data bank for railways & for an airline's worldwide operations.

CREATING AN EFFECTIVE RESERVATIONS SYSTEM

RESERVATIONS BOOKINGS OR APPOINTMENTS Airlines, Haircuts, Hotels, Visits to doctors Restaurants, Consultants, Car rentals, Vacation rentals Theater seats. Repair and maintenance.

CREATING AN EFFECTIVE RESERVATIONS SYSTEM

The challenge in designing reservations systems is to make, them fast and user friendly for both staff and customers.

CREATING AN EFFECTIVE RESERVATIONS SYSTEM

Many firms now allow customers to make their own reservations on a Web site- a trend that seems certain to grow. Whether they talk with a reservations agent or make their own bookings, customers want quick answers to queries about service availability at a preferred time.

YIELD - FOCUSED RESERVATIONS STRATEGIES

Service organizations often use percentage of capacity sold as a measure of operational efficiency.

YIELD - FOCUSED RESERVATIONS STRATEGIES

Transport services talk of the "load factor" achieved, hotels of their "occupancy rate," and hospitals of their "census."

YIELD - FOCUSED RESERVATIONS STRATEGIES

Similarly; professional firms can calculate what proportion of a partner's or an employee's time is classified as billable hours, and repair shops can look at utilization of both equipment and labor.

YIELD - FOCUSED RESERVATIONS STRATEGIES

By themselves, however, these percentage figures tell us little of the relative profitability of the business attracted, as high utilization rates may be obtained at the expense of heavy discounting or even outright give always.

EFFECTIVE DEMAND AND CAPACITY MANAGEMENT REQUIRES INFORMATION

Managers require substantial information to help them develop effective strategies to manage demand and capacity and then monitor subsequent performance in the marketplace.

EFFECTIVE DEMAND AND CAPACITY MANAGEMENT REQUIRES INFORMATION

Following are some important categories of information for this purpose. Historical data on the level and composition of demand over time, including responses to changes in price or other marketing variables Forecasts of the level of demand for each major segment under specified conditions Segment-by-segment data to help management evaluate the impact of periodic cycles and random demand fluctuations

EFFECTIVE DEMAND & CAPACITY MANAGEMENT REQUIRES INFORMATION

EFFECTIVE DEMAND AND CAPACITY MANAGEMENT REQUIRES INFORMATION

Cost data to enable the organization to distinguish between fixed and variable costs and to determine the relative profitability of incremental unit sales to different segments and at different prices In Multi site organizations, identification of meaningful variations in the levels and composition of demand on a site-by-site basis Customer attitudes toward queuing under varying conditions Customer opinions on whether the quality of service delivered varies with different levels of capacity utilization.