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

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

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

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

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

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.

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

Table 14-2 What is the Constraint on Capacity?

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

Figure 14-3 Strategies for Shifting Demand to Match Capacity 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 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 Demand Too HighDemand Too Low Shift Demand

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

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

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

Tools for Managing Demand n Reservation system. n Differential pricing. n Communication

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

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

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

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

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

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

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

Shared Facilities or Equipment n Reduce capital investment costs. n Maximize facility utilization. n Efficient scheduling. n Access to facility or equipment. n Customer confusion. BenefitsConcerns

Outsourcing n Expand capacity. n Expand supply. n Level of service quality. n Stealing of customers. n Conflicts as to who was hired. BenefitsConcerns

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

What does it mean? n Yield can be raised by increasing capacity used or by increasing price. n It is basically a differential capacity allocation and pricing strategy n 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.

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

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