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MOS/U2 Topic 8 Demand and Capacity Management

Originally two strategies were suggested for managing demand and capacity: the first would involve adjusting capacity to match demand (defined as ‘chasing demand’) and the second, altering demand to match available capacity (known as ‘level capacity’).

  1. Adjusting capacity to match demand

(i) Extend the opening hours This is not an option open to all service organizations. Where it is possible it is likely to occur only when demand levels are regarded as particularly excessive.

(ii) Encourage employees to work harder The requirement here is usually that of processing more customers per hour or per day. Although a mark of efficiency (more output from existing staff), service quality for customers may deteriorate.

(iii) Cross-train employees Enables organizations to operate with fewer staff. Instead of being confined to handling few responsibilities staff are equipped to manage a variety of tasks and activities. It amounts to a move in the direction of job enlargement and some might say job enrichment, increasing employee motivation, satisfaction and morale. Not all employees will welcome it, particularly where there is seen to be little increase in commensurate rewards. The type of service and the organizational culture will be two prominent factors that need to be taken into account prior to such a move.

(iv) Recruiting part-time employees This is an option low in cost and potentially one that can be achieved quickly. Organizations should, of course, ensure that part-time employees be given the same support and encouragement as given to full-time staff.

(v) Add facilities Usually in the form of table, chairs or other equipment. Just how much scope there is for this will depend on the initial configuration and layout designed to communicate a specific atmosphere and/or level of service. Adding facilities may change both.

(vi) Hire or share facilities or equipment May be in the form of additional physical space or vehicles required either on a temporary or recurring basis. Using customers as productive resources – up to this point all attempts at adjusting capacity have involved manipulating internal resources and assets. However some have suggested that organizations should regard customers as ‘partial employees’ and make a contribution to productive capacity.

(vii) Outsourcing For small to medium-sized organizations, in particular, calling on outside assistance is a valuable option in trying to meet market demand. Typical areas for outsourcing are technological and marketing support, employee recruitment and training, and Web development. Large organizations also outsource. Consider the recent case of British Airways and the outsourcing of its inflight catering to Gate Gourmet. Competitive pressures in the airline industry had forced this move. Unfortunately, the demand for lower costs led to industrial action by Gate Gourmet employees. The above options, then, are aimed at increasing capacity to absorb demand.

However, for service organizations there will inevitably be periods of time where capacity is under-utilized. Such a situation will remain so if attempts to encourage demand during these periods prove unsuccessful. It has been suggested that slack time be used ‘productively as a time to train new employees, do maintenance on the equipment, clean the premises, prepare for the next peak and give the workers some relief from the frantic pace of the peak periods’.

  1. Altering demand to match available capacity

Whereas capacity management is a response to demand, demand management is an attempt to shift demand. Given the relative inflexibility of capacity organizations may seek to smooth demand by reducing the variability and fluctuation of existing patterns. Organizations can turn to the marketing mix for stimulating demand during periods of spare capacity or shifting demand during periods where capacity is operating at or near maximum. Of the ‘4 Ps’ price and, to a lesser extent, place, offer the most potential in this area.

(i) Manipulate price This will be discussed in more detail in the following section on ‘Revenue Management’. The central role of price is to discourage too many customers from using the service during ‘peak demand’ periods and encourage more customers to select ‘off-peak’ periods. On price alone this strategy will only work if enough customers can be attracted by the lower prices available during low demand periods. Leisure, hospitality and transportation services would appear suited to this approach. However this strategy of price differentiation is, it is argued, not without risk. Customers may become acclimatized to the lower prices and expect them whenever the service is used. Equally there is risk to the organization’s image in that lower prices may attract undesirable customers. This would be particularly relevant for a service that regards itself as more upmarket or exclusive.

(ii) Offer a mobile service For a number of reasons consumers have welcomed the emergence of mobile services where the provider takes the service to the customer rather than or in addition to the customer having to visit the provider in some fixed location. Libraries have used this approach for many years, the service being particularly valued by the disabled and those living in remote locations. Other services that have found mobility an effective method of managing demand include breakdown and maintenance, blood donation and catering.

(iii) Communicating with customers The provision of information as to when demand is, or is likely to be, high appears to be a strategy not well adopted by service organizations. In particular for customers in our ‘call centre society’ it can be especially frustrating. Waiting is a feature of modern day society and will be addressed later in the chapter.

(iv) Changing the service offer For most organizations this is not an option. What they offer remains fixed. Where services with a sizeable facility like hotels experience significant seasonal fluctuations however, action may be taken to encourage varied usage of the facility when capacity is under-utilized.


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