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 firm’s
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

VOLUME DEMANDED
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

 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
• Labour used for physical or mental work
• Public/private infrastructure – e.g., highways,
airports, electricity
 Alternate 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
– Extended 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

Predictable Cycles of Underlying Causes of

Demand levels Cyclical variations
– Day – Billing or tax
– payments/refunds
Week
– Pay days
– Month
– School hours/holidays
– Year
– Seasonal climate changes
– other – Public/religious holidays
 Causes of Seemingly random Changes in Demand
Levels

• Weather

• Health problems

• Accidents, Fire, crime

• Natural Disasters
 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
 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 behaviour and perceptions of wait

• Install a reservation system

 Tailoring Queuing Systems to Market Segments: Criteria for
Allocation to Designated Lines

• Urgency of jobs
– Emergencies vs. non-emergencies
• Duration of service transaction
– Number of times to transact
– Complexity of task
• Payment of premium price
– First class vs. economy
• Importance of customer
– Frequent users/loyal customers vs. others
 The psychology of waiting time
• The noted philosopher William James observed: “Boredom results from
being attentive to the passage of time itself”

• When increasing capacity is simply not feasible, service providers should

try to be creative and look ways to make waiting more palatable for
customers

• Doctors/Clinics  Pile of magazine for the waiting patients

• Car Service Station  television for customers in waiting lounge

• Restaurants solve the waiting problem by inviting guest to have a drink in

the bar until their table is ready  making money for themselves at the
same time keeps the customer occupied
 Ten propositions on the psychology of waiting lines

1. Unoccupied time feels longer than the occupied time

– The challenge for service organization is to give customers something to do
or to distract them while waiting
2. Pre and post-process waits feel longer than in-process waits
– Waiting to buy a ticket to enter a theme park is different from waiting to ride
on a roller coaster once you’re in the park
3. Anxiety makes waits seem longer
– Waiting at unfamiliar places – outdoor or after dark etc
4. Uncertain waits are longer than known, finite waits
– We can usually adjust mentally to a wait of known length. It’s the unknown
that keeps us on edge
5. Unexplained waits are longer than explained waits
– In addition to uncertainty about the length of the wait, there’s added worry
about what is going to happen
 Ten propositions on the psychology of waiting lines

6. Unfair waits are longer than equitable waits

– People waiting in line expect everybody to wait their turn and are likely to
irritated if they see others jumping ahead or being given priority for no
apparent good reason
7. The more valuable the service, the longer people wait
– People will wait overnight to get a good seat at a major concert or a
soccer/cricket match
8. Solo waits feel longer than group waits
9. Physically uncomfortable waits feel longer than comfortable waits
10. Unfamiliar waits seem longer than familiar ones
– New or occasional users of service are often nervous, wondering not only
about the probable length of the wait but also about what happens next
 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
– requiring deposits to discourage no-shows
– canceling unpaid bookings after designated time
– compensating victims of over-booking
 Setting Capacity Allocation Sales
Targets for a Hotel by Segment and
Time
Week 7
Period Week 36
Capacity (% rooms) (Low Season) (High Season)
100%
Out of commission for renovation Executive service guests

Executive service
guests
Transient guests
Weekend
package
50% W/E
package
Transient guests
Groups and conventions

Groups (no conventions)

Airline contracts Airline contracts

Nights: M Tu W Th F S Sn M Tu W Th F S Sn
Time
 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
• Customer attitudes towards queuing
• Customer evaluations of quality at different levels of
capacity utilization