Chapter 12 Managing Capacity and Demand

1. Chapter 12Managing Capacity and Demand

2. 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. • Use yield management.

3. SUPPLY STRATEGIES DEMAND STRATEGIES 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 Yield management Strategies for Matching Supply and Demand for Services

4. DEMAND STRATEGIES Partitioning demand Developing complementary services Establishing price incentives Developing reservation systems Promoting off-peak demand Bar at a restaurant Video games at movie Gift shop Appts vs. wak-ins Weekend and night rates Matinee rates Off-season rates Early-bird pricing Pre-sell services Hotel Airlines Professional retainers Down payments “Shop early avoid Holiday rush” Resort offering business retreats

5. 140 130 120 110 100 physician visits Percentage of average daily 90 80 70 60 1 2 3 4 5 Day of week Segmenting Demand at a Health Clinic Smoothing Demand by Appointment Scheduling Day Appointments Monday 84 Tuesday 89 Wednesday 124 Thursday 129 Friday 114

6. 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, 23 2.50 plus Victoria Day 3 Fridays of weeks 3 to 15, plus all other days of weeks 43 0.50 9 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 1 5.891 $14,727 5,000 $30,000 2 8,978 22,445 8,500 21,250 3 6,129 15,322 15,500 7.750 4 4,979 12,447 …. …. Total 25,977 $ 64,941 29,000 $59,000

7. Hotel Overbooking Loss Table 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

8. SUPPLY STRATEGIES DEMAND STRATEGIES 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 Yield management Strategies for Matching Supply and Demand for Services

9. SUPPLY STRATEGIES Increasing customer participation Sharing capacity Scheduling work shifts Cross- training employees Creating adjustable capacity Using part-time employees Airlines sharing gates, ramps, baggage-handling equipment, ground personnel Buffets, Clearing tables, Pump Gas, Bulk items Caution: Legal, waste, unawareness Supermarkets, fast food restaurants, sports teams Reconfiguring aircraft, rearrange restaurant, preparing for rush period Tellers, Off-duty but on standby, Doctors on-call, Students

10. 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 2500 2000 1500 Calls 1000 500 Tour 0 12 2 4 6 8 10 12 2 4 6 8 10 12 12 2 4 6 8 10 12 2 4 6 8 10 12 Time

11. Objective function : + x + x + x + x + x + x Minimize x 1 2 3 4 5 6 7 Constraints : ³ + x + x + x + x 3 Sunday x 2 3 4 6 5 ³ Monday x + x + x + x + x 6 3 4 5 6 7 ³ + x + x + x + x 5 Tuesday x 1 4 5 6 7 ³ + x + x + x 6 + x Wednesday x 1 2 5 6 7 + x + x ³ + x + x 5 Thursday x 1 2 3 6 7 ³ + x + x + x 5 Friday x + x 7 1 2 3 4 ³ + x + x + x + x Saturday x 5 1 2 3 4 5 Integer Linear Programming (ILP) Modelfor Weekly Nurse Staffing Requirements Tour Requirement: 5 days on and 2 consecutive days off

12. Weekly Nurse Staffing Schedule 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 6 6 5 6 5 5 7 Required 3 6 5 6 5 5 5 Excess 3 0 0 0 0 0 2

13. Tellers required 5 4 4 Tellers required 3 3 0 1 2 3 4 5 2 2 1 Two Full-time Tellers 1 1 5 2 Fri. Mon. Wed. Thurs Tues. Mon. Tues. Wed. Thurs. Fri. Scheduling Part-time Bank Tellers Decreasing part-time teller demand histogram 0 1 2 3 4 5 6 7 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

14. Yield Management Most appropriate for services with the following characteristics: • Fixed Capacity hotels, airlines • Ability to Segment Markets Saturday-night stay, Seasonal resort example • Perishable Inventory standby passengers • Product Sold in Advance Demand control for a hotel example • Fluctuating Demand Increase utilization (slow demand) Increase revenue (high demand) • Low Marginal Sales Cost and High Capacity Change Cost selling airline snack vs. cost on bigger aircraft

15. 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

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

17. What possible dangers are associated with developing complementary services? What organizational problems can arise from the use of part-time employees? SUPPLY STRATEGIES DEMAND STRATEGIES 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 Yield management Will the widespread use of yield management eventually erode the concept of fixed prices? What possible negative effects can yield management have on customer relations?