Managing Capacity and Demand

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.
Strategies for Matching Supply
and Demand for Services

DEMAND SUPPLY
STRATEGIES STRATEGIES

Partitioning Increasing
demand customer
Developing participation
Sharing
complementary
capacity
services
Establishing
Scheduling
price
Developing Cross- work shifts
incentives
reservation training
systems employees
Promoting Creating
off-peak adjustable
Using
demand capacity
part-time
employees

Yield
management
Segmenting Demand at a Health Clinic

140
Percentage of average daily

130 Smoothing Demand by Appointment

120 Scheduling
physician visits

110 Day Appointments

100
Monday 84
90
Tuesday 89
80 Wednesday 124
70 Thursday 129
Friday 114
60
1 2 3 4 5
Day of week
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 …. ….
Total 25,977 $ 64,941 29,000 $59,000
 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
 Daily Scheduling of
Telephone Operator Workshifts

2500
30
Topline profile
25

Number of operators
2000

20
1500
Calls

Scheduler program assigns

15 tours so that the number of
1000
operators present each half
hour adds up to the number
10 required
500
5 Tour

0
12 2 4 6 8 10 12 2 4 6 8 10 12 012 2 4 6 8 10 12 2 4 6 8 10 12
Time
Time
 LP Model for Weekly Workshift
Schedule with Two Days-off Constraint
Objective function:
Minimize x1 + x2 + x3 + x4 + x5 + x6 + x7

Constraints:
Sunday x2 + x3 + x4 + x5 + x6 3
Monday x3 + x4 + x5 + x6 + x7 6
Tuesday x1 + x4 + x5 + x6 + x7 5
Wednesday x1 + x2 + x5 + x6 + x7 6
Thursday x1 + x2 + x3 + x6 + x7 5
Friday x1 + x2 + x3 + x4 + x7 5
Saturday x1 + x2 + x3 + x4 + x5 5
xi  0 and integer

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
 Scheduling Part-time Bank Tellers
7 5 6
Tellers required

Decreasing part-time teller demand histogram

Tellers required
0 1 2 3 4 5
5
2 3 4

4 4
3 3
2 2 1
Two Full-time Tellers 1 1 5 2
1

Fri. Mon. Wed. Thurs Tues.

0

Mon. Tues. Wed. Thurs. Fri.

Object ive funct io n:
Minimize x1 + x2 +x3 +x4 +x5 +x6 +x7

Co nst raint s:
Sunday x2 +x3 +x4 +x5 +x6  b1
Mo nday x3 +x4 +x5 +x6 +x7  b2

DAILY PART-TIME WORK SCHEDULE, X=workday

Teller Mon. Tues. Wed. Thurs. Fri.

1 x …. x …. x
2 x …. …. x x
3,4 x …. …. …. x
5 …. …. x …. x
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
Seasonal Allocation of Rooms by
Service Class for Resort Hotel
Percentage of capacity allocated
to different service classes

20% 20% 20%

First class 30%

30%
50% 50%
Standard
60%

50% 30%
Budget 30%
10%

Peak Shoulder Off-peak Shoulder

(30%) (20%) (40%) (10%)
Summer Fall Winter Spring

Percentage of capacity allocated to different seasons

Demand Control Chart for a Hotel
300
Expected Reservation Accumulation

250
2 standard deviation control limits

200
Reservations

150

100

50

0
1

11

16

21

26

31

36

41

46

51

56

61

66

71

76

81

86
Days before arrival
Yield Management Using the
Critical Fractile Model
Cu ( F  D)
P(d  x )  
Cu  Co p F
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.
D if an economizing passenger
Co  
 ( F  D) if a full fare passenger (marginal gain)
Expected value of Co = pD-(1-p)(F-D) = pF - (F-D)
 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?
 Interactive Exercise
Watch the PowerPoint presentation
concerning the overbooking experience at
the Doubletree Hotel in Houston, Texas.
How could this situation been handled
differently?