Minimizing distribution demand spikes by leveraging customer pricing

Last year I bought a Nest Thermostat with the intention of saving money over the coming years on energy costs… and of course to add another gadget to my inventory! At the time there were rebates offered from energy companies that partnered with Nest, but ComEd was not on the list. Last week I noticed online that ComEd had recently partnered with Nest on a rebate program called Rush Hour Rewards and the rebate could be as high as $140 for staying enrolled through the end of September. The program is designed to lower peak demand for electricity on hot days by allowing ComEd to control the schedule of your AC. ComEd will let you know a day in advance what your “rush hour” will be for the next day and they will only take control 10 times throughout the summer. Signing up was very easy and I don’t anticipate any problems this summer while ComEd pre-cools my house prior to a scheduled rush hour.

This program got me thinking about the distribution industry as well as some of our clients, specifically distributors that can control demand through sales methods or customer interaction, and what strategies they use to minimize peak demand. Most distribution operations have a theoretical throughput they can achieve, and as the volume approaches this threshold, margins take a hit from operating less efficiently. A few key variables that impact efficiency related to volume: storage capacity and building footprint, velocity of product from pick locations, number of people and machines creating bottlenecks, inbound and outbound dock capacity, and management or supervision of the operation. I’ve seen the constraints in an operation and the cause and effect of large volume swings or a building operating at capacity. The management teams typically employ a plethora of inefficient workarounds to get product out the door and seemingly put out fires in a reactionary manner opposed to strategically taking corrective action or isolating root causes.

Ideally, a distributor knows the operating throughput range for a building that maximizes margins as well as the incremental cost of volume changes – whether they are spikes or long term growth. Once a company knows the cost of operating at different volumes, they can create a strategy to alleviate demand spikes for short term patterns, and plan operational and process changes for long term growth to maintain or increase margins.

In thinking about my past clients, I am not aware of any that leverage a volume costing model to support initiatives for leveling demand or minimizing peak demand periods. To mimic the ComEd and Nest rebate program, the distribution company should be able to identify peak periods using forecasting models or even real time tracking of incoming orders to interact and offer customers a discount or rebate for changing when they would like to receive the product. This could be as simple as a salesman asking the customer if he or she is willing to accept a different delivery window for a discounted order price. A more complicated and technological approach is to monitor orders as they are placed and create a pricing scheme that rewards customers for adapting to your demand constraints – thereby automatically streamlining demand. I think customers would respond positively to a demand-based pricing model if given the proper tools and incentives from the distribution company. Customers have demonstrated a willingness to wait longer to have products delivered in a more sustainable fashion, so it seems likely that incentives would also entice customers to be more flexible. Defining those pricing incentives would make for an interesting customer experience project, creating the application for displaying discounts or demand pricing would be a breeze for our application development team, and defining the volume costing model is right in line with our operations excellence distribution center experience. The sector is rich with opportunity, the distributors just need to create an underlying model that is win-win for all parties involved.

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Phone: 312-602-4000
Email: marketing@westmonroepartners.com
222 W. Adams
Chicago, IL 60606
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