McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved

Chapter

14 Managing Demandand Capacity

• The Underlying Issue: Lack of Inventory Capability

• Understanding Capacity Constraints• Understanding Demand Patterns• Strategies for Matching Capacity and

Demand• Yield Management• Waiting Line Strategies

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved

Objectives for Chapter 14:Managing Demand and Capacity

• Explain the underlying issue for capacity-constrained services: lack of inventory capacity.

• 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) flexing capacity to meet demand.

• Demonstrate the benefits and risks of yield management strategies.

• Provide strategies for managing waiting lines.

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved

Figure 14.1

Variations in DemandRelative to Capacity

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved

Understanding Capacity Constraints and Demand Patterns

• Time, labor, equipment, and facilities

• Optimal versus maximal use of capacity

• Charting demand patterns• Predictable cycles• Random demand

fluctuations• Demand patterns by

market segment

Capacity Constraints Demand Patterns

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved

Table 14.1

Demand vs. Supply

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved

Table 14.2

Constraints on Capacity

Nature of the constraint Type of serviceTime Legal

ConsultingAccountingMedical

Labor Law firmAccounting firmConsulting firmHealth clinic

Equipment Delivery servicesTelecommunicationUtilitiesHealth club

Facilities HotelsRestaurantsHospitalsAirlinesSchoolsTheatersChurches

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved

Figure 14.3

Strategies for Shifting Demand to Match Capacity

• Use signage to communicate busy days and times.

• Offer incentives to customers for usage during non-peak times.

• Take care of loyal or “regular” customers first.

• Advertise peak usage times and benefits of non-peak use.

• Charge full price for the service--no discounts.

• Use sales and advertising to increase business from current market segments.

• Modify the service offering to appeal to new market segments.

• Offer discounts or price reductions.

• Modify hours of operation.

• Bring the service to the customer.

Demand Too High Demand Too LowShift Demand

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved

Figure 14.4

Strategies for Flexing Capacity to Match Demand

• Stretch time, labor, facilities and equipment.• Cross-train employees.• Hire part-time employees.• Request overtime work from employees.• Rent or share facilities.• Rent or share equipment.• Subcontract or outsource activities.• Outsource.

• Perform maintenance, renovations.

• Schedule vacations.

• Schedule employee training.

• Lay off employees.

Demand Too High Demand Too LowFlex Capacity

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved

Waiting Issues

• unoccupied time feels longer• preprocess waits feel longer• anxiety makes waits seem longer• uncertain waits seem longer than finite waits• unexplained waits seem longer• unfair waits feel longer• longer waits are more acceptable for “valuable”

services• solo waits feel longer

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved

Waiting Strategies

• Employ operational logic to reduce wait

• Establish a reservation process

• Differentiate waiting customers

• Make waiting fun, or at least tolerable

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved

Figure 14.5

Waiting Line Strategies

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved

Figure 14.6

Waiting Line Configurations