Critical Analysis of Research Findings
Demand Management
-Prestline Jose (B2147)
Introduction
What makes service firms unique is its concept of immediacy; train boogies must be free when
the customers want to travel, the hotel rooms must be available when sleepy travelers check in
and hamburgers must be hot when we collect it from McDonalds. Due to the unique
characteristics of services such as perishability, intangibility, simultaneous production and
consumption, heterogeneity and customer participation in the service process; balancing the
supply and demand sides of a service industry is not easy. Hence a good demand management
process can enable a company to be more proactive to anticipated demand and more active to
unanticipated demand (Croxton, Lambert, Garcia-Dastugue and Rogers, 2002).
Definition of Demand Management
Of late, demand management has been researched extensively in service operations owing to the
growing importance of services and the emergence of the experience economy. Yield
management is defined as the application of information systems and pricing strategies to “sell
the right capacity to the right customers at the right prices” (Smith, Leimkuhler, Darrow, 1992).
Thus, demand management is the supply chain management process that balances the customers’
requirements with the capabilities of the supply chain. An important component of demand
management is finding ways to reduce demand variability and operational flexibility. Hence one
of the modern definitions of demand management is the management of the four Cs of perishable
service:
Calendar (how far in advance reservations are made), clock (the time of day service is offered),
capacity (the inventory of service resources), and cost (the price of the service) to manage a fifth
C, customer demand, in such a way as to maximize profitability (Kimes and Chase, 1998).
Demand Management Process
The demand management process has strategic and operational components. While the strategic
element establishes the structure for managing the process, it is the operational process that
results in the actualization of demand management. Hence, the strategic process facilitates the
integration of the various members of the supply chain and it is at the operational level that the
day-to-day activities are executed (Croxton, Lambert, Garcia-Dastugue and Rogers, 2002).
Strategic Demand Management Process
It comprises of six sub-processes that are aimed at designing an efficient operational system for
matching supply and demand. The team needs to determine how the firm will use technology
within the demand management process, and how information systems will need to be integrated
with other members of the supply chain to facilitate the process. Some firms will require more
investment in information technology than others (Todd, Mabe and Beech, 1998).
i. Determine demand management goals and strategy
The team must have a holistic view of the firm’s long-term outlook and its strategy,
the customers and their needs, the manufacturing capabilities, and the supply chain
network. With these in mind, the focus of the demand management must be zeroed
down such as whether the priority is on accommodating flexibility in the system or on
generating accurate forecasts.
ii. Determine Forecasting Procedures
This includes determining the levels and time frames of the forecasts needed
throughout the firm, identifying the sources of data, and then defining procedure for
each forecast required. Different parts of the firm might need different levels of the
forecast (Helms, Ettkin and Chapman, 2000). For instance, manufacturing planning
might require an SKU-level forecast. Transportation planning, on the other hand,
might need a forecast aggregated at the product-family level but disaggregated by
region.
iii. Plan Information Flow
This involves determining the sources of data collection, how the input data would be
obtained and transferred to the needed parties and what output ought to be
communicated and to whom.
iv. Determine Synchronization Procedures
The synchronization procedure is often referred to as Sales and Operations Planning
(S & OP) and requires sans frontier coordination across all departments such as
marketing, manufacturing, logistics and finance. IT solutions such as Enterprise
Resource Planning (ERP) systems is one of the effective paths to fuel the
synchronization.
v. Develop Contingency Management System
Since risk is by all means inevitable in any business, the success of the plans could be
cemented through the development of contingency plans to deal with both internal
and external certainties (Stauffer, 2003)
vi. Develop Framework of Metrics
Well-defined performance metrics is a prerequisite for the effective implementation
of the plan. A uniform approach should be used throughout the firm to develop these
metrics be it Economic Value Added (EVA) or Return on Investment (ROI)
Operational Demand Management Process
This involves execution of the strategic plan
i. Collect Data/Information
Important information is collected from the team handling order processing,
rendering customer service as well as those dealing with returns management.
ii. Forecasts:
It involves developing forecasts, analyzing forecasts errors and incorporating this
feedback to fine tune the forecasting methods. These forecasts must consider capacity
of the members within the supply chain network, financial limitations and current
inventory positions.
iii. Synchronization:
This is one of the most crucial elements wherein the forecasts are converted into
demand execution plan.
iv. Reduce variability and Increase flexibility:
The manager can reduce the negative impact of variability either by reducing the
variability itself or by increasing the capacity to react to it. The success lies in striking
a proper balance between the two. Increasing flexibility comes with a price but it
helps the firm to respond quickly to both internal and external events (Slack and
Correa, 2007). Reducing demand variability helps in consistent planning and reducing
the costs.
v. Measure Performance
Uniform metrics is distributed throughout the supply chain for measurement of
performance and link metrics to EVA.
Strategies
According to W. Earl Sasser (Harvard Business Review, November 1976), there are two basic
strategies- Chase demand and level capacity strategies in dealing with demand management.
Chase demand involves hiring and firing workers to match demand. Hence it is applied to for
unskilled employees performing jobs with little or no discretion for low pay in a relatively
unattractive environment. Hence both the skill level requirement and training cost per employee
will also be lower. However, the overall costs are high owing to high turnover rate.
On the other hand, a level strategy is aimed at producing at a constant rate and using inventory to
absorb fluctuations in demand. Managers use level strategy when high skilled employees are
employed for high pay, with some or a lot of discretion in a relatively pleasant environment.
Hence, as one may have reasoned, the training cost per employee and lead time to fill
replacement is high but the chance of errors in performance are minimal.
Strategic Levers of Demand or Yield Management
Sticking along with the basic strategies, Professor Sheryl E. Rimes of Cornell University and
Richard B. Chase of the University of Southern California classified all yield management
strategies based on two components: pricing and duration of customer use. Accordingly, prices
can be fixed (one price for the same service for all customers for all times) or variable (different
prices for different times or for different segments) and duration can be predictable or
unpredictable.
They came up with the following classification:
The intent of this classification method is to help industries not currently using yield
management strategic framework for developing yield management.
Critical Analysis of Demand Management in Various Sectors
i. Airline Industry
The airline industry has always been tormented with the problem of overbooking during
the holiday season especially Christmas and summer while filling the empty seats in all
the other months. In the light of this, various American airlines pioneered in the
development of the reservation system. This was aided by the concept of hub and spoke
model which ensured wider geographical coverage and wider connectivity. Here, each
airline had on or more hubs from which various connecting flights operated. However,
contrary to this was the point-to-point strategy popularized and promoted by the South
West Airlines. Further, they did not adopt the policy of fixed seats nor charging for bags.
Their target market was a local business traveler and not a globe-trotting vagabond. All
these lowered costs and they also reported profits for many decades now (Kimes and
Chase, 1998).
ii. Healthcare: Aravind Eye-Care system: McDonaldization of Eye- Care
Aravind serves as large as 6000 out-patients in the hospital and 1500 patients in out-reach
camps every day. The process flow involves registration, vision test, preliminary exam,
refraction, final exam, counseling and recommendation for surgery. The Aravind doctor
performs a minimum of 2000 surgeries in a year compared to Indian average of 400. This
high productivity is attained by means of adopting assembly line approach to surgery.
Each operating room has one surgeon in each room, but a minimum of two operating
tables, multiple sets of equipment and multiple nursing teams to carry out non-surgical
tasks such as preparing the patient and administering the anesthetic. This unique layout
enables the surgeon to complete a surgery, turn around and start the surgery on the next
patient who has been pre-prepared. This procedure enables the doctor to perform six to
eight surgeries per hour as opposed to one surgery per hour. They have employed tele-
medicine so that doctors from the main hospital can evaluate and diagnose millions of
patients at scale (Krishnan, 2015).
iii. Logistics and Freight: Mumbai Models of Service Excellence-Dabbawallas
Between 175000 and 200000 lunch boxes are moved each day by 4500 to 5000
dabbawallas. The key to managing demand include various pillars primarily its
operations process. The process entails the simple codes, buffer capacity and adherence
to standards. As for the codes, the lid of the dabba has three key markings on it- number
for the district that the dabba is going to be delivered, mark showing the originating
station and code for the destination. The time allotted for picking up at a house might be
only 30 to 60 seconds. So, to stay on schedule, each group has two or three extra workers
who fill in whenever they are needed, and all members are cross-trained in different
activities: collecting, sorting, transporting, finance, and customer relations. There are also
standards which are in place- for instance, the dabbas are all roughly the same size a
cylindrical shape. To encourage customers to confirm, containers incur an additional fee
when they are so large that they require special handling. Unusual containers that
interfere with the delivery operation are simply not accepted. This uniformity allows the
dabbas to be packed quickly onto crates, which is also a standard size so that they can be
effectively loaded onto trains. Hence, due to all this, 100 years on, Dabbawallas continue
to be self-reinforcing system. They have proved that when the system is right, an
organization does not need extraordinary talent to achieve extraordinary performance
(Thomke, 2012).
iv. Travel Demand Management:
The private car is fast, comfortable, and convenient. However, worldwide massive car
use causes serious environmental problems. Although clean energy cars have come in
place, nevertheless, reducing car use is one of best means to arrive at travel demand
management. Given below are some of few measures that could be adopted in this regard.
First, physical changes aim at increasing the relative attractiveness of alternative travel
modes, for instance, improving infrastructure for public transport, walking and cycling,
removing parking places, or constructing speed ramps.
Second, legal measures may be implemented to enforce car use. Examples include
prohibiting car traffic in city centers, decreasing speed limits, and introducing parking
regulations. The assumption is that people will comply with these measures. In addition,
it is hoped that in the longer-term legal policies result in changes in social norms.
Third, economic measures aim at making car use relatively more expensive. Examples of
economic policies are congestion or road pricing, taxation of fuels and cars, and reducing
costs for public transport. The underlying assumption is that people’s travel choices
depend on cost-benefit analyses of alternatives.
Fourth, information and education measures aim at changing people’s perceptions,
attitudes, beliefs, values, and personal norms concerning car use. Examples include
providing information about positive and negative aspects of car use, social modeling
(such as public figures using alternate travel modes), and individualized marketing
(providing people with customized information about their travel options). (Garling and
Schuitema, 2007).
v. Hotel Demand Management:
Under changing market conditions for the hospitality industry, the Carlson Rezidor Hotel
Group (CRHG) collaborated with JDA Software Group to use operations research to
drive higher revenue for its hoteliers and to stay ahead of the competition. This highly
innovative revenue optimization project, Stay Night Automated Pricing (SNAP), started
with enterprise demand forecasting across 600 US hotels in 2007. It was followed by a
large-scale network optimization solution to dynamically optimize hotel room rates based
on price elasticity of demand, competitor rates, availability of remaining inventory,
demand forecasts, and business rules. All North American hotels were operational in
SNAP by March 2011. Starting from the optimization prototyping results in 2008, CRHG
consistently measured a 2–4 percent revenue improvement in compliant hotels over
noncompliant ones. To date, compliant hotels have increased revenue by more than $16
million annually. After a successful deployment in the Americas, CRHG extended the
partnership with JDA to globally roll out SNAP, with an initial focus on Europe, the
Middle East, Africa, and the Asia Pacific region. CRHG anticipates that the worldwide
incremental revenue from this solution will exceed $30 million annually (Pekgün,
Menich, Acharya, Finch, Deschamps, Mallery, Sistine, Christianson and Fuller).
vi. Water Demand Management:
Yesterday, nations went to war for land. Today, conflict involve energy. And tomorrow,
Brahma Chellaney writes, the battles will be about water. Increase in population and per
capita consumption of water puts a pressure on the world’s water bodies. Hence, water
demand management has become more important than ever before. National and local
governments should initiate creative approaches, courageous policies, regulations and
their enforcement. They should test the use of incentives and sanctions, tax measures, and
introduce realistic full-cost pricing of water in a step-by-step action plan. Hence, many
governments have introduced increasing block rate pricing strategy to manage the
consumption of water. Re-use of waste-water within industries or within an industrial
zone, re-use of municipal wastes, for irrigation of fields and parks, and industrial cooling
are just examples of key elements that reconcile pollution abatement with water demand
management. (Arlosoroff, 1998).
Future Trends
i. Standardization or McDonaldization is not possible everywhere to manage demand as
customer becomes more demanding
ii. The whole concept of supply chain management through ERP networks could be
replaced by blockchain technology. This would ease information flow and reduce
yield times.
iii. The expansion in the scope of demand side management to managing supply as well.
This could be achieved by multiple means such as using part-time employees,
maximizing efficiency of employees, increasing customer participation, sharing
capacity, investing in expansion etc.
Conclusion
Managing demand and supply is a key task of service manager. Although there are two basic
strategies for capacity management, the enlightened manager will, in almost all cases, deviate
from these two extremes. The real success of a service manager lies in arriving at the best fit
between demand and capacity. Since each system cannot handle infinite demands, the manager
needs to question how much of the peak demand to accommodate. Ultimately of course, the aim
of the manager is to increase revenue, through an existing service delivery system of given
capacity. Service managers need to think out of the box in effective management of demand and
supply and in it lies their success.
References
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x. Thomke, S. (2012). Mumbai’s Models of Service Excellence. Harvard Business
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