Balancing Demand and Productive Capacity

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Balancing Demand and Productive Capacity
Chapter 9 Lovelock

• Chapter 9

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Fluctuations in Demand Threaten Service
Productivity
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From Excess Demand to Excess Capacity

• Four conditions potentially faced by
  fixed-capacity services
• Excess demand
• Too much demand relative to capacity at a given
  time
• Demand exceeds optimum 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
• Excess capacity
• Too much capacity relative to demand at a given
  time

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Versus
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Addressing Problem of Fluctuating Demand

• Two basic approaches
• Adjust level of capacity to meet demand
• Need to understand productive capacity and how it
  varies on an incremental basis
• Manage level of demand

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Variations in Demand Relative to Capacity (Fig
9.1)

• Use marketing strategies to smooth out peaks,
  fill in valleys
• Many firms use a mix of both approaches

VOLUME DEMANDED
Demand exceeds capacity
(business is lost)
CAPACITY UTILIZED
Demand exceeds
Maximum Available
optimum capacity
Capacity
(quality declines)
Optimum Capacity
(Demand and Supply Well Balanced)
Excess capacity
(wasted resources)
Low Utilization
(May Send Bad Signals)
TIME CYCLE 1
TIME CYCLE 2
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Many Service Organizations Are Capacity
Constrained
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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 infrastructure

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Alternative Capacity Management Strategies

• Level capacity (fixed level at all times)
• Stretch and shrink
• Offer inferior extra capacity at peaks (e.g.,
  bus/train standees)
• Vary seated space per customer (e.g., elbow room,
  leg room)
• Extend/cut hours of service
• Chase demand (adjust capacity to match demand)
• Flexible capacity (vary mix by segment)

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Adjusting Capacity to Match Demand

• Schedule downtime during periods of low demand
• Use part-time employees
• Rent or share extra facilities and equipment
• Ask customers to share
• Invite customers to perform self-service
• Cross-train employees

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Patterns and Determinants of Demand
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Predictable Demand Patterns and Their Underlying
Causes (Table 9.1)
Predictable Cycles of Demand Levels
Underlying Causes of Cyclical Variations

• day
• week
• month
• year
• other

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

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Causes of Seemingly Random Changes in Demand
Levels

• Weather
• Health problems
• Accidents, Fires, Crime
• Natural disasters

Question Which of these events can be predicted?
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Demand Levels Can Be Managed
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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 queuing

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Marketing Strategies CanReshape Some Demand
Patterns

• Use price and other costs to manage demand
• Change product elements
• Modify place and time of delivery
• No change
• Vary times when service is available
• Offer service to customers at a new location
• Promotion and education

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Inventory Demand through Waiting Lines and
Reservations
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Waiting Is a Universal Phenomenon!

• An average person may spend up to 30 minutes/day
  waiting in lineequivalent to over a week per
  year!
• Almost nobody likes to wait
• It's boring, time-wasting, and sometimes
  physically uncomfortable

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Why Do Waiting Lines Occur?

• Because the number of arrivals at a facility
  exceeds capacity of system to process them at a
  specific point in the process
• Queues are basically a symptom of unresolved
  capacity management problems

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Saving Customers from Burdensome Waits

• Add extra capacity so that demand can be met at
  most times (problem may increase costs too much)
• 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

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Alternative Queuing Configurations
Single line, single server, single stage
Single line, single servers, 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)
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Criteria for Allocating Different Market
Segments to Designated Lines

• Urgency of job
• Emergencies versus non-emergencies
• Duration of service transaction
• Number of items to transact
• Complexity of task
• Payment of premium price
• First class versus economy
• Importance of customer
• Frequent users/high volume purchasers versus
  others

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Minimize Perceptions of Waiting Time
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Ten Propositions on Psychology of Waiting Lines

• Unoccupied time feels longer than occupied time
• Pre- and post-process waits feel longer than
  in-process waits
• Anxiety makes waits seem longer
• Uncertain waits are longer than known, finite
  waits
• Unexplained waits are longer than explained waits
• Unfair waits are longer than equitable waiting
• People will wait longer for more valuable
  services
• Waiting alone feels longer than waiting in groups
• Physically uncomfortable waits feel longer
• Waits seem longer to new or occasional users

Sources Maister Davis Heineke Jones
Peppiatt
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Create An Effective Reservation System
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Benefits of Reservations

• Controls and smoothes demand
• Pre-sells service
• Informs and educates customers in advance of
  arrival
• Saves customers from having to wait in line for
  service (if reservation times are honored)
• Data captured helps organizations
• Prepare financial projections
• Plan operations and staffing levels

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Characteristics of Well-Designed Reservations
System

• Fast and user-friendly for customers and staff
• Answers customer questions
• Offers options for self service (e.g., the 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