Sunday, December 04, 2005

Supply vs Demand-led service provision

The public transport version of the chicken and the egg dilemma seems to be the debate about which comes first; supply or demand.

Transport operators and governments may take the view that as existing services are not overcrowded at the moment, providing more services would produce few returns for the cost. Cost-effective patronage growth would have to come from better marketing, such as 'Travelsmart' programs or increasing charges for motorists.

Consumer and passenger groups counter by saying that people cannot use services that do not exist. Hence service increases must precede patronage growth; marketing alone isn't enough and could be counter-productive.

In anticipating future demand, others such as shopping centre builders and road engineers are also big fans of supply-side planning. Just the act of initial supply helps shape consumption. Provided the product isn't completely to the customer's disliking, the total market for it will probably be bigger than if a more timid demand-side scarcity-based approach was taken. The slogan 'build it and they will come' explains the supply-side planning assumption well.

That these debates apply in areas other than passenger transport was brought home when listening to today's Hindsight program on Radio National (downloads available). The program profiled Gordon Barton, who got his start by challenging (then) government-controlled railway monopolies on freight by forming a trucking company in the 1950s. IPEC grew and became a dominant company in its field.

In 1979 he moved to Europe and successfully established IPEC there. The Hindsight report mentioned that established transport companies waited they could fill a truck before despatching it. Hence it took many weeks to send items a few hundred kilometres. Though not pointed out, this is a good example of a demand-driven approach, ie not running a truck unless the load was sufficient.

Barton's genius was that he sent off trucks on a regular schedule, regardless of whether they were full or empty. Regular departure times allowed connections with other trucks, forming a co-ordinated network. In the early years running nearly-empty trucks around the countryside was expensive. However IPEC Europe provided a superior service, and as the loads increased, it thrived. In this example, Barton showed that his agressive supply-driven approach not only worked but took business from his more complacent rivals.

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