Aligning Demand and Capacity

What is aligning capacity and demand?

Aligning capacity and demand is a strategic approach that organizations use to ensure that
the level of resources and production capabilities matches the patterns of customer demand. It
involves balancing the available capacity with the fluctuations in demand to optimize resource
utilization and deliver high-quality products or services. The primary goal of aligning capacity
and demand is to meet customer needs efficiently and cost-effectively while minimizing waste
and maximizing revenue. Effective alignment of capacity and demand is crucial for achieving
operational efficiency, improving customer satisfaction, and maximizing revenue while
minimizing costs. It requires a combination of data analysis, strategic planning, and operational
agility to respond to changing conditions in the market and customer preferences.
Service organizations must have a clear understanding of the limits of their capacity and the
patterns of demand they face in order to come up with strategies to match the available supply
with the demand. Matching capacity and demand may be accomplished through the following
strategies: level the fluctuations of demand by modifying demand to match the existing capacity
or adjust capacity according to demand fluctuations.

In aligning capacity and demand, Services cannot be stored, which leads to temporary
imbalances between the supply and demand of services. This supply demand mismatch poses
a difficult challenges for managers of service term.
At any given moment, a fixed capacity service may face one of the following four
conditions
Excess demand
Excess demand, also known as a demand/supply imbalance or a shortage, occurs when the
quantity of goods or services demanded by customers exceeds the available supply.
Example: Popular Restaurant with Limited Seating
Imagine there's a highly-rated and trendy restaurant in a busy city known for its exceptional
cuisine and limited seating capacity. The restaurant has only 40 seats, and reservations are
highly sought after. Here's how excess demand might play out in this scenario:
Reservations Open: The restaurant announces that reservations for the upcoming weekend
will open at a specific time and date. As soon as reservations open, there is a flood of online
bookings and phone calls for reservations. Within a short period, all 40 seats for the weekend
are fully booked. Many customers who called or tried to make online reservations are informed
that there are no available tables left. The restaurant maintains a waiting list for customers who
couldn't secure reservations. This list quickly becomes long, with dozens of hopeful diners
requesting to be notified if there are cancellations or available slots. Some customers who
couldn't make reservations decide to try their luck as walk-ins, hoping there might be last-minute
cancellations or available bar seating. The restaurant experiences long wait times for walk-in
customers, as they hope for a chance to be seated. The bar area is crowded with patrons
hoping for a spot. Customers who are unable to secure reservations or face long wait times
express frustration and disappointment, especially if they had planned a special occasion.
Managing Expectations: The restaurant's staff works to manage customer expectations,
providing estimated wait times for walk-ins and offering apologies for any inconvenience
caused. The restaurant values customer feedback and encourages diners to provide comments
or join a loyalty program. They also use social media and their website to keep customers
informed about special events or upcoming reservation openings. Due to the consistent high
demand, the restaurant's management may consider options such as expanding the seating
area, opening additional locations, or adjusting reservation policies to accommodate more
guests.
Demand exceeds optimum capacity
When demand exceeds optimum capacity, it means that the level of customer demand for a
product or service is greater than what an organization or system has determined as the most
efficient or ideal capacity to meet that demand. This situation can lead to several challenges and
opportunities for businesses and organizations.
Example: Overbooked Hotel during a Popular Event
Imagine a well-known hotel located in a major city. This hotel has a total of 200 rooms and
operates at near-full capacity on most days. However, a significant annual event, such as a
major international conference or a large music festival, is scheduled to take place in the city.
Here's how the hotel might experience excess demand:
Event Announcement: The event organizers announce the dates and details of the event
several months in advance, generating significant interest from attendees. Hotel managers
anticipate a surge in demand during the event period due to attendees and tourists visiting the
city. They start receiving reservation inquiries well in advance. Many individuals and groups
start booking rooms at the hotel months ahead of the event to secure accommodations near the
event venue. As the event date approaches, the hotel's reservation rate begins to increase
significantly, and the majority of rooms are booked. Despite careful planning, it becomes evident
that the demand for rooms during the event period far exceeds the hotel's 200-room capacity. In
an attempt to maximize occupancy and revenue, the hotel management overbooks rooms,
expecting a certain percentage of guests not to show up or cancel their reservations. Closer to
the event date, the hotel continues to receive reservation requests and inquiries, including from
walk-in guests hoping for availability. As the event dates arrive, the hotel reaches full
occupancy, and all 200 rooms are booked. However, there are still potential guests inquiring
about available rooms. Some guests with confirmed reservations may arrive to find that the
hotel is overbooked or that their room type is unavailable due to the excess demand. This leads
to customer frustration and disappointment.
Alternative Accommodations: The hotel may need to arrange alternative accommodations for
guests affected by overbookings, such as transferring them to partner hotels or providing
transportation to nearby hotels with available rooms. To mitigate customer dissatisfaction, the
hotel offers compensation or incentives to affected guests, such as discounted rates,
complimentary services, or future stay vouchers. The hotel communicates openly with guests
about the situation, apologizes for any inconvenience, and strives to provide a high level of
customer service despite the challenges. After the event concludes, the hotel conducts a post-
event assessment to analyze the demand patterns, the effectiveness of overbooking strategies,
and customer feedback to better prepare for similar situations in the future.

Well-balanced demand and supply

This is optimum level of capacity
Example: 100 tables in a restaurant and 100 reservations for the tables, which is a perfect
situation for the restaurant.
Excess capacity
Excess capacity, or overcapacity, occurs when an organization or system has more production
or service capability than needed, causing challenges, inefficiencies, and affecting profitability
and resource utilization.
An organization must take efforts to understand the demand patterns and its capacity
constraints to effectively formulate strategies that can match demand and capacity.
Strategies in Modifying Demand to Match Existing Capacity
This general strategy aims to reduce excess customers beyond the capacity of the organization
during peak times and to influence them to use the service during off-peak times instead.
Service organizations will be able to maximize productivity if they can move customers during
slow periods or even attract new customers at this time. This strategy may not be possible for
other customers whose needs cannot be adjusted.
Meaning, to manage and balance customer demand, ensure that it doesn't exceed the
organization's capacity during peak times. This is often done to avoid overcrowding, long wait
times, reduced service quality, and other negative effects of excessive demand that can strain
the organization's resources. Also, to encourage the customers to use the service during off-
peak times when there is more capacity available.
a. Communicate with Customers.
Service organizations can create and maintain communication with customers to inform them of
the peak periods and to sway them to use the service at other times for them to avoid crowding,
delays, and long waiting time.
Proactive communication is crucial for service organizations to inform customers about peak
periods and encourage them to use services during less congested times. And this include
strategies like, sending customer alerts via email, SMS, or app, and regularly updating websites
and social media profiles to inform customers about upcoming peak periods, along with
suggestions for alternative times to visit or use the service.
b. Modify Timing and Location of Service Delivery.

Organizations may choose to adjust their operation time to cater to market segments to
disperse crowding. Others locate in strategic areas or offer online transactions to accommodate
customers whenever and wherever they are. Families usually go out and relax during
weekends, hence, cinemas can increase, number Of theaters showing family oriented movies.
Bus and rall arg may be purchased at convenience stores other than their usual ticket; booths.

Adjusting operational timing and location is an effective way for organizations to cater to
different market segments, disperse crowding, and meet the needs of diverse customer groups.

c. Offer Incentives for Off Peak Usage.

Special discounts, promo packages, a freebies may be offered to customers who will use the
service during off peak periods.

Offering incentives for off-peak usage is an effective strategy to encourage customers to use
services during less crowded times.