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