Chapter 9

Balancing Demand and Capacity

Relating Demand to Capacity: Four Key Concepts

Excess demand: too much demand relative to capacity at a given time Excess capacity: too much capacity relative to demand at a given time Maximum capacity: upper limit to a firms ability to meet demand at a given time Optimum capacity: point beyond which service quality declines as more customers are serviced

Variations in Demand Relative to Capacity

(Fig. 9-1)
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)

Excess capacity (wasted resources)

TIME CYCLE 1

TIME CYCLE 2

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 infrastructuree.g., highways, airports, electricity

Alternative Capacity Management Strategies

Level capacity (fixed level at all times)

Stretch and shrink

offer inferior extra capacity at peaks (e.g. bus/metro standees) vary seated space per customer (e.g. elbow room, leg room) extend/cut hours of service

Chase demand (adjust capacity to match demand)

schedule downtime in low demand periods use part-time employees rent or share extra facilities and equipment cross-train employees

Flexible Capacity (vary mix by segment)

Predictable Demand Patterns and Their Underlying Causes (Table 9-1)

Predictable Cycles of Demand Levels
day week month year other

Underlying Causes of Cyclical Variations

employment billing or tax payments/refunds pay days school hours/holidays seasonal climate changes public/religious holidays natural cycles (e.g. coastal tides)

Causes of Seemingly Random Changes in Demand Levels

Weather Health problems Accidents, Fires, Crime Natural disasters Question: which of these events can be predicted?

Alternative Demand Management Strategies (Table 9-2)

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 queueing

Hotel Room Demand Curves by Segment and by Season (Fig. 9-2)

Price per Room Night Th
Tl Bl Bh 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
Note: hypothetical example

Quantity of Rooms Demanded at Each Price by Travelers in Each Segment in Each Season

Avoiding Burdensome Waits for Customers

Add extra capacity so that demand can be met at most times (problem: may add too many costs) 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

(Fig. 9-4)
Single line, single server, single stage Single line, single servers at sequential stages Parallel lines to multiple servers

Designated lines to designated servers

Single line to multiple servers (snake)

Take a number (single or multiple servers)
28 30 31 26 32

29
25

21 20 24

27
23

 Urgency of job

Tailoring Queuing Systems to Market Segments: Criteria for Allocation to Designated Lines
emergencies vs. non-emergencies

Duration of service transaction

number of items to transact complexity of task

Payment of premium price

First class vs. economy

Importance of customer
frequent users/loyal customers vs. others

1. Unoccupied time feels longer

Ten Propositions on the Psychology of Waiting Lines (Table 9-3)

2. Preprocess/postprocess waiting feel longer than in-process

3. Anxiety makes waiting seem longer 4. Uncertain waiting is longer than known, finite waiting

5. Unexplained waiting seems longer

6. Unfair waiting is longer than equitable waiting 7. People will wait longer for more valuable
Sources: Maister; Davis & Heineke; Jones & Peppiatt

Benefits of Effective Reservations Systems

Controls and smoothes demand Pre-sells service Informs and educates customers in advance of arrival Customers avoid waiting in line for service (if service times are honored) Data capture helps organizations prepare financial projections

Characteristics of Well-designed Reservations Systems

Fast and user friendly for customers and staff

Can answer customer questions

Offers options for self service (e.g. 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

Setting Capacity Allocation Sales Targets for a Hotel by Segment and Time Period (Fig. 9-5)Week 36 Week 7 Capacity (% rooms)
(Low Season) (High Season) 100% Out of commission for renovation Executive service guests Transient guests 50% Executive service guests

Weekend package
Transient guests

W/E package

Groups and conventions

Groups (no conventions)

Airline contracts Nights: M Tu W Th F S Sn Airline contracts

Time

Tu

Th

Sn

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 Fixed and variable cost data, profitability of incremental sales Site-by-site demand variations