SQ Lecture Eight - Balancing Demand Against Productive Capacity
Balancing Demand and Capacity
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Transcript of Balancing Demand and Capacity
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Balancing Demand and Productive Capacity
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Overview Fluctuations in Demand Threaten Service Productivity
Capacity-Constrained Service Organizations
Patterns and Determinant of Demand
Managing Demand Levels
Inventory Demand through Waiting Lines and Reservations
Minimize Perceptions of Waiting Time
Create an Effective Reservations System
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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 firm’s 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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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
VOLUME DEMANDED
TIME CYCLE 1 TIME CYCLE 2
Maximum Available Capacity
Optimum Capacity (Demand and Supply Well Balanced)
Low Utilization (May Send Bad Signals)
Demand exceeds capacity (business is lost)
Demand exceeds optimum capacity
(quality declines)
Excess capacity (wasted resources)
CAPACITY UTILIZED
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Variations in Demand Relative to Capacity
Use marketing strategies to smooth out peaks, fill in valleys
Many firms use a mix of both approaches
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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
day week month year
employment billing or tax
payments/refunds pay days school hours/holidays seasonal climate
changes public/religious
holidays
Predictable Cycles
of Demand Levels
Underlying Causes of
Cyclical Variations
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Causes of Seemingly Random Changes in Demand Levels
Weather Health
problems Accidents, Fires,
Crime Natural
disastersQuestion: Which of these events can be predicted?
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Analyzing Drivers of Demand
Understand why customers from specific market segments select this service
Keep good records of transactions to analyze demand patterns Sophisticated software can help to
track customer consumption patterns Record weather conditions and
other special factors that might influence demand
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Demand Levels Can Be Managed
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Alternative Demand Management Strategies
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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Hotel Room Demand Curves by Segment and Season
Bh = business travelers in high season
Bl = business travelers in low season
Th = tourist in high season
Tl = tourist in low season
Bh
Bh
Bl
Bl
Th
Th
Tl
Tl
Price per room night
Quantity of rooms demanded at each price by travelers in each segment in each season
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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 line—equivalent to over a week per year!
Almost nobody likes to wait It's boring, time-wasting, and
sometimes physically uncomfortable
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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 stagese.g. - airport
Parallel lines to multiple serverse.g.- Billing counter at mall
Designated lines to designated serverse.g.- bank
Single line to multiple servers (“snake”)e.g.- akashardam
“Take a number” (single or multiple servers)28 29
21
20
24
23
30 25
3126
2732
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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
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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 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 Canceling unpaid bookings after designated
time Compensating victims of over-booking
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Information Needed for Demand and Capacity Management Strategies
Historical data on demand level and composition, noting responses to marketing variables
Demand forecasts by segment under specified conditions
Segment-by-segment data Fixed and variable cost data, profitability of
incremental sales Meaningful location-by-location demand variations Customer attitudes toward queuing Customer opinions of quality at different levels of
capacity utilization
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Summary: Balancing Demand and Productive Capacity
At any moment in time, a fixed-capacity service may face
Excess demand Demand exceeding optimum capacity Demand and supply well-balanced at the level of
optimum capacity Excess capacity
Productive resources are used for creating goods and services; when facing capacity constraints, firms can consider
Stretching or shrinking capacity levels Adjusting capacity to match demand Creating flexible capacity
To determine what factors govern demand, firms need to
Understand patterns of demand Analyze drivers of demand Divide demand by market segments
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In nutshell: Balancing Demand and Productive Capacity
Demand levels can be reshaped by marketing strategies Use price and other costs to manage demand Change product elements Modify place and time of delivery Use promotion and education
Waiting is a universal phenomenon. Waits can be reduced by
Rethinking the design of the queuing system Redesigning the processes to shorten the time of each
transaction Managing customers’ behavior and their perceptions of
the wait Installing a reservation system
An effective reservations system
Enables demand to be controlled and smoothed in manageable way
Should focus on yield Requires information