MGMT 456 Ch.11 Managing Capacity and Demand
Strategies for managing customer-induced variability
Accomodation Reduction
5 sources of customer-induced variability in services
Arrival Variability Capability Variability Request Variability Effort Variability Subjective Preference Variability
Cross-training employees
Cross-training employees to perform tasks in several operations creates flexible capacity to meet localized peaks in demand
Strategies for adjusting service capacity to meet demand
Daily Workshift Scheduling Workshift Scheduling Approach Increasing Customer Participation Creating adjustable capacity How to expand capacity Sharing capacity Cross-training employees Using Part-Time Employees
Sharing capacity
During periods of underutilization, it might be possible to find other uses for this capacity ex: At small airports, airlines share the same gates, ramps, baggage-handling equipment, and ground personnel
How to prevent no-shows
Examples of solutions to this problem: airlines now issue nonrefundable tickets and hotels require cancellation before 6 PM of the day of arrival or a one night stay is charged to their credit cards
Perishable Inventory
For capacity-constrained service firms, each room or seat is referred to as a unit of inventory to be sold
Yield Management Applications
Holiday Inn Rate Optimization (HIRO) -The goal of maximizing occupancy and revenue means renting as many rooms as possible for the best price that the market will bear -Uses historical and current booking behavior to analyze room requests for each hotel -The yield management optimization equation includes seasonal occupancy patterns, local events, weekly cycles, and current trends to develop a hurdle price
Generic Strategies for Capacity Management
Level Capacity Chase Demand
Yield Management works best in firms with these characteristics
-Relatively Fixed Capacity -Ability to Segment Markets -Perishable Inventory -Product sold in advance -Fluctuating Demand -Low marginal sales costs and high marginal capacity change costs
Another benefit of promoting off-peak demand
can be used to discourage overtaxing the facility at other times ex: Shop early to avoid the christmas rush and coupons given for the middle of the week rather than the busy weekends
No-shows
customers fail to honor their reservations
Service Capacity
defined in terms of an achievable level of output per unit of time ex: transactions per day for a busy bank teller can also be defined in terms of the supporting facility, such as number of hotel beds
Segmenting demand
demand for a service rarely comes from a single source of people ex: airlines differentiate between weekday business travelers and weekend pleasure travelers
how is demand segmented?
demand often is grouped into random arrivals and planned arrival ex: a bank expects planned visits from it commercial account holders and can also expect random visits from their personal account holders
Developing Complementary Services
is a natural way to expand one's market, and it is particularly attractive if the new demands for service are contracyclical and result in a more uniform aggregate demand (i.e., when the new service demand is high, the original service demand is low)
Capability Variability
is caused by the level of customer knowledge, physical ability, and skill because some customers can perform tasks easily while others require hand-holding ex: Patient unable to explain symptoms to a doctor
Reservations
presells the potential service -additional demand is deflected to other time slots at the same facility or to other facilities within the same organization -benefit consumers by reducing waiting and guaranteeing service availability
Creative use of off-peak capacity
results from seeking different sources of demand ex: resort hotel during the off-season as a retreat location for business or professional groups
Request Variability
results from the unique demands of customers that create uneven service time ex: a bank customer who wants to purchase a CD and another customer who wants to cash a check
Arrival Variability
results in either idle servers or waiting customers because independent decisions of customers seeking service are not evenly spaced in time
Daily Workshift Scheduling
scheduling workshifts carefully during the day, the profile of service capacity can be made to approximate demand
Subjective Preference Variability
the expectation of what it means to be treated well varies among customers and results
How is discriminatory pricing used
used to fill the low demand times but also making sure that customers who normally pay higher fees dont switch to the lower fee times
Chase Demand
The pure form of chase demand is best illustrated by call centers that schedule the number of telephone agents according to expected hourly demand refers to the notion that you are chasing the demand set by the market
Increasing Customer Participation
This strategy relies on having the customer participate at some point in the process in order to increase the capability of the service. This is best seen in fast-food services that have eliminated personnel who serve food and clear tables
Fluctuating Demand
Using demand forecasting, yield management allows managers to increase utilization during periods of slow demand and to increase revenue during periods of high demand
Reduction
this strategy favors operational simplicity over service experience
How to expand capacity
use of slack times -Performing supportive tasks during slower periods of demand allows employees to concentrate on essential tasks during rush periods -requires cross training to work
Examples of differential pricing
1. Matinee or reduced prices before 6 PM at movie theaters. 2. Off-season hotel rates at resort locations. 3. Peak-load pricing by utility companies
Workshift Scheduling Approach
1. The general approach begins with a forecast of demand by hour, which is converted to hourly service staffing requirements 2. Convert to Operator Requirements 3. Next, a schedule of tours, or shifts, is developed to match the staffing requirements profile as closely as possible 4. Finally, specific service personnel are assigned to tours, or shifts
Creating adjustable capacity
A portion of capacity can be made variable through design. ex: Airlines routinely move the partition between first class and coach to meet the changing mix of passengers
Overbooking
By accepting reservations for more than the available seats, airlines hedge against significant numbers of no-shows; however, the airlines risk turning away passengers with reservations if they overbook too many seats
Problem with no-shows
Customers are usually not held financially reliable for missing their reservations and this can lead to undesirable behaviors where customers may make multiple reservations to cover their own contingencies
Ability to Segment Markets
For yield management to be effective, the service firm must be able to segment its market into different customer classes
Low marginal sales costs and high marginal capacity change costs
The cost of selling an additional unit of inventory must be low, such as the negligible cost of a snack for an airline passenger. The marginal cost of capacity additions is large, however, because of the necessary lumpy facility investment (i.e., a hotel addition must be at least an increment of 100 rooms)
Level Capacity
Utilities practice a pure form of level capacity because power stations are expensive and customers expect uninterrupted service involves maintaining stable workforce level and output rates over the planning horizon
Effort Variability
When customers are expected to perform a role in a service interaction, the level of commitment results in effort variability ex: Returning a shopping cart to its corral
Using Part-Time Employees
When peaks of activity are persistent and predictable, such as at mealtimes in restaurants or paydays in banks, part-time help can supplement regular employees
Yield Management
the practice of adjusting prices up or down in response to demand to control the sales generated
Accomodation
this strategy favors customer experience over operational efficiency
Product sold in advance
Reservation systems are adopted by service firms to sell capacity in advance of use; however, managers are faced with the uncertainty of whether to accept an early reservation at a discount price or to wait and hope to sell the inventory unit to a higher-paying customer
Relatively Fixed Capacity
Service firms with a substantial investment in facilities (e.g., hotels and airlines) can be considered as being capacity-constrained