MANAGING CAPACITY and DEMAND

*service capacity is a perishable commodity. For example, a plane flying with empty seats has lost forever the
revenue opportunity of carrying those additional passengers.
*unlike products that are stored in warehouses for future consumption, a service is an intangible personal
experience that cannot be transferred from one person to another. Instead, a service is produced and
consumed simultaneously.

Strategies for Managing Demand

Customer-Induced Variability: Frances Frei five sources of customer-induced variability in service operations.

 Arrival Variability: customers don’t all want service at the same time, or a times convenient for your
company.
 Capability Variability: customers vary in their ability to perform tasks needed to receive service.
 Request Variability: customers ask for a range of things.
 Effort Variability: customers expend varying degrees of energy on tasks needed to receive service.
 Subject Preference Variability: customers have different opinions about what it means to be treated
well.
→ Strategies for managing customer-induced variability fall into two categories: ACCOMODATION and REDUCTION. The
accommodation strategy favours customer experience over operational efficiency. The reduction strategy favours operational
simplicity over service experience.
Examples of strategies to manage customer-induced variability are outlined
TYPE OF VARIABILITY ACCOMODATION REDUCTION
Arrival Provide generous staffing Require reservations
Capability Adapt to customer skill levels Target customers based on
capability
Request Cross-train employees Limit service breadth
Effort Do work for customers Reward increased effort
Subjective Preference Diagnose expectations and adapt Persuade customers to adjust
expectations

Segmenting Demand: Demand for a service seldom derives from a homogenous source.
Offering Price Incentives: price incentives is a common form of sales
Chart Title promotion in which price reductions are offered to consumers to encourage
140
them to buy a particular product earlier or in larger quantity.
120 Experience type Days and weeks of camping Number of days Daily fee
season
1 Saturdays and Sundays of 14 $ 6.00
100 weeks 10 to 15, plus dominion
day and civic holidays
80 2 Saturdays and Sundays of 23 2.50
weeks 3 to 9 and 15 to 19, plus
60 Victoria day
3 Fridays ok week 3 to 15, plus 43 .50
40 other days of weeks 9 to 15
that are not in experience type
1 or 2.
20 4 Rest of camping season 78 free

0
Comparison of existing revenue and projected revenue from discriminatory pricing

Existing Fee of $2.50 Discriminatory Fee

Experience type Campsites occupied Revenue Campsite occupied Revenue
(est)
1 5,891 $14,727 5,000 $30,000
BEFORE SMOOTHING
2 8,978 22,445 8,500 21,250
AFTER SMOOTHING 3 6,129 15,322 15,500 7,750

4 4,979 12,447 ----- -----

Total 25,977 $64,941 29,000 $59,000

Note the projected increase in demand for experience type 3 because of the substantially reduced fee. The
result of off-peak pricing is to tap a latent demand for campsites instead of redistributing peak demand to off-
peak times.
Promotion Off-Peak Demand: creative use of off-peak demand results from seeking different sources of
demand. The strategy of promoting off-peak demand can be used to discourage overtaxing the facility at other
times.
Developing Complementary Services: this is a natural way to expand one’s market, and it is particularly
attractive if the new demands for service are contracyclical and result in a more uniform aggregate demand.
Reservation Systems and Overbooking: taking reservations presells the potential service. As reservation are
made, additional demand is deflected to other time slots at the same facility or to other facilities within the
same organization. Reservations also benefit consumers by reducing waiting and guaranteeing service
availability. Problems do arise, however, when customers fail to honor their reservations.
Overbooking is a strategy by accepting reservations for more than the available seats or rooms. A good
overbooking strategy should minimize the expected opportunity cost of idle service capacity as well as the
expected cost of turning away reservations.

STRATEGIES FOR MATCHING

Managing
service
operations
CAPACITY OF AND DEMAND FOR
SERVICES
strategy

level capacity Chase demands

Managing Managing
demands Capacity

developing increasing
complementary segmenting sharing capacity customer
services demand participation

reservation offering prive cross-training schedulling

systems and incentives employess work shiftd
booking

customer creating
promoting off- using part-time adjustbale
induced employees
peak demand capacity
variability

YIELD
MANAGEMENT

Prepared by: Franklin Paul R. Banua 1 BSHM- A