1 Chapter 14 Managing Capacity and Demand 1 Chapter 14 MANAGING CAPACITY AND DEMAND McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

2 Chapter 14 Managing Capacity and Demand 2 LEARNING OBJECTIVES Introduce different strategies for managing service capacity. Introduce the concept of yield management as a tool for increasing revenues and profits for service operations. Identify the characteristics of services that can take maximum advantage of yield management. Illustrate how services control capacity and manage customer demand to maximize capacity utilization. Identify additional approaches for maximizing capacity utilization that improves the overall long-term performance of the film.

3 Chapter 14 Managing Capacity and Demand 3 TYPES OF CAPACITY 1.Fixed or Long-Term Capacity 2.Variable or Short-Term Capacity

4 Chapter 14 Managing Capacity and Demand 4 Exhibit 14.1 EXAMPLES OF FIXED CAPACITY Service Airline Hotel Restaurant Hospital College Call Center Examples of Fixed Capacity Airplanes, Ticket Counters, Gates Guest Rooms, Meeting Rooms, Parking Tables, Seats, Kitchen Equipment Beds, Operating Rooms Classrooms, Dormitory Rooms Telephone Lines, Work Stations

5 Chapter 14 Managing Capacity and Demand 5 CAPACITY STRATEGIES Managing Capacity to Address Variation 1.Maintain Level Capacity 2.Chase Demand Source: Sasser, W.Earl, “Match Supply and Demand in Service Industries,” Harvard Business Review, November-December 1976, p Managing Capacity for Growth 1.Add Capacity in Anticipation of Demand 2.Add Capacity when Demand Levels have Exceeded Current Capacity

6 Chapter 14 Managing Capacity and Demand 6 Source: Adapted from Christopher Lovelock, “Strategies for Managing Capacity-Constrained Services,” Managing Services: Marketing, Operations Management and Human Resources, 2 nd ed., Prentice-Hall, Englewood Cliffs, NJ, Demand 100% 0% Capacity Utilization customers turned away poor service Demand 100% Maximum Capacity BreakfastMidmorningLunch Time poor service excess idle capacity Optimal Capacity Utilization Low Exhibit 14.2 COMPARING CAPACITY AND DEMAND FOR A FOODSERVICE FACILITY

7 Chapter 14 Managing Capacity and Demand 7 COMMON APPROACHES USED TO MANAGE DEMAND IN SERVICES Pricing Advertising and Promotion Reservations Creating New Demand

8 Chapter 14 Managing Capacity and Demand 8 Exhibit 14.3 FRAMEWORK FOR APPLYING YIELD MANAGEMENT FOR DIFFERENT SERVICE INDUSTRIES Source: Kimes, Sheryl E., and Richard B. Chase, “The Strategic Levers of Yield Management,” Journal of Service Research, Vol. 1 No 2, 1998, pp

9 Chapter 14 Managing Capacity and Demand 9 SERVICES THAT ARE APPROPRIATE FOR YIELD MANAGEMENT Market Segmentation High-Fixed and Low-Variable Costs Product Perishability Presell Capacity Characteristics of Services Appropriate for Yield Management

10 Chapter 14 Managing Capacity and Demand 10 Exhibit 14.5 EXAMPLES OF SERVICES AND MARKET SEGMENTATION STRATEGIES Service Airline Hotel Restaurant Toll Roads Parking Garages Casinos Examples of Market Segmentation Weekday vs. Weekends, Advance Purchase Weekday vs. Weekends; High vs. Low Season Early Bird Menu vs. Regular Menu Peak vs. Non-Peak Hours Hourly vs. Daily vs. Monthly High Minimum Tables vs. Low Minimum Tables

11 Chapter 14 Managing Capacity and Demand 11 Exhibit 14.6 EXAMPLE OF A BOOKING CURVE

12 Chapter 14 Managing Capacity and Demand 12 Exhibit 14.7 EXAMPLE OF OVERBOOKING

13 Chapter 14 Managing Capacity and Demand 13 Exhibit 14.9 DEMAND CURVES FOR VARIOUS AIRFARES

14 Chapter 14 Managing Capacity and Demand 14 KEY TERMS Booking Curve Bundling Dynamic Pricing Overbooking Yield Management