MANAGING DEMAND AND CAPACITY

1. MANAGING DEMAND AND CAPACITY Donna J. Hill, Ph.D. Fall 2000

2. Objectives for Chapter 14:Managing Demand and Capacity • Explain: • the underlying issue for capacity-constrained services • the implications of capacity constraints • the implications of different types of demand patterns on matching supply and demand • Lay out strategies for matching supply and demand through: • shifting demand to match capacity or • flexing capacity to meet demand • Demonstrate the benefits and risks of yield management strategies • Provide strategies for managing waiting lines

3. Fundamental Issue • Lack of inventory • perishability (cannot store up) • simultaneous product and consumption (cannot be transported from one place to another)

4. Managing Demand and Capacity • No buffer for services from demand. • Demand volatile • Goal: supply and demand balanced at optimum capacity • Under utilizing when demand is below optimum capacity • If demand is above capacity then quality may suffer

5. Matching Supply and Demand • Determine demand pattern. • Assess causes of demand variations. • Develop methods for managing capacity. • Develop methods for managing demand.

6. Table 14-1 What is the Nature of Demand Relative to Supply? Source: Christopher H. Lovelock, “Classifying Services to Gain Strategic Marketing Insights,” Journal of Marketing, 47, 3 (Summer 1983): 17.

7. Time, labor, equipment and facilities Optimal versus maximal use of capacity Understanding Capacity Constraints and Demand Patterns Demand Patterns Capacity Constraints • Charting demand patterns • Predictable cycles • Random demand fluctuations • Demand patterns by market segment

8. Table 14-2 What is the Constraint on Capacity?

9. Managing Demand • Shift demand from high to low demand periods. • Decrease demand during peak demand periods. • Stimulate demand during low demand periods.

10. 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 Figure 14-3Strategies for Shifting Demand to Match Capacity Demand Too High Demand Too Low Shift Demand • 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

11. Business is not lost. Service quality is not adversely affected. Increased efficiency. Customers may not want to shift. Customers may not have control over when they use the service. Shifting Demand Advantages Disadvantages

12. Service quality is normally improved. Increased efficiency. Lost revenue. Not a good strategy for firms in the for-profit sector. Reducing Demand Advantages Disadvantages

13. Increased efficiency. Increased income. Increased utilization of facility. May not be profitable. May cause some current customers to shift usage. Stimulating Demand Advantages Disadvantages

14. Tools for Managing Demand • Reservation system. • Differential pricing. • Communication

15. Managing Capacity • Part-time employees. • Employees work overtime. • Peak-time operating procedures. • Cross-training of employees. • Increase customer participation. • Shared facilities. • Outsourcing.

16. 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 Figure 14-4 Strategies for Flexing Capacity to Match Demand Demand Too High Demand Too Low Flex Capacity • Perform maintenance renovations • Schedule vacations • Schedule employee training • Lay off employees

17. Reduce costs. Increase capacity. Less training. Lower performance. Lower productivity. Poor attitude. Less knowledgeable. Less personalization. Higher turnover. Part-time Employees Benefits Concerns

18. Employees knowledgeable. Employees know customers. Cost effective for some services. Increase capacity. Lower service quality due to fatigue. Higher costs. Employees Work Over-time Benefits Concerns

19. Keep operations at capacity. Identifying peak routines. Lack of personal attention. Incomplete job. Crowded facility. Feeling of being cheated. Peak-time Operating Procedures Benefits Concerns

20. Keep operation at capacity. Reduce bottlenecks. Fill-in for absent employees. Lower service quality. Lower productivity. Cross-Training of Employees Benefits Concerns

21. Increase productivity. Maximize capacity. Reduce costs. Customers lack expertise. Conflict of scripts. Lower service quality. Sometimes decrease productivity - if customer too slow. Increased Customer Participation Benefits Concerns

22. Reduce capital investment costs. Maximize facility utilization. Efficient scheduling. Access to facility or equipment. Customer confusion. Shared Facilities or Equipment Benefits Concerns

23. Expand capacity. Expand supply. Level of service quality. Stealing of customers. Conflicts as to who was hired. Outsourcing Benefits Concerns

24. Yield Management • The process of allocating the right type of capacity to the right kind of customer at the right price so as to maximize revenue. • Yield = Actual revenue/Potential revenue • Where actual revenue = actual capacity used times average actual price • and Potential revenue = total capacity times maximum price

25. What does it mean? • Yield can be raised by increasing capacity used or by increasing price. • It is basically a differential capacity allocation and pricing strategy • Yield management strategy is most profitable when those who arrive early or reserve early are more price sensitive than those who reserve or arrive late.

26. Risks Associated with the Use of Yield Management • The loss of competitive focus • Customer alienation • Incompatible incentive and reward systems • Employee morale problems

27. Waiting Line Issues and Strategies • unoccupied time feels longer • preprocess waits feel longer • anxiety makes waits seem longer • uncertain waits seem longer than finite waits • unexplained waits seem longer • unfair waits feel longer • longer waits are more acceptable for “valuable” services • solo waits feel longer