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Managing Customer Relations When Demand Exceeds Supply
Ideas for Leaders #249
Managing Customer Relations When
Demand Exceeds Supply
Key Concept
Authors
When demand outpaces inventory suppliers cannot fulfil everyone’s orders.
Two academic researchers have developed a quantitative model that
suppliers can use to make the right decisions on which orders to fill, and
which to delay, while keeping the greatest number of customers happy in the
short- and long-term.
Adelman, Daniel
Mersereau, Adam J.
Institutions
University of Chicago Booth School of
Business
Idea Summary
University of North Carolina Kenan-Flagler
What happens when a business has more orders that it can fill? While the
situation may seem to be a happy one, resolving the dilemma effectively is
key to maintaining a happy and profitable customer base.
Business School
Source
Management Science
The decisions must thus be made carefully: which customers should be
served first? The high-margin customers might seem the logical choice. But
what about the customers who historically complain the loudest when they
have to wait? Or what if the low-margin customers in the queue order more
consistently than the high-margin customers?
To help suppliers make the most optimal allocation decisions, Professor
Daniel Adelman of the University of Chicago’s Booth School of Business and
Professor Adam Mersereau from the University of North Carolina’s KenanFlagler Business School developed a quantitative model that factors in the
three fundamental ways that customers differ from each other:
Idea conceived
March 2013
Idea posted
October 2013
DOI number
10.13007/249
Subject
Customer-centricity
Contributing margin: the profit that the supplier makes from a customer;
Customer Relationship Management
Demand volatility: a customer’s consistency or inconsistency in the frequency and amount of
Sales Management and Strategy
orders;
Customer memory: the sensitivity of a customer to past experience with the supplier.
Choosing the customers with the highest margins might make economic
sense in the short-term. Such easy profit-taking, however, ignores the impact
of goodwill on a supplier’s relationships with its customers and, ultimately, on
that supplier’s long-term profitability. For example, if market conditions
change, the low-margin customers neglected today might be essential for
future profitability; however, their goodwill toward the supplier damaged by
past experience, these customers are no longer around — they moved on to a
more satisfying supplier.
This scenario highlights the importance of customer memory. Customers
remember past service and this memory affects their ordering decisions.
Customers with long memories will be willing to forgive an occasional lessthan-stellar order fulfilment; customers with short memories, on the other
hand, are more likely to complain — and leave.
The decision support model developed by Adelman and Mersereau factors in
this key relationship between customer memory and demand volatility.
Business Application
The best strategy that emerges from the research is for the supplier to
maintain and nurture a portfolio of customers who vary in margin, demand
volatility and customer memory. The supplier can then manage the trade-offs
between these three factors with the goal of keeping a relatively steady
stream of orders coming from the entire customer base.
In this pool of customers, for example, will be customers with short memories
— the squeaky wheels who if unhappy might retaliate with less future orders.
The model indicates that stability is a key factor in keeping these customers
happy and ordering. Suppliers must let the ultimate goal of stability — e.g. the
same turnaround time for each order — in mind as they make their order
fulfilment decisions concerning these types of customer.
Other customers, those with longer memories, might be more lenient or not as
rigid in their expectations. These customers might be satisfied with less
stability, within reason, of course.
One can see how a pool of customers with different expectations gives
suppliers the flexibility they need to maintain the goodwill of all their
customers. In a period of short supply, for example, it’s less risky to focus on
fulfilling the orders of the customers with less memory and making the
customers with longer memories wait a little longer. (One could say the model
offers quantitative support to the old adage, “the squeaky wheel gets the
grease.”)
The key is to manage the different customer expectations effectively. Given
the complex dynamics involved, the model created by Adelman and
Mersereau is the tool that suppliers need to keep the most people happy most
of the time.
In short, suppliers should:
Avoid short-term profit-taking. Such a strategy is myopic.
Recognize that different customers will have different expectations and understand what those
expectations are.
Manage expectations carefully to ensure that the excessive expectations of some customers
do not drown out the others.
Mix and match your fulfilment decisions in an attempt to meet the differing expectations of all
customers.
Let the maintenance of long-term goodwill guide all decisions.
Further Reading
Dynamic Capacity Allocation to Customers Who Remember Past Service. Daniel
Adelman & Adam J. Mersereau. Management Science (March 2013).
Relationship Advice for Suppliers. Vanessa Sumo. Capital Ideas (Summer 2013).
Further Relevant Resources
Daniel Adelman’s profile at the University of Chicago Booth School of Business
Adam J. Mersereau’s profile at University of North Carolina Kenan-Flagler Business School
University of Chicago Booth Executive Education profile at IEDP
UNC Kenan-Flagler Business School Executive Education profile at IEDP
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