Definitions of managing capacity and managing demand
Managing capacity refers to the way capacity is used and tailored to match variations in demand.
Means for operationalizing each include:
Creating Flexible Capacity
- Provide for additional capacity
- Rent facilities
- Create flexibility in what is offered
- Review the hours of business
- Cross-train employees
Managing demand, however, implies attempting to do something about it.
This means either; (a) controlling it (through price or inventorying mechanisms, or by shifting demand to other periods); or (b) increasing it.
Strategies for meeting the challenges of Fixed Capacity
There are fundamentally two ways by which innate capacity constraints may be overcome or at least made less of a constraint than they might otherwise be. The first of these involves putting in place measures that have the effect of creating flexible capacity for an organization. The second relates to how resources are utilized and managed.
Creating Flexibility capacity refers to the physical ability of a service organization to absorb or cope with extra demand through the way in which the infrastructure of the organization has been designed and set up.
Strategies for Managing Demand
The article explains that at any point in time a fixed capacity organization may be faced with one of four threatening conditions:
- Demand exceeds maximum available capacity.
- Demand exceeds optimum capacity: all are served but service quality deteriorates
- Optimum capacity utilization: demand and supply are well balanced
- Demand is below optimum capacity and productive resources are underutilized, leading to customer doubts about service viability.
To deal with each of these threats, managers may choose to:
- Take no action (situation ranges from disorganized queuing to wasted capacity)
- Reduce demand
- Increase demand (price lower, promote, enhance service features)
- Inventory demand through reservations and formalized queuing
Understanding Patterns and Determinants of Demand
- Effective demand management begins with understanding what drives demand. This implies identifying and analyzing:
- The predictability of demand over a cycle of known duration
- Causes of observed demand variations
- Random changes in demand and their causes
- The possibility of disaggregating overall demand levels by market segment.
Chasing Demand (Variations in demand)
This refers to the option of tailoring the overall level of capacity to match variations in demand rather than trying to stretch existing capacity in peak times.
- Product Variations: Features may be varied according to the time of day (e.g., restaurants) or season of the year (hotels) to attract different market segments.
- Distribution: Modifying time and place of delivery to reflect changing market needs over the product demand cycle.
- Pricing: If the shape of demand curves for different market segments is understood, then prices may be raised/lowered to discourage/attract particular segments at particular times
- Communication: Signage, advertising, and promotion can be used to inform customers of peak periods.
Demand may also be managed through the use of customer-friendly Queuing and Reservations systems. We call this Inventorying Demand. The text explains different ways in which these kinds of initiatives may be implemented and highlights
- important behavioural considerations when customers are required to wait; and
- information required by managers in order to develop effective demand management strategies.
To develop effective demand management and capacity management strategies, managers need information on:
- Historical demand levels over time
- Future demand forecasts by segments
- Periodic cycles vs. random fluctuations on a segment by segment basis
- Data on both fixed and variable costs for each service offering
- Demand variations on a site-by-site basis for multisite service operations
- Customer attitudes towards queuing
- Customers’ opinions on service quality at different levels of capacity utilization