This document discusses managing demand and capacity in the service industry. It describes the nature of services and how demand fluctuates while capacity is usually constant. This can lead to four scenarios: excess demand, demand exceeding optimum capacity, balanced demand and capacity, and excess capacity. The document outlines various strategies for matching demand and capacity, such as shifting demand patterns, adjusting capacity levels, using yield management, and establishing waiting line strategies.

1. Managing Demand & Capacity
Shwetanshu Gupta (49)
Kritika Handoo (18)
Tanvi Bhargav (53)

2. Nature of Service
 Services are deeds, performances and processes produced
or co-produced by one person or entity for another person
or entity
 Intangibility
 Heterogeneous
 Simultaneous consumption and production
 Perishability
• Because of the characteristics that service holds, it can’t be
inventoried.
• These shortcomings in services combined with fluctuating
demand lead to variety of potential outcomes

3. Demand and Capacity
 Demand is the amount of a particular economic good or
service that a consumer or group of consumers will want to
purchase at a given price. Capacity is the amount available at
given price.
 Managing Capacity means managing the limits of an
organization's resources, such as its labor force,
manufacturing and office space, technology and equipment,
raw materials, and inventory .
 Capacity is usually constant whereas demand usually
fluctuates.
 Overuse or underuse of a service results in Gap 3 of the Gap
model- failure to deliver what was designed and planned i.e..

4. Optimum vs. Maximum Capacity
 Maximum capacity on the other hand represent the
absolute limit of service availability.
 Using capacity at optimum level means the resources
are fully employed but not overused and customers are
receiving quality services.
 Example: Theatre- Maximum capacity= Optimum
capacity
:University Classroom- not desirable to have
maximum capacity utilization

5. Lack of inventory capability

6. Demand Vs. capacity: 4 scenarios
Excess demand: Demand exceeds the maximum capacity. In such
situation customers will be turned away, as they don’t receive quality
service due to crowding or overtaxing of staff and facilities.
Demand exceeds optimum capacity: No one is being turned away
but quality of service suffer due to overuse, crowding or staff being
pushed beyond their abilities to deliver consistent quality.

7. Demand and supply are balanced at the level of optimum
capacity: Staff and facilities are occupied at an ideal level. No one is
overworked, facilities can be maintained and customers are receiving
quality service without undesirable delay.
Excess capacity: demand is below optimum capacity. Resources are
being underutilized , resulting in low productivity and low profits.
Customers receive excellent quality, because they have full use of
resources.

8. Cont’d
 Service is a sector where all the firms aren’t challenged
equally in terms of managing demand and supply.
 Seriousness of problem will depend o the extent of
demand fluctuations over time and the extent to which
capacity is constrained.
Extent to which
supply is constrained
Extent of Demand Fluctuations over time
Wide Narrow
Peak demand can
usually be met without
a major delay
1. Electricity
Natural gas
Internet services
2. Insurance
Banking
Peak demand regularly
exceeds capacity
4. Accounting and tax
preparation
Hotels
Restaurants
3. Services similar to
those in cell 2

9. Capacity Constraints
Nature of the
constraint
Type of services
Time Legal, Consulting, Accounting,
Medical
Labor/ staff Law firm, accounting firm,
Consulting firm, Health clinic
Equipment Telecomm, Network services,
Utilities, Health Club
Facilities Hotels, Restaurants, Hospitals,
Schools, theaters, Churches

10. Demand Patterns
 To manage fluctuating demand in a service business, it is
important to have a clear understanding of demand patterns,
why they vary, and the market segments that comprise
demand at different points in time.
 Charting of demand patterns
First, the organization needs to chart the level of demand over
relevant time periods. Organizations that have good
computerized customer information systems can do this very
accurately. The others may need to chart demand patterns
more informally. Daily, weekly and monthly demand levels
should be tracked.

11.  Predictable Cycles
 When organizations chart down their demand patterns,
predictable cycles may be detected.
 Certain service firms have predictable demand patterns.
 For example for a tax accountant, it is generally predicted
that demand will be high at times when taxes are due.
 For hotels it is predicted that demand will be high during
vacations.
 Similarly for telecomm industry demand will be high at
certain holidays and times of the week and day.

12.  Random Demand Fluctuations :
 Sometimes the patterns of demand appear to be
random—there is no apparent predictable cycle.
 For example. day to-day changes in the weather may
affect use of recreational, shopping, or entertainment
facilities. Although the weather cannot be predicted far
in advance, it may be possible to anticipate demand a
day or two ahead.
 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.
 Example: Flood in J&K

13.  Demand Patterns by Market Segment:
 If an organization has detailed records on customer
transactions, it may be able to disaggregate demand
by market segment, revealing patterns within patterns.
Or the analysis may reveal that demand from one
segment is predictable while demand from another
segment is relatively random.
 For example, many auto service centers experience
more walk- in- customers on Monday morning than
any other day of the week.
 Knowing that this pattern exists, some clinics schedule
more future appointments (which they can control) for
later days of the week, leaving more of Monday
available for same-day appointments and walk-ins.

14. Strategies for matching Capacity &
Demand
 When an organisation has clear grasp of its capacity
constraints & an understanding of demand patterns, it is
in a good position to develop strategies for matching
supply and demand.
 2 general approaches
1) To smooth the demand fluctuations by shifting demand to
match existing supply .
2) To adjust capacity to match fluctuations in demand.

15. Shifting Demand to Match Capacity
 An organisation seeks to shift customers away from
periods in which demand exceeds capacity, perhaps by
convincing them to use the service during slow demand.
 During periods of slow demand, the organisation seeks
to attract more customers to utilize its productive
capacity.
 Frequently a firm uses combination of approaches.

16. Strategies for shifting demand to match
capacity

17. Vary the service offering : This approach is to
change the nature of the service offering, depending
upon the season of the year, day of the week or time
of the day.
Example
Communicate with customers : Letting them know
the times of peak demand so they can choose to use
the services at alternative times and avoid crowding
and delays.
Example

18. Modify timing & location of service delivery : Some
firms adjust their hours & days of service delivery to
more directly reflect customer demand.
Example
 Differentiate on Price : A common response during
slow demand is to discount the price of the service. To
be effective however, a price differentiation strategy
depends on understanding of customer price sensitivity
& demand curves.
Example

19. Adjusting Capacity to meet
Demand
 The fundamental idea here is to adjust, stretch & align
capacity to match customer demand.
 During periods of peak demand the organisation seek to
stretch or expand its capacity as much as possible.
 During periods of slow demand it tries to shrink capacity
so a snot to waste resources.

20. Strategies for adjusting capacity to match
demand

21.  Stretch existing capacity : The existing capacity is
expanded temporarily to match demand. No new
resources are added; rather the people, facilities, &
equipment are asked to work harder & for longer.
 Stretch Time : A health clinic may stay open longer
during flu season or retailers are open longer hours
during the festive season.
 Stretch Labour : In many service organisations,
employees are asked to work longer & harder during
period of peak demand.

22.  Align capacity with demand fluctuations : this
basic strategy is sometimes called as a “chase
demand” strategy. By adjusting service resources
creatively, organisations can in effect the demand
curves to match capacity with customer demand
patterns.
Use part-time employees : In this situation the
organisation’s labour resource is being aligned with
demand. Retailer’s hire part-time employees during
holiday rush, restaurants often ask employees to work
split shifts(work the lunch shift, leave for few hours, &
come back for dinner rush) during peak mealtime
hours.

23.  Outsourcing : firms that find they have a temporary
peak in demand for a service that they cannot perform
themselves may choose to outsource the entire
service.
 Schedule downtime during periods of low demand
: if people, equipment,& facilities are being used at
maximum capacity during peak periods, then it is
imperative to schedule repair, maintenance &
renovation during off-peak season.
 Cross- train employees : if employees are cross-trained,
they can shift among tasks, filling in where they
are most needed. It increases the efficiency of the
whole system & avoids underutilizing employees in
some areas while others are being overtaxed.

24. Yield Management
 “ It the process of allocating right type of capacity to the
right type kind of customer at the right price so as to
maximise revenue or yield.”
 The goal of yield management is to produce the best
possible financial return from a limited available
capacity.
 Using yield management models, organisations find the
best balance at a particular point in time among the
prices charged, the segments sold to, and the capacity
used.
 It is the ratio of :
yield = actual revenue
potential revenue

25. Implementing a Yield Management
System
 To implement a yield management system, an
organisation needs detailed data on past demand
patterns by market segment as well as methods of
projecting current market demand.

26. Challenges & Risks in using Yield
Management
 Loss of competitive focus : it may cause a firm to over
focus on profit maximisation & inadvertently neglect
aspects of the service that provide long-term competitive
success.
Customer alienation : if customers learn that they are
paying a higher price for service than someone else,
they may perceive the pricing as unfair, particularly if
they do not understand the reasons.
Employee morale problems : this system take much
guesswork & judgement in setting prices away from
sales & reservations people. Although some employees
may appreciate, others may resent the rules &
restrictions on their own discretion.

27.  Lack of employee training : extensive training is
required to make a yields system work. Employees
need to understand its purpose, how it works, how
they should make decisions, and how the system will
affect their jobs.
 Inappropriate organisation of the yield
management function : to be most effective with
yields management, an organisation must have
centralised reservations. Although airlines & some
large hotel chains do have such centralisation, smaller
organisations may have decentralised reservation
system & thus find it difficult to operate a yield
management system effectively.

28. Waiting line Strategies : When
Demand & Capacity can’t be matched
Sometimes it is not possible to manage capacity to
match demand or vice versa. It may be too costly - for
eg, most health clinics would not find it economically
feasible to add additional facilities or physicians to
handle peak in demand. Or demand may be very
unpredictable & the service capacity very inflexible.
 To deal effectively with the inevitability of waits,
organisations can utilize a variety of strategies:

29. Employ Operational Logic : if customer waits are
common, a first step is to analyse the operational
processes to remove any inefficiencies. It may be
possible to redesign the system to move customers
along more quickly.

30.  Establish a Reservation Process : when waiting
cannot be avoided, a reservation system can help to
spread demand. Restaurants, transportation
companies, & many other use reservation systems to
alleviate long waits.

31.  Differentiate Waiting Customers : not all customers
need to wait the same length of time for service. On the
basis of need or customer priority, organisations
differentiate among customers. It can be based on
following factors :
• Importance of the customer : frequent customers who
spend large amount of time with the organisations can be
given priority in service by providing them with a special
waiting area or segregated lines.
• Urgency of the job : those customers with the most
urgent need may be served first. This strategy is used in
emergency health care.
• Payment of a premium price : customers who pay extra,
for eg: first class on airline, are often given priority via

32.  Making waiting fun:
All waits need not to be boring to customers.
Organizations can make waiting a value received by the
customers. Customers can be satisfied by making waiting
fun or at least tolerable. There are 9 principles about
waiting: • 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