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Module 1: Balancing Demand and Productive Capacity

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Balancing Demand and Productive Capacity - Part 1

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MODULE OVERVIEW

Know the different demand supply situations that fixed capacity firms may face.
Understand what is meant by productive capacity in a service context.
Be familiar with basic ways of managing capacity.
Recognize that demand patterns vary by segment situations, so specific variations in demand can be predicted.

FLUCTUATIONS IN DEMAND THREATEN PROFITABILITY

Most services are perishable and cannot be inventoried for sale at a later date.
This poses a challenge for any capacity constrained service that faces wide swings in demand.
To quote a service manager “ It’s either feast or famine for us” In peak periods, we’re disappointing prospective customers.
In low periods, our facilities are idle, and we’re losing money.
In other words, demand and supply are not in balance.

FROM EXCESS DEMAND TO EXCESS CAPACITY
A fixed-capacity service faces one of the four following conditions:

Excess demand — Level of demand exceeds maximum available Capacity with the result that some customers are denied service.
Demand exceeds optimum capacity — No one is turned away, but conditions are crowded and customers are likely to perceive deterioration in service quality.
Demand and supply are well-balanced at the level of optimum capacity — Staff and facilities
Excess capacity — Demand is below optimum capacity and productive resources are underutilized, resulting in low productivity.

ADDRESSING PROBLEM OF FLUCTUATING DEMAND
Approaches to problem of fluctuating demand

Adjust level of capacity to meet variations in demand

This approach requires an understanding of what constitutes productive capacity and how it may be increased or decreased on an incremental basis.


Manage the level of demand

This requires using marketing strategies to smooth out the peaks and fill in the valleys so as to generate a more consistent flow of requests for service.


Many firms use a mix of both approaches.

PRODUCTIVE CAPACITY
It refers to the resources or assets that a firm can employ to crate goods and services. It includes

Physical facilities designed to certain customers
Physical facilities designed for storing or processing
Physical equipment used to process people, possessions, or information
Labor
Infrastructure

MANAGING CAPACITY

Stretched capacity levels
Adjusting capacity to match demand
Use part time employees
Invite customers to perform self-service
Ask customers to share
Create Flexible capacity
Rent or share extra facilities and equipment

CONCLUSION

In this module, firstly we discussed about the different types of demand-supply situations.
Next, we identified the various forms of productive capacity in services and ways to manage it.
Finally we discussed about the demand patterns.