Demand Management Strategies

Proposed Demand Management Strategies

There are two primary alternatives in managing demand and supply: manage the capacity to match the demand and alter the demand to better match the capacity available (Sasser 1976). Figure 5.3 shows the effects of these strategies as the alternatives of match (manage the capacity) and influence (alter demand). In these variations, the service business attempts to balance the economic trade-offs between the cost of excess capacity and the opportunity cost of lost business because of excess lead time.

Crandall offered two variations of those alternatives described by Sasser (Crandall 1993). Figure 5.3 shows them as provide (constant capacity to meet peak demand) and control (constant capacity to meet average demand) strategies. While providing sufficient capacity to meet peak demand at any time (provide) may be thought of as economically infeasible and controlling demand to a level flow (control) may be thought of as undesirable from a customer viewpoint, successful service companies actually use both strategies. The provide strategy includes quick lube businesses where no waiting is part of the service package; kitchen capacity in restaurants, where changes in capacity are restricted or expensive; and the use of technology to provide inexpensive sources of capacity, such as the use of vending machines to sell insurance at airports or automatic teller machines (ATMs) on college campuses to provide students with cash. The control strategy includes scheduling of return visits by doctors, turning away the overflow of customers by airlines by refusing to accept reservations for flights when there are no seats available (the practice of overbooking is an attempt to maximize resource utilization although there may be some adverse effect on customer service), and the use of regular schedules for deliveries by wholesale businesses.

A provide strategy can be thought of as an extreme form of managing demand through providing excess capacity or in deciding how much excess capacity to provide given uncertainty.

Likewise, a control strategy can be thought of as an extreme form of managing demand with lead time or scheduled arrivals. Match and influence strategies can be viewed as combination or intermediate strategies. The real issue is when the deployment of extreme and combination strategies should take place.

To review, let us look at the four strategies in a nutshell:

Provide—Attempt to have sufficient capacity at all times to meet peak demand. While this means there may be excess capacity, the provider believes this is more important than taking the chance of losing business.

Match—Attempt to anticipate demand patterns so that capacity levels can be changed as needed. This means scheduling the work force carefully and using subcontractors or other temporary arrangements.

Influence—Attempt to change customer demand patterns to obtain good utilization of resources. This requires that marketing carefully plan promotions, pricing, and other marketing programs, so they are closely coordinated with operations.

Control—Keep demand variation to a minimum to fully utilize unique services and need high-cost resources to provide the level of customer service expected.

Provide and control strategies imply a level capacity, the former at peak demand and the latter at average demand. Match and influence strategies imply variable capacity, the former to accept demand as given and the latter to alter demand to reduce the range of fluctuations.

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Programs Used to Implement Demand Management Strategies

A number of programs could be used to implement demand management strategies. Table 5.8 shows programs grouped under each demand management strategy.

Provide Strategy Programs

The programs in this category assure that capacity will be available to meet maximum, or near-maximum, demand. Sometimes, this can be accomplished with automated processing, such as ATMs at banks. While there may be times when customers have to wait, usually, there is ample excess capacity to meet all demand. Another way to provide excess capacity is to work through intermediaries, such as when airlines use online travel websites to sell tickets or when insurance companies work through independent agents.

Demand in excess of capacity becomes the domain of the travel agent and the independent insurance agent. Sometimes, only a part of the resources have excess capacity, such as in the size of a convocation hall at a university, where it would be impossible to adjust the size to fit the demand. Companies can also contract for standby equipment for peak periods—cities contracting for help in snow removal, hiring excess employees to be available during all demand periods, investing in multiskilled workers, and cross-training existing employees.

TABLE 5.8

Demand Management Programs

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Provide capacity to meet peak demand

Use automation for round-the-clock operation.

Develop intermediaries, i.e., travel agents.

Provide excess capacity for long-lead-time facilities.

Contract for standby equipment for peak periods.

Hire additional employees to minimize wait time.

Invest in multiskilled employees or cross-train existing employees.

Match capacity to demand fluctuations

Use flexible staffing of full-time employees.

Use part-time employees, or allow overtime of full-time employees.

Share capacity with other firms.

Increase customer participation in service process.

Use alternative (sometimes less efficient) methods.

Shift nonessential work to off-peak periods.

Influence demand to smooth capacity requirements

Use off-peak period or some other form of dynamic pricing.

Use advertising and other forms of promotion.

Utilize personal contact from provider to customer.

Create a reservation system.

Develop complementary services.

Limit variety of customers; implement niche positioning.

Control demand to level-capacity requirements

Separate high and low contacts; control technical core.

Develop distinctive competencies to retain customers.

Obtain contractual commitments.

Preschedule from one visit to the next.

Inventory customers in a waiting line.

Reduce variation among customers with conditioning.

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Match Strategy Programs

Match strategies attempt to adjust capacity up or down to closely correspond with the demand. Usually, the resource most often varied is the work force, although other resources can be altered, under certain conditions. Two frequently used approaches are (1) to schedule full-time employees on staggered shifts to match more employees with heavier demand and (2) to use part-time employees, or let regular employees work overtime, to handle peak periods. A way to match equipment capacity with demand is to share capacity with other firms, in the hope that their peak periods will occur at different times. Electric utilities use this approach very successfully as they import or export power to other utilities throughout the country over an electric power distribution network.

The service process can be designed to be flexible so that the customer can participate more actively when demand is high, such as in many self-service operations, for example, building and supply retailer. Sometimes, capacity can be matched to demand by opening more units of capacity, even if it is less efficient, such as in the use of backroom clerks to serve as tellers in a bank or in the use of manual photocopy machines when the automatic sorter and collating copier are loaded. One of the simplest ways to utilize capacity during peak periods is to shift nonessential work, such as filing, to off-peak periods. Another interesting way of changing capacity is to match demand by changing the layout of retail stores to accommodate seasonal merchandise or changes in demand patterns. Even the shelf-space allocations can change as demand for different items varies (Hill 2000).

Influence Strategy Programs

This strategy attempts to reduce the amount of demand variation, so that there is less need to adjust capacity. The customer voluntarily changes their arrival time or rate to alleviate the high fluctuations of the demand pattern. While the service provider can use a matching strategy, it requires less adjustment after the demand fluctuation has been reduced. Dynamic pricing, or using variable price schedules, can be a powerful tool to attract customers to off-peak demand periods. For example, economic incentives can be used in early-bird specials at restaurants or low weekend room rates at hotels that specialize in business travelers. A similar motivator is to advertise or use other forms of promotion to attract customers to off-peak periods, such as having a retail store send letters to customers telling them that they can get sales-promotion prices if they shop a day early.

Some companies, such as a fitness center, use an informal process by having their employees tell certain customers they will not need to wait as long if they come at the suggested time. A more formal move is to create a reservation system so that demand is much more predictable. The service operation can also create complementary services so that the customer can be flexible in the service required. For example, in a supermarket, a customer who sees a long line at the deli may go to the produce section to shop instead, then return to the deli when the line is shorter.

Control Strategy Programs

This strategy attempts to fully utilize the capacity resources by limiting demand variation.

The customer accepts the need to vary their arrival patterns but not always in as cooperative a fashion as under the influence strategy. One traditional approach is to separate the high- and low-contact areas to establish the technical core where demand is controlled carefully. Processing mortgage payment checks in a bank is an example of the use of the technical core approach. Another approach is to develop distinctive competencies so that the customer is willing to endure a reservation system or long lead times to obtain service, such as in a doctor’s or dentist’s office. Sometimes the service provider can obtain contractual commitments, such as for a wholesaler who delivers a retail store’s order every Thursday afternoon. Some professional offices also schedule return visits for repeat customers, that is, an appointment for teeth cleaning or taking piano lessons. The use of waiting lines is a form of demand control (this is probably the one a college or university uses the most), although most service businesses try to avoid this method as much as possible. A long-term approach is to reduce the variation among customers by training the customer in the service process so that most non-value-added process steps are eliminated. The self-service checkout lines in a grocery store are an example of this approach. Customers can choose to stand in lines (which are often longer) where cashiers ring up and bag the groceries, but they have the option of self-checkout if they desire.

These program classifications are not meant to be rigid definitions; they are only examples of the kinds of programs that a business can choose. Many service companies choose programs that may represent different strategies; however, they tend to concentrate their efforts in one or two strategic areas.

― Richard E. Crandall, William R. Crandall, Charlie C. Chen, Principles of Supply Chain Management, Second Edition.