One of the enjoyable and interesting aspects of teaching college-level business courses is that you often encounter examples of the concepts you teach on a regular basis in everyday life. I think one of the reasons students enjoy my classes is that I often bring my personal experiences to the classroom to demonstrate what we are learning. In addition, as I relate my personal experiences, the students tend to recognize that they have had relevant experiences as well, which reinforces their learning. This was particularly evident this past week as we discussed the role of how businesses, particularly those in service industries, address issues of capacity.
Capacity is the maximum amount of service a business can provide within a specific time frame. As customers, we have all been impacted by how firms plan and manage their capacity. Since much of the Augusta Business Daily’s readership manages or works in service industries, in today’s column, I will discuss how service companies deal with issues related to capacity to better serve their target markets.
I have been teaching Operations and Supply Chain Management at colleges and universities for the better part of thirty years. As a doctoral student and early in my career as a professor, when teaching students about capacity, our emphasis was on planning and managing capacity primarily for manufacturing businesses. While capacity planning can be challenging in manufacturing, there are two important and related reasons that it is more demanding in a services environment. First, unlike manufactured goods, services typically cannot be stored or inventoried in anticipation of demand. If a company is producing a physical product, it can make it in anticipation of demand and put it in inventory until a customer wants it. Services cannot be put in inventory, so the service company must have capacity available when customers arrive. This brings us to the second difference. Since customers typically need to be present in services, your capacity to provide your service when customers arrive will significantly impact the customer experience. If your capacity to handle customers is unable to keep up with the customer demand or arrival rates, longer waiting times will ensue, often causing a negative customer experience.
Ultimately, the goal of planning and managing capacity is to have enough capacity to meet demand. However, this is particularly tricky in services when demand can be both irregular and unpredictable. All industries, but particularly services, must deal with the potential implications, both positive and negative, of having too much or not enough capacity. For instance, if your firm wants to make sure it always has enough capacity to meet demand, there are going to be times when much of that capacity is idle. Idle capacity, whether it be facilities, equipment, and/or labor, is expensive. Such a strategy might make sense if you are competing on speed and/or customer service, but you must realize you will drive your costs higher. On the other hand, if you are competing primarily on low prices/cost, you may choose to limit your capacity, knowing there are going to be times when there will be dissatisfied customers. These dissatisfied customers will often go somewhere else, and you will have sacrificed revenues, but it might be worth it if the cost savings are enough to make up for the lost revenues.
So, the tradeoff in capacity is having too much, which drives up your costs, but enhances your speed and customer service, versus not having enough, which will save you money, but will likely lose you some customers. You should examine this tradeoff strategically (i.e., how you compete) and quantitatively (i.e., costs vs. revenues) to determine the appropriate capacity level for your business. While this long-term capacity planning “locks in” much of your capacity, there are other ways to address your capacity issues. They include:
- Moving Demand: As mentioned above, demand for services is driven by when customers arrive. So, many services have peak hours. For example, restaurants around typical meal hours, bars later in the evening, theaters in the evening, and even grocery stores, in which busy shoppers tend to buy their groceries at the beginning or end of the week or on weekends. When these industries have enough capacity for these peak times, they have idle capacity at non-peak times. That is why restaurants have “Early Bird” dinner prices, bars have “Happy Hours”, theaters have reduced matinee prices, and grocery stores have Wednesday discounts for seniors. You can move some of your peak demand to non-peak times through reduced prices and promotions to utilize some of your idle capacity.
- Process Efficiency/Remove “Bottlenecks”: Another way to improve your capacity is by making your service processes more efficient. There are multiple ways to do this. Examine your processes to determine how they can be done better. Train your people so that you can execute better and more quickly. Address “bottlenecks” in the process by increasing capacity for those particular steps.
Addressing capacity is a key issue for almost all service industries. As customers, we see it every day when we patronize a service and spend much of our time waiting. Business owners, managers, and employees need to be aware of how capacity impacts the customer experience and plan and manage accordingly.
