Whenever I go see my doctor at her clinic at the hospital, I always would find myself waiting in line with other patients. The clinics adjacent to my doctor’s would also have patients waiting, in which sometimes the queues would overflow into the corridor. Even if I had called ahead and set an appointment, I would still end up in line. There are just so many patients for every doctor in the hospital.
I would also need to wait in line when I would want a radiological exam (e.g., X-ray, MRI) or a blood chemistry test at the hospital’s respective laboratories. I also would be required to line up when I pay at the hospital’s cashier’s station.
The hospital had spent a lot of money for state-of-the-art medical equipment, cutting-edge information technology systems, and the hiring & training of talented people to assure the best quality care for patients. Why, then, with all the available technology & talent invested, do we have to wait so long at doctors’ clinics and laboratories?
The answer is simply capacity. Hospitals don’t obtain enough facilities or hire or engage an adequate number of physicians, nurses, or staff to accommodate the daily influx of patients needing treatment or care. The equipment and the staff may provide the best quality care, but they aren’t necessarily as efficient as we would want them to be.
Why don’t hospitals invest in enough capacity to attain that efficiency?
We in our businesses spend a lot of money developing and marketing our products & services. We, however, sometimes intentionally do not spend for more than enough capacities to deliver those products & services. It’s not because we don’t want to serve our customers but it’s because we want to get the best return in our investments. When we fully utilise the capacities of our facilities, we are visibly assured that we are getting the most out of the money we put in for them. We invest in more when we are assured we will reap the desired benefits (i.e., money).
Hence, we deliberately create scarcity in the management of our enterprises. We balance the inconvenience we may cause to customers who’d have to wait for the availability of our products & services with the risk mitigation we do in not immediately investing in additional capacities. We’d rather demand overtake supply before we decide to boost our capabilities.
Like the hospital, we try to cope with the clamour of customers’ demanding more than we can make available. We build in the best quality we possibly could to our products & services such that we hope customers would find them worth the wait. Patients would be willing to wait in line at the hospital because they trust the talents of doctors & medical staff as well as the value of the hospital’s facilities & equipment in diagnosing their conditions. Opting for hospitals with cheaper facilities or not very skilled medical professionals is out of the question.
The decision to deliberately create scarcity is common among executives in most, if not all, industries. But the reasons behind such decisions are not only due to hesitancy to invest in additional capacities.
Some enterprises deliberately create scarcity to simply drive prices higher to realise higher profit margins. Commodity traders, for instance, would purposely delay purchases of agricultural staples (e.g., sugar, rice, flour) to goad buyers to offer higher bids.
Enterprises that market luxury products such as sports cars and expensive wristwatches deliberately create scarcity because their executives believe their products are a class above the rest. Ferrari’s lead time, for example, from order to delivery can last as long as two (2) years because Ferrari’s manufacturing operations involve a great deal of manual craftsmanship in the building of each of its cars. Ferrari’s parent company could convert to a mass-production model which would shorten the delivery time but it chooses not to, because the sports car executives prefer to preserve the tradition of their company’s painstaking but highly reputable production process. Ferrari’s customers, anyway, would be willing to wait for their much-desired automobiles.
We just don’t want to spend more than we think we should. We spend on just enough capacity which surely would just meet what we estimate demand would be. Whenever demand goes beyond what we forecasted, then maybe we’ll invest in more capacity. In the meantime, our customers would just have to wait for the products to become available as we hope they will.
Deliberately creating scarcity, thus, has its trade-offs. We risk turning away paying customers who may never return. Enterprises in very competitive environments would likely not take that chance. Consumer goods companies, for example, would not hesitate to increase capacities to ensure continuous occupancy of supermarket shelves, which are hotly contested by rivals.
Netflix, for a time, was a leader in online subscription-only streaming of movie & television series content. Netflix deliberately doesn’t make available all its content to all regions around the world. It limits content not only in compliance to studio licensing agreements but also to focus subscribers to view what are offered. Too much content would not generate the money’s worth from the company’s investment.
When rivals like Disney, Paramount, Amazon, Apple, and Peacock made available content from their abundant libraries or from made-for-streaming films & shows, Netflix countered with original content of their own, on top of acquiring more movies & TV shows from studios around the world. Netflix would deliberately limit content if it could but would not hesitate to match rivals to stay competitive.
Big banks would not spend for additional tellers or open more branches to alleviate long queues of clients wanting to deposit or withdraw funds. They’d rather let clients wait, feeling little risk that the clients would switch to other banks (who just the same would also have long queues). But if a rival bank expands its business hours and pirates away clients because they offer more conveniences, the big banks would tend to follow suit and match.
Vendors or contractors of industrial equipment (e.g., electrical machinery, motors, pumps) keep very little stock of their items & spare parts because they want to avoid tying up too much of their cash in inventory. The vendors or contractors, however, risk the ire of customers, especially those who are in immediate need for parts for emergency repairs. Customers won’t wait very long if their vendors or contractors don’t respond right away; the vendors or contractors, therefore, balance speed of procurement & service to counterbalance the intentional non-stocking of inventories.
Deliberate scarcity is an instrument which enterprises apply to save on capital and costs. We should make sure we get our priorities straight whenever we do deliberately create scarcity. What do we hope to gain versus what we risk in losing customer goodwill? How serious are we when we commit to customer service? How much risk are we willing to take in deferring capacity investments to save on cashflow versus not serving the demands of all our customers?
Economists argue that resources are limited or scarce and thus, we should manage supply and demand via pricing and capacity. On the other hand, resources may not be as scarce as we may believe. Sometimes we have much more in supply than demand, such that we risk wasting any surplus other than losing money from selling to liquidate at lower prices at negative margins.
We tend to blame supply chains when we are unable to satisfy the clamour of impatient customers seeking to obtain the items we are selling. We say that our operations need productivity improvements, or we were deficient in inventory planning, or we lacked synchronicity with vendors & customers. We don’t realise that part of the problem could be in our decisions to deliberately cause scarcity, for reasons ranging from maximising margins, saving working capital, to marketing our products as premium items.
When it comes to scarcity, it’s probably we who caused it, not economics. We should always know what our priorities are.
Do we really mean to serve all our customers, or do we just want to serve only just enough to accomplish what we aimed for?
Ellery's Essays 