Discuss about the demand and capacity management. Discuss the demand and capacity strategy.

Managing demand and managing capacity :
Some capacity is elastic in its ability to absorb extra demand. A subway car, for instance, may offer 40 seats and allow standing room for another 60 passengers with adequate handrail and floor space for all. In short, there are several actions that managers can take to adjust capacity to match the fluctuating levels of demand;

  • Schedule downtime during the periods of low demand: To ensure that 100 percent of capacity is available during peak periods, scheduled repair and maintenance activities should be conducted when demand is expected to be low. Employee vacations should also be taken during such periods.
  • Use part-time employees: Many organizations hire extra workers during their busiest periods. Examples include postal workers and store clerks at Christmas-time, extra lifeguards on summer weekends, and additional hotel employees during vacation periods.
  • Rent or share extra facilities and equipment: To limit investment in fixed assets, a service business may be able to rent extra space or machines at peak times. Firms with complementary demand patterns may enter into formal sharing agreements.
  • Cross train employees: Even when the service delivery system appears to be operating at full capacity, certain physical elements—and their attendant employees—may be underutilized. If employees can be cross-trained to perform a variety of tasks, they can be shifted to bottleneck points as needed, thereby increasing total system capacity. In supermarkets, for instance, the manager may call on stockers to operate cash registers when checkout lines start to get too long.

Whether a service organization pursues a strategy of level capacity or elects to chase demand, its managers need to understand and forecast the forces determining demand.


Strategies for managing demand:

  • Demand exceeds maximum available capacity with the result that potential business may be lost.
  • Demand exceeds the optimum capacity level, no one is turned away, but all customers are likely to perceive deterioration in the quality of service delivered.
  • Demand and supply are well balanced at the level of optimum capacity.
  • Demand is below optimum capacity and productive resources are under utilized, this poses the risk (in some instances) that customers may find the experience disappointing or doubts about the viability of the service.

capacity and demand Management

Approaches for managing demand:
There are five common approaches to managing demand;

The first, which has the virtue of simplicity but little else, involves taking no action and leaving demand to find its own levels. Eventually customer learns from experience or word of mouth when they can expect to stand in line to use the service and when it will be available without delay. The trouble is, they may also learn to find a competitor who is more responsive.

More interventionist approaches involve influencing the level of demand at any given time, by taking active steps to reduce demand in peak periods and to increase demand where there is excess capacity.

Two more approaches both involve inventorying demand until capacity becomes available. You can accomplish this either by introducing a reservations systems that promises customers access to capacity at specified times, or by creating formalized queuing systems (or by a combination of the two).

Capacity Situation Relative to Demand

Approaches Used to Managed Demand

Insufficient Capacity (Excess Demand)

Sufficient Capacity (Satisfactory Demand)

Excess Capacity (Insufficient Demand)

Taking no action Unorganized queuing results (May irritate customers and discourage future use) Capacity in fully utilized (But in this the most profitable mix of business?) Capacity is wasted. (Customers may have a disappointing experience for services like theater.)
Reduced demand Pricing higher will increase profits. Communication can be employed to encourage usage in other time slots. (Can this effort be focused on less profitable/desirable segments?0 Take no action (but see above) Take no action (but see above)
Increase demand Take no action, unless opportunities exist to stimulate (and give priority to) more profitable segments. Take no action, unless opportunities exist to stimulate (and give priority to) more profitable segments. Price lower selectively (try to avoid cannibalizing existing business; ensure all relevant costs and covered). Use communications and variation in products/distribution (but recognize extra costs, if any, and make sure appropriate trade-offs are made between profitability and usage levels.
Inventory demand by reservation system Consider priority system for most desirable segments. Make other customers shift (a) to outside peak period or (b) to future peak. Try to ensure most profitable mix of business. Clarify that space is available and that no reservations are needed.
Inventory demand by formalized queuing Consider override for most desirable segments. Seek to keep waiting customers occupied and comfortable. Try to predict wait period accurately. Try to avoid bottleneck delays. Not applicable.

The above table links these five approaches to the three basic situations of insufficient capacity relative to demand, sufficient capacity, and excess capacity, and added a brief strategic commentary.

Use of marketing mix elements to shape demand patterns:
All the elements of the marketing mix have a role to play in stimulating demand during periods of excess capacity and in decreasing it (demarcating) during periods of insufficient capacity. Price is often the first variable to be proposed for bringing demand and supply into balance, but change in product, distribution strategy, and communication efforts can also play an important role.

Product variance: Although pricing is the most commonly advocated method of balancing supply and demand, it is not quite as universally feasible for services as for goods. A rather obvious example is provided by the respective problems of a ski manufacturer and a ski slope operator during the summer. The former can either produce for inventory or try to sell skis in the summer at a discount. If the skis are sufficiently discounted, some customers will buy before the ski season in order to save money.

Modifying the timing and location of delivery: Rather than seeking to modify demand for a service that continues to be offered at the same time in the same place, some firms respond to market needs by modifying the time and place of delivery. Three basic options are available;

  • The first represents a strategy of no change; regardless of the level of demand, the service continues to be offered in the same location at the same times.
  • A second strategy involves varying the times when the service is available to reflect changes in customer preference by day of week, by season, and so forth.
  • A third strategy involves offering the service to customers at a new location. One approach is to operate mobile units that take the service to customers rather than requiring them to visit fixed-site service locations.

Pricing strategy: For price to be effective as a demand management tool, the marketing manger must have some sense of the shape and slope of a product’s demand curve (i.e. how the quality of service demanded responds to increases or decreases in the price per unit) at a particular point in time. It’s important to determine whether the aggregate demand curve for a specific service varies sharply from one time period to another.

Communication effort: Even if the other variables of the marketing mix remain unchanged, communication efforts alone may be able to help smooth demand. Signing, advertising, and sales messages can remind customers of peak periods and encourage them to travel at uncrowned, off-peak times when service is, perhaps, faster or more comfortable. Examples include postal service requests to “Mail Early for Christmas” public transport messages urging non-computers—such as shoppers or tourists—to avoid the crush conditions of the commute hours, and communications from sales reps for industrial maintenance firms advising customers of periods when preventive maintenance work can be done quickly.

Inventory demand through queuing and reservation
What is a manager to do when the possibilities for shaping demand have been exhausted and yet supply and demand are still out of balance? Taking no action at all and leaving customers to sort things out for themselves is no recipe for service quality and customer satisfaction. Instead, the search must turn to strategies for ensuring order predictability, and fairness in place of a random free-for-all.

Although service businesses can rarely inventory supply, they can often inventory demand. This task can be achieved in one of two ways;

  • By asking customers to wait in line on a first-come, first-served basis (queuing). Or
  • By offering them the opportunity of reserving space in advance.