When an organization has a clear grasp of its capacity constraints and an understanding of demand patterns. It is in a good position to develop strategies for matching supply and demand.
There are two general approaches for accomplishing demand and capacity.
- The first is to smooth the demand fluctuations themselves by shifting demand to match existing supply.
- The second general strategy is to adjust capacity to match fluctuations in demand.
Shifting demand and capacity
By shifting demand and capacity an organization seeks to shift customers away from periods in which demand exceeds capacity. Perhaps by convincing them to use the service during periods of slow demand. This may be possible for some customers but not for others. For example, many business travelers are not able to shift their needs for airline, car rental, and hotel services. Pleasure travelers on the other hand can often shift the timing of their trips. Those who can’t shift and can’t be accommodated will represent lost business for the firm.
Vary the service offering
One approach is to change the nature of the service offering, depending on the season of the year, day of the week, or time of day. For example, Whistler Mountain, a ski re sort in Vancouver, Canada, offers its facilities for executive development and training programs during the summer when snow skiing is not possible.
A hospital in the Los Angeles area rents use of its facilities to film production crews who need realistic hospital settings for movies or TV shows. Accounting firms focus on tax preparation late in the year and until April 15. When federal taxes are due in the United States. During other times of the year they can focus on audits and general consulting activities.
Air lines even change the configuration of their plane seating to match the demand from different market segments. In some planes there may be no first-class section at all. On routes with a large demand for first-class seating, a significant proportion of seats may be placed in first class..
Care should be exercised in implementing strategies to change the service offering. Because such changes may easily imply and require alterations. Other marketing mix variables are promotion, pricing and staffing to match the new offering. Unless these additional mix variables are altered effectively to support the offering, the strategy may not work. Even when done well, the downside of such changes can be a confusion in the organization’s image from the customers’ perspective or a loss of strategic focus for the organization and its employees.
Communicate with customers
Another approach for shifting demand and capacity is to communicate with the customers. It helps them know the times of peak demand so that they can choose to use the service at alternative times and avoid crowding or delays. E.g signs in banks and post offices let customers know their busiest hours and busiest days of the week can serve as a warning. This allows customers to shift their demand to another time if possible.
Forewarning customers about busy times and possible waits can have added benefits. Many customer service phone lines provide a similar warning by informing waiting customers of approximately how long it will be until they are served. Those who don’t want to wait may choose to call back later when the lines are less busy. Research in a bank context found that customers who were forewarned about the bank’s busiest hours were more satisfied. Even when they had to wait than were customers who were not forewarned.
In addition to signage communicating peak demand times to customers, advertising and other forms of promotion can emphasize different service benefits during peak and slow periods. Advertising and sales messages can also remind customers about peak demand times.
Modify timing and location of service delivery
Some firms adjust their hours and days of service delivery to more directly reflect customer demand. Historically, U.S. banks were open only during “bankers’ hours” from 10 A.M. to 3 P.M. every weekday. Obviously these hours did not match the times when most people preferred to do their personal banking. Now U.S. banks open early, stay open until 6 P.M. many days, and are open on Saturdays, better reflecting customer demand patterns.
Theaters also accommodate customer schedules by offering matinees on weekends and holidays when people are free during the day for entertainment. Movie theaters are sometimes rented during weekdays by business groups. It is an example of varying the service offering during a period of low demand.
Differentiate on price
A common response during slow demand is to discount the price of the service. This strategy relies on basic economics of supply and demand. To be effective, however a price differentiation strategy depends on solid understanding of customer price sensitivity and demand curves. For example, business travelers are far less price sensitive than are families traveling for pleasure.
For any hotel, airline, restaurant or other service establishment all of the capacity could be filled with customers if the price were low enough. But the goal is always to ensure the highest level of capacity utilization without sacrificing profits.
Heavy use of price differentiation to smooth demand can be a risky strategy. Over reliance on price can result in price wars in an industry where eventually all competitors suffer. Price wars are well known in the airline industry. In this industry the total industry profits suffered as a result of airlines simultaneously trying to attract customers through price discounting.
Another risk of relying oh price is that customers grow accustomed to the lower price and expect to get the same deal the next time they use the service. If communications with customers are unclear, customers may not understand the reasons for the discounts. And they will expect to pay the same during peak demand periods. Overuse or exclusive use of price as a strategy for smoothing demand is also risky due to potential impact on the organization’s image and the possibility of attracting undesired market segments.
Flexing capacity to meet demand
A second strategic approach to matching demand and capacity focuses on adjusting or flexing capacity. The fundamental idea here is to adjust, stretch and align capacity to match customer demand. During periods of peak demand the organization seeks to stretch or expand its capacity as much as possible. During periods of slow demand it tries to shrink capacity so as not to waste resources.
Stretch existing capacity
The existing capacity of service resources can often be expanded temporarily to match demand. In such cases no new resources are added. Rather people, facilities, and equipment are asked to work harder and longer to meet demand.
- Stretch time: It may be possible to extend the hours of service temporarily to accommodate demand. A health clinic might stay open longer during flu season. Retailers are open longer hours during the Christmas shopping season. And accountants have extended appointment hours (evenings and Saturdays) before tax deadlines.
- Stretch labor: In many service organizations, employees are asked to work longer and harder during periods of peak demand. For example, consulting organizations face extensive peaks and valleys with respect to demand for their services. During peak demand, associates are asked to take on additional projects and work longer hours. And front-line service personnel in banks, tourist attractions, restaurants and telecommunications companies are asked to serve more customers per hour during busy times.
- Stretch facilities: Theaters, restaurants, meeting facilities and classrooms can sometimes be expanded temporarily by the addition of tables, chairs, or other equipment needed by customers. Or as in the case of a commuter train, a car can hold a number of people seated comfortably or can “expand” by accommodating standing passengers.
- Stretch equipment: Computers, telephone lines and maintenance equipment can often be stretched beyond what would be considered the maximum capacity for short periods to accommodate peak demand. In using these types of “stretch” strategies, the organization needs to recognize the wear and tear on resources. The potential for inferior quality of service may go with the use. These strategies should thus be used for relatively short periods in order to allow for later maintenance of the facilities and equipment.
As noted earlier, sometimes it is difficult to know in advance, particularly in the case of human resources, when capacity has been stretched too far.
Align capacity with demand fluctuations
This basic strategy is sometimes known as a “chase demand” strategy. By adjusting service resources creatively, organizations can in effect chase the demand curves to match capacity with customer demand patterns. Time, labor, facilities, and equipment are again the focus, this time with an eye toward adjusting the basic mix and use of these resources.
Specific actions might include the following:
- Use part-time employees: In this case the organization’s labor resource is being aligned with demand. Retailers hire part-time employees during the holiday rush, tax accountants engage temporary help during tax season, tourist resorts bring in extra workers during peak season. Restaurants often ask employees to work split shifts (work the lunch shift, leave for a few hours, and come back for the dinner rush) during peak mealtime hours.
- Outsourcing: Firms that find they have a temporary peak in demand for a service that they cannot perform themselves may choose to outsource the entire service. For example, in recent years, many firms have found they don’t have the capacity to fulfill their own needs for technology support, Web design, and software-related services. Rather than try to hire and train additional employees, these companies look to firms that specialize in outsourcing these types of functions as a temporary (or sometimes long-term) solution.
Rent or share facilities or equipment
For some organizations it is best to rent additional equipment or facilities during periods of peak demand. For example, ex press mail delivery services rent or lease trucks during the peak holiday delivery sea son. It would not make sense to buy trucks that would sit idle during the rest of the year. Sometimes organizations with complementary demand patterns can share facilities.
An example is a church that shares its facilities during the week with a Montes son preschool. The school needs the facilities Monday through Friday during the day; the church needs the facilities evenings and on the weekend.
Schedule downtime during periods of low demand
If people, equipment, and facilities are being used at maximum capacity during peak periods, then it is imperative to schedule repair, maintenance, and renovations during off-peak periods. This ensures that the resources are in top condition when they are most needed. With regard to employees, this means that vacations and training are also scheduled during slow demand periods.
If employees are cross-trained, they can shift among tasks, filling in where they are most needed. This increases the efficiency of the whole system and avoids underutilizing employees in some areas while others are being over taxed. Many airlines cross-train their employees to move from ticketing to working the gate counters to assisting with baggage if needed. In some fast-food restaurants, employees specialize in one task (like making french fries) during busy hours, and the team of specialists may number 10 people. During slow hours the team may shrink to three, with each person performing a variety of functions.
Grocery stores also use this strategy, with most employees able to move as needed from cashiering to stocking shelves to bagging groceries.
Modify or move facilities and equipment
Sometimes it is possible to adjust, move, or creatively modify existing capacity to meet demand fluctuations. Hotels accomplish this by reconfiguring rooms—two rooms with a locked door between can be rented to two different parties in high demand times or turned into a suite during slow demand. The airline industry offers dramatic examples of this type of strategy. Using an approach known as “demand-driven dispatch,” airlines have begun to experiment with methods that assign airplanes to flight schedules on the basis of fluctuating market needs.’ The method depends on accurate knowledge of demand and the ability to quickly move airplanes with different seating capacities to flight assignments that match their capacity The Boeing 777 aircraft is so flexible that it can be reconfigured within hours to vary the number of seats allocated to one, two, or three classes.’ The plane can thus be quickly modified to match demand from different market segments, essentially molding capacity to fit demand.
Another strategy may involve moving the service to a new location to meet customer demand or even bringing the service to customers. Mobile training facilities, libraries, and blood donation facilities are examples of services that physically follow customers.
- Conditional CAPM analysis for stock-based investing - February 20, 2021
- Short term momentum analysis of growth, income and value stocks - February 9, 2021
- Inferential analysis to compare the performance of stocks listed in the BSE (2011-2020) - January 30, 2021