FORECASTING DEMAND optimal supply level, error starts to occur, and the
service quality starts to decline. Failure to
FORECASTING
Forecasting: The art and science of predicting future
events.
Forecasting is a vital part of hospitality operations
because it allows businesses to make imperative
decisions, such as pricing, promotions, distribution,
scheduling, and arranging facilities, based on the
predicted demand and supply.
Hospitality Demand and Supply
Characteristics of Hospitality Demand and
Supply
Demand: The amount of service that a consumer is
willing to purchase.
Supply: The amount of service that a service
provider is available to sell.
When supply exceeds demand, hospitality products
or services disappear and the potential revenue
cannot be regained.
Notice that supply can also be referred to as capacity,
since supply in hospitality pertains to the physical or
supporting facilities and other resources and assets,
such as labor and time.
1) Excess supply (demand < supply): Supply
is underutilized because demand is not sufficient at
this level. Customers may receive either poor service
due to service deterioration or excellent service
because the staff manages only few guests. Excess
supply can result in leftover costs and can yield profit
loss.
2) Demand and supply are well balanced
(demand = supply): Also known as the optimum
capacity, this is the best level for customers,
employees, and the business itself. At this level,
service quality remains high, and profitability is
generated for the business. The optimum capacity
varies for different hospitality operations: for an
airline, it ranges from 65% to 75%, while for a
restaurant, it ranges from 70% to 90%.
3) Demand exceeds optimal supply (demand
> optimum capacity): When demand exceeds the
accommodate irritated customers leads businesses to
lose long-term, valued guests.
4) Excess demand (demand > maximum
capacity): When demand exceeds the maximum
available capacity, quality of service deteriorates
significantly because staff are stretched to the limit.
At this level, mistakes and error are frequent and
customers can also become unsatisfied and
frustrated. The business may be generating profit at
the moment, but ultimately exposes itself to a
potential permanent loss.
Managing Demand
• In managing demand, the level capacity
strategy (altering demand to match a fixed supply) is
generally employed where demands are less volatile
and more predictable.
• Hospitality operations may attempt to smooth
demand by either stimulating demand when supply
is underutilized or shifting demand when demand is
in excess.
1. Offer reduced room rates during off-seasons
and offer discounted menus and drinks
during happy hours.
2. Attract different types of customers during
off-peak demand periods. Hotels that mainly
target business travelers can design appealing
packages that attract leisure customers to
increase demand during the weekend.
3. Utilize meeting and event space during off-
peak demand periods with social events, such
as weddings and community parties.
4. Use reservation systems to pre-sell potential
service and adopt a strategy of overbooking
in anticipation of customer no-shows.
Managing Supply
Chase demand strategy (adjusting supply to match
demand) is a response to demand.
It is preferred at service delivery systems where
demands are highly seasonal and unpredictable.
It works better where employees are unskilled with forecast the daily occupancy rates, average daily
limited training needs and where turnover rates are rates, and average length of stay first and work
higher. up to estimate the total weekly revenue.

1. Tailor staffing plans and work schedules to

ensure sufficient staff are available during
periods expected to see peak demand; reduce
staff on-duty during offpeak times. Hiring
part-time and seasonal work can also help.
2. Cross-train staff to ensure many employees
can perform critical roles in the service
process. As needed, managers can
temporarily redeploy staff from their regular
roles to those experiencing high demand.
3. Reduce setup time and in-process activities to
deliver services and consider automations
that further deduct from labor needs and
waiting.
4. Adjust space, such as seating in a restaurant
or queue configurations for waiting lines, to
moderate the number of customers that can
be served at any time.
Forecasting

Forecasting is predicting future events.

Forecasting enables hospitality operations to

make informed business decisions and predict
short-term and long-term performance.
By forecasting, hospitality operations can make
better estimates of what may happen in the future
and manage service efficiently because they can
be better prepared.
Additionally, forecasting can be classified into
the three terms as follows:
1. Short-term forecasting: This forecast
has a time span of generally less than
three months but up to one year.

2. Medium-term forecasting: This

Forecasting can be classified into two ways:
1) Top-down method: This method uses
summative metrics to forecast the aggregated
sales first and then estimates the individual sales
for particular products and service. For example,
with the top-down method, a hotel will forecast
total weekly revenue first and from there, work
down to the daily occupancy rates, average daily
rates, and average length of stay.
2) Bottom-up method: This method forecasts
the individual sales of particular products and
service first and then calculates the aggregated
sales by summing the detailed forecasts. For
example, with the bottom-up method, a hotel will
forecast has a time span of generally three
months to three years.
3. Long-term forecasting: This forecast
has a time span of generally three years or
more.
Notes:
• Forecasting methods allow hospitality
operations to translate the multitude of data
into various strategies that become
competitive advantages for businesses.
 • Forecasting is an ongoing process of data
collection, model building, and data
application to modify the forecasting
outcomes with appropriate variables and
more accurate estimates to retrieve reliable
information.
• Consequently, accurate forecasting is
necessary for hospitality operations to keep
guests satisfied, maximize revenue, and
minimize cost.
Forecasting Factors
• Internal factors
are those that occur within the organization,
and thus, the organization has control on them.
• External factors
are those that occur outside of the
organization, and thus, the organization has no
control over them.
Yield Management
• Yield management is an approach that
emerged to maximize revenue by addressing
the challenges of managing demand and
supply through forecasting.
• Yield management is a comprehensive
practice that adjusts the price in response to
the fluctuating demand.
• Yield management is not the same as revenue
management but is instead a subset aiming to
maximize revenues by selling the product or
service to the right customer, at the right time,
at the right price.
• By implementing yield management,
hospitality operations attempt to allocate the
fixed amount of supply to match the potential
demand in the most profitable way.
Characteristics of Yield Management
1. Fluctuating demand: The adoption of
differential pricing smooths demand by either
stimulating or shifting demand to different
periods of time. By this approach, total
revenue for the constrained service can be
maximized.
2. Relatively fixed supply: Hospitality firms
with substantial investments in facilities are
considered capacity constrained. When all
the rooms at a hotel are sold out, further
demand cannot be met without substantial
capital investment. Once all of the seats are
sold out on an airline, further demand can be
met only through booking passengers on a
later flight. Likewise, once all of the seats are
sold out at a restaurant, further demand can
be met only after earlier customers complete
their meals.
3. Perishable inventory: Each unit of a room at
a hotel and a seat at a restaurant or airline is
perishable. This becomes a major constraint
because they cannot be stored for future sales.
Revenue from an unsold room or an unsold
seat becomes lost forever and can never be
recovered.
4. Segmented markets: Hospitality firms can
segment their market based on different
criteria. By segmenting the markets into
price-sensitive versus time sensitive
customers or economic versus standard
versus prestige customers, hospitality
businesses can allocate the availability of
supply for each segment and discriminate the
rates.
5. Product sold in advance: Hospitality
operations use reservation systems to sell
products in advance. The reservation systems
allow hospitality firms to better utilize their
supply by suggesting an approximate
demand.
6. Low variable to fixed cost ratio: The cost of
selling an additional unit must be low while
the marginal cost of capacity additions is
large. In other words, the low level of
variable cost paired with discretion in pricing
means that the revenue expected from selling
it is invariably greater than if it was not sold.
Basic Yield Management Math
The basic yield management statistic is expressed
as follows:
𝐴𝑐𝑡𝑢𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
Yeild = 𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝑜𝑟 𝑚𝑎𝑥𝑖𝑚𝑢𝑚 𝑟𝑒𝑣𝑒𝑛𝑢𝑒
Note that the potential revenue indicates the revenue
that is generated when supply is 100% sold at the
maximum price possible.
For example, hotel A has 100 rooms available on a
specific night with rack rate of ₱4,500.00. Here, the
potential maximum revenue is ₱450,000.00 (100 ×
₱4,500.00). If the hotel is sold out at 100%
occupancy rate, the yield
₱450,000.00/₱450,000.00= 1
100 rooms x ₱4,500.00 = ₱450,000.00 (Potential
Maximum Level)
₱450,000.00 / ₱450,000.00 = 1
However, on that night the hotel sold 70 rooms and
achieved an average room rate of ₱4,500.00. Here
the actual revenue is ₱315,000.00 (70 × ₱4,500.00).
Therefore, the yield is ₱315,000.00/₱450,000.00 =
0.7.
70 rooms x ₱4,500.00 =₱315,000.00
₱315,000.00 = .7/₱450,000.00
In more detail, yield is the function of price
efficiency and supply sold as follows:
Price efficiency × Supply sold
𝑎𝑐𝑡𝑢𝑎𝑙 𝑝𝑟𝑖𝑐𝑒
Price efficiency = 𝑚𝑎𝑥𝑖𝑚𝑢𝑚 𝑝𝑟𝑖𝑐𝑒 , 𝑎𝑛𝑑
𝑈𝑛𝑖𝑡𝑠 𝑜𝑓 𝑠𝑢𝑝𝑝𝑙𝑦 𝑠𝑜𝑙𝑑
Supply sold = 𝑡𝑜𝑡𝑎𝑙 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑠𝑢𝑝𝑝𝑙𝑦
Therefore, the yield statistic for a hotel can be
expressed as follows:
Yield=
𝐴𝑐𝑡𝑢𝑎𝑙 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑜𝑜𝑚 𝑟𝑎𝑡𝑒 𝑟𝑜𝑜𝑚𝑠 𝑝𝑒𝑟 𝑛𝑖𝑔ℎ𝑡 𝑠𝑜𝑙𝑑
𝑥
𝑚𝑎𝑥𝑖𝑚𝑢𝑚 𝑟𝑎𝑡𝑒 𝑟𝑜𝑜𝑚 𝑛𝑖𝑔ℎ𝑡𝑠 𝑎𝑣𝑎𝑖𝑎𝑙𝑏𝑙𝑒 𝑓𝑜𝑟 𝑠𝑎𝑙𝑒
Based on this foundation, measures have been
established to measure success in yield management.
These measures indicate the revenue per available
timebased inventory unit and can be described as
follows for
different hospitality industries:
is • Airline: revenue per available seat mile
(RevPASM);
• Hotel: revenue per available room night (RevPAR);
and
• Restaurant: Revenue per available seat hour
(RevPASH).
Yield Management Benefits
Yield management provides three main benefits for
hospitality operations:
Increased revenue: Revenue increases by utilizing
the occupancy at the optimum level. For example,
suppose a hotel property has 100 rooms and the room
rate is ₱4,500.00. On a given day, if all rooms are
sold, the revenue generated is ₱450,00.00. However,
if the hotel increases the rate to ₱5,000.00 because of
the high demand, the total earned revenue
increases to ₱500,00.00
Competitive analysis: Applying yield management
enables hospitality operations to stay competitive.
Hospitality operations need to always check on their
competitors’ rates and analyze their pattern when
they employ yield management. The competitors’
pricing strategy becomes a valuable benchmark in
employing dynamic pricing adjustments to generate
higher incremental revenue.
Decreased errors: A successful implementation of
yield management is based on precise demand
forecasting. Accurate demand forecasting is only
available through accurate data and exact details,
which further eliminates any miscalculated risks.
Yield Management Applications
Hotels: Hotels also have classic demand imbalances
due to varying peak and low seasons. Top hotel
companies heavily invest on software systems that
aid yield management.
a. These systems include seasonal occupancy
patterns, local events, weekly cycles, and current
trends to forecast demand and develop hurdle prices,
manage discounts, and overbooking.
Restaurants: Due to its small profit margins, more
restaurants are implementing yield management to
maximize their profits.
a. Unlike other point-of-sale (POS) systems, it
empowers restaurant businesses with unique
hospitality intelligence by delivering diverse insights
including demand forecasting, food cost
management, inventory management, menu
engineering, scheduling, automated purchasing, etc.