Managing demand and capacity
By: Sanskriti Rao
Tags: Branding, Marketing Strategies, Marketing, Book Review, Startup

1. Lack of inventory capability

The fundamental issues underlying supply and demand management is services in the lack of inventory capability. Unlike manufacturing firms service firms cannot build up inventory capability is due to the perishability of services and their simultaneous production and consumption. An airline seat not sold on a given flight cannot be left in inventory and resold the following day. The product capacity of the seat on that flight has perished. Service cannot be transported from one place to another or transferred from person to person.

The lack of inventory capability combined with fluctuating demand leads to a variety of potential outcomes. There are basically four scenarios that result from difference in combination of capacity and demand:

Excess Demand: In this situation some customers will be turned away, resulting in the lost business opportunity.

Demand exceeds optimum capacity: No one is being turned away, but the quality of service may still suffer because of overuse, crowding, or staff being pushed beyond their abilities to deliver consistent quality.

Demand and supply are balanced at the level of optimal capacity: Staff and facilities are occupied at an idea level. No one is over worked, facilities can be maintained, and customers are receiving quality service without undesirable delays.

Excess capacity: Demand is below the optimal capacity. Productive resources in the form of labor, equipment, and facilities are underutilized, resulting in low productivity and lower profile.

2. Capacity constraints

For many firms, service capacity is fixed, critical fixed-capacity factors can be-depending on the type of service-time, labor, equipment, facility, or a combination of these.

Time, Labor, Equipment and Facility: For some business, the primary constraint on service production in time. For example, a lawyer, a hairdresser, a plumber, and a psychology counselor all primarily sell their time. In such contexts, if the service worker is not available or if his or her time is not used productively, profits are lost.

Optimal versus maximum use of capacity: To fully understand capacity issues, it is important to know the difference between optimal and maximum use of capacity. Using capacity at optimal level means that resources are fully employed but not overuse and that customer are receiving quality service in timely manner. Maximum capacity, on the other hand, represents the absolute limit of service availability.

3. Demand patterns

To manage fluctuating demand in a service business, it is imperative to have a clear understanding of demand patterns, why they wary, and the market segments that comprise demand at different points in time.

Charting Demand Patterns : First, the organization needs to chart the level of demand over relevant time periods. Organizations that have good computerized customer information systems can do this very accurately. The others may need to chart demand patterns more informally.

: First, the organization needs to chart the level of demand over relevant time periods. Organizations that have good computerized customer information systems can do this very accurately. The others may need to chart demand patterns more informally. Predictable Cycles: In looking at the graphic representation of demand levels, is there a predictable cycle daily (variations occur by hours), weekly (variations occur by day), monthly (variations occur by the month), and/or yearly (variations occur according to months or seasons)?

If there is a predictable cycle , what are the underlying causes? This can help a service provider in dealing with the customers in a much better way.

Random Demand Fluctuations : Sometimes the patterns of demand appear to be random — there is no apparent predictable cycle. Yet even in this case, causes can often be identified. For example. day to-day changes in the weather may affect use of recreational, shopping, or entertainment facilities. Although the weather cannot be predicted far in advance, it may be possible to anticipate demand a day or two ahead. Health-related events also cannot be predicted. Accidents, heart attacks, and births all increase demand for hospital services, but the level of demand cannot generally be determined in advance. Natural disasters such as floods, fires, and hurricanes can dramatically increase the need for such services as insurance, telecommunications, and health care. Acts of war and terrorism such as that experienced in the United States on September 11, 2001, general instantaneous need for services that can’t be predicted.

: Sometimes the patterns of demand appear to be random — there is no apparent predictable cycle. Yet even in this case, causes can often be identified. For example. day to-day changes in the weather may affect use of recreational, shopping, or entertainment facilities. Although the weather cannot be predicted far in advance, it may be possible to anticipate demand a day or two ahead. Health-related events also cannot be predicted. Accidents, heart attacks, and births all increase demand for hospital services, but the level of demand cannot generally be determined in advance. Natural disasters such as floods, fires, and hurricanes can dramatically increase the need for such services as insurance, telecommunications, and health care. Acts of war and terrorism such as that experienced in the United States on September 11, 2001, general instantaneous need for services that can’t be predicted. Demand Patterns by Market Segment:If an organization has detailed records on customer transactions, it may be able to dis-aggregate demand by market segment, revealing patterns within patterns. Or the analysis may reveal that demand from one segment is predictable while demand from another segment is relatively random.

For example, for a bank, the visits from its commercial accounts may occur daily at a predictable time, whereas personal account holders may visit the bank at seemingly random intervals. Health clinics often notice that walk-in or “care needed today” patients tend to concentrate their arrivals on Mon day, with fewer numbers needing immediate attention on other days of the week. Knowing that this pattern exists, some clinics schedule more future appointments (which they can control) for later days of the week, leaving more of Monday available for same-day appointments and walk-ins.

4. Strategies for matching capacity and demand

When an organization 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.

4.1 Shifting demand and capacity

By shifting demand and capacity an organization seeks to shift customers away from periods in which demand exceeds capacity. Perhaps by convincing them to use the service during periods of slow demand.

4.2 Reduce Demand during peak times

One strategic approach to matching capacity and demand for a service provider focuses on reducing demand during times when customer demand is at its peak for service.

4.3 Increase demand to match capacity

Other approaches service providers may consider in matching capacity and demand focus increasing demand for service during times when the service is operating at less than full capacity.

4.4 Adjusting capacity to meet demand

A second strategic approach to matching supply and demand focuses on adjusting capacity. The fundamental idea here is to adjust, stretch, and align capacity to match customer demand.

5. Waiting Line Strategy

A waiting line system, also known as a queuing system, is exactly what it sounds like. It’s when a person or object spends time waiting in a line for an activity or transaction to happen. For example, a customer may be waiting in line to purchase a movie ticket or deposit a check, or a package may be waiting in line at a warehouse to be shipped.

There are two levels of service for a waiting line: a low level, which is initially inexpensive to the company, or a high level , which is initially expensive to the company. However, that expense may be worth it because the higher the customer satisfaction, the more likely a customer is to return. For example, if a customer waits in line to return an item to a store without a receipt, a ‘no return policy’ would be a low level of service. But a store that issues a store credit would be offering a high level of service.

6. Summary

Because service organizations lack the ability to involve their products, the effective use of capacity can be critical to success. Idle capacity in the form of unused time, labor, facilities, or equipment represents a direct drain on bottom-line profitability. When the capacity represents a major investment, the losses associated with under-use of capacity are even more accentuated.