Managing Capacity

1
Managing Capacity
2
Service capacity

• Objective match the level of operations with the
  level of demand, finding the best balance between
  cost and service levels.
• Capacity is perishable
• Non- inventoriable
• High contact brings uncertainty (time, quality)
• intangibility brings difficulty into the
  measurement of capacity

3
Bad capacity decisions

• Increasing the wrong kind of capacity (airlines)
• Not increasing all round capacity (hotel)
• Not considering competitive reaction (Disney)
• Undercutting ones own service (package delivery)

4
Strategies for capacity management

• Control supply Chase strategy vary capacity to
  follow changes in demand
• Low skill, training, high turnover
• Seasonal fluctuations
• Level capacity peak demand
• Skilled employees, long term success
• Alter demand proactive

5
Strategies for Matching Supply and Demand for
Services

DEMAND STRATEGIES
SUPPLY STRATEGIES
Increasing customer participation
Partitioning demand
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
Queuing
Yield management
6
Hotel Overbooking Decision Matrix

• 
  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
Controlling Supply

• Customer participation capacity just when it is
  needed.
• Lower price, faster service
• Less control over quality of service
• Creating adjustable capacity through design
  (i.e. Layout)

8
Controlling Supply

• Maximizing efficiency
• only essential tasks at peak demand periods
  shift some processes to slack periods
• increase the use of effective capacity identify
  tasks done by people with higher skills
• Cross training of employees creates flexible
  capacity to meet localized peaks
• Subcontracting expand capacity by using the
  capacity of others.
• Subcontractor quality subcontractor capacity

9
Controlling Supply

• Expansion in ante
• Sharing capacity
• Lease underutilized capacity to others
• Share capacity for ancillary services (ground
  personnel)
• Share capacity of equipment (dialysis machine,
  ambulance, police, fire)

10
Controlling Supply

• Using part-time employees
• Minimal skill (training) requirements
• Ready pool of labor availability
• Back-room operations least customer contact
• Alternatively
• Place off-duty personnel on standby
• Longer working hours for full time employees

11
Controlling Supply

• Scheduling
• Staggered overlapping shifts
• Daily workshift scheduling
• Weekly workforce scheduling with 2 consecutive
  days-off constraint

12
Strategies for Matching Supply and Demand for
Services

DEMAND STRATEGIES
SUPPLY STRATEGIES
Increasing customer participation
Partitioning demand
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
Queuing
Yield management
13
Yield Management

• Using reservation systems
• Overbooking
• Partitioning demand

14
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

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