Balancing of Demand &

Capacity
Chapter 6
Module 2

Versus

Strategies for Matching

Supply and Demand for
Services
DEMAND
STRATEGIES

Developing
complementary
services
Developing
reservation
systems

Queuing

SUPPLY
STRATEGIES

Partitioning
demand

Sharing
capacity

Establishing
price
incentives

Crosstraining
employees

Promoting
off-peak
demand

Using
part-time
employees
Yield
management

Increasing
customer
participation
Scheduling
work shifts
Creating
adjustable
capacity

Process Strategies
The objective of a process strategy is
to build a production process that
meets customer requirements and
product specifications within cost
and other managerial constraints

The underlying issue

Perishability
Simultaneous Production & Consumption
Lack of Inventory
Fluctuating Demand

Variations in Demand Relative to

Capacity

1st scenario Excess Demand

Demand

>Maximum
Capacity = Lost
Business
Poor quality service
to customers due to
overcrowding or
overtaxing of staff &
facilities

2nd Scenario Demand exceeds

Optimum capacity
No one is

turned away
Poor quality
of service to
customers
due to
overcrowdin
g or
overtaxing
of staff &
facilities

3rd Scenario Demand & Supply are balanced

at the level of optimum capacity
Quality

service by
customers
without
delays
Staff &
facilities are
occupied at
an ideal
level.

4th Scenario Excess

capacity
Demand <

Optimum
capacity =
Underutilisatio
n , low
productivity &
low profits.
Customers
receive
excellent
quality service
no waiting
and complete
attention from
staff.

Alternative supply and

demand outcomes

Alternative supply and

demand outcomes (cont.)

Average unit cost

(dollars per room per night)

Economies and
Diseconomies of Scale
25 - room
roadside
motel

50 - room
roadside
motel

Economie
s of scale

25

75 - room
roadside
motel

Diseconomi
es of scale

50
Number of Rooms

75

Capacity constraints
Nature of constraint
Type of service

Consulting

Accounting

Time & Labour

Medical

Delivery services
Telecommunication
Network services

Equipment & Facilities

Legal

Utilities
Health club

Hotels & Restaurants

Hospitals

Airlines

Schools

Theatres

Churches

Service Supply and

Demand
Extent of demand fluctuations over time
Extent to which
supply is
constrained

Wide

Peak demand can

1
usually be met
Electricity
without a major
Natural gas
delay
Telephone
Hospital maternity unit
Police and fire
emergencies
Peak demand
regularly exceeds
capacity

4
Accounting and tax
preparation
Passenger transportation
Hotels and motels
Restaurants
Theaters

Narrow
2
Insurance
Legal services
Banking
Laundry and dry cleaning

3
Services similar to those in
2 but which have
insufficient capacity for
their base level of business

Source: Christopher H. Lovelock, Classifying Services to Gain Strategic Marketing Insights, Journal of Marketing, 47, 3 (Summer 1983): 17.

- Dwayne D. Gremler

Planning Over a Time

Horizon
Options for Adjusting Capacity
Longrange
planning
Intermedia
te-range
planning

Add facilities
Add long lead time
equipment
Subcontract
Add equipment
Add shifts

Shortrange
planning

*
Add personnel
Build or use inventory

*
Modify capacity

Schedule jobs
Schedule personnel
Allocate machinery
Use capacity

* Difficult to adjust capacity as limited options exist

Strategies for Matching Capacity &

Demand
Shifting Demand to Match capacity

Demand too high

Demand too low

Shift Demand

Adjusting capacity to meet Demand

Demand too high

Demand too low

Adjust
Capacity

Strategies for shifting Demand to

match Capacity
Shift Demand

Demand too High

Demand too low

Reduce Demand during Peak times

Communicate busy days and times

to customers

Increase Demand to match Capacity

Stimulate Business from current

segments through Advertising & sales

promotion

Modify timing & location of Service

Delivery

Offer incentives for nonpeak usage

Vary how the facility is used

Take care of loyal or regular

customers first.

Offer discounts or price reductions.

Advertise peak usage times and

benefits of nonpeak use.

Bring the service to the customer.

Charge full price for the serviceno

discounts.

Modify hours of operation.

Modify the service offering to appeal to

new market segments

Adjusting demand to meet supply

Strategies for adjusting capacity to

match Demand
Demand too High Adjust Capacity Demand too low

Stretch existing capacity

Stretch time, labour, facilities &

equipment temporarily
Use / hire part time employees

Schedule downtime during periods

of low demand
Maintenance & renovations
Schedule vacations

Request overtime from employees

Schedule employee training

Subcontract or outsource activities

Lay off employees

Rent or share facilities & equipment.

Modify or move facilities & equipment

Adjusting supply to meet demand

Planning Over a Time

Horizon
Options for Adjusting Capacity
Longrange
planning
Intermedia
te-range
planning

Add facilities
Add long lead time
equipment
Subcontract
Add equipment
Add shifts

Shortrange
planning

*
Add personnel
Build or use inventory

*
Modify capacity

Schedule jobs
Schedule personnel
Allocate machinery
Use capacity

* Difficult to adjust capacity as limited options exist

Yield Management: Balancing

capacity utilization, pricing, market
segmentation & financial return
Also known as revenue management
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.
Its main aim is to produce the best possible financial
return from a limited available capacity
It attempts to allocate the fixed capacity of a service
provider to match the potential demand in various
segments so as to maximize revenue or yield.

Yield Management
Yield =

Actual revenue
Potential Revenue

Where
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 = 50%

Full rate charged, but only 80 rooms sold

Yield = 80 x $100/$20,000 = $8,000 = 40%

Full rate charged for 80 rooms, discount for

remaining 120 rooms
Yield = [(80 x $100) + (120 x $50)]/$20,000 =

13-25

Challenges & Risks in Yield

Management
Loss of competitive focus
Customer alienation
Overbooking
Employee morale problems
Incompatible incentive & reward systems
Lack of employee training
Inappropriate organisation of the yield

management function

Waiting Is a Universal
Phenomenon!
An average person may spend up to 30
minutes/day waiting in lineequivalent
to over a week per year!
Almost nobody likes to wait
It's boring, time-wasting, and
sometimes physically uncomfortable

Why Do Waiting Lines

Occur?
Because the number of arrivals at a
facility exceeds capacity of system
to process them at a specific point
in the process
Queues are basically a symptom of
unresolved capacity management
problems

Waiting Woes
1. unoccupied time feels longer than occupied time
2. preprocess waits feel longer than in-process waits
3. anxiety makes waits seem longer
4. uncertain waits seem longer than known, finite waits
5. unexplained waits seem longer than explained waits
6. unfair waits feel longer than equitable waits
7. the more valuable the service, the longer the

customer will wait

8. solo waits feel longer than group waits
9. Physically uncomfortable waits feel longer
10. Waits seem longer to new or occasional users

Waiting Line strategies when demand

& capacity cannot be matched
Employ operational logic
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 pleasurable or at least

tolerable

Waiting Line Configurations

Source: J. A. Fitzsimmons and M. J. Fitzsimmons, Service Management, 4th ed. (New York: Irwin/McGraw-Hill, 2004),
chap. 11, p. 296.

Alternative Queuing
Configurations
Single line, single server, single stage
Single line, single servers, sequential stages
Parallel lines to multiple servers
Designated lines to designated servers
Single line to multiple servers (snake)
29

28

Take a number (single or multiple servers)

25

30
31

26
32

27

21
20
24
23

Create An Effective
Reservation System

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

Characteristics of Well-Designed
Reservations System

Fast and user-friendly for customers and staff

Answers customer questions
Offers options for self service (e.g., the Web)
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
Requiring deposits to discourage no-shows
Canceling unpaid bookings after designated time
Compensating victims of over-booking