Managing Capacity

Service capacity Objective: match the level of operations with the level of demand, finding the best balance between cost and service levels. Capacity is perishable Non- inventoriable High contact brings uncertainty (time, quality) intangibility brings difficulty into the measurement of capacity

Bad capacity decisions Increasing the wrong kind of capacity (airlines) Not increasing all round capacity (hotel) Not considering competitive reaction (Disney) Undercutting one’s own service (package delivery)

Strategies for capacity management Control supply: ‘Chase strategy’ vary capacity to follow changes in demand Low skill, training, high turnover Seasonal fluctuations Level capacity: peak demand Skilled employees, long term success Alter demand: proactive

Strategies for Matching Supply and Demand for Services Partitioning demand Increasing customer participation Developing complementary services Sharing capacity Establishing price incentives Scheduling work shifts Cross- training employees Developing reservation systems Creating adjustable capacity Promoting off-peak demand Using part-time employees Queuing Yield management

Hotel Overbooking Decision Matrix Number of Reservations Overbooked No- Prob- shows ability 0 1 2 3 4 5 6 7 8 9 0 .07 0 100 200 300 400 500 600 700 800 900 1 .19 40 0 100 200 300 400 500 600 700 800 2 .22 80 40 0 100 200 300 400 500 600 700 3 .16 120 80 40 0 100 200 300 400 500 600 4 .12 160 120 80 40 0 100 200 300 400 500 5 .10 200 160 120 80 40 0 100 200 300 400 6 .07 240 200 160 120 80 40 0 100 200 300 7 .04 280 240 200 160 120 80 40 0 100 200 8 .02 320 280 240 200 160 120 80 40 0 100 9 .01 360 320 280 240 200 160 120 80 40 0 Expected loss, $ 121.60 91.40 87.80 115.00 164.60 231.00 311.40 401.60 497.40 560.00

Controlling Supply Customer participation: capacity just when it is needed. Lower price, faster service Less control over quality of service Creating adjustable capacity: through design (i.e. Layout)

Controlling Supply Maximizing efficiency: only essential tasks at peak demand periods; shift some processes to slack periods increase the use of effective capacity: identify tasks done by people with higher skills Cross training of employees: creates flexible capacity to meet localized peaks Subcontracting: expand capacity by using the capacity of others. Subcontractor quality; subcontractor capacity

Controlling Supply Expansion in ante Sharing capacity Lease underutilized capacity to others Share capacity for ancillary services (ground personnel) Share capacity of equipment (dialysis machine, ambulance, police, fire)

Controlling Supply Using part-time employees Alternatively Minimal skill (training) requirements Ready pool of labor availability Back-room operations; least customer contact Alternatively Place off-duty personnel on standby Longer working hours for full time employees

Controlling Supply Scheduling Staggered overlapping shifts Daily workshift scheduling Weekly workforce scheduling with 2 consecutive days-off constraint

Strategies for Matching Supply and Demand for Services Partitioning demand Increasing customer participation Developing complementary services Sharing capacity Establishing price incentives Scheduling work shifts Cross- training employees Developing reservation systems Creating adjustable capacity Promoting off-peak demand Using part-time employees Queuing Yield management

Yield Management Using reservation systems Overbooking Partitioning demand

Ideal Characteristics for Yield Management Relatively Fixed Capacity Ability to Segment Markets Perishable Inventory Product Sold in Advance Fluctuating Demand Low Marginal Sales Cost and High Capacity Change Cost

Seasonal Allocation of Rooms by Service Class for Resort Hotel First class Standard Budget 20% 20% 20% 30% 50% 30% 50% 60% Percentage of capacity allocated to different service classes 50% 30% 30% 10% Peak Shoulder Off-peak Shoulder (30%) (20%) (40%) (10%) Summer Fall Winter Spring Percentage of capacity allocated to different seasons

Demand Control Chart for a Hotel Expected Reservation Accumulation 2 standard deviation control limits