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A question of capacity

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  • SIMA
- Posted: October 29, 2018
By Doug Clark, CSP

Some companies manufacture goods. Others provide services. Sometimes, “goods” and “services” are spoken in the same breath; yet they differ in rather profound ways.

A “good” is a tangible thing. If a manufacturer makes a snowplow and there’s no one to buy it yet, they can store it in inventory and wait until an order arrives. Businesses that provide “services” do not have this luxury. A snow and ice management provider can’t preplow a lot, store it and sell it when an order comes in. So snow and ice management service providers have a unique problem tied to seasonal demand fluctuations. 

Because service businesses cannot store inventory, the amount of work they can do is limited to the amount of available labor. You don’t want to have large segments of your workforce sitting around unused except during the absolute busiest periods; therefore, at some point you will have to turn away business so you don’t exceed your capacity. 

If you have a highly seasonal business, your staffing and equipment capacity should be set where the revenue that you lose from having to turn away business equals the cost of keeping that capacity paid and paid for when there isn’t enough demand (Figure 1).
Fig. 1_Native_file
But no one likes to turn away business. Not to mention, idle shops in the off-season can look like a failing business. As a result, service businesses have to look for ways to rapidly add or subtract capacity. Fortunately, other service industries can point the way to useful strategies.

Labor capacity
Regarding labor, companies tend to manage this demand fluctuation in one of three ways:

1. Keep them busy. Rescheduling activities that are not weather dependent in high-demand periods or scheduling maintenance in slack times can temporarily manage some spikes. For example, in the hospitality industry hotels and convention centers will offer excellent rates to encourage conventions, for example, during non-peak periods. The number of these activities is highly limited in our industry and will not provide a great deal of relief.

2. Provide counter-seasonal services. For most companies, snow and ice removal is a counter-seasonal business designed to reduce slack capacity in the winter for landscapers; however, a growing number of companies are beginning to transition snow to their primary profit center. By overlapping services with complementary counter-seasonal activities, you can greatly reduce the scale of the demand spikes, with the “slack” periods coming during the changeovers, in spring and fall.

3. Temporarily add or subtract capacity. Many snow-only businesses use this method, notably by using subcontractors and seasonal labor. By adding and shedding labor capacity as demand for services rises and falls, you can reduce the amount of lost revenue.

Adding or subtracting capacity in this fashion can provide stability for your existing workforce, making them less susceptible to layoffs. As a result, your core personnel are always there when you need them. Firms that lay off employees often find that when they return to those high-value employees that they laid off, those people have found new positions. The more valuable the worker is to you, the higher the likelihood that someone else might scoop them up.

Equipment capacity
Successful snow companies must have the equipment capacity to deliver the contracted service levels. Depending on your company’s business model and company size, it may be worth considering renting or leasing to increase capacity. 

Although you lose some of the value of owning the equipment (e.g., depreciation and resale value), in return you receive a known, fixed cost for the addition of capacity, and you eliminate many costs of ownership like unscheduled maintenance - a pretty word for “things breaking.” 

When you own a piece of equipment that breaks, it’s your problem. If you lease a piece of equipment that breaks, it’s the leasing company’s problem. And there is a good chance that the leasing company has another of whatever just broke in the field, thus actually decreasing downtime from equipment failures.

And, in our industry, many subcontractors will provide their own equipment. On the flip side, there are now matchmaking services that do for equipment leasing what Airbnb has done for room rentals.

No matter which path you take to temporarily increase or decrease capacity, you are still foregoing some revenue and incurring some excess capacity cost - but you’ve reduced the amount of both. Skillful use of these techniques can maximize your revenue and provide additional intangible business benefits.

Very large businesses in our industry have learned these lessons. By managing a large portfolio of counter-seasonal businesses with these capacity practices, a company that ought to be turning away a fair amount of business and incurring slack time costs can actually start to approach the perfect alignment of capacity with demand across the entire year (Fig 2).
Fig._4_Native_File
The snow removal business isn’t that different from the airline business. Both are service businesses. Like you, airline businesses are also seasonal - anyone who doubts that should go to any major airport at Thanksgiving or during the summer. Like you, they may hire subcontractors (many airlines have commuter companies they hire under contract during the year). And like you, they can lease equipment - in fact, most airlines do not own their aircraft. 

But airplanes these days are very full, and that is not by accident. They have perfected the model to maximize profit while minimizing the commitment to excess capacity. With care you can create a business that minimizes known spikes and produces the best possible conditions for you and your team. 

Doug Clark, CSP, is product manager for Western Products. Contact him at dclark@westernplows.com.
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