Managing Capacity and Demand

1
Managing 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
Strategies for Matching Supply and Demand for
Services

DEMAND STRATEGIES
SUPPLY 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
4
Segmenting Demand at a Health Clinic

Smoothing Demand by Appointment Scheduling Day
Appointments Monday
84 Tuesday
89 Wednesday
124 Thursday
129 Friday
114
5
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
  . .

6
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

7
Daily Scheduling of Telephone Operator Workshifts

Topline profile
Scheduler program assigns tours so that the
number of operators present each half hour
adds up to the number required
Tour
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
8
LP Model for Weekly Workshift Schedule with Two
Days-off Constraint

Schedule matrix, x day off Operator
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
9
Scheduling Part-time Bank Tellers

Decreasing part-time teller demand histogram
Tellers required
5
4
4
0 1 2 3 4 5 6 7
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.
DAILY PART-TIME WORK SCHEDULE, Xworkday Teller
Mon. Tues.
Wed. Thurs.
Fri. 1 x
. x
. x 2
x .
. x
x 3,4 x
. .
. x 5
. . x
. x
10
Ideal Characteristics for Yield Management

• Relatively Fixed Capacity
• Ability to Segment Markets
• Perishable Inventory
• Product Sold in Advance
• Fluctuating Demand
• Low Marginal Sales Cost and High Capacity
  Change Cost

11
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
12
Demand Control Chart for a Hotel

Expected Reservation Accumulation
2 standard deviation control limits
13
Yield Management Using the Critical Fractile
Model

Where x seats reserved for full-fare
passengers d demand for full-fare
tickets p proportion of economizing
(discount) passengers Cu lost revenue
associated with reserving one too few seats at
full fare (underestimating demand). The lost
opportunity is the difference between the fares
(F-D) assuming a passenger, willing to pay
full-fare (F), purchased a seat at the discount
(D) price. Co cost of reserving one to
many seats for sale at full-fare (overestimating
demand). Assume the empty full-fare seat
would have been sold at the discount price.
However, Co takes on two values, depending on
the buying behavior of the passenger who would
have purchased the seat if not reserved for
full-fare.
if an economizing passenger
if a full fare
passenger (marginal gain) Expected value of Co
pD-(1-p)(F-D) pF - (F-D)
14
Topics for Discussion

• What organizational problems can arise from the
  use of part-time employees?
• How can computer-based reservation systems
  increase service capacity utilization?
• What possible dangers are associated with
  developing complementary services?
• 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?

15
Interactive Exercise

• Watch the PowerPoint presentation concerning
  the overbooking experience at the Doubletree
  Hotel in Houston, Texas. How could this
  situation been handled differently?