Managing Demand and Capacity

Managing Demand
and Capacity
Chapter’s Objectives ……………
Explain the underlying issue for capacity-constrained services: lack of

inventory capability.
 Present the implications of time, labor, equipment, and facilities

constraints combined with variations in demand patterns.
Lay out strategies for matching supply and demand through (a) shifting
demand to match capacity or (b) adjusting capacity to meet demand.
Demonstrate the benefits and risks of yield management strategies in

forging a balance among capacity utilization, pricing, market
segmentation, and financial return.
 Provide strategies for managing waiting lines for times when capacity
and demand cannot be aligned.
Lack of inventory
Capability
Variations in Demand Relative to Capacity
 Excess demand: the level of demand exceeds max capacity.
◦Some customers will be turned away.
◦For customers who do receive service, quality may be lacking because of
crowding or overtaxing of staff and facilities
 Demand exceeds optimum capacity.
◦No one is turned away, but quality may still suffer.
 Demand and supply are balanced at optimum capacity.

◦Staff and facilities are occupied at ideal level.
◦No one is overworked, facilities can be maintained, customers are receiving
quality.
 Excess capacity: demand is below optimum.
◦Resources are underutilized resulting in lower profits.
◦Some customers may receive high quality service, but if quality depends on
the presence of other customers, customers may be disappointed.
Demand and Capacity for
Service Providers
Constraints on
Capacity
Capacity…………………
Examples-:
Place Capacity
Premadasa stadium 35000 Seats
Savoy Film Theater 513 seats
Galadari Hotel 450 Rooms
Sri Lankan Air Lines Business class seats 28

A330-3000 Economic class seats 269
Optimal Vs. Maximum
Optimal Maximum
• Resources are fully employed • Resources are fully
but capacity not over used. employed
• Customers are received quality • Limited service available

service in a timely manner. capacity
• Best Quality • Highest possible

Demand Patterns
1. The charting of demand patterns

2. Predictable cycles
3. Random demand fluctuations
4. Demand pattern by market segment
Strategies for Matching Demand
and Capacity
Strategies for Shifting Demand to Match
Capacity
Strategies for Adjusting Capacity to

Match Demand
and Capacity
Strategies for Shifting Demand to Match
Capacity
and Capacity
Strategies for Adjusting Capacity to
Match Demand
and Capacity
Definition
“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.”
Actual revenue
Yield = Potential revenue
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 = $10,000/20000 x 100= 50%
Full rate charged, but only 80 rooms sold

◦Yield = (80 x $100)/$20,000 = $8,000/20000 x100 = 40%
Full rate charged for 80 rooms, discount for remaining

120 rooms
◦Yield = [(80 x $100) + (120 x $50)]/$20,000 = $14,000/20000 x100
= 70%
Challenges and Risks in
Using Yield
Management
 Loss of competitive focus
 Customer alienation
 Overbooking
 Incompatible incentive and reward systems
Inappropriate organization of the yield

management function
Waiting Line Configurations
Employ operational logic to reduce wait

◦How to configure the queue?
◦Multiple Queue
◦Single Queue
◦Take a Number
Waiting Line
Configurations
2
8
1 3
Waiting Line Strategies
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 more pleasurable

Issues to Consider in Making
Waiting More Pleasurable
Unoccupied time feels longer than occupied time.
Preprocess waits feel longer than in-process waits.
Anxiety makes waits seem longer.
Uncertain waits seem longer than known, finite waits.
Unexplained waits seem longer than explained waits.
Unfair waits feel longer than equitable waits.
The more valuable the service, the longer the customer
will wait.
Solo waits feel longer than group waits.

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Managing Demand

Explain the underlying issue for capacity-constrained services: lack of

 Present the implications of time, labor, equipment, and facilities

Demonstrate the benefits and risks of yield management strategies in

 Demand and supply are balanced at optimum capacity.

Savoy Film Theater 513 seats

Galadari Hotel 450 Rooms

Sri Lankan Air Lines Business class seats 28

• Customers are received quality • Limited service available

• Best Quality • Highest possible

1. The charting of demand patterns

Strategies for Adjusting Capacity to

Actual revenue = actual capacity x average actual

Potential revenue = total capacity x maximum price

All rooms sold at discounted rate ($50/night)

Full rate charged, but only 80 rooms sold

Full rate charged for 80 rooms, discount for remaining

 Incompatible incentive and reward systems

Inappropriate organization of the yield

Employ operational logic to reduce wait

Differentiate waiting customers

Make waiting more pleasurable

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