6/8/2020 Strategies to match demand and capacity

Strategies to match demand

and capacity
By Priya Chetty on October 30, 2010

When an organization has a clear grasp of its capacity constraints and an understanding
of demand patterns. It is in a good position to develop strategies for matching supply
and demand.

There are two general approaches for accomplishing demand and capacity.

The first is to smooth the demand fluctuations themselves by shifting demand to

match existing supply.

The second general strategy is to adjust capacity to match fluctuations in demand.

Shifting demand and capacity

By shifting demand and capacity an organization seeks to shift customers away from
periods in which demand exceeds capacity. Perhaps by convincing them to use the
service during periods of slow demand. This may be possible for some customers but
not for others. For example, many business travelers are not able to shift their needs
for airline, car rental, and hotel services. Pleasure travelers on the other hand can often
shift the timing of their trips. Those who can’t shift and can’t be accommodated will
represent lost business for the firm.

Vary the service offering

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One approach is to change the nature of the service offering, depending on the season
of the year, day of the week, or time of day. For example, Whistler Mountain, a ski re
sort in Vancouver, Canada, offers its facilities for executive development and training
programs during the summer when snow skiing is not possible.

A hospital in the Los Angeles area rents use of its facilities to film production crews
who need realistic hospital settings for movies or TV shows. Accounting firms focus
on tax preparation late in the year and until April 15. When federal taxes are due in the
United States. During other times of the year they can focus on audits and general
consulting activities.

Air lines even change the configuration of their plane seating to match the demand
from different market segments. In some planes there may be no first-class section at
all. On routes with a large demand for first-class seating, a significant proportion of
seats may be placed in first class..

Care should be exercised in implementing strategies to change the service offering.

Because such changes may easily imply and require alterations. Other marketing mix
variables are promotion, pricing and staffing to match the new offering. Unless these
additional mix variables are altered effectively to support the offering, the strategy may
not work. Even when done well, the downside of such changes can be a confusion in
the organization’s image from the customers’ perspective or a loss of strategic focus
for the organization and its employees.

Communicate with customers

Another approach for shifting demand and capacity is to communicate with the
customers. It helps them know the times of peak demand so that they can choose to use
the service at alternative times and avoid crowding or delays. E.g signs in banks and

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post offices let customers know their busiest hours and busiest days of the week can
serve as a warning. This allows customers to shift their demand to another time if
possible.

Forewarning customers about busy times and possible waits can have added benefits.
Many customer service phone lines provide a similar warning by informing waiting
customers of approximately how long it will be until they are served. Those who don’t
want to wait may choose to call back later when the lines are less busy. Research in a
bank context found that customers who were forewarned about the bank’s busiest
hours were more satisfied. Even when they had to wait than were customers who were
not forewarned.

In addition to signage communicating peak demand times to customers, advertising

and other forms of promotion can emphasize different service benefits during peak and
slow periods. Advertising and sales messages can also remind customers about peak
demand times.

Modify timing and location of service

delivery
Some firms adjust their hours and days of service delivery to more directly reflect
customer demand. Historically, U.S. banks were open only during “bankers’ hours”
from 10 A.M. to 3 P.M. every weekday. Obviously these hours did not match the times
when most people preferred to do their personal banking. Now U.S. banks open early,
stay open until 6 P.M. many days, and are open on Saturdays, better reflecting
customer demand patterns.

Theaters also accommodate customer schedules by offering matinees on weekends and

holidays when people are free during the day for entertainment. Movie theaters are
sometimes rented during weekdays by business groups. It is an example of varying the
service offering during a period of low demand.
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Differentiate on price
A common response during slow demand is to discount the price of the service. This
strategy relies on basic economics of supply and demand. To be effective, however a
price differentiation strategy depends on solid understanding of customer price
sensitivity and demand curves. For example, business travelers are far less price
sensitive than are families traveling for pleasure.

For any hotel, airline, restaurant or other service establishment all of the capacity could
be filled with customers if the price were low enough. But the goal is always to ensure
the highest level of capacity utilization without sacrificing profits.

Heavy use of price differentiation to smooth demand can be a risky strategy. Over
reliance on price can result in price wars in an industry where eventually all
competitors suffer. Price wars are well known in the airline industry. In this industry
the total industry profits suffered as a result of airlines simultaneously trying to attract
customers through price discounting.

Another risk of relying oh price is that customers grow accustomed to the lower price
and expect to get the same deal the next time they use the service. If communications
with customers are unclear, customers may not understand the reasons for the
discounts. And they will expect to pay the same during peak demand periods. Overuse
or exclusive use of price as a strategy for smoothing demand is also risky due to
potential impact on the organization’s image and the possibility of attracting undesired
market segments.

Flexing capacity to meet demand

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A second strategic approach to matching demand and capacity focuses on adjusting or

flexing capacity. The fundamental idea here is to adjust, stretch and align capacity to
match customer demand. During periods of peak demand the organization seeks to
stretch or expand its capacity as much as possible. During periods of slow demand it
tries to shrink capacity so as not to waste resources.

Stretch existing capacity

The existing capacity of service resources can often be expanded temporarily to match
demand. In such cases no new resources are added. Rather people, facilities, and
equipment are asked to work harder and longer to meet demand.

Stretch time: It may be possible to extend the hours of service temporarily to

accommodate demand. A health clinic might stay open longer during flu season.
Retailers are open longer hours during the Christmas shopping season. And
accountants have extended appointment hours (evenings and Saturdays) before tax
deadlines.

Stretch labor: In many service organizations, employees are asked to work longer
and harder during periods of peak demand. For example, consulting organizations
face extensive peaks and valleys with respect to demand for their services. During
peak demand, associates are asked to take on additional projects and work longer
hours. And front-line service personnel in banks, tourist attractions, restaurants
and telecommunications companies are asked to serve more customers per hour
during busy times.

Stretch facilities: Theaters, restaurants, meeting facilities and classrooms can

sometimes be expanded temporarily by the addition of tables, chairs, or other
equipment needed by customers. Or as in the case of a commuter train, a car can
hold a number of people seated comfortably or can “expand” by accommodating
standing passengers.

Stretch equipment: Computers, telephone lines and maintenance equipment can

often be stretched beyond what would be considered the maximum capacity for
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short periods to accommodate peak demand. In using these types of “stretch”

strategies, the organization needs to recognize the wear and tear on resources. The
potential for inferior quality of service may go with the use. These strategies
should thus be used for relatively short periods in order to allow for later
maintenance of the facilities and equipment.

As noted earlier, sometimes it is difficult to know in advance, particularly in the case

of human resources, when capacity has been stretched too far.

Align capacity with demand fluctuations

This basic strategy is sometimes known as a “chase demand” strategy. By adjusting
service resources creatively, organizations can in effect chase the demand curves to
match capacity with customer demand patterns. Time, labor, facilities, and equipment
are again the focus, this time with an eye toward adjusting the basic mix and use of
these resources.

Specific actions might include the following:

Use part-time employees: In this case the organization’s labor resource is being
aligned with demand. Retailers hire part-time employees during the holiday rush,
tax accountants engage temporary help during tax season, tourist resorts bring in
extra workers during peak season. Restaurants often ask employees to work split
shifts (work the lunch shift, leave for a few hours, and come back for the dinner
rush) during peak mealtime hours.

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.
For example, in recent years, many firms have found they don’t have the capacity
to fulfill their own needs for technology support, Web design, and software-
related services. Rather than try to hire and train additional employees, these
companies look to firms that specialize in outsourcing these types of functions as
a temporary (or sometimes long-term) solution.

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Rent or share facilities or equipment

For some organizations it is best to rent additional equipment or facilities during
periods of peak demand. For example, ex press mail delivery services rent or lease
trucks during the peak holiday delivery sea son. It would not make sense to buy trucks
that would sit idle during the rest of the year. Sometimes organizations with
complementary demand patterns can share facilities.

An example is a church that shares its facilities during the week with a Montes son
preschool. The school needs the facilities Monday through Friday during the day; the
church needs the facilities evenings and on the weekend.

Schedule downtime during periods of low

demand
If people, equipment, and facilities are being used at maximum capacity during peak
periods, then it is imperative to schedule repair, maintenance, and renovations during
off-peak periods. This ensures that the resources are in top condition when they are
most needed. With regard to employees, this means that vacations and training are also
scheduled during slow demand periods.

Cross-train employees
If employees are cross-trained, they can shift among tasks, filling in where they are
most needed. This increases the efficiency of the whole system and avoids
underutilizing employees in some areas while others are being over taxed. Many
airlines cross-train their employees to move from ticketing to working the gate
counters to assisting with baggage if needed. In some fast-food restaurants, employees

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specialize in one task (like making french fries) during busy hours, and the team of
specialists may number 10 people. During slow hours the team may shrink to three,
with each person performing a variety of functions.

Grocery stores also use this strategy, with most employees able to move as needed
from cashiering to stocking shelves to bagging groceries.

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Modify or move facilities and equipment

Sometimes it is possible to adjust, move, or creatively modify existing capacity to meet
demand fluctuations. Hotels accomplish this by reconfiguring rooms—two rooms with
a locked door between can be rented to two different parties in high demand times or
turned into a suite during slow demand. The airline industry offers dramatic examples
of this type of strategy. Using an approach known as “demand-driven dispatch,”
airlines have begun to experiment with methods that assign airplanes to flight
schedules on the basis of fluctuating market needs.’ The method depends on accurate
knowledge of demand and the ability to quickly move airplanes with different seating
capacities to flight assignments that match their capacity The Boeing 777 aircraft is so
flexible that it can be reconfigured within hours to vary the number of seats allocated
to one, two, or three classes.’ The plane can thus be quickly modified to match demand
from different market segments, essentially molding capacity to fit demand.

Another strategy may involve moving the service to a new location to meet customer
demand or even bringing the service to customers. Mobile training facilities, libraries,
and blood donation facilities are examples of services that physically follow
customers.

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Priya Chetty

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