Chapter 15 – Managing Demand and Capacity
The Underlying Issue: Lack of Inventory Capability
Fundamental issue of supply and demand management is the lack of inventory capabilities. Service firms don’t
have the abilities to build up inventories during slow periods. Lack of inventory capabilities and fluctuating demand
leads to a variety of outcomes. Many services have a fixed capacity, while demand usually fluctuates.
Excess demand – Demand exceeds maximum capacity, resulting in lost business.
Demand exceeds optimum capacity – No one is turned away, but service quality may suffer.
Optimum Capacity (Demand balances Quantity) – Ideal level
Excess Capacity – Demand is below optimum, resulting in lower profits.
Not all firms are equally challenged in terms of managing supply and demand. It depends on the extent of demand
fluctuation and supply constraints. Hospitals will differ than banking.
Time, Labor, Equipment, Facilities
For some service businesses, the primary constraint on service production is time (e.g.
Hairdresser, lawyer). If time is not used productively, profits are lost. With excess demand, time
cannot be created.
In some businesses, labor is a constraint, as in a repair firm. Demand for services can’t be met as
labor is operating a peak capacity.
Equipment can be a constraint in services such as trucking or air delivery.
Limited facilities, such as hotel rooms or seats at a restaurant, can also constrain.
Optimal vs Maximum Use of Capacity
Optimal and Maximum capacity may not be the same. An optimum level means resources are fully
employed but not overused. Maximum means the limit of the service availability. In the event of a
football game, optimum and maximum are the same. In a university classroom or restaurant,
maximum and optimum are different.
In the case of Facilities or Equipment, the maximum capacity is obvious. There are only a certain
number of seats in an aircraft.
When time and labor, maximum capacity is vague to define and it’s flexible amongst everyone. When
a service has reached maximum capacity, service experiences a decrease in service quality,
dissatisfaction and employee burnout. Demand Patterns
The Charting of Demand Patterns
An organization needs to chart the level of demand over a relevant time period. Computerized systems
can be very accurate, while others would have to track informally.
Looking at graphic representations of demand levels, one can usually observe predictable cycles over any
time period. If a cycle is predicted, what are the causes?
Random Demand Fluctuations
Sometimes demand appears to be random, yet causes can be derived. Changes in weather can affect
shopping, etc. Weather can be used to predict the near future tendencies.
Demand Patterns by Market Segment
Detailed records on transactions may be able to disaggregate demand by market segment, for patterns
Strategies for Matching Capacity and Demand
When an organization has a clear grasp of its capacity constraints and an understanding of demand patterns, it