Challenges in managing demand for services

Demand management is a critical aspect of service management. Poorly managed demand is a source of risk for service provider s because of uncertainty in demand. Excess capacity generates cost without creating value that provides a basis for cost recovery. Customer s are reluctant to pay for idle capacity unless it has value for them.

There are instances in which a certain amount of unused capacity is necessary to deliver service level s. Such capacity is creating value through the higher level of assurance made possible with higher capacity. Such capacity cannot be considered idle capacity because it is in active use for a purpose.

Insufficient capacity has impact on the quality of services delivered and limits the growth of the service. Service level agreement s, forecasting, planning, and tight coordination with the customer can reduce the uncertainty in demand but cannot entirely eliminate it.

Service management faces the additional problem of synchronous production and consumption. Service production cannot occur without the concurrent presence of demand that consumes the output. It is a pull-system in which consumption cycles stimulate production cycles.

Demand management techniques such as off-peak pricing, volume discounts and differentiated service levels can influence the arrival of demand in specific patterns. However, demand still pulls capacity. Demand cannot exist simply because capacity exists.

Consumption produces demand and production consumes demand in a highly synchronized pattern (Figure 5.22). Unlike goods, services cannot be manufactured in advance and stocked in a finished goods inventory in anticipation of demand. Demand and capacity are far more tightly coupled in service system s even when compared with just-in-time (JIT) manufacturing.

Figure 5.22Tight coupling between demand and capacity

The productive capacity of resource s available to a service is adjusted according to demand forecasts and patterns. Some types of capacity can be quickly increased as required and released when not in use. The arrival of demand can be influenced using pricing incentives. However, it is not possible to produce and stock service output before demand actually materializes.

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