CAPACITY AND DEMAND MANAGEMENT IN LOGISTICS SERVICES – PART 1

I - CAPACITY CONCEPT AND MANAGEMENT

Several articles published in this same magazine and in other specialized sources draw attention to the significant impact that the logistics service has on customer satisfaction. Renowned authors claim that the result of all logistical efforts is to provide a service that meets and even exceeds customer expectations.

Among the attributes of the logistics service consistently pointed out as the most valued by customers are:

• Availability: the ability to fulfill customer orders in a given time;
• On-time deliveries: the ability to deliver products on time, with little variability;
• Communications: the ability to provide prompt and relevant information to any customer queries;
• After-sales service: the ability to solve problems that the customer may have with the purchased product.

To meet these attributes, the service provider needs to have CAPACITY. Capacity is the productive potential of a process. The number of deliveries that can be made in a day, the number of orders that can be processed in an hour, or the number of calls a technician can handle in a week are examples of measures of capacity. The capacity is determined by the resources that the system has to perform its activities. Storage space, delivery vehicles, inventory investment, technicians to assist customers, etc. are examples of resources that determine the ability to provide the logistics service.

Capacity management in a service provider system is one of the main management challenges. For many service experts, the way capacity is managed can determine whether a business is profitable or not. This is because capacity sizing affects the company's performance as it has an impact on investments and operating costs. Due to certain characteristics of services, capacity is perishable and cannot be stored. An empty seat on an airplane, once the flight has been checked in, cannot be stored for a day when the demand for that flight exceeds the supply of seats. A technician who only has two visits scheduled for a day cannot “store” his idle hours for another day when the number of service requests exceeds his service capacity.

The previous paragraph illustrates the complexity of capacity management. It is a task that seeks to balance the dimensioning of resources (investments in facilities, equipment, people, etc.) with the behavior of demand (variability, seasonality, customer expectations). It is possible that the service provider experiences periods of idleness in some or all of its resources and periods of lack of service capacity, generating customer dissatisfaction, poor perception of the quality of its service, lost sales, etc. The perfect balance between supply and demand is almost never achieved. A recent example of a situation that occurred in our country proves the complexity of the issue: through television and newspapers, Brazil followed, in the first half of last April, a serious problem in the capacity of a logistical service. The super harvest of soybeans and corn caused traffic jams of up to 100 km on the roads of Paraná. A queue of more than 4000 trucks congested the accesses to the port of Paranaguá, whose processing capacity was 500 trucks per day. Trucks stopped for days, irritated drivers, time and money lost by many people, it was the balance of an undesirable situation for all parties involved. As one port director stated, “no port can be scaled by peak demand”. Solutions such as unloading in warehouses was the way found to release the trucks.

The objective of this article is to present the available strategies to manage capacity in services and some mechanisms to, in the short term, try to bring capacity and demand closer together, reducing situations of excess or lack of capacity.

II - STRATEGIES FOR MANAGING CAPACITY IN SERVICES

There are two basic strategies for managing service capacity. The first is to “chase” demand. If demand goes up, capacity goes up; if demand decreases, capacity also decreases. This is an appropriate strategy for services where seasonality is accentuated or demand fluctuation is very intense and unpredictable. Its adoption is indicated in processes that are intensive in abundant and unskilled labor and where investments in physical resources are minimal.

The second strategy consists of fixing the capacity at a level capable of meeting a certain percentage of the maximum expected demand. It's the service level strategy. The decision on the percentage should take into account the type of service, how much customers are willing to pay for availability, how much the lack of capacity means and the cost of idle resources when demand is lower than the fixed capacity level. Thus, for example, a company prepared to respond within 24 hours to all orders that arrive by 18:24 pm the previous day, needs a higher capacity than another that says it only responds to orders within XNUMX hours from a certain geographic area. The first company certainly has more resources, whether people, vehicles or technology. Its structural cost must be higher, but perhaps this will give it the possibility to serve more demanding customers, willing to pay for the availability of the service.

As every service consists of processes, it is possible that for a certain process the use of the demand monitoring strategy is indicated and, for another, the most viable thing is to fix the capacity. Both strategies have advantages and disadvantages, and the savvy manager will, in almost all cases, seek to steer clear of both extremes.

Figure 1 graphically illustrates the two basic strategies for managing service capacity.

In the case of logistics services, the demand monitoring strategy has obvious limitations. It is not economically viable to continually invest and disinvest in facilities, equipment, personnel, etc. Thus, the service level strategy is the most suitable and the problem then consists of deciding what percentage of the maximum expected demand the company wants to meet. If the decision is to have the capacity to meet peak demand, this means assuming the costs of idleness during periods of normal demand. This option can be justified when the margins obtained during peak demand offset the cost of low utilization during normal periods. On the other hand, a decision for a service level of less than 100% can also be wise; the company assumes that being prepared to meet the entire demand is more expensive than it would earn by meeting the excess percentage over the decided level.

In neither case, however, is the manager exempt from trying to resolve both potential problems. In the first case, idleness during periods when demand is normal and, in the second, the fact of not meeting demand greater than the decided capacity. The literature on capacity management in services offers a series of “tricks” available to managers interested in adjusting supply and demand, that is, seeking to reduce the existing gap between capacity and demand in those periods when supply exceeds demand or in those periods when supply exceeds demand. that demand exceeds capacity.

In this issue, we will focus on the mechanisms to work on capacity in order to bring it closer to demand. Next month we will dedicate the article to methods of working with demand, trying to adjust it to capacity. There is no reason to prevent the adoption of mechanisms from both categories. Just for the sake of presentation, we will divide such mechanisms into two sets. An observation is in order here: not all the mechanisms that will be presented can be applied to every type of service. Our objective in presenting a broad list is to offer ideas that may have some potential for use in service systems that face problems of unbalance between supply and demand, in particular logistical systems.

III – WORKING ON CAPACITY

The manager of a service has more power to work with supply than with demand. After all, the offer is dimensioned based on the company's resources and, obviously, such resources are variables that can be controlled by management.

Mobile Services/Distributing Capacity in Special Locations: Leasing flexibility can increase facility utilization by dynamically allocating service delivery closer to potential demand. It is useful when demand varies geographically over a period of time. The ambulances of certain health plans are present at sporting events, for example, and provide emergency services for anyone who feels unwell, whether or not they are members.

Capacity Sharing, including with competitors: When it is necessary to invest in expensive equipment whose capacity exceeds the need, one can consider sharing its use with other companies that are in a similar situation. This is a common practice, for example, between airlines that share seats on certain flights, and ground personnel and equipment (ladders, luggage conveyors, etc.) at airports where they operate infrequently.

Time-saving technology: It can significantly increase plant efficiency and increase system capacity. Bar codes and their multiple applications are a good example of saving time in warehouse operations. In transport operations, routing software is a great help in optimizing delivery times by efficiently scheduling the collection and delivery of orders. One company that uses technology very well to save time is Federal Express, which has scanners, computer terminals, and online information systems to streamline its operations.

Pre-order processing: The nature of some services allows certain tasks to be performed before the service is actually performed. These pre-processed steps constitute a “buffer” to face peak hours. The possibility of pre-processing is highly correlated with the degree of standardization of products and processes. Many service companies use information pre-processing to reduce service time. Known examples are those of delivery restaurants or radio taxi companies that only with the customer's telephone number already know the address, the most common order or the route that the customer takes most frequently, speeding up the service and increasing the capacity of this operation. .

Standardize operations in certain periods, including eliminating certain activities: If capacity is scarce in certain periods, study the activities that consume the most capacity and verify opportunities to standardize them. Some may even be temporarily deleted. Companies that sell a few highly standardized products have an advantage because it increases the efficiency of their service facilities. Standardization allows for more accurate demand forecasting, minimizing one of the hurdles of capacity management. Concentrating efforts only on essential tasks for providing the service, leaving support or less important tasks for hours of reduced demand, is another way to increase supply.

Increase headcount and/or employ part-time labor: Increasing headcount to accommodate peak demand is a useful alternative in some types of service operations. Many companies hire temporary labor to face the high demand in the last months of the year. The cycle of peak demand varies according to the type of business that can correspond to certain hours of the day, certain days of the week, certain weeks of the month or certain months of the year. Using part-time labor can be an option when demand peaks occur in a predictable and consistent manner. In these cases, the company typically maintains a full-time employee base that operates the system during off-peak hours and hires employees to work short periods of the day to meet peak hours. Temporary hiring of labor is an example of a capacity-following-demand strategy. In certain distribution centers, for example, storage capacity is fixed since it is not feasible to increase or decrease such capacity according to changes in demand. On the other hand, the ability to handle and separate goods, operations generally dependent on labor, varies according to the needs of the business.

Cross-functional employees: Since a service system may involve performing activities that require different skills and the demand for these activities may vary, employees capable of performing diverse tasks can be reallocated in the system, allowing a spike in demand for one particular activity is more easily attended. In addition, this strategy reduces the monotony of the function and increases employee knowledge and involvement with the process. Some supermarkets, for example, train their stock replenishers to work as cashiers. When the manager identifies an increase in the queues at the tellers, these replenishers are summoned to meet the demand at check-outs. At Domino's Pizza, where 80% of all orders take place during 20% ​​of operating hours, most employees are capable of performing more than one of five critical roles – driving, taking orders, making pizzas, tending the oven and determine which are the best routes for delivery.

Increased customer participation: the use of the customer himself in carrying out some activities during the provision of services can be a way to increase the system's capacity. The participation of the client performing or facilitating the performance of some activities reduces times, increasing the capacity of the system as a whole. For this, the client must be well informed on how to perform the task that fits him and must perceive some benefit, such as a discount or streamlining the process. The order receiving operation, for example, can have its capacity increased if the customer himself already has a form with the items that the company sells, the codes of these items, etc. Orders placed via the Internet fulfill this role. Another example in this line are the agreements between suppliers and customers to reduce the delivery time of products at the customer's premises.

Extend or redistribute opening hours: To meet demand without expanding physical capacity, opening hours can be adjusted. Some services have this flexibility and thus manage to increase their offer. Night deliveries are a good example, especially in certain areas where traffic is chaotic during normal hours, there are parking restrictions, there are a number of other suppliers making deliveries, etc.

Offer of Complementary Services: This mechanism, especially compatible with highly seasonal services, allows two or more services to be offered in different periods of the year in order to establish a more homogeneous demand. An example would be refrigeration equipment maintenance companies, which might repair air conditioners in the summer and heaters in the winter when demand drops. Another example is schools that offer summer camps to their students during periods when classes are suspended.

Services made for “batches” of clients: It is an excellent way to increase efficiency and flexibility when the service can be performed simultaneously for a group of clients. Some service companies have the flexibility to increase the “batch” size to respond to increases in demand (economies of scale). Consolidation of loads is an example that fits this type of mechanism. However, it is necessary to know the implications of this practice in the assessment that the customer makes of the quality of the service. The time required for batch formation can mean the loss of the customer who is not willing to receive the service within the time frame that suits the company and not him.

Small investments to eliminate bottlenecks: When a service is provided through a sequence of processes, it is necessary to know the execution times in each process to identify the bottleneck in the system. This is because the capacity of the system is determined by the slowest process. Once the bottleneck is identified, small localized investments can increase system capacity without having to invest resources in the system as a whole.

Subcontracting: Temporarily subcontracting some activities can increase system capacity at times of peak demand. This is the case, for example, of companies that have their own fleet for deliveries during periods of normal demand and that have a register of transport companies or even independent transporters that are hired to meet extraordinary demand. The disadvantages or difficulties reside in the decrease of control over the service, which can generate quality problems or higher costs. However, it is a way to reduce operating leverage in the face of unstable demand behavior. It should be clarified that subcontracting does not mean outsourcing services. Outsourcing cannot be seen as a measure of adjustment between supply and demand because it is a decision that involves strategic considerations normally associated with the medium and long term.

IV - CONCLUSION

Managers interested in finding a balance between supply and demand in their service provision system have a reasonable range of alternatives. Depending on the service, some alternatives are more applicable than others. You need to have a good understanding of the structure of the costs of serving and the reactions of customers in the various segments that the company serves. In this article we offer alternatives to try to adjust capacity to demand. In the next issue, we will address mechanisms that seek to work with demand in order to adjust it to existing capacity.

BIBLIOGRAPHY

BITRAN, G. and MONDSCHEIN, S. “Managing the Tug-of-War Between Supply and Demand in the Service Industries”. European Management Journal, 15(5), October 1997, pp. 523–535.

NG, ICL, WIRTZ, J. and LEE, KS “The Strategic Role of Unused Service Capacity”. International Journal of Service Industry Management, vol. 10, No. 2, 1999, pp. 211-238.