13- Balancing and Managing Demand and Capacity

Introduction:

The fundamental issue underlying service supply and demand management is the lack of inventory capability. Unlike manufacturing firms, service firms cannot build up inventories during periods of slow demand for use later when demand increases. This lack of inventory capability is due to services’ perishability and simultaneous production and consumption. For example, an airline seat not sold on a given flight cannot be left in inventory and resold the following day. Service cannot be transported from one place to another or transferred from person to person. For example, Phoenix Ritz – Carlton’s service cannot be moved to an alternative location in the summer when demand for hotel rooms is high due to tourists.

Variation in Demand Relative to Capacity:

Excess demand: The level of demand exceeds maximum capacity. In this situation, some customers will be turned away, resulting in lost business opportunities. For the customers who receive the service, its quality may not match what was promised because of crowding or overtaxing staff and facilities.

Demand exceeds optimum capacity: Customers are not turned away, but the quality of service may suffer because of overuse, crowding, and excessive staff utilization beyond their abilities to deliver consistent quality.

Demand and supply are balanced at the level of optimum capacity. This is the ideal level at which no one is overworked, facilities can be maintained, and customers receive quality service without undesirable delays.

Excess capacity: Demand is below optimum capacity. Productive resources in labour, equipment and facilities are underutilized, resulting in lost productivity and lower profits. Customers may receive excellent quality individually because they fully use the facilities, no waiting and complete attention from the staff. If, however, service quality depends on the presence of other customers, customers may be disappointed or worry that they have chosen an inferior service provider.

Not all firms will be challenged equally in managing supply and demand. The problem will depend on the extent of demand fluctuations over time and the extent to which supply is constrained.

1. Experiencing wide fluctuation in demand, e.g. telecommunications, hospitals, transportation, restaurants.
2. Experiencing narrow fluctuations in demand, e.g., insurance, laundry, and banking.
3. Peak demand can be met even when demand fluctuates, e.g., for electricity, natural gas, and internet services.
4. Peak demand may frequently exceed capacity, e.g. hospital emergency rooms and restaurants near football stadiums.

Capacity Constraints:

An organization needs a clear understanding of the constraints on its capacity and the underlying demand patterns to identify effective strategies for managing supply and demand fluctuations.

1) Constraints on capacity due to time, labour, facilities or a combination of these:

Time: For some service businesses, time is the primary constraint on service production. For Example, a lawyer, hairdresser, plumber, consultant, or psychological counsellor. In such a context, productivity profits are lost if the service worker is unavailable or his/ her time is not used. In excess demand, additional time cannot be created to satisfy it.

Labour: From the point of view of a firm with many service providers, labour/ staffing can add to capacity constraints. In excess demand, services cannot be met because staff already operate on peak capacity. Examples include repair and maintenance contractors, law firms, and university Departments.

Equipment: Equipment may be a critical constraint. For example, UPS, FedEx, BlueDart, and DHL face this constraint during the festive season. Health clubs face constraints at certain times of the day, for network service providers, bandwidth, servers, and switches act as capacity constraints.

Facilities: Limited facilities represent constraints. For example, Hotels have only a certain number of rooms to sell, the number of seat limits airlines, educational institutions are limited by the number of classrooms and the number of tables limits restaurants.

2) Optimum versus maximum use of capacity:

Knowing the difference between optimal and maximum capacity use is essential to understanding capacity issues. They may not be the same. Using capacity at an optimum level means that resources are fully employed but not overused and that customers receive quality service promptly.

Maximum capacity, on the other hand, represents the absolute limit of service availability.

Knowing the difference between optimum and maximum capacity use varies from firm to firm. For example, optimum and maximum capacity can be the same in a Sporting event. The game’s entertainment value is enhanced for customers when every single seat is occupied.

University classroom- optimum use of capacity is less than the maximum.

Restaurant: Maximum capacity use may result in excessive customer waiting. From the perception of customer satisfaction, optimum capacity use will again be less than maximum use.

Equipment of facility constraints- the maximum capacity at any given time is evident in the case of a health club, aeroplane, or cargo carrier.

In a bottling plant, when maximum capacity on the Assembly line is executed, bottles begin to break, and the system shuts down.

Time or Labour: The maximum capacity for people’s time or labour is harder to specify because people are, in a sense, more flexible than facilities and equipment.

3) Demand patterns:

To manage fluctuating demand in a service business, it is necessary to have a clear understanding of demand patterns, why they vary, and the market segments that comprise demand at different points in time. Several questions need to be answered regarding demand’s predictability and underlying causes.

The charting of demand patterns: The organisation needs to chart the level of demand over time. Daily, weekly, and monthly demand should be tracked. Seasonal demand should be charted based on data from the past year. Some services, such as restaurants or Healthcare, also consider hourly fluctuations in demand. The organisation should have a good customer information system to chart the demand pattern accurately.

– Predictable cycles: The graphical representation of demand levels may detect the predictable cycles, i.e., Tourist demand can be predicted by month, week, day, and hour. Bank services can vary by hour, week, and month. Accountants can predict demand based on quarterly or annual.

– Random demand fluctuations: Sometimes, the demand patterns appear random. There is no apparent predictable cycle. For example, Changes in the weather affect recreational use and shopping for entertainment facilities. Good weather increases the demand for the services provided by an amusement park. Auto service centres find an increase in demand during poor weather. Weather cannot be predicted well in advance it may be possible to anticipate demand a day or two ahead. Health-related events cannot be predicted in advance. Natural disasters like floods, fires, and hurricanes can increase the services of insurance, healthcare, and telecommunication. Manmade disasters like war terror attacks, for example, September 11, 2001. The US terror attack led to the instantaneous need for services that cannot be predicted. Cox Communications faced a sudden increase in demand for services in Baton Rouge, Louisiana, after Hurricane Katrina in August 2005.

– Demand pattern the market segmentation:

An organisation that has detailed records of customer transactions may be able to aggregate demand market segments. Revealing patterns within patterns, all the analysis narratives show that demand from one segment is predictable, whereas demand from another is relatively random. For example, For a bank, the visit from its commercial accounts may occur daily at a predictable time, and personal account holders measure the bank at seemingly random intervals. Auto service centres experience a similar pattern, with more walk-in customers for car servicing and repair on Monday morning than any other day.

Strategies for Matching Capacity and Demand:

When an organisation has a clear grasp of its capacity constraints and an understanding of demand patterns, it is in a good position to develop strategies for matching supply and demand. These are two approaches for accomplishing this match.

1. Shifting demand to match capacity.
2. Adjust capacity to match fluctuations in demand.

I). Shifting demand to match capacity:

 With this strategy, an organisation seeks to shift customers away from periods when demand exceeds capacity. Perhaps by convincing them to use the service during slow demand. During periods of slow demand, the organisation seeks to attract more and/or different customers to increase demand and thus better utilise its productive capacity. There are various shifts in demand during both slow and peak periods.

a. Reduce demand during peak time:

Communicate with customers: Through communication, the customers can be informed regarding the peak demand time so they can choose an alternative time and avoid crowds and delays. For example, sign-in banks and post offices educate customers about the busiest hours and days. Telephone lines provide information about the time that would be wasted in waiting. The service provider gives an alternative to call back at less busy hours or to visit the company’s website for faster service.

Modified timing and location of Service Delivery: Some firms adjust the hours and days of Service Delivery to reflect customer demand. For example, the US bank, for the convenience of customers, where they were working from 10:00 a.m. to 3:00 p.m. on weekdays, modified the timing from early till 6:00 p.m. and worked on Saturdays. Many banks opened branches and supermarkets like Walmart and Meijer. Movie theatres often modify the schedule by offering additional services for matinees or weekends and holidays.

Offer incentives for nonpeak usage: Some firms will offer incentives to encourage customers to shift the use of service to other times. For example, In the Northern Midwest States, swimming pool contractors offer additional amenities such as a free diving board, free heater, larger-sized pools, etc. To customers who are willing to postpone the purchase/ use of their services.

Set priorities: When demand for services is high and there is limited capacity, service providers can prioritise what is served by taking care of loyal or high-need customers first. For example, a tax firm might decide to serve its best customers rather than first-time walk-ins just before the Income tax due date.

Charge full Price: Forms generally charge full price for the first service during periods of time when they know their services are historically in high demand. For example, Airlines charge full price during vacation season.

Service providers may consider other approaches in matching capacity and demand, focusing on increasing demand for service when the service is at less than total capacity.

b. Increase demand to match capacity:

Stimulate business from the current market segment: Advertising and other forms of promotion can emphasize different service benefits to customers during teak and slow periods. For example, tourist attractions often advertise more in the local market during off-peak times.

Vary how the facility is used: One approach is to change how the service facility is used, depending on the season of The Year, day of the week, or time of Day. For example, a hospital in the Los Angeles area rents its facilities to two film production crews for shooting. Educational institutions rent the ground for celebrations and ceremonies.

Vary the service offering: This is related to changing the nature of the service offering. For example, McDonald’s offers food delivery to increase demand for its services. In this context, the service offering and associated benefits are changed to smooth customer demand for the organisation’s resources.

Differentiate on price: A typical response during periods of slow demand is to discount the price of the service. This strategy relies on the basic Economics of supply and demand. To be effective, a price differentiation strategy depends on a solid understanding of customer price sensitivity and demand curves.

II). Adjusting capacity to meet demand:

The fundamental idea is to adjust, stretch, and align capacity to match customer demand. During peak demand, the organisation seeks to stretch or expand its capacity as much as possible, and during slow demand, it tries to shrink capacity to avoid resource wastage. There are various strategies for adjusting capacity to match demand.

Stretch existing capacity: In this approach, no new resources are added, but the people, facilities, and equipment are asked to work harder and longer to meet demand.

Stretch time temporarily: It may be possible to temporarily extend the hours of service to accommodate demand. For example, a Health clinic may stay open longer during flu season, and retailers may stay open longer during the holiday shopping season.

Stretch labour temporarily: In many service organisations, employees are asked to work longer and harder during peak demand. For example, Frontline service personnel in banks, restaurants, and telecommunication companies are asked to serve more customers per hour during busy times than during normal hours or days.

Stretch facility temporarily: Theatres, restaurants, and classroom extras can sometimes be temporarily expanded by adding tables, chairs, or other equipment needed by customers.

Stretch equipment temporarily: Computers, power lines, tour buses can often be stretched beyond what would be considered the maximum capacity for short period To accommodate peak demand.

Align capacitor with demand fluctuations: This basic strategy is sometimes called the chase demand strategy. By adjusting service resources creatively, an organisation can, in effect, change the demand curves to match capacity with customer demand patterns.

Use part-time employees: In this situation, the organisation’s labour resources are aligned with demand. For example, Retailers hire part-time employees during the holiday rush.

Outsource: Companies that find they have a temporary peak in demand for internal services choose to outsource certain services, such as Web design and software-related services.

Rent or share facilities or equipment: Express mail delivery services rent or lease trucks during the Peak holiday season.

Schedule downtime during periods of low demand: If people, equipment and facilities are being used at maximum capacity during peak periods, then it is imperative to schedule repair maintenance and innovations during off-peak periods. Online banking services of a scheduled software upgrade on early Sunday morning(4:00 a.m. to 6:00 a.m.) award description of the services.

Cross-train employees: Cross-trained employees can shift among the tasks, filling in where they are most needed. For example, Many Airlines cross-train employees to move from ticketing to working the gate counter, assisting with baggage if needed.

Modify and move facilities and equipment: Hotels utilize this strategy by reconfiguring rooms. For example, two rooms with a locked door between them can be rented to two different parties in high demand and turned into a suite during slow demand. Using a “demand-driven dispatch” approach, airlines often assign aeroplanes to flight schedules based on fluctuating market needs.

Combining demand and capacity strategy:

Many firms use multiple strategies, combining marketing-driven demand management approaches with operations-given capacity management strategies. Figuring out which is the best set of strategies for maximizing capacity utilization, customer satisfaction, and profitability can be challenging. For example, Services include a theme park with rides, restaurants, and shopping and a ski Resort with ski slopes, spas, restaurants, and entertainment.

Waiting Line Strategies:

When Demand and capacity cannot be matched

Sometimes, managing capacity to match demand is impossible, and vice versa.

– it may be too costly. For example, it may not be economically feasible to add additional facilities to handle patients during winter flu season.

– Demand may be unpredictable, and service capacity may be inflexible.

– This may occur when demand backs up because of the variability in the time needed for service. For example, patients wait despite taking appointments because some patients take longer during their check-ups.

Waiting can occur on the telephone, for example: Customers are put on wait/ hold when they call to ask for information, an order, or a complaint.

– in person. Example: Customer waiting in a queue at Bank, Post office, theatre, physician’s office, etc.

– with service transactions through the mail. Example: Delay in mail order delivery.

Due to hectic schedules and other commitments, customers seek efficient, quick service without waiting. Organisations should consider that customers are made to wait, which may lead to customer dissatisfaction and even loss of business. Waiting time satisfaction is nearly as important as service delivery satisfaction. To deal effectively with the inevitability of waits, organisations can utilize a variety of strategies such as follows:

1) Employ operational logic:

If customer waits are common, the first step is to analyse the operational processes to remove inefficiencies. Redesigning the system and modifying the operational system can reduce customer waiting and improve service. First National Bank Of Chicago developed a Computer-based customer information system to allow tellers to answer questions more quickly, implemented an electronic queuing system, hired peak-time tellers, expanded its hours, and provided customers with alternative delivery channels. Collectively, these reduce wait time and improve productivity and customer satisfaction.

Marriott hotels used an operation-based modification tour to eliminate much of the waiting previously experienced by its guests. Guess who uses a credit card and pre-register can avoid waiting in line at the hotel front desk altogether. The gas can go outside the hotel to their room in about three minutes. When escorted, a ‘guest service associate ‘checks the guest into the hotel, picks UP the east and paperwork from a rack in the lobby and then escorts the guest directly to the room.

When queues are inevitable, the organisation faces an operational definition of what kind of queuing system to use or how to configure the queue. Queue configuration refers to the number of queues, their locations, their spatial requirement and their effect on customer Behaviour. Several possibilities exist, such as:

Multiple queue: In the multiple queue alternative, the customer arrives at the service facility and decides which queue to join and whether to switch later to another queue where the wait line is short.For example, railway ticket booking.

– Single queue: The single queue alternative fairness of waiting time is ensured because the first Come, First serve rule applies to everyone.

– Take a number: The Take a number option allows arriving customers to take a token number to indicate line position. It has similar advantages to a single queue, but the customer should be alert to hear their number when they are called. For example, see the Vodafone gallery.

2) Establish a reservation process:

When waiting cannot be avoided, a reservation system can help spread demand. Restaurants, transportation companies, theatres, physicians, etc., use reservation systems to alleviate long waits. Reservation systems guarantee that the service will be available when the customer arrives. They can also potentially shift demand to less desirable time periods.

The challenge for the reservation system is ‘ no shows’. Some customers reserve time but do not appear or show up. In such situations, Organisations, based on records, do overbooking. If the predictions are accurate, overbooking is a good solution. However, if predictions are inaccurate, the customer will become the victim of overbooking. In such situations, organisations compensate for the inconvenience caused to the customers. In the case of a show, the customers who do not show up are charged to avoid or reduce the show’s problems.

3) Differentiate waiting customers:

Not all customers need to wait the same time for service. Based on need or customer priority, some organisations differentiate among customers, allowing some to experience shorter waits for service than others. Known as ‘queue discipline, ‘ such differentiation reflex management policies regarding whom to select for the next service. The most popular discipline is First Come First served. Differentiation can be based on factors such as:

– the importance of the customer. For example: Frequent customers.

– Urgency of the job. For Example: Emergency Healthcare.

– duration of the service transaction. For example, the Express lane for shorter service.

– payment of a premium price. For example, First class passengers on an airline are often given priority via separate check-in lines or express systems.

4) Make wait pleasurable or at least tolerable:

Customers can be more or less satisfied even when they have to wait, depending on how the organisation handles the wait. The length of weight is not only the factor that creates an effect on the customer, but the type of wait also influences customers’ willingness to wait and react in a positive and negative manner.

David Maister and other researchers have the following suggestions on the psychology of waiting to make waits less stressful and unpleasant:

Unoccupied time feels longer than occupied time: When customers are unoccupied, they will likely be bored and notice the passage of time more than when they have something to do. Providing something for waiting customers to do, mainly if the activity offers a benefit in and of itself or is related in some way to the service, can improve the customer’s experience and benefit the organisation. For Example, Providing informational magazines, playing entertaining programs, etc.

The pre-and post-process wait feels longer than the process wait: Waiting to buy a ticket to enter the theme park is different from waiting to ride a Rollercoaster once you are in the park.

Solo waits to feel longer than group waits: Waiting with friends or known people helps us pass the time rather than waiting alone.

The physically uncomfortable wait feels longer than a comfortable wait:  Standing in a queue is more painful than sitting. Hot temperature makes wait uncomfortable in summer, rainfall makes weight and comfortable without protection.

Unfair is longer than equitable waits: People expect everybody to wait their Turn in line and are likely to get irritated if they see others jumping ahead or given priority for no good reason.

Unfamiliar waits seem longer than familiar ones: Frequent users of the service know what to expect and are less likely to worry while waiting than new or occasional users.

Uncertain waits are longer than known, finite waits: Waiting for delayed flight and not being informed how long the delay will be.

Unexplained wait a longer than explained wait: Waiting in a car stuck in a traffic jam without knowing the reason and time length of weight.

Anxiety makes the wait seem longer: Waiting in unfamiliar locations, especially outdoors and at night, creates anxiety, which makes the wait cm longer.

The more valuable or important the service, the longer people will wait: People queuing up overnight to get a good seat at a major concert or event.