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This unit explores the reasons behind low variable costs and high fixed costs in sectors such as movie theaters, hospitals, and hotels. Key concepts include definitions of capacity, capacity cushion, productivity, and utilization. It highlights the difference between efficiency and customer service, discussing how too much customer input can reduce efficiency. The unit also suggests strategies for managing costs, including delaying customer inputs and structuring options. By understanding these principles, businesses can better navigate cost issues and optimize operations.
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Unit 7 Cost Issues
Why Are variable cost low and fixed costs high? • Examples: • Movie theatres • Doctor’s office/hospitals • Hotels • Others?
Definitions • Capacity: maximum sustainable input or output rate for a facility • Capacity cushion: extra unscheduled capacity held in reserve for contingencies • Productivity = output/input • Utilization =actual output/potential output (measures absence of idle time)
Efficiency vs Customers • Efficiency = output/time • Potential efficiency is a function of • 1-cust content/service creation time • More customer content = less efficiency • What to do: • Delay customer inputs (localization) • Restrict options (“structure” inputs) • Service manufacturing
