Balancing of Demand &
Capacity
Chapter 6
Module 2
Versus
Strategies for Matching
Supply and Demand for
Services
DEMAND
STRATEGIES
Developing
complementary
services
Developing
reservation
systems
Queuing
SUPPLY
STRATEGIES
Partitioning
demand
Sharing
capacity
Establishing
price
incentives
Crosstraining
employees
Promoting
off-peak
demand
Using
part-time
employees
Yield
management
Increasing
customer
participation
Scheduling
work shifts
Creating
adjustable
capacity
Process Strategies
The objective of a process strategy is
to build a production process that
meets customer requirements and
product specifications within cost
and other managerial constraints
The underlying issue
Perishability
Simultaneous Production & Consumption
Lack of Inventory
Fluctuating Demand
Variations in Demand Relative to
Capacity
1st scenario Excess Demand
Demand
>Maximum
Capacity = Lost
Business
Poor quality service
to customers due to
overcrowding or
overtaxing of staff &
facilities
2nd Scenario Demand exceeds
Optimum capacity
No one is
turned away
Poor quality
of service to
customers
due to
overcrowdin
g or
overtaxing
of staff &
facilities
3rd Scenario Demand & Supply are balanced
at the level of optimum capacity
Quality
service by
customers
without
delays
Staff &
facilities are
occupied at
an ideal
level.
4th Scenario Excess
capacity
Demand <
Optimum
capacity =
Underutilisatio
n , low
productivity &
low profits.
Customers
receive
excellent
quality service
no waiting
and complete
attention from
staff.
Alternative supply and
demand outcomes
Alternative supply and
demand outcomes (cont.)
Average unit cost
(dollars per room per night)
Economies and
Diseconomies of Scale
25 - room
roadside
motel
50 - room
roadside
motel
Economie
s of scale
25
75 - room
roadside
motel
Diseconomi
es of scale
50
Number of Rooms
75
Capacity constraints
Nature of constraint
Type of service
Consulting
Accounting
Time & Labour
Medical
Delivery services
Telecommunication
Network services
Equipment & Facilities
Legal
Utilities
Health club
Hotels & Restaurants
Hospitals
Airlines
Schools
Theatres
Churches
Service Supply and
Demand
Extent of demand fluctuations over time
Extent to which
supply is
constrained
Wide
Peak demand can
1
usually be met
Electricity
without a major
Natural gas
delay
Telephone
Hospital maternity unit
Police and fire
emergencies
Peak demand
regularly exceeds
capacity
4
Accounting and tax
preparation
Passenger transportation
Hotels and motels
Restaurants
Theaters
Narrow
2
Insurance
Legal services
Banking
Laundry and dry cleaning
3
Services similar to those in
2 but which have
insufficient capacity for
their base level of business
Source: Christopher H. Lovelock, Classifying Services to Gain Strategic Marketing Insights, Journal of Marketing, 47, 3 (Summer 1983): 17.
- Dwayne D. Gremler
Planning Over a Time
Horizon
Options for Adjusting Capacity
Longrange
planning
Intermedia
te-range
planning
Add facilities
Add long lead time
equipment
Subcontract
Add equipment
Add shifts
Shortrange
planning
*
Add personnel
Build or use inventory
*
Modify capacity
Schedule jobs
Schedule personnel
Allocate machinery
Use capacity
* Difficult to adjust capacity as limited options exist
Strategies for Matching Capacity &
Demand
Shifting Demand to Match capacity
Demand too high
Demand too low
Shift Demand
Adjusting capacity to meet Demand
Demand too high
Demand too low
Adjust
Capacity
Strategies for shifting Demand to
match Capacity
Shift Demand
Demand too High
Demand too low
Reduce Demand during Peak times
Communicate busy days and times
to customers
Increase Demand to match Capacity
Stimulate Business from current
segments through Advertising & sales
promotion
Modify timing & location of Service
Delivery
Offer incentives for nonpeak usage
Vary how the facility is used
Take care of loyal or regular
customers first.
Offer discounts or price reductions.
Advertise peak usage times and
benefits of nonpeak use.
Bring the service to the customer.
Charge full price for the serviceno
discounts.
Modify hours of operation.
Modify the service offering to appeal to
new market segments
Adjusting demand to meet supply
Strategies for adjusting capacity to
match Demand
Demand too High Adjust Capacity Demand too low
Stretch existing capacity
Stretch time, labour, facilities &
equipment temporarily
Use / hire part time employees
Schedule downtime during periods
of low demand
Maintenance & renovations
Schedule vacations
Request overtime from employees
Schedule employee training
Subcontract or outsource activities
Lay off employees
Rent or share facilities & equipment.
Modify or move facilities & equipment
Adjusting supply to meet demand
Planning Over a Time
Horizon
Options for Adjusting Capacity
Longrange
planning
Intermedia
te-range
planning
Add facilities
Add long lead time
equipment
Subcontract
Add equipment
Add shifts
Shortrange
planning
*
Add personnel
Build or use inventory
*
Modify capacity
Schedule jobs
Schedule personnel
Allocate machinery
Use capacity
* Difficult to adjust capacity as limited options exist
Yield Management: Balancing
capacity utilization, pricing, market
segmentation & financial return
Also known as revenue 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 or
yield.
Its main aim is to produce the best possible financial
return from a limited available capacity
It attempts to allocate the fixed capacity of a service
provider to match the potential demand in various
segments so as to maximize revenue or yield.
Yield Management
Yield =
Actual revenue
Potential Revenue
Where
Actual Revenue = Actual capacity x Average Actual
Price
Potential Revenue = Total capacity x Maximum
Price
Yield Management Example
200-room Hotel
Max room rate = $100/night
Potential Revenue = 200 x $100 = $20,000
All rooms sold at discounted rate
($50/night)
Yield = 200 x $50 /$20,000 = $10,000 = 50%
Full rate charged, but only 80 rooms sold
Yield = 80 x $100/$20,000 = $8,000 = 40%
Full rate charged for 80 rooms, discount for
remaining 120 rooms
Yield = [(80 x $100) + (120 x $50)]/$20,000 =
13-25
Challenges & Risks in Yield
Management
Loss of competitive focus
Customer alienation
Overbooking
Employee morale problems
Incompatible incentive & reward systems
Lack of employee training
Inappropriate organisation of the yield
management function
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
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
Waiting Woes
1. unoccupied time feels longer than occupied time
2. preprocess waits feel longer than in-process waits
3. anxiety makes waits seem longer
4. uncertain waits seem longer than known, finite waits
5. unexplained waits seem longer than explained waits
6. unfair waits feel longer than equitable waits
7. the more valuable the service, the longer the
customer will wait
8. solo waits feel longer than group waits
9. Physically uncomfortable waits feel longer
10. Waits seem longer to new or occasional users
Waiting Line strategies when demand
& capacity cannot be matched
Employ operational logic
Establish a Reservation Process
Differentiate waiting customers
Importance of the customer
Urgency of the job
Duration of the service transaction
Payment of a premium price
Make waiting pleasurable or at least
tolerable
Waiting Line Configurations
Source: J. A. Fitzsimmons and M. J. Fitzsimmons, Service Management, 4th ed. (New York: Irwin/McGraw-Hill, 2004),
chap. 11, p. 296.
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)
29
28
Take a number (single or multiple servers)
25
30
31
26
32
27
21
20
24
23
Create An Effective
Reservation System
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
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
