Capacity Management in Service Companies

In 1968, the American economist, Victor Fuchs, published a book called ‘The Service Economy” which represented an early formulation of the service economy concept. According to him, USA was the first nation to grab the opportunities in the booming service sector (Zhou 2015, p.17). In 2014, service- related revenues contributed to 62.4% of the GDP in the world (Central Intelligence Agency 2016).

Capacity management is defined as:

“The maximum level of value-added activity over a period of time that the process can achieve under normal operating conditions” (Slack et al. 2013, p.324).

Capacity management is not a stand-alone discipline. The success of this field is attributed to an interaction between capacity, inventory and scheduling as shown below.pic-2-modified

In a service-based environment, the process is referred to the ‘service delivery process’ (Johnston et al. 2012, p.193).

Fundamentally, what makes a difference in capacity management in the service sector is that the output in a service company lacks the physical property. Accordingly, it is perishable, cannot be stored in advance, the production and the consumption occur simultaneously and usually, the presence of the customer during the service act is a must. More importantly, the defects in services cannot be easily reworked or scrapped (Lewis et al. 2007, pp.435–436; Johnston et al. 2012, p.29).

The timescale of capacity-related decisions is split over three stages (Slack et al. 2013, p.324):

  • Long term capacity planning;
  • medium term capacity planning;
  • Short term capacity planning.

Furthermore, in today’s business environment, companies are no longer responding to a certain well-predicted demand pattern. Instead, they are required to meet and exceed unexpected rabidly-changing demand (Slack et al. 2013, p.326). Within capacity management discipline, companies can respond to that fluctuating via three strategies (Slack et al. 2013, p.334; Johnston et al. 2012, p.290):

  • Level capacity;
  • Chase capacity;
  • Demand management.

The application of the capacity management stages and strategies in the service sector will be further illustrated in the next articles.

References

Central Intelligence Agency, 2016. The world factbook, Available at: https: //www.cia.gov/library/publications/the-world-factbook/geos/print_xx.html.

Johnston, R., Clark, G. & Shulver, M., 2012. Service operations management [e-book] 4th ed., Harlow: Pearson Education.

Lewis, P. et al., 2007. Management: challenges for tomorrow’s leaders. Cengage Learning 5th ed., Mason USA: Thomson South-Western.

Slack, N., Jones, A. & Johnston, R., 2013. Operations Management 7th ed., Harlow, England: Pearson.

Warwick Manufacturing Group LOM Module Notes, 2015. Introduction to Logistics Systems Management- Module Notes. Available at: http: //moodle.warwick.ac.uk/course/view.php?id=15203.

Zhou, Z., 2015. The development of service economy 2016: A General Trend of the Changing Economy in China [e-book] 1st ed., Springer.

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