1. Chapter 11 Managing Capacity and Demand
McGraw-Hill/Irwin
Service Management: Operations, Strategy, and Information Technology, 6e
Copyright © 2008 by The McGraw-Hill Companies, Inc. All Rights Reserved.

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.
Explain what yield management is and how it is applied.
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3. Level Capacity and Chase Demand
Strategic Dimension
Level Capacity
Chase Demand
Customer Waiting
Generally Low
Moderate
Employee Utilization
High
Labor-skill Level
Low
Labor Turnover
Training Required per Employee
Working Conditions
Pleasant
Hectic
Supervision Required
Forecasting
Long-run
Short-run
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4. Strategies for Matching Capacity and Demand for Services
MANAGING
DEMAND
MANAGING
CAPACITY
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
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5. Customer-induced Variability
Arrival: customer arrivals are independent decisions not evenly spaced.
Capability: level of knowledge and skills vary resulting in some hand-holding.
Request: uneven service times result from unique demands.
Effort: level of commitment to coproduction or self-service varies.
Subjective Preference: personal preferences introduce unpredictability.
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6. Segmenting Demand at a Health Clinic
Smoothing Demand by Appointment
Scheduling
Day Appointments
Monday
Tuesday
Wednesday
Thursday
Friday
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7. Discriminatory Pricing for Camping
Experience No. of Daily
Type Days and weeks of camping season Days Fee
Saturdays and Sundays of weeks 10 to 15, plus $6.00
Dominion Day and civic holidays
Saturdays and Sundays of weeks 3 to 9 and 15 to 19,
plus Victoria Day
Fridays of weeks 3 to 15, plus all other days of weeks
9 to 15 that are not in experience type 1 or 2
Rest of camping season free
EXISTING REVENUE VS PROJECTED REVENUE FROM DISCRIMINATORY PRICING
Existing flat fee of $ Discriminatory fee
Experience Campsites Campsites
Type occupied Revenue occupied (est.) Revenue
$14, , $30,000
, , , ,250
, , ,
, , … ….
Total , $ 64, , $59,000
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8. Hotel Overbooking Loss Table
Number of Reservations Overbooked
No Prob-
shows ability
Expected loss, $
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9. 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)
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10. 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
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11. LP Model for Weekly Workshift Schedule with Two Days-off Constraint
Schedule matrix, x = day off
Nurse Su M Tu W Th F Sa
x x … … … … … x x … … … …
… x x … … …
… x x … … …
… … … … x x …
… … … … x x …
… … … … x x …
x … … … … … x
Total
Required
Excess
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12. Scheduling Part-time Bank Tellers
Decreasing part-time teller demand histogram
Tellers required 5 4 4
Tellers required 3 3 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, X=workday
Teller Mon Tues Wed Thurs Fri.
x … x … x
x … … x x
3, x … … … x
… … x … x
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13. 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
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14. 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
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15. Demand Control Chart for a Hotel
Expected Reservation Accumulation
2 standard deviation control limits
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16. 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?
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