Managing Capacity and Demand Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

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Presentation transcript:

Managing Capacity and Demand Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

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

Segmenting Demand at a Health Clinic Smoothing Demand by Appointment Scheduling Day Appointments Monday 84 Tuesday 89 Wednesday 124 Thursday 129 Friday Day of week Percentage of average daily physician visits

Discriminatory Pricing for Camping Experience No. of Daily type Days and weeks of camping season days fee 1 Saturdays and Sundays of weeks 10 to 15, plus 14 $6.00 Dominion Day and civic holidays 2 Saturdays and Sundays of weeks 3 to 9 and 15 to 19, plus Victoria Day 3 Fridays of weeks 3 to 15, plus all other days of weeks to 15 that are not in experience type 1 or 2 4 Rest of camping season 78 free EXISTING REVENUE VS PROJECTED REVENUE FROM DISCRIMINATORY PRICING Existing flat fee of $2.50 Discriminatory fee Experience Campsites Campsites type occupied Revenue occupied (est.) Revenue $14,727 5,000 $30, ,978 22,445 8,500 21, ,129 15,322 15, ,979 12,447 …. …. Total 25,977 $ 64,941 29,000 $59,000

Hotel Overbooking Loss Table Number of Reservations Overbooked No- Prob- shows ability Expected loss, $

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 Percentage of capacity allocated to different service classes 60% 50% 30% 20% 50% Peak Shoulder Off-peak Shoulder (30%) (20%) (40%) (10%) Summer Fall Winter Spring Percentage of capacity allocated to different seasons 30% 20% 10% 30% 50% 30%

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

Yield Management Using the Critical Fractile Model Where x = seats reserved for full-fare passengers d = demand for full-fare tickets p = proportion of economizing (discount) passengers C u = lost revenue associated with reserving one too few seats at full fare (underestimating demand). The lost opportunity is the difference between the fares (F-D) assuming a passenger, willing to pay full-fare (F), purchased a seat at the discount (D) price. C o = cost of reserving one too many seats for sale at full-fare (overestimating demand). Assume the empty full-fare seat would have been sold at the discount price. However, C o takes on two values, depending on the buying behavior of the passenger who would have purchased the seat if not reserved for full-fare. if an economizing passenger if a full fare passenger (marginal gain) Expected value of C o = pD-(1-p)(F-D) = pF - (F-D)