1 chapter 9: balancing demand and productive capacity
TRANSCRIPT
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Chapter 9:
Balancing Demand and Productive Capacity
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VOLUME DEMANDED
TIME CYCLE 1 TIME CYCLE 2
Maximum Available Capacity
Optimum Capacity (Demand and Supply Well Balanced)
Low Utilization (May Send Bad Signals)
Demand exceeds capacity (business is lost)
Demand exceeds optimum capacity (quality declines)
Excess capacity (wasted resources)
CAPACITY UTILIZED
From Excess Demand to Excess Capacity
Four conditions potentially faced by fixed-capacity services:
Excess demand Too much demand relative to capacity at a given time
Maximum capacity Upper limit to a firm’s ability to meet demand at a given time
Optimum capacity Point beyond which service quality declines as more
customers are serviced
Excess capacity Too much capacity relative to demand at a given time
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Approaches to the Problem of Fluctuating Demand
Two options:Manage supply (capacity management)
time, labor, equipment, facility constraints watch carefully: employee satisfaction
Manage demand market needs constraints watch carefully: customer satisfaction
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Many firms use a mix of both approaches
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Many Service Organizations Are Capacity
Constrained
Constraints on CapacityTime
legal, consulting, accounting, medical
Labor legal, consulting, accounting, medical
Equipmentdelivery services, telecommunication, health club
Facilitieshotels, restaurants, hospitals, airlines, schools,
theaters, churches
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Any of the service firms listed can be operating under multiple constraints.
Alternative Capacity Management Strategies
Level capacity (fixed level at all times)
Stretch and shrink (Should be used for short period)
Offer inferior extra capacity at peaks (e.g., bus/train standees)
Vary seated space per customer (e.g., elbow room, leg room)
Extend/cut hours of service
Chase demand (adjust capacity to match demand)
Use part-time employees
Rent or share extra facilities and equipment
Ask customers to share
Outsourcing7
Alternative Capacity Management Strategies
Invite customers to perform self-service
Cross-train employees
Schedule downtime during periods of low demand
Modify or move facilities and
Flexible capacity (Vary mix by segment)
Not all unsold capacity is wasted
Free trials for prospective customers
Free trials for intermediaries
Employee rewards
Bartering with firms own suppliers 8
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Patterns and Determinants of Demand
Patterns and Determinants of DemandTo manage fluctuating demand it is necessary
to have a clear understanding of-Demand patterns
Cyclical Vs RandomUnderlying causes of variationsSpecific market segment responsible for the
variation
Keep good records of transactions to analyze demand patternsSophisticated software can help to track
customer consumption patterns10
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Season of Year
Off-peak Shoulder Peak
Weekday
Weekend
Morning peak
Midday
Afternoon peak
Evening/ night
Time of Day
Day of Week
Predictable Demand Patterns and Their Underlying Causes (Table 9.1)
day week month year other
billing or tax payments/refunds
pay days school hours/holidays seasonal climate
changes public/religious
holidays natural cycles employment (e.g., coastal tides)
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Predictable Cycles
of Demand Levels
Underlying Causes of
Cyclical Variations
Analyzing Demand by Market SegmentDifferent customers have different demand
patterns by day or by season (e.g., business travelers vs. tourists)
Some users have little choice in timing of demand, others are flexible (e.g. commuters vs. shoppers)
Some demand is undesirable and should be discouraged (e.g., inappropriate calls to emergency services)
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Extent of demand fluctuations over time
Extent to whichsupply isconstrained
Wide Narrow
Peak demand canusually be metwithout a majordelay
1ElectricityNatural gasTelephoneHospital maternity unitPolice and fireemergencies
2InsuranceLegal servicesBankingLaundry and dry cleaning
Peak demandregularly exceedscapacity
4Accounting and taxpreparationPassenger transportationHotels and motelsRestaurantsTheaters
3Services similar to those in2 but which haveinsufficient capacity fortheir base level of business
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Demand Levels Can Be Managed
Alternative Demand Management Strategies (Table 9.2)Take no action
Let customers sort it outReduce demand
Higher prices Communication promoting alternative times
Increase demand Lower prices Communication, including promotional incentives Vary product features to increase desirability More convenient delivery times and places
Inventory demand by reservation systemInventory demand by formalized queuing
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Marketing Strategies CanReshape Some Demand Patterns
1. Use price and other costs to manage demand
2. Change product elements
3. Modify place and time of delivery No change Vary times when service is available Offer service to customers at a new location
4. Promotion and education17
Yield ManagementThe process of allocating the right type of
capacity to the right kind of customer at the right price so as to maximize yield or revenue.
Ratio of actual revenue to potential revenue for a particular measurement period.
Yield = Actual Revenue
Actual Revenue = Actual capacity used x Average actual price
Potential Revenue = Total capacity x Maximum price
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Potential Revenue
Ideal Characteristics for Yield Management
Relatively Fixed CapacityAbility to Segment MarketsPerishable InventoryProduct Sold in AdvanceFluctuating DemandLow Marginal Sales Cost and High Capacity
Change Cost
Seasonal Allocation of Rooms by Service Class for Resort Hotel
First class
Standard
Budget
Per
cent
age
of c
apac
ity a
lloca
ted
to d
iffer
ent s
ervi
ce c
lass
es
60%
50%30%
20%
50%
Peak Shoulder Off-peak Shoulder (30%) (20%) (40%) (10%)Summer Fall Winter Spring
Percentage of capacity allocated to different seasons
30%20% 20%
10% 30%
50% 30%
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Inventory Demand through Waiting Lines
and Reservations
Waiting Is a Universal Phenomenon!An average person may
spend up to 30 minutes/day waiting in line—equivalent to over a week per year!
Almost nobody likes to wait
It's boring, time-wasting, and sometimes physically uncomfortable
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Why Do Waiting Lines Occur?
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•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
Saving Customers from Burdensome WaitsAdd extra capacity so that demand can be met at
most times (problem: may increase costs too much)
Rethink design of queuing system to give priority to certain customers or transactions
Redesign processes to shorten transaction time
Manage customer behavior and perceptions of wait
Install a reservations system
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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”)
“Take a number” (single or multiple servers)28 29
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Criteria for Allocating Different Mkt Segments to Designated Lines
Urgency of job Emergencies versus non-
emergencies
Duration of service transaction Number of items to transact Complexity of task
Payment of premium price First class versus economy
Importance of customer Frequent users/high volume
purchasers versus others
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Minimize Perceptions of Waiting Time
Ten Propositions on Psychology of Waiting Lines (1) (Table 9.3)
1. Unoccupied time feels longer than occupied time
2. Pre- and post-process waits feel longer than in-process waits
3. Anxiety makes waits seem longer4. Uncertain waits are longer than known, finite
waits5. Unexplained waits are longer than explained
waits
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Ten Propositions on Psychology of Waiting Lines (2) (Table 9.3)
6. Unfair waits are longer than equitable waiting 7. People will wait longer for more valuable
services8. Waiting alone feels longer than waiting in
groups9. Physically uncomfortable waits feel longer10. Waits seem longer to new or occasional users
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