Managing Capacity and Demand Chapter - 12

1. 12 Managing Capacity and DemandChapter - 12

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, fig. 12.1

4. Segmenting Demand • Demand often can be grouped into: • random arrivals – ex. Weekday business travelers for airlines; walk-in patients in health clinic • planned arrivals – ex. Weekend pleasure travelers for airlines; appointments for health clinic • Random arrivals are not controllable, but planned arrivals are controllable • Using data you can forecast for random arrivals on any given day and any given time. • Subtracting these walk-in patients from daily (or hourly) physician capacity gives the number of appointment patients needed each day to smooth demand

5. Offering Price Incentives • The price incentives pushes the casual demand and helps in smoothening the demand. For example: • Weekend and night rates for cell-phone plans • Off-season hotel rates at resort locations • Peak-load pricing by utility companies

6. Promoting off-peak demand • Do specials to attract demand during off-peak • Use of resort hotels to do off-season specials, like free breakfast or tickets

7. Reservation System and Overbooking • Taking reservations pre-sells the potential service – allowing better planning. • Reservation allows you to deflect additional demand to other time slots at the same facility or other facility within the same organization – example, Hotel chains • Customer benefits from reservation that they do not have to wait in lines and are guaranteed service availability • What if customer decides not to honor their reservation? • Potential problem for the service provider • Service providers have started overbooking (that is, book more than capacity) to overcome the problem of no-shows. • What if all customers show-up? • Train your frontline workers to handle overbooking problem graciously.

8. Strategies for Managing Capacity • Daily work-shift scheduling • By scheduling work-shifts appropriately, the service capacity can be made available to meet demand • We forecast demand for every hour, which is used to create hourly service staffing requirements • Decide the service level you want to provide – for example, what percentage of calls should be picked within 4 rings will decide the number of operators to schedule.

9. Increasing Customer participation • Design service in such a way that you can involve customers in service delivery – example fast food places • This allows the capacity to vary along with the demand, that is, customers not only increase demand but also increase capacity • Incentive should be built in for customers to participate as a co-producer– example price break, faster check-out • Problems • what if the customers gets hurt • No control on service quality provided by the customer, example table may not be cleaned properly after eating • Contamination and spillage – in bulk stores the customer can use dirty hands or can spill

10. Creating Adjustable Capacity • By design the capacity can be made variable • In Benihana restaurant, they can change the number of tables depending on the number of chefs; because a chef is assigned to a table • Capacity at peak periods can be increased and at off-peak time the workers are used effectively to perform supportive tasks and have higher level of preparedness • Requires cross trained employees • no union problems in job classifications

11. Other Strategies • Sharing capacity • Airlines cooperate in sharing same gates, ramps, baggage-handling equipment, and ground personnel • Cross-trained employees • Creates flexible capacity and also increases capacity, example Hy-Vee where the workers stock at off-peak time unless called by the manager to operate a register. • Using part-time employees • They can supplement regular employees

12. Yield Management • Yield management model attempts to allocate the fixed capacity of seats on an aircraft to match the potential demand in various market segments in the most profitable manner.

13. Ideal Characteristics for Yield Management • Relatively Fixed Capacity – ex. Hotels and Airlines • Ability to Segment Markets – airlines can discriminate between time-sensitive business traveler and price-sensitive customer • Perishable Inventory – revenue for unsold seat is lost forever • Product Sold in Advance – reservations and booking , sometimes at discount price instead of the uncertainty of selling at higher price later • Fluctuating Demand – you can give price discounts in slow season to increase utilization; and increase price during high season • Low Marginal Sales Cost and High Capacity Change Cost