Managing Supply and Demand - Essay Example

? The services sector is the fastest growing sector in the world economy but the biggest challenge in the sector is satisfaction (Bick, Abratt & Moller, 2010). The consumer satisfaction index has been consistently declining ever since its inception in 1994. This is based on a study conducted by the (ACSI) American Customer Satisfaction Index (Allred & Addams, 2000). One of the main reasons for declining customer satisfaction is the inability of the service providers to match the supply with the demand for the service (Lovelock, n.d.). Differences between supply and demand occur because services cannot be inventoried, thereby giving it the unique characteristic of ‘perishability’. This is particularly found in sectors such as banking, healthcare, retail and hospitality sectors where the service manager is at a loss trying to balance the supply and demand issues. This is despite the fact that profitability is enhanced if the managers can balance the supply and demand issues (Klassen & Rohleder, 2001). However, with certain changes in the strategy, the supply and demand issues can be managed to some extent. While the different services sector attempt to enhance customer satisfaction levels, they are unable to schedule the services due to the uncertainty of demand. Klassen and Rohleder (2001) find that uncertainty of demand patterns and the inability to make precise demand forecasts have been responsible for the challenge and the struggle that services have been facing in managing capacity and demand. Uncertainty and fluctuation of demand can be traced to culture and habit. In the banking sector demand changes every five minutes and the off-peak periods could last up to an hour. In the retail sector also demand is marked by uncertainty as the shoppers are not logical in their shopping habits. Services are intangible, perishable, heterogeneous, and inseparable (Gronroos, 1998; Ladhari, 2009).The term “service” denotes a sense of interpersonal attentiveness which contributes to customer satisfaction (Johns, 1998). However ‘fluctuating service demand’ is the greatest challenge facing the service managers. The challenge is intensified as the demand and the capacity occur simultaneously. Customers have to be served when they want the service and service cannot be inventoried. This is what creates the challenge. The challenge occurs more in capacity-constrained service organizations that face fluctuations in demand. Organizations cannot keep the productive capacity high when the demand is low. One solution to overcome the challenges of wasting productive capacity is to tailor the capacity as per past experience to meet demand variations (Lovelock). For instance, in the hotel sector, some labor can be on contract basis that can be hired during the peak seasons and laid off during the low seasons. They can even rent out service equipments during low season to make up for low demand. In the service sector it is not possible to schedule customers. When the demand for the hotel rooms does not increase in proportion to the enhanced supply, the revenue per room derived by the hotel is low. The profitability of a company depends upon their ability to extract maximum possible revenue from a fixed quantity of goods and services. This is also known as Yield Management (YM). This allows the hotels and even the airlines to set prices based on the demand. Airlines such as Ryanair, South West Airlines and EasyJet have been proactive and adopted YM (Gothesson & Riman, 2004). This enabled them to maximize capacity utilization. While the new entrants in the airline sector adopted this approach, the established players in the sector initially were reluctant to change their policy. Over time, the older airlines too had to take this approach seriously and bring about changes. Thus flexibility in the pricing can help reduce capacity wastage and encourage maximize capacity utilization. Revenue Management (RM) and YM are interchangeably used. The airlines started using this technique to increase yield by allocating fixed fares to predetermined seating capacities (Wang & Bowie, 2009). This was a better option that competing on highly discounted fares as the yield was better. However, RM impacts customer relationship in the hotel sector. This is a short-term revenue growth strategy which results in loss of customers on a long-term basis. RM leads to demand-oriented pricing and controlled availability at certain rates to preferred customers only. The outcome is that other customers feel alienated and that they have been unfairly treated, thereby leading to customer dissatisfaction. This can also lead to customer conflicts. The authors highlight the potential areas of customer conflicts and how relationship strategy can help overcome these conflicts. The customers could perceive change in nature of service and the actual service delivery. They could also perceive unfairness and financial risks involved. Service encounters could also lead to lack of customer appreciation. Through bundling of services and effective clear communication, to some extent, the conflicts could be resolved and customer relationship maintained. The service organization must also have clear policies for loyal customers as a long-term strategy, while determining and setting the optimal capacity limits. Finally, customer segmentation helps in retaining loyal customers and enhancing customer experience, service encounters and in maintaining key accounts. All these factors influence how customers perceive service levels. Speed of service denotes that they would not like any wait-time in availing of services. Customers in any sector do not like to wait and this leads to customer satisfaction. Many organizations have tried different techniques to divert customer attention during the wait period but this does not always result in positive outcome. What is used to divert the attention is important, contend McGuire, Kimes, Lynn, Pullman and Lloyd (2010). It can, to some extent, decrease boredom thereby reducing the negative wait experience. However, much also depends on individual human temperament. Moreover, if the customer has other important schedules lined up, diversion can only add to frustration and anger, especially when connecting flights are likely to be missed (Taylor, 1994). An organization such as a bank can even end up losing a loyal customer. Hence it cannot be concluded that using the right means to divert the customers can pacify the customers or reduce customer dissatisfaction. Wait experience differs for different services. It also depends upon the company one has while waiting. For instance, with friends around, waiting for a table at a recognized restaurant, even 15-minute wait would not seem long but in an emergency even a 5-minute wait at a pharmacy may appear never-ending (McGuire et al). The peak experiences play a vital role in the overall experience of the service. Situation such as emergency or other engagements would not permit the customer to lose track of the passage of time even when attempts are made to divert the attention, as has been suggested by McGuire et al. Delays definitely affect service evaluations and hence what should matter to the service providers is the customer perception of the wait period. Delays in flights can lead to anger and frustration which is further enhanced if the airline refrains from effective communication. If the customers are not informed of the reasons of delay and the expected duration of delay, it only serves to enhance the uncertainty of wait and ultimately service evaluation (Taylor, 1994). Apart from timely demand of services, customers also demand speed of service. Consumers always have time crunch and if the wait is more than expected, they then expect speed in service to make up for the delay to some extent. Katz, Larson and Larson (1991) suggest that if the wait time is expected to be high and the service delivery is done faster than the expected wait time, the customer satisfaction level is high. Hence, organizations such as Disney World keep the customer lines moving so that the wait time is not perceived as ‘wait time’. Moreover, the waiting time posted at each attraction is overestimated so that at the end one feels grateful for having spent less time that was expected. Thus, customer experience and encounter of service influences the customer’s decision in re-purchase of that particular service. Many researchers and authors suggest different techniques to enhance the customer experience and meet the demand uncertainties through effective management of operations and marketing. Lovelock suggests modifying the marketing mix elements to manage demand. Pricing is the most critical factor in managing the challenges between supply and demand differences. One of the solutions to manage the challenges of supply and demand in the service organizations is to have differential pricing, which is again part of YM. The prices for the rooms in the hotels can be higher during the weekdays (as business visits usually occur during the week) and reduced pricing during the weekends to attract the leisure segment. This could be the strategy for the business hotels and the reverse could be applicable to the leisure hotels. Premium rates during high season and attractive prices for the low season or the shoulder season help maximize capacity utilization. Other factors such as overbooking, charging cancellation fees and offering discounts help to deal with demand uncertainties. Overbooking becomes essential as no-shows are likely both in the hotel and the airline sectors. Without overbooking capacity may remain underutilized. Charging cancellation fees also helps to avoid unwanted bookings which only add to the administrative costs. Discounts are meant to attract people during the lean season. Thus, YM can be used as a tool to deal with demand uncertainties and to enhance revenue. Another method that hotels most often use to maximize revenue and forecast demand is to offer heavy discounts if bookings are made well in advance. As the period of stay or travel approaches, the price of the air ticket or the hotel room increases. Moreover, if sizeable bookings are received in advance at low rates, this demonstrates that the season would be good and hence after offering the lowest price for a period, the organization stops taking bookings at that rate. Once the demand for that particular period becomes clear the rates can be fixed accordingly. Such techniques of revenue management help cope with perishable inventory and fixed capacity of the hotels. It also helps to be more accurate in forecasting demand. In the hotel sector further pricing difference can be followed based on market segmentation. Those willing to pay premium price can be offered rooms with view or facing the lakes or hills while those looking for modest pricing should be offered rooms with no view or low in facilities. Thus segmentation can be based on physical facilities desired, length of duration, time of purchase, point of sale and the volume of recurring business provided (Welcome Group, 2009). All these factors help focus on the supply as demand becomes easier to forecast. Demand and pricing are inter-related, and the YM and revenue management help in reducing demand uncertainties, making near accurate demand forecast and maximizing capacity utilization. Apart from pricing, promotion variation is another element which can help in balancing the demand supply challenges. For instance, sea resorts are not popular destinations during the monsoons but how the message is communicated would make the difference. Instead of merely promoting the hotel, the destination can be promoted like ‘come and experience the beauty of the rains’ or some such message which would bring immediate bookings. The point of sale also matters for such promotions. Product variation can also be made by reducing some in-house games and similar facilities to reduce costs of service, thereby attracting the customers with low, affordable prices. This can particularly be used during the lean season. However, to plan strategies information is necessary. This information can help in forecasting daily demands and accounting for seasonalities and trends. It should be possible to convert the forecast demand to half-hourly requirements (Klassen & Rohleder, 2001). The demand requirements help to ascertain the staff requirements, the acceptable service levels and the service capabilities. Thus, if customer segmentation has been done, it would be possible to shift staff at service delivery points depending upon the matching the expected service levels and the service capabilities. The shift can thus be created to match the requirements which help to deal with the length and timing of the shifts. Cross-training of employees can help them to cover more than one position and hence resources can be allocated to the area of the greatest need. To enhance customer perception, organizations must have appropriate staff and other resources available at hand to meet the change in demand on a minute-to-minute basis (Klassen & Rohleder, 2001). This implies that flexibility is essential to influence customer perception and also that maximum capacity can be changed in the short run. To meet the demand-supply challenges, Klassen and Rohleder further suggest that demand should be maintained as close to the optimal demand level as possible. Research by the authors suggest that services that experience large, fast and unpredictable changes in demand can generally serve higher expectations of demand in order to maintain customer satisfaction. Thus, lower utilization means idle capacity. To manage the demand-supply challenge, it is neither possible to control demand or maintain capacity to serve the maximum demand as this could likely result in customer dissatisfaction. However, service organizations can influence demand to reduce the magnitude of peaks and valleys to match capacity to a resulting pattern (Klassen & Rohleder, 2001). An organization can control demand only when the resources have high value and the organization is well positioned in the market. However, with the current competitive environment in every sector, this is not possible. Influencing demand to reduce the magnitude of peaks is considered a high level of management sophistication. Warnaby and Davies (1997) suggest that apart from understanding consumer behavior it is also essential to address the interactive nature of services and the involvement of the customers. Anything and anyone coming in contact with the customer is delivering service. Thus consumer forms a holistic perception of the service. Hence, even if the flight is delayed, if the service staff is polite, courteous and informative, the anxiety, anger and frustration of the customers could be controlled to some extent. The flight delays may be beyond the control of the airline management but staff behavior towards customers is under their control. The contact people hence must recognize this fact and provide a holistic positive customer experience. Thus, services being perishable cannot be inventoried. However, service encounters can be enhanced even if delays and waiting occurs during the delivery of service. This can be done through effective management of the wait time through customer engagement. The actual wait time may not be less but the wait experience can be enhanced thereby minimizing customer dissatisfaction and allowing for a holistic perception of service. To meet other challenges of uncertain demand in the service sector, researchers suggest marketing and operational changes. Changes in different elements of the marketing mix, particularly in the pricing can help meet uncertain demand while maintaining customer satisfaction. Demand forecast should be made based on past experience and strategies formed accordingly. Allocation of resources is another technique that can help overcome the unexpected demand in service. It is not possible to control the demand but it is possible to influence the demand to reduce the magnitude of peaks. At times, these could lead to customer conflicts but effective relationship management could help overcome these conflicts. References Allred, A.T., & Addams, H.L. (2000). Service quality at banks & credit unions. Managing Service Quality, vol. 10, no. 1, pp. 52-60 Bick, G., Abratt, R., & Moller, D. (2010). Customer service expectations in retail banking in Africa. S.Afr.J.Bus.Manage, vol. 41, no. 2, pp. 13-27 Gothesson, L., & Riman, S. (2004). REVENUE MANAGEMENT WITHIN SWEDISH HOTELS. http://gupea.ub.gu.se/bitstream/2077/2256/1/gbs_thesis_61.pdf Gronroos, C. (1998). Marketing services: the case of a missing product. JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, vol. 13. no. 4/5, pp. 322-338 Johns, N. (1998). European Journal of Marketing, vol. 33, no. 9/10, pp. 958-973 Katz, K.L., Larson, B.M., & Larson, R.C. (1991). Prescription for the Waiting-In-Line Blues: Entertain, Enlighten, and Engage. MIT Sloan Management Review, vol. 32, no. 2, pp. 44-53 Klassen, K.J., & Rohleder, T.R. (2001). Combining Operations and Marketing to Manage Capacity and Demand in Services. The Services Industries Journal, vol. 21, no. 2, pp. 1-30 Ladhari, R. (2009). Assessment of the psychometric properties of SERVQUAL in the Canadian banking industry. Journal of Financial Services Marketing, vol. 14, no. 1, pp. 70-82 Lovelock, C.H. (n.d.). Strategies for Managing Demand in Capacity-Constrained Service Organisations. Marketing in the Service Industries. pp. 12-39 McGuire, K.A., Kimes, S.E., Lynn, M., Pullman, M.E., & Lloyd, R.C. (2010). A framework for evaluating the customer wait experience. Journal of Service Management, vol. 21, no. 3, pp. 269-290 Taylor, S. (1994). Waiting for Service: The Relationship between Delays and Evaluations of Service. The Journal of Marketing, vol. 58, no. 2, pp. 56-69 Wang, X.L., & Bowie, D. (2009). Revenue management: the impact on business-to-business relationships. Journal of Services Marketing, vol. 23, no. 1, pp. 31-41 Warnaby, G., & Davies. B.J. (1997). Cities as service factories? International Journal of Retail & Distribution Management. vol. 25, no. 6, pp. 204-210 Welcome Group. (2009). Revenue Management. http://www.welcomegroupinc.com/technology.php?sec=RM Read More