Managing capacity and demand

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Managing capacity and demand

• Module 9
• Chapter 10

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Lecture overview

• Lack of inventory capability
• Managing capacity
• Understanding demand patterns
• Managing demand
• Using the marketing mix to manage demand
• Inventorying demand
• Information on demand

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Lack of inventory capability

• services are perishable
• they cannot be stored (inventoried)
• some services face fluctuating demand
• some services are capacity-constrained

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Managing supply and demand

• When a firm experiences wide fluctuations in
  demand and peak demand regularly exceeds capacity
  the firm needs to balance demand and supply

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Activity

• Add relevant examples to each cell

Wide fluctuations in demand over time
Narrow fluctuations in demand over time
Peak demand can usually be met without a major
delay

• Electricity/gas
• Telephone

• Banking
• Legal services

• Hotel
• Taxis
• Restaurants
• Accountants

Peak demand regularly exceeds capacity

• Centrelink
• Public hospitals

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Four demand and supply situations

• Refer to figure 10.2, p. 276
• Demand exceeds maximum capacity
• Demand exceeds optimal capacity
• Demand equals optimal capacity
• Capacity exceeds demand

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Fig 10.2 Implications of variations in demand
relative to capacity
Volume demanded
Demand gt maximum capacity Lost business
Maximum capacity
Demand gt optimum capacity Service quality drops
Optimum capacity
Excess capacity
Excess capacity Lost profits
Time cycle 1
Time cycle 2
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Maximum v optimum capacity

• A business may think that operating at maximum
  capacity is the most profitable strategy
• However, service quality may suffer and the firm
  may lose customers
• What are some examples ?????

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Capacity of service firms is constrained by...

• time
• people
• equipment
• facilities

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Three ways to manage constrained capacity

• stretch existing capacity
• vary capacity to match demand
• level capacity

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Stretch existing capacity

• use existing resources more efficiently
• For example ???
• extend hours of operation
• What service firms have done this???
• staff work more efficiently during peak times
• For example????
• reduce service levels or offer smaller range of
  options during peak times
• Examples ?????
• increase customer participation
• How ????

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Vary capacity to meet demand

• adjust the firms resources to match demand
• What could be done during peak periods?
• use part-time/casual employees
• share or rent extra facilities or equipment
• cross-train (multi-skill) employees
• outsource some functions i.e. reservations
• What could be done during off-peak periods?
• schedule down-time
• reduce staff numbers

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Activity

• How could capacity be stretched or aligned in ONE
  of the following service organisations?
• Hair salon
• Public hospital
• Restaurant

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Level capacity

• Allow demand to find its own level
• do not vary capacity despite variations in demand

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Benefits and concerns of managing supply

• refer to table 9.2, study guide, p. 9.7
• each strategy has benefits, but also can create
  some marketing and customer problems
• For example
• Employees working overtime can lead to errors and
  lower levels of service quality

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Understanding demand patterns

• What are the forces that influence demand in our
  industry?
• How predictable is demand over a cycle of known
  duration?
• what are the causes of cyclical demand variation?
  
• what are the causes of random variation?
• refer fig 10-1, p. 275 variations by time
  period
• Does demand vary by segment?

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Activity

• What is the nature of demand in the Queensland
  tourism industry?
• What factors influence demand?
• What causes cyclical demand?
• What causes random demand?
• Does demand vary across segments?

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Approaches to managing demand

• take no action
• leave demand to find its own level
• reduce demand
• higher prices, less promotion
• increase demand
• lower prices, more promotion
• inventory demand
• (a) reservation system
• (b) formalised queuing system
• (c) combination

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• Refer to table 10.1, p. 337
• what is the impact of each strategy under various
  capacity levels?
• insufficient capacity (excess demand)
• sufficient capacity (satisfactory demand)
• excess capacity (insufficient demand)
• Refer to figure 9.2, p. 9.10 (study guide)
• tactics for managing demand

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Using the marketing mix to manage demand

• product
• vary service offering and service line to match
  demand at different times
• distribution
• vary time and/or location of delivery
• pricing
• raise during peak or lower during off peak
• refer fig 10-3, p. 281

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• promotion
• communicate product, distribution and price
  variations
• communicate peak and off-peak times
• use incentives to encourage off-peak usage
• take care of loyal (regular) customers first

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Inventory demand

• reservations and booking systems
• formalised queuing systems
• number of people at the service facility exceeds
  the capacity of the system to service them
• not always on an equal basis
• VIP line
• emergency lines
• express lanes or cash only lanes
• premium price line

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About waiting.

• unoccupied time seems longer
• keep them occupied
• pre-process wait feels longer than in-process
  wait
• get them into the delivery system quickly
• anxiety makes the wait seem longer
• keep them informed of progress
• uncertain, unfair, unexplained and solo waits
  seem longer
• explain delays, treat all customers fairly,
  entertain them
• people will wait longer for a more valuable
  service

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How can we make waiting more pleasant?

• comfortable seating and air-conditioning
• calming music
• entertainment
• refreshments
• pre-gather information (ie forms etc)

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What information is required to manage supply and
demand?

• historical data on demand
• cyclical and random demand patterns
• forecast by major segments
• fixed and variable cost data
• site by site demand
• customer attitudes
• toward queuing (zone)
• toward maximum v optimal capacity

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Summary

• Services cannot be stored
• Need to manage supply and demand
• Strategies for managing capacity
• Understanding demand patterns
• Strategies for managing demand
• Inventorying demand
• Information on demand

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Tutorial

• Case 10 The repositioning of an Art Gallery, p.
  499.
• Review questions 1, 2 and 6