Question

In manufacturing and in retail stores, a firm can prepare for a spike or a lull in demand by adjusting the amount of finished goods inventory on hand. So, before the Christmas holiday rush, Target fills their stores with toys for all ages. However, service businesses cannot prepare for variable demand in the same way. Explain how this issue affects a beauty shop, and describe how such service businesses cope with variable demand instead of by adjusting finished goods inventory.

Answer 1

Solution

Yes, manufacturing and retail firm can prepare for a variable demand well in advance by adjusting the amount of finished goods inventory on hand.They anticipate the variability in demand well in advance and prepare accordingly.

Even though service oriented businesses like beauty shop,diagnostic services,airlines,etc., cannot cope with demand variability in the same manner.This is because the costs associated with it.In these businesses,the services are offered on demand and it takes time to deliver the service (can only be delivered to limited number of people during a given time) unlike selling goods (which can be produced before hand and stored )

In other words manufactured goods can be stored i.e.,can maintain inventory but there is no inventories in services - vacancies are lost.Ex: Vacant seats means the revenue is lost for that particular airline so if at all the seats are vacant,they try to offer them even at a very low price otherwise they will have to loose the revenue on that seat.

This issue will affect the service businesses like beauty shops since they are not able to cater to increased demand nor able to control their expenses when the demand is low.

So,their top limit of revenue cannot be increased temporarily and also they cannot control their expenses during the lag / low demand season.

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