Managing Capacity and Demand McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives Describe the strategies for matching capacity and demand for services. Recommend an overbooking strategy. Use Linear Programming to prepare a weekly workshift schedule. Prepare a work schedule for part-time employees. Explain what yield management is and how it is applied. 11-2

Level Capacity and Chase Demand Strategic DimensionLevel CapacityChase Demand Customer WaitingGenerally LowModerate Employee UtilizationModerateHigh Labor-skill LevelHighLow Labor TurnoverLowHigh Training Required per EmployeeHighLow Working ConditionsPleasantHectic Supervision RequiredLowHigh ForecastingLong-runShort-run 11-3

Strategies for Matching Capacity and Demand for Services MANAGING DEMAND Partitioning demand Developing complementary services Establishing price incentives Developing reservation systems Promoting off-peak demand Yield management MANAGING CAPACITY Cross- training employees Increasing customer participation Sharing capacity Scheduling work shifts Creating adjustable capacity Using part-time employees 11-4

Customer-induced Variability Arrival: customer arrivals are independent decisions not evenly spaced. Capability: level of knowledge and skills vary resulting in some hand-holding. Request: uneven service times result from unique demands. Effort: level of commitment to coproduction or self-service varies. Subjective Preference: personal preferences introduce unpredictability. 11-5

Strategies for Managing Customer-induced Variability Type of Variability AccommodationReduction ArrivalProvide generous staffingRequire reservations CapabilityAdapt to customer skill levels Target customers based on capability RequestCross-train employeesLimit service breadth EffortDo work for customersReward increased effort Subjective Preference Diagnose expectations and adapt Persuade customers to adjust expectations 11-6

Segmenting Demand at a Health Clinic Smoothing Demand by Appointment Scheduling Day Appointments Monday 84 Tuesday 89 Wednesday 124 Thursday 129 Friday

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,

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

Daily Scheduling of Telephone Operator Workshifts Scheduler program assigns tours so that the number of operators present each half hour adds up to the number required Topline profile Tour

LP Model for Weekly Workshift Schedule with Two Days-off Constraint Schedule matrix, x = day off Nurse Su M Tu W Th F Sa 1 x x … … … …... 2 … x x … … … … 3 …... x x … … … 4 …... x x … … … 5 … … … … x x … 6 … … … … x x … 7 … … … … x x … 8 x … … … … … x Total Required Excess

Scheduling Part-time Bank Tellers Tellers required Mon. Tues. Wed. Thurs. Fri. Two Full-time Tellers Fri. Mon. Wed. Thurs Tues Tellers required Decreasing part-time teller demand histogram DAILY PART-TIME WORK SCHEDULE, X=workday Teller Mon. Tues. Wed. Thurs. Fri. 1 x …. x …. x 2 x …. …. x x 3,4 x …. …. …. x 5 …. …. x …. x 11-12

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 11-13

Q P Price Quantity Consumer Surplus Seats Available Demand Curve Airline Pricing for a Coach Seat Traditional Fixed Price Total Revenue = PQ 11-14

Price Quantity P1P1 P2P2 P3P3 Q1Q1 Q2Q2 Q3Q3 Consumer Surplus Advanced Purchase Internet Special Full Coach Demand Curve Seats Available Airline Pricing for a Coach Seat Multiple Pricing Using Yield Management Total Revenue = P 1 Q 1 + (Q 2 -Q 1 )P 2 + (Q 3 -Q 2 )P

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% 11-16

Demand Control Chart for a Hotel Expected Reservation Accumulation 2 standard deviation control limits 11-17

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 to 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) 11-18

Topics for Discussion What organizational problems can arise from the use of part-time employees? How can computer-based reservation systems increase service capacity utilization? What possible dangers are associated with developing complementary services? Will the widespread use of yield management eventually erode the concept of fixed prices? Go to and discuss the ethical issues associated with yield management

Interactive Exercise Watch the PowerPoint presentation concerning the overbooking experience at the Doubletree Hotel in Houston, Texas. How could this situation been handled differently? 11-20