The equation that is supply and demand and why it affects your profitability!
December 26, 2010 in Organisations
Anyone who has studied microeconomics or runs a business knows that one of the most important equations is how to balance supply with demand. Supply and demand is great in theory but what about in reality and what happens in the circumstances that supply doesn’t equal demand?
So this week we will focus on providing strategies to overcome supply and demand issues. To begin with there are four types of constraints that you must be aware of:
1. TIME: Services based on time. Essentially if the time of the individual is not used productively, then profits are lost. Furthermore, if there is excessive demand, additional time cannot be created to satisfy it. For instance, a plumber or accountant who bill by time cannot be at two different jobs at the same time.
2. LABOUR: Sometimes services cannot be met, because staff are already operating at peak capacity. For instance, University departments may find that in one semester demand for their subject will be higher. As a result, staff may be forced to operate at peak capacity due to this high demand.
3. EQUIPMENT: Demand can exceed the capacity of the equipment. For instance, service providers cannot produce items if their equipment is already at maximum capacity.
4. FACILITIES: Firms can face restrictions brought about by their limited facilities. For instance the number of seats available on a plane or number of seats in a restaurant will impact on the quantity a provider can serve.
Now that you are aware of the four type of constraints, you should look at ways to shift supply or demand to maximise the amount of profit generated by your firm.
You may be wondering how you go about doing this. Well it’s quite simple, generally you would have a rough idea about your peak and off-peak times – it’s all about formalising this and putting it on paper as a strategy, then you can have a list of key activities that can be completed during low demand periods and strategies in place to cope with higher demand periods.
How do I shift demand to match capacity?
This is easy, as the below strategies can easily be implemented at minimal cost.
1. Convince customers to use the service during periods of slow demand. This allows you to attract more and or different customers to increase demand and better utilise productive capacity.
Methods to reduce demand during peak times include:
*Communicating with customers – let them know the times of peak demand, so they can choose to use the service at alternative times and avoid crowding or delays.
*Modify timing and location of service delivery – adjust hours and days to deliver to more directly reflect customer demand
*Offer incentives for nonpeak usage – such as cheaper prices for non peak times. This is a strategy used by both public transport and cinemas such as Hoyts or Village.
*Set priorities – prioritise who is served by taking care of loyal customers
How can I align capacity to meet customer demand?
This strategy is slightly more difficult to manage as it requires the temporary stretching of resources. However, it can still yield positive benefits for your organisation and employee.
*Stretch existing capacity – staff, facilities and equipment are forced to work harder during times of higher demand.
*Stretch time temporarily – extend the hours of service temporarily. Eg. Shopping centres have their hours extended during Christmas and sale periods.
*Stretch labour temporarily – employees are asked to work longer hours.
*Stretch facilities temporarily – Add chairs, tables and other equipment to meet the demands of customers during high periods of demand.
*Stretch equipment temporarily – Australia Post works the postal services such as mail sorters harder during peak times.
If you are having to stretch resources to meet capacity, ensure that your staff are given opportunities in quiet times to recharge their batteries. Although it’s natural to want to maximise profit as much possible – if staff are fatigued or not happy, long term profitability will suffer. Also look at ways to cross train employees so in peak times responsibilities can be shared.
There you have it, the ability to better match supply and demand is now in your reach! Feel free to contact Vent2Me as we can assist in putting your demand and supply strategies into action.
Cents and Sensibility