MANAGING DEMAND AND CAPACITY

Dr. Pham Thi Hoa

1
 CAPACITY CONSTRAINTS

• The service performance gap can occur when organizations fail to smooth the peaks and valleys of demand,
overuse their capacities, attract an inappropriate customer mix in their efforts to build demand or rely too
much on price smoothing demand.

2
 DEMAND PATTERNS

• Critical fixed capacity factors can be time, labour, equipment, facilities or (in many cases) a combination of
these.
• For some service businesses, the primary constraint on service production is time.
Ex: A lawyer, a consultant, a hairdresser, a plumber and a personal counsellor 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.
If there is excess demand, time cannot be created to satisfy it. From the point of view of the individual service
provider, time is the constraint.
• From the point of view of a firm that employs a large number of service providers, labour or staffing levels
can be the primary capacity constraint.

Ex: A law firm, a university department, a consulting firm, a tax accounting firm and a repair and
maintenance contractor may all face the reality that at certain times demand for their organizations’ services
cannot be met because staff are already operating at peak capacity. However, the service firms can not hire
additional service providers if low demand is a reality a large percentage of the time.

3
• Equipment may be the critical constraint. For road transport or airfreight delivery services, the lorries or
aeroplanes needed to service demand may be the capacity limitation.

Ex: During the Christmas holidays, DHL, TNT and other delivery service providers face this issue. Health clubs
also deal with this limitation, particularly at certain times of the day (before work, during lunch hours, after
work) and in certain months of the year.
• Many firms face restrictions brought about by their limited facilities.
Ex: Hotels have only a finite number of rooms to sell, airlines are limited by the number of seats on the aircraft,
universities are constrained by the number of rooms and the number of seats in each lecture theatre, and
restaurant capacity is restricted to the number of tables and seats available.

à Understanding the primary capacity constraint, or the combination of factors that restricts capacity, is a
first step in designing strategies to deal with supply and demand issues.

4
 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.
• THE RECORDING OF DEMAND PATTERNS
• To begin to understand demand patterns, the organization needs to record the level of demand over
relevant time periods.
• Daily, weekly and monthly demand levels should be followed, and if seasonality is a suspected problem,
graphs should be drawn for data from at least the past year.
• In some services, such as restaurants or health care, hourly fluctuations within a day may also be relevant.
Sometimes demand patterns are intuitively obvious; in other cases patterns may not reveal themselves until
the data are collected.
• PREDICTABLE CYCLES
• In looking at the graphic representation of demand levels, predictable cycles may be detected, including
daily (variations occur by hours), weekly (variations occur by day), monthly (variations occur by day or week)
and/or yearly (variations occur according to months or seasons).

5
• In some cases, predictable patterns may occur at all periods. For example, in the restaurant industry, especially in
seasonal tourist locations, demand can vary predictably by month, by week, by day and by hour.
• If a predictable cycle is detected, what are its underlying causes? When predictable patterns exist, generally one or
more causes can be identified.
Ex: Tax advisers can predict demand based on when taxes are due. Services catering to children and families
respond to variations in school hours and vacations. Retail and telecommunications services have peak periods at
certain holidays and times of the week and day.
• 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.
Ex: Day-to-day changes in the weather may affect use of recreational, shopping or entertainment facilities. Good
weather can increase the use of outdoor activities such as amusement parks and bicycle rental but it has the opposite
effect on cinemas and art galleries. 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 storms can dramatically increase the need for such services as insurance,
telecommunications, builders and health care.

6
• DEMAND PATTERNS BY MARKET SEGMENT
• The analysis may reveal that demand from one segment is predictable, whereas demand from another
segment is relatively random.

Ex: For a bank, the visits from its business customers may occur daily at a predictable time, whereas personal
account holders may visit the bank at seemingly random intervals.
Ex: Health clinics often notice that walk-in or ‘same-day requests to see a doctor’ patients tend to concentrate
their arrivals on Monday, with fewer needing immediate attention on other days of the week.

7
 STRATEGIES FOR MATCHING CAPACITY AND DEMAND

• SHIFTING DEMAND TO MATCH CAPACITY

• With this strategy 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.
• This change may be possible for some customers but not for others.
Ex: Many business travellers are not able to shift their needs for airline, car rental and hotel
services; leisure travellers, on the other hand, can often shift the timing of their trips. Customers
who cannot shift and cannot be accommodated will represent lost business for the firm.
• During periods of slow demand, the organization seeks to attract more and/or different
customers to utilize its productive capacity.

8
9
Ex: MODIFY TIMING AND LOCATION OF SERVICE DELIVERY

• Some firms adjust their hours and days of service delivery

to more directly reflect customer demand. Historically, UK
banks were open only during ‘bankers’ hours’ from 10 a.m.
to 3 p.m. every weekday. Obviously these hours did not
match the times when most people preferred to do their
personal banking. Now UK banks open earlier, stay open
until 5 p.m. many days, and are open on Saturdays, better
reflecting customer demand patterns. Online banking has
also shifted demand from branches to ‘anytime, anywhere’
websites. Theatres accommodate customer schedules by
offering matinees on weekends and holidays when people
are free during the day for entertainment. Cinemas are
sometimes rented during weekdays by business groups – an
example of varying the service offering during a period of
low demand.

10
 Ex: STIMULATE BUSINESS FROM CURRENT MARKET SEGMENTS

• Advertising and other forms of promotion can

emphasize different service benefits to customers
during peak and slow periods. Advertising and sales
messages can remind customers about times when
demand is low. For example, car tyre replacement
centres such as Kwik Fit increase their service
advertising during periods when demand is slow by
sending out reminders and offering discounts for
replacing more than one tyre.

11
 Ex: VARY HOW THE FACILITY IS USED
• Novotel, the hotel chain, has bedrooms, restaurants and meeting facilities all
available to guests 365 days and nights of the year. Yet natural demand for them
varies tremendously. Because Novotel hotels cater to business travellers and
business meetings, demand has a weekly cycle in addition to any seasonal
fluctuations. Business travellers do not stay over weekends. Thus, demand for
rooms from the hotel’s primary market segment drops on Friday and Saturday
nights.
• To smooth the peaks and valleys of demand for its facilities, Novotel has
employed a number of strategies. Group business (primarily business
conferences) is pursued throughout the year to fill the lower-demand periods. A
variety of special events, weddings and getaway packages are offered year round
to increase weekend demand for rooms. Most city centre hotels have tried to
cater to families and children on the weekends. For many working parents,
weekend getaways are a primary form of relaxation and vacation. The city centre
hotels cater to these couples and families by offering discounted room rates,
child-oriented activities and amenities, and an environment in which families feel
comfortable. At weekends, children stay free. On arrival, each child receives a gift
featuring ‘Dolfi’, the hotel’s dolphin mascot. The hotels also do special weekend
promotions with local theme parks and visitor attractions. 12
 EX: VARY THE SERVICE OFFERING

• A ski resort that offers facilities and accommodation for

skiers in the winter offer may adapt their services to attract
executive development and training programmes during the
summer when snow skiing is not possible. Airlines even
change the configuration of their plane seating to match the
demand from different market segments. Some planes may
have no first-class section. On routes with a large demand for
first-class seating, a significant proportion of seats may be
placed in first class. The Pizza Express restaurant chain which
is primarily a sit-in restaurant offers take away services in
certain branches as a way to increase demand for its service.

13
 EX: DIFFERENTIATE ON PRICE

• A price differentiation strategy depends on solid

understanding of customer price sensitivity and
demand curves. For example, business
travellers are far less price sensitive than are
families travelling for pleasure. For Novotel
hotels, lowering prices during the slow summer
months is not likely to increase dramatically
bookings from business travellers. However,
lower summer prices attract considerable
numbers of families and local guests who want
an opportunity to experience a good quality
hotel but are not able to afford the rooms
during peak season.
14
 ADJUSTING CAPACITY TO MEET DEMAND

• The fundamental idea here is to adjust, stretch and align capacity to match customer demand

15
Ex: Modify or move facilities and equipment
• Sometimes it is possible to adjust, move or creatively modify existing capacity to
meet demand fluctuations. Hotels utilize this strategy by reconfiguring rooms –
two rooms with a locking door in-between can be rented to two different parties
in high demand times or turned into a suite during slow demand. The airline
industry offers dramatic examples of this strategy. Using an approach known as
‘demand-driven dispatch’, airlines have begun to experiment with methods that
assign aeroplanes to flight schedules on the basis of fluctuating demand and the
ability to quickly move aeroplanes with different seating capacities to flights that
match their capacity. The Boeing 777 aircraft is so flexible that it can be
reconfigured within hours to market needs. The method depends on accurate
knowledge of vary the number of seats allocated to one, two or three classes. The
aircraft can thus be quickly modified to match demand from different market
segments, essentially moulding capacity to fit demand. Another strategy may
involve moving the service to a new location to meet customer demand or even
bringing the service to customers. Mobile training facilities, libraries and blood
donation facilities are examples of services that physically follow customers.

16
 REVENUE MANAGEMENT

• Using revenue management models, organizations find the best balance at a particular point in time among
the prices charged, the segments sold to and the capacity used.
• Revenue management has been defined as ‘the process of allocating the right type of capacity to the right
kind of customer at the right time at the right price so as to maximize revenue or yield’.
• The underlying effectiveness measure is the ratio of actual revenue to potential revenue for a particular
measurement period:

where:

17
Exercise: Simple Yield Calculations: Examples
from Hotel and Legal Services on page 559

18