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Demand Management
Part 2 of 4

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Sasser (1976) described two primary alternatives in managing demand and supply: manage the capacity to match the demand, or alter the demand to better match the capacity available. Figure 1 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 tradeoff between the cost of excess capacity and the opportunity cost of lost business because of excess lead time.

Another study posed two variations, or extensions, of those alter­natives described by Sasser (Crandall 1996). Figure 1 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 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 use both alternatives. Ex­amples of the provide strategy include 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. Examples of the control strategy include the 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

If a provide strategy is the extreme in managing demand through providing excess capacity or in deciding how much excess capacity to provide given uncertainty, and a control strategy is the extreme in man­aging demand with lead time or scheduled arrivals, then match and influence strategies are combination, or intermediate strategies. The real issue is when, if ever, can or should the extreme strategies of pro­vide and control be used?


There are a number of programs that could be used to implement de­mand management strategies. Table 1 shows programs grouped under each demand management strategy.

Provide Strategy Programs

The programs in this category attempt to ensure that capacity will be available to meet maximum, or near-maximum, demand. Sometimes this can be done with automated processing, such as the ATM at banks, that is available at all hours. 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 travel agents 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 need 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, such as cities contracting for help in snow removal; hire ex­cess employees to be available during all demand periods; and invest in multiskilled workers.

Table 1. Demand management programs

PROVIDE CAPACITY TO MEET PEAK DEMAND Use automation for round-the-clock operation Develop intermediaries, i.e., travel agents Excess capacity for bng lead time facilities Contract for stand-by equipment for peak periods Hire excess employees to minimize wait time Invest in multiskilled employees

MATCH CAPACITY TO DEMAND FLUCTUATIONS Use flexible staffing of full-time employees Use part-time employees, or overtime 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 pricing Use advertising and other forms of promotion Personal contact from provider to customer Create reservation system Develop complementary services Limit variety of customers; niche positioning

CONTROL DEMAND TO LEVEL CAPACITY REQUIREMENTS Separate high- and low-contact; 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

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 heavily used approaches are to schedule full-time em­ployees to staggered shifts to match more employees with heavier de­mand, and secondly, to use part-time employees, or overtime, to handle peak periods. A way to match equipment capacity with demand is to share capacity with other firms, in the hopes 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, as in many self-ser­vice operations such as building and supply retailers. 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 is loaded. One of the simplest ways to utilize capacity during peak periods is to shift nonessential work, such as filing, to off-peak periods.

To Be Continued


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