Operations Notes – Capacity and Demand

Demand may be time variant (dynamic), uncertain. 3 main problems:

• capacity
• utilization
• yield (esp. when available capacity has high fixed costs)

Ways demand can be managed (sometimes):

• design product portfolio to manage fluctuations (e.g. products with complementary demand patterns)
• modify time and location of delivery
• pricing strategies (customer segmentation)
• communication with the customer
• reservations, appointments (yield management)

5 Overall Strategies to Manage Demand

• take no action
• reduce demand
• increase demand
• inventory demand by reservation system
• inventory demand by formalized queues

Alternative to managing demand is to chase demand with flexible capacity:
The ability to chase demand depends on how flexible capacity is (various types of capacity must be considered).

Capacity Shortage Situations

• Ask if aggregate capacity over a longer term < demand
• if yes, need to add capacity
• If aggregate capacity is adequate, examine how capacities compare with demand over shorter time horizons:
• If there is no shortage, need to use capacity better
• If there is a shortage during some periods and excess over others, try to reschedule to chase demand
• Add capacity after rescheduling cannot close the gap completely

Different types of capacity (labor, facilities, equipment) need to be balanced carefully.