Service Capacity Planning
These course notes are for use in conjunction with Learning Module 8 of
MG 476 - Services Management.
Menu for Learning Module 8
Capacity Planning for Service Organizations
Capacity planning presents a different problem for the production of services than for the production of manufactured goods. If demand is cyclical in manufacturing, shortages can usually be avoided by building up inventory during slow periods or arranging to subcontract production from another firm. In a service organization, like a pizza shop, it would be unwise to make more pizzas on Thursday in anticipation of large demand on Friday evening. However, capacity can be adjusted to some extent by scheduling more kitchen staff and drivers on weekends and holidays when demand in high. (See Short-Term Capacity Planning in Service Organizations, below)
At the pizza shop, for example, a major constraint is the oven capacity. It cannot be adjusted in the short run, and thus must be built into the facility to meet peak periods of demand. As in manufacturing organizations, it is important to balance capacity at various stages of a service process to avoid bottlenecks. Balancing is probably even more important for service organizations, in fact, since manufactured goods do not complain about waiting, but people do. In deciding to change capacity, service and manufacturing organizations must make similar decisions. They must be concerned with the amount, timing, and form of capacity additions.
It is easy, however, to add the wrong kind of capacity for producing services. For instance, to increase passenger capacity, some airlines purchased jumbo jets. That turned out to be a poor strategic decision when competitors increased capacity by flying more frequently with smaller jets. While their total capacity was the same in terms of seats per day, the more frequent flight schedules provided better customer service and gained increased market share for the airline providing the service.
Another strategic error a service organization can make is to increase only a portion of its service capacity. For example, if a hotel adds more rooms, it must also increase capacity in its restaurants, meeting rooms, and recreational facilities to accommodate a larger number of guests. [32]
Although capacity planning in services is subject to many of the same issues as manufacturing capacity planning, and facility sizing can be done in much the same way, there are several important differences. Service capacity is more:
Unlike goods, services cannot be stored for later use. The capacity must be available to produce a service at the time when it is needed. For example, a customer cannot be given a seat that went unoccupied on a previous airline flight if the current flight is full. Nor could the customer purchase a seat on a particular day's flight and take it home to be used at some later date.
The service capacity must be located near the customer. In manufacturing, production takes place, and then the goods are distributed to the customer. With services, however, the opposite is true. The capacity to deliver the service must first be distributed to the customer (either physically or through some communication media such as the telephone); then the service can be produced. A hotel room or rental car that is available in another city is not much use to the customer - it must be where she is when she needs it.
The volatility of demand on a service delivery system is much higher than that on a manufacturing production system for three reasons.
First, as just mentioned, services cannot be stored. This means that inventory cannot be used to smooth the demand as in manufacturing.
The second reason is that the customers interact directly with the production system - and each of these customers often has different needs, will have different levels of experience with the process, and may require different numbers of transactions. This contributes to greater variability in the processing time required for each customer and hence greater variability in the minimum capacity needed.
The third reason for the greater volatility in service demand is that it is directly affected by consumer behavior. Influences on customer behavior ranging from the weather to a major event can directly affect demand for different services. Go to any restaurant near your campus during spring break and it will probably be almost empty. Or try to book a room at a local hotel during Homecoming weekend. This behavioral effect can be seen over even shorter time frames such as the lunch-hour rush at a bank's drive-through window or the sudden surge in pizza orders at Domino's during halftime on Superbowl Sunday. Because of this volatility, planning capacity in services is often done in increments as small as 10 to 30 minutes, as opposed to the one-week increments more common in manufacturing.
Service Utilization and Service Quality
Planning capacity levels for services must consider the day-to-day relationships between service utilization and service quality. Consider a service situation cast in waiting line terms (arrival rates and service rates).
As noted by Haywood-Farmer and Nollet [6], the best operating point is near 70 percent of the maximum capacity. This is "enough to keep servers busy but allows enough time to serve customers individually and keep enough capacity in reserve so as not to create too many managerial headaches." In the critical zone, customers are processed through the system, but service quality declines. Above the critical zone, the line builds up and it is likely that many customers may never be served.
Haywood-Farmer and Nollett [6] also note that the optimal utilization rate is very context-specific. Low rates are appropriate when both the degree of uncertainty and the stakes are high. For example, hospital emergency rooms and fire departments should aim for low utilization because of the high level of uncertainty and the life-or-death nature of their activities. Relatively predictable services such as commuter trains or service facilities without customer contact, such as postal sorting operations, can plan to operate much nearer 100 percent utilization.
Interestingly, there is a third group for which high utilization is desirable. All sports teams like sellouts, not only because of the virtually 100 percent contribution margin of each customer, but because a full house creates an atmosphere that pleases customers, motivates the home team to perform better, and boosts future ticket sales. Stage performances and bars share this phenomenon. On the other hand, many airline passengers feel that a flight is too crowded when the seat next to theirs is occupied. Airlines capitalize on this response to sell more business-class seats.
Adding capacity through multisite service growth
Many services, particularly franchises, start with one unit and grow by adding similar units at different locations. Research by Sasser, Olsen, and Wyckoff [7] indicated that this growth followed four life cycle stages:
Services are conceived in the entrepreneurial stage. Services generally offer a single service at a single location. Many services such as small groceries, specialty stores, and restaurants never grow out of this stage. Capacity expansion consists of the addition of equipment and personnel at the current site to meet a growing demand for the service. Planning issues revolve around (1) equipment cost and (2) how the addition of equipment and personnel into a normally already cramped facility will affect service delivery.
Two strategies are commonly used by a single-site firm to cope with the highly volatile demand typical of services.
The first is cultivating the ability to shift resources from other tasks to where they are needed. Services will commonly cross-train personnel to fill in at other positions when they are needed, such as training a bank clerk to fill in as a teller during the lunch-hour rush or teaching a salesperson to run a register whenever a line forms.
The second strategy is the use of customer coproduction. Coproduction takes place when the customer does some or all of the work required in a service transaction, as with self-serve drink fountains or self-bussing tables in restaurants. Coproduction tends to smooth the demands on the system because whenever demand increases, these additional customers also provide labor to help meet this demand.
Multisite Rationalization Stage
At the multisite rationalization stage, the service firm has exhausted the local market for its existing service and must make a decision about continued growth. The firm can:
If a firm decides to grow by adding services to the existing site, it manages capacity expansion in much the same manner as firms at the entrepreneurial stage. Service firms that choose multiple sites have an additional option for managing the demand volatility - by shifting resources between sites to cover the peak demands. Cars and truck rental firms will shift vehicles from slow locations to where the demand is currently highest. In fact, through the use of select discount fares on one-way rentals, these firms actually have the customers transport the vehicles to where they are most needed. Companies with multiple telephone call handling centers will often reroute the overload during peak hours to call centers in other time zones that peak earlier or later in the day. One engineering firm is able to handle rush jobs by electronically moving the work among sites around the globe. By passing work on at the end of one site's day to a site where the day is just beginning, the company is able to work 24 days a day on an important project, even though none of its offices actually keep those hours.
Some firms (such as resorts, universities, and hospitals) manage to grow quite large without ever becoming multisite operations by adding more and more services at their existing site. Other firms (such as chain restaurants and hotels) replicate a more focused concept in a large number of different sites.
Despite the success of a limited number of firms, those that try to expand in both directions most often fail. In some cases, this is because the complexity of managing a large variety of services at multiple sites becomes overwhelming. In other cases, some or all components of a complex package of services that evolve to serve customers in one location may simply not be appropriate for customers in another.
Different types of economies apply depending on how the service firm expands. As the capacity of a service at a given site increases, there will be economies of scale, just as in a manufacturing plant. Adding sites to a service firm, however, produces more limited economies of scale. Fixed costs are still distributed over a greater volume, but we do not expect to see the capital and operating cost reductions. This is because adding a site does not actually increase the "plant" size, it merely adds another small "plant."
Diseconomies of scale are also evident as service firms acquire too many sites and the complexity becomes increasingly unmanageable. At least one major study [8] has shown that perceived quality of food service deteriorates as the number of sites grows very large.
Multi service firms often experience the other type of economy, economies of scope. In other words, offering related services at a single site can be less expensive than offering the services independently at separate sites. This is possible because some common resources such as databases or specific employee skills that have related services at little or no additional cost. To take full advantage of economics of scope, therefore, it is important to focus on adding new service that can efficiency use existing resources.
When the service firm enters its rapid growth stage, its sales volume typically increases exponentially. Unfortunately, so does the operational complexity of running the firm. This is what Sasser, Olsen, and Wycoff [7] refer to as the "Bermuda triangle" of operational complexity, where the difficulty in running the business outstrips the manager's ability to handle it.
Other new capacity planning challenges at this stage include
By the mature stage, a service firm has tapped most of its potential market and may have lost much of its original uniqueness. At this stage, operational efficiencies become particularly important as the competition becomes largely price based. Because of the age of the facilities, capacity issues generally focus on remodeling and replacement. Sometimes, however, it is necessary to modify the service concept because it has become stale over time. If the concept is revitalized, capacity planning must address the complicated issue of duplicating any required changes across the entire existing system.
Short-Term Capacity Planning in Service Organizations
In terms of capacity planning, the main way services differ from goods is that services are produced and consumed simultaneously. Consequently, service inventories cannot be built during periods of slack demand in the same way as in manufacturing. Capacity is necessarily short term. Strategies for short-term capacity can be grouped into two categories:
Here is a recent news article with an interesting approach that is being tested:
McDonald's
The Wichita Eagle recently published an article about the restaurant, McDonald's. McDonald's is one of the biggest fast food chains in the world. In the last four months, McDonald's has been testing a new technolohy, in chains in Colorado Springs, CO., where automation is taking over to speed up their service. It will have computers and robots cook to order, sometimes in less time it takes to fill the order now. The new system will have a computer system that transmits orders to the kitchen, where in the kitchen, the holding bins will regulate the temperature to keep the food hot and fresh. This story shows an example of volity of demand. The reasons are that McDonald's services and cooked food can not be stored, each of the customers have different needs and different orders, so they have to cook on the basis of what they want. Also, McDonald's is steadily busy, but tend to have surges of customers at peak times, like breakfast, lunch, and when sports teams and vacationers stop because of their well known fast service. This will in-turn, make McDonald's plan capacity overload in their work schedule. This new system will be good for business, because the customers needs are at hand and the new technology is promised to produce the meals within 3 1/2 minutes of ordering, or the next meal is free...which shows the efficentcy McDonald's is displaying.
This article shows how McDonald's is dealing with "Volatility of Demand."
I found this article in the July 23, 1997 issue of The Wichita Eagle, "Local and State" section.
Provided by Amy Jo Hesting, during Summer 1997 Class
The use of part-time or seasonal employees to control supply is quite common in service organizations. For example, fast-food restaurants employ large numbers of part-time employees with varying work schedules to match capacity to demand. Retailers use part-time workers during the winter holiday season. Amusement parks and resort hotels use full-time seasonal employees during their peak season.
Similar to using part-time employees is adjusting short-term work schedules. Hospitals, restaurants, banks, and many other service organizations schedule employees on variable shifts to match fluctuating demands over a day or week.
Another method of adjusting service capacity is to shift work to slack periods. For example, hotel clerks prepare bills and perform other paperwork at night, when check-in and check-out activity is light. This leaves them more time to service customers during the daytime hours.
Cross-training employees to perform different tasks creates the flexibility required to meet peak demands. Thus, in supermarkets, it is common for personnel to work as cashiers during busy periods and to assist with stocking during slow periods.
Increasing customer participation in the service process also increases capacity while reducing demands on the physical resources of an organization. Examples of this strategy include self-service gasoline pumps, "bag-your-own" policies in supermarkets, and self-service salad bars in restaurants.
A final method of capacity planning by controlling supply is capacity sharing. Fire stations in neighboring townships or villages do this routinely. Hospitals also employ this strategy. Every hospital, for example, need not purchase every expensive, specialized piece of equipment. A consortium of several hospitals might be set up in which each hospital focuses on a particular specialty and shares services. A blood bank is another example of capacity sharing.
Another means of meeting fluctuating demand in service organizations is to alter demand by influencing consumer behavior. For example, the demand at health clinics is often heaviest early in the week. Demand may be smoothed by offering appointments later in the week.
Differential pricing schemes that serve to increase demand during normally non-peak hours are common. For example, bars and restaurants offer "happy hours," telephone rates are reduced during evenings and weekends to stimulate demand, movie theaters offer special matinee prices, and so on. New service packages are often developed to utilize idle capacity during off-peak times. For instance, many fast-food restaurants have introduced breakfast service, and many hotels offer special weekend packages.
Like manufacturing, service organizations must manage capacity and "plan production." Although the approaches differ in many ways, the goal is the same: to maintain a level of service that meets the strategic goals of the organization at a low cost. [32]
Strategic capacity planning involves an investment decision that must match resource capabilities to a long-term demand forecast. Factors to be taken into account in selecting capacity additions for both manufacturing and services include
For services in particular, key considerations include
(Note: This section is not related to capacity planning but is a good overview of the context within which services management must be conducted today. Some of you will have seem much of this before, some of it will be new to you. Dr. Smith )
Dessler [10] suggests that the following are trends we see today that will dominate the management of tomorrow. He notes that organizations today need to grapple with a number of revolutionary forces:
Forces like these have changed and increased the need for firms to be responsive, flexible, and capable of competing in a global marketplace. Following is his summary of what management experts believe "the new management" will look like:
The average company will become smaller, employing fewer people. This is partly because more people will set up business for themselves and partly because many larger firms will continue to downsize or will break themselves up. Even within many big firms, the operating units will be divided into small, self-contained mini-units.[11]
The traditional, pyramid-shaped organization will give way to new organizational forms.[12] The new organization will stress cross-functional teams and boosting interdepartmental communications. There will be corresponding de-emphasis on "sticking to the chain of command" to get decisions made. At General Electric, Chairman Jack Welch talks of the boundaryless organization, in which employees do not identify with separate departments, but instead interact with whomever they must to get the job done.
Employees will be called upon to make more and more decisions. Work will be less routine, with less drudgery. Work will require constant learning, "higher order" thinking, and much more worker commitment. The result will be more empowerment and less of a 9-to-5 mentality. Experts like Karl Albrecht argue for turning the typical organization upside down. They say today's organization should put the customer on top and emphasize that every move the company makes should be toward satisfying the customer's needs. To do so management must empower its front-line employees - the front desk clerks at the hotel, the cabin attendants on the Delta plane, the assemblers at Saturn. In other words, employees need the authority to respond quickly to the customer's needs. The main purpose of managers in this "upside down" organization is to serve the front-line employees, to see that they have what they need to do their jobs - and thus serve the customers.
Flatter organizations will be the norm. Instead of the pyramid-shaped organization with its seven to ten or more layers of management, flat organizations with just three or four levels will prevail. Many companies have already cut the managerial layers from a dozen to six or fewer.[11] As the remaining managers have more people reporting to them, they will be less able to meddle in the work of their subordinates.
Work itself-on the factory floor, in the office, even in the hotel-will be organized around teams and processes rather than specialized functions. On the plant floor, a worker will not just have the job of installing the same door handle over and over again. He or she will belong to a multifunctional team, one that manages its own budget and controls its own quality.
The bases of power will change. In the new organization, says management theorist Rosabeth Moss Kanter [13], position, title, and authority are no longer adequate tools for managers to rely on to get their jobs done. Instead, "success depends increasingly on tapping into sources of good ideas, on figuring out who's collaboration is needed to act on those ideas, and on working with both to produce results. In short, the new managerial work implies very different ways of obtaining and using power. Similarly, Peter Drucker [14] has said, "you have to learn to manage in situations where you don't have command authority, where you are neither controlled nor controlling." Thus, managers in the new organization will have to win the respect and commitment of highly trained and empowered employees.
The new organization will be knowledge based. As Peter Drucker [14] says, tomorrow's organization will be "composed largely of specialists who direct and discipline their own performance through organized feedback from colleagues, customers and headquarters." Similarly, management specialist Tom Peters [15] says the new organization will be more like consulting firms and hospitals. Teams of highly committed and trained professionals will work in teams, focusing on their customers while largely managing their own activities.
Managers will not "manage." Yesterday's manager knew that the president and owners of the firm gave him or her the authority to command and control subordinates. Today, most managers realize that reliance on formal authority is a thing of the past. Peter Drucker says that managers have to learn to manage in situations where they do not have command authority, where "you are neither controlled nor controlling." As Rosabeth Moss Kanter put it, managers will have to depend "increasingly on tapping into sources of good ideas, on figuring out whose collaboration is needed to act on those ideas, on working with both to produce results. Thus the new managerial work implies very different ways of obtaining and using power." [16]
Service management expert Karl Albrecht makes a similar point.
He says managers have to turn the organizational pyramid upside down and put the customers and subordinates on top. Doing so emphasizes that manager's real role today is to help their employees get their jobs done by training them, removing roadblocks, and getting employees the resources they need. This highlights one big difference between the old and new manager. Yesterday's manager thinks of himself or herself as a "manager" or "boss," while the new manager thinks of himself or herself as a "sponsor," "team leader," "coach, "or "internal consultant." The old manager makes most decisions alone: the new one invites others to join in the decision making. The old manager hoards information in part to build his or her personal power. The new manager shares information to help subordinates get their jobs done.
The new company will stress vision and values.[17] Formulating a clear direction and vision among employees will be more important than ever before. Managers will have to communicate clear values regarding what is important and unimportant, and regarding what employees should do and should not do. As GE CEO Jack Welch has said: "Every organization needs values, but a lean organization needs even more. When you strip away the support systems of staffs and layers, people need to relearn their habits and expectations or else the stress will just overwhelm them...values [are] what enable people to guide themselves through that kind of change. "[18] Other experts agree. Peter Drucker says today's organization - comprised as they are of professionals and other employees who largely control their own behavior - require "clear, simple, common objectives that translate into particular actions." In other words, they need a clear vision of where the firm is heading.[14] Similarly, says Rosabeth Kanter, "helping people believe in the importance of their work is essential, especially when other forms of certainty and security have disappeared." Therefore, she says, "good leaders can inspire others with the power and excitement of their vision and give people a sense of purpose and pride in their work."[13]
Management will empower employees and build commitment. Building adaptive, customer-responsive organizations means that eliciting employees' self-control will be more important than it has ever been. GE's Jack Welch put it this way: "The only way I see to get more productivity is by getting people involved and excited about their jobs. You can't afford to have anyone walk through a gate of a factory or into an office, who is not giving 120 percent."[18]
Management will seek to create open, boundaryless organizations. Managers will also have to build what Welch calls boundaryless organizations, ones in which the employees don't feel they can interact only with coworkers at their own level or in their own departments. This will require, says Welch, an open, trusting sharing of ideas, which in turn means a willingness on the part of management to listen, debate, and then take the best ideas "and get on with it." Why? Because creating open, boundaryless organizations means doing more than paying lip service to me need to "be open." Practicing managers know that it's all too easy to inadvertently create a politicized, "stab-in-the-back" culture, one that inhibits open communication. Creating an open, trusting, "I-am-willing-to-listen" culture is therefore a skill today's manager must develop.
Managers must be agents of change. As GE's Jack Welch puts it "you've got to be on the cutting edge of change. You can't simply maintain the status quo, because somebody's always coming from another country with another product, or consumers' taste change, or the cost structure does, or there's a technology breakthrough. If you are not fast and adaptable, you are vulnerable."[19]
Service capacity is more:
Locate an article in a recent business publication, or on a web site, that relates how a current business today is grappling with one or more of these issues and how they are handling the situation.
Summarize this situation in about two screens of explanation.
Send your comments to the
instructor, subject: MG 476 - Assignment 8-1
Consider the four life cycle stages of a service business:
Locate an article in a recent business publication, or on a web site, that relates how a current business today is grappling with one or more of these issues and how they are handling the situation.
Summarize this situation in about two screens of explanation.
Send your comments to the instructor, subject: MG 476 - Assignment 8-2
Reminder: Is your Electronic
Journal Article turned in yet... or about to be?
Assume that you, or you in partnership with someone in some way, were going to start a new service business, or, take over the service management of an existing business, within the next year, one that you have not discussed with me in assignments to date. Drawing from what you have learned in the Learning Modules, Activities, and discussions to date, briefly describe the service operation, then name and briefly discuss each of the five most important considerations you would work on to make the business successful in the eyes of your customers.
This should take about two or three screens of explanation.
Send your comments to the
instructor, subject: MG 476 - Assignment 8-3
William
L. Smith Teacher Home Page Service Management Home Page Emporia State University
If you have comments or suggestions, e-mail me at smithwil@emporia.edu
This page last updated March 29, 1999.