CAPACITY MANAGEMENT IN SERVICES -

YIELD MANAGEMENT
This results in mismatch between demand and supply.

During periods of less demand, some part of the capacity

remains unutilized.
This idle capacity cannot be stored for later use, as per the
practice followed in the case of manufacturing firms, because
the service inventory is perishable.
On the other hand, during periods of high demand, sufficient
capacity is not available to meet the demand.
This often results in mismatch between supply and demand
which needs to be bridged either by making adjustments to
capacity or influencing the demand.
This matching is essential to ensure provision of cost-effective
service along with high level of customer satisfaction.

Such matching is done using various strategies available to the

service organization.

Therefore, such issues become strategic decisions in the case of

service firms.
In addition, they also make use of other strategies such as
absorbing the demand variation through inventories or
adjusting the capacity by working overtime / undertime,
working additional shift and so on.

In addition, they can also resort to backordering.

However, for service firms, average demand has no meaning

since capacity has to be matched to supply based on daily or
even hourly variations in demand.
• Daily demand for ice cream cones is as under

Week days 100 - 300

Saturday 500 - 1500
Sunday 500 - 1100
• For the manufacturer supplying the cones, the capacity is a
simple matter
• The average weekly demand is calculated as under:
• 5 (200) + 1000 + 800 = 2800 cones
• It makes 2800 / 7 = 400 cones every day, and carries a small
inventory of extra cones for the busier days
• for the servicer provider who fills cones as customers walk in,
this simple arithmetic does not apply, he may use some basic
strategies
• Assume that one employee can make 100 cones a day
• The following strategies may be used:
• Provide:
– Ensure sufficient supply at all times. For this, he would want to have
enough people to handle maximum demand. This, he would have 15
employees on Saturday, 11 on Sunday, and 3 for the rest of the week.
– This strategy is associated with high service quality generic strategy,
but it is also high cost and would result in idle time for employees
– Businesses with these characteristics include high margin sales, and
those with wealthy individuals as clients
• Match:
– Change capacity as needed. This strategy would use 10 employees on
Saturday, 8 on Sunday, and 2 for the rest of the week, with excess
Saturday and Sunday employees strictly part-timers
– This approach reduces service quality and costs and used by a large
number of firms including most mid- and low-priced restaurants and
telemarketing firms
• The following strategies may be used:
• Influence:
– Alter demand patterns to fit firm capacity. Here, pricing, marketing,
or appointment systems flatten demand peaks to conform to capacity
– This is most common in high capital intensive services such as airlines
and hotels; highly paid professionals like doctors and lawyers also
commonly use it
• Control:
– Maximize capacity utilization. If only full time employees could be
used, this strategy would have just two employees whose schedules
overlapped on week-ends.
– It is commonly used in low-margin services as well as situations where
high priced employees want to maximize their utilization.
– Many physicians deliberately schedule patient appointments so tightly
that a crowd is always in their waiting room
– This strategy is willing to sacrifice sales at busy times to ensure the
service functions efficiently at all times
• To assist these strategies, many specific tactics can be used to
manage supply and demand. These include:
• Work-shift scheduling:
– The unevenness of customer demand throughout a day means
utilizing creative work schedules such as non-uniform starting times,
and work days that have variable work hours
– Work scheduling software is available to help construct flexible
solutions within a match strategy
• Increase customer participation:
– A traditional method for a control strategy cuts total labor by
encouraging customers to participate in serving themselves
– For example, many fast-food restaurants use a semi-control strategy in
which customers pour their own fountain drinks and procure their
own condiments
• Adjustable (surge) capacity
– “Surge” capacity means capacity that can be available for a short
period of time
– By cross-training personnel for different jobs, a company can flexibly
shift personnel temporarily to increase the capacity of any one
position
– Since cross-training is expensive, and cross-trained personnel are more
ex[pensive to retain, this approach is appropriate within a provide
strategy
• Sharing capacity
– Capacity can often be shared between departments or between firms
for personnel or equipment that is needed only occasionally
– For example, small business incubators, often contact with many
businesses to share the same secretarial, accounting, and office
management team
• Demand Management Tactics
• Partitioning Demand:
– Some components of demand are inherently random, while some are
fixed
– This approach melts the more malleable demand around the
tendencies of random demand
– Thus, if it is known that more walk-in business generally comes in from
11.00 am to 01.00 pm, then schedule appointments either before or
after that time
– This approach works primarily for provide and match strategies
• Price incentives and promotion of off-peak demand
– This highly common method works in an influence strategy, as we can
see in telephone bills
– It is also commonly used in restaurants, (“early bird” specials), hotels
(both off-season and day of week pricing), resorts, etc.
 Demand Develop
Management complementary
Tactics strategies:

The way to avoid For example, heating However, this

inevitable seasonality and air-conditioning approach remains
of many services is to repair, ski slopes in only a theoretical
couple counter- winter and mountain construct for most
cyclical services bike trails in summer services
together
 Capacity Management

If the resources are underutilized, it can affect the firm in the

following ways:
• Resources are very costly and if they don’t earn revenue, it
can adversely affect the financial results.
• In many cases, customers do not like to avail services which
appear to not very busy. This is particularly so in case of
banks, financial institutions, and restaurants where
customers are wary of using an empty branch.
• If under utilization persists, employees become bored and
demotivated and this can, in the long run, lead to reduced
customer satisfaction and affect the profitability of the
firm.
 Strategies for Managing Capacity in Service Firm
• The diagram below indicates the various strategies available
for matching supply and demand in services.
Yield Management
 Yield Management

Definition yield management:

“(…) Yield management guides the decision of how to allocate

undifferentiated units of capacity to available demand in such a way as to
maximize profit or revenue.” (Kimes, 1989).

“Yield management allows the airlines to allocate their fixed capacity of

seats in the most profitable manner possible.” (Kimes, 1989)

“(…) forecast demand and calculate the number of seats to be made

available to each fare type, with the goal of maximizing total flight
revenues.“ (Belobaba et al., 1997)
 Yield Management
• Characteristics of Industries suitable for Yield Management:
– Relatively fixed capacity (high fixed costs for hotel and employees)
– Demand can be segmented into clearly defined partitions (e.g.
business customers vs. tourists in a hotel)
– Inventory is perishable (e.g. empty seats in an airplane).
– Product is sold sometime in advance (e.g. tickets for a cruise)
– Demand fluctuates strongly (e.g. according to day of the week or
season).
– Marginal sales costs and production costs are low, but capacity costs
are high (e.g. costs of a cruising ship and employees are high, but
variable costs for one additional passenger are low).
 Yield Management

• In yield management, the aim is not necessarily to gain

maximum utilization from the limited resource but instead to
maximize the revenue yield from pricing differentials.
• It combines three techniques:
– Overbooking
– Assigning capacity amounts to different market segments and
– Differential pricing
• It is used extensively by many industries.
 Yield Management
• Consumers often encounter examples of “yield management”
• Some knowledge about how these systems work is useful to
make life easier or at least less expensive
• Some practical examples of dealing with yield management
system include:
– Overbooking at a car rental agency; even though you had “confirmed”
your reservation, it is still necessary to show up early in the day to get
a car
– If you are somewhat flexible about which days you fly, an airplane
ticket may cost much less. The airline flight you are trying to book may
be “full today”, but tomorrow, a seat may be available even without
others’ cancellations
– A hotel that says “no room is available” on Thursday may suddenly
find a room for Thursday, if you add that your staying till Friday
 Yield Management
• These types of situations occur because of yield management
systems

• Customers and employees are often puzzled by the

application of yield management practices

• It is useful to understand the reasoning and techniques of

yield management

• This will help you to be better customer even if you do not

work in an industry where yield management is practiced.
• Yield Management
– The term yield management is a bit of a misnomer because
these techniques are not directly concerned with managing
yield but really concerned with managing revenue
– Consequently, it is sometimes called revenue management
or perishable asset revenue management
– The purpose of yield management is to sell right capacity to
the right customer at the right price
– Many capital-intensive services can and do use these
techniques heavily
– The main business requirement for using these techniques is
having limited fixed capacity
• Yield Management
– Business characteristics that make yield management more
effective
• Ability to segment markets
• Perishable inventory
• Advance sales
• Fluctuating demand
• Accurate, detailed information systems
– These characteristics increase the complexity of a business
and the profit potential from applying yield management
– Industries that fully utilize the yield management techniques
are transportation-oriented industries (airlines, railroads, car
rental agencies, shipping), vacation-oriented industries
(resorts, tour operators), other capacity-constrained
industries (hotels, storage facilities etc.)
 Yield Management

• Many other industries can partially use these techniques

successfully
• Yield management is a relatively new science
• Airlines are credited with the invention of most of these
techniques.
• However, airlines did not develop most of these systems until
a few years after the industry was deregulated.
• These techniques only began to spread to other industries in
the 1990s.
• Yield Management
– A yield management system consists of three basic elements:
• Overbooking (accepting more requests for service than can be
provided)
• Differential pricing to different customer groups
• Capacity allocation among customer groups
– Overbooking:
• The need for overbooking is quite clear
• Customers are fickle and do not always show up, so firms that
overbook, make far more money than those that don’t
• Of course, the alternative to overbooking is to simply charge the
customers whether they show up or not, but this approach is not
feasible
• The question for many businesses is not whether to overbook, but
rather how much to overbook
– To demonstrate some mathematical methods, to determine the
level of overbooking, consider the following example
• Yield Management
– Example:
• The Hotel California found that it frequently turned down a
customer in the lobby because a room was reserved for a
customer who never showed up.
• The manager felt that the hotel’s policy of overbooking should be
examined
• The average room rate was $ 50 per night, but the hotel could not
collect the room rate from the ‘no show’ customers.
• If no over bookings were allowed, each no-show would in reality
cost the hotel $50
• If it overbooked too much and filled up early in the night,
customers with reservations who arrived later to find no rooms
available, would be most unhappy
• About 10% of those customers did not cost the hotel any money;
they merely muttered menacingly and walked out
• Yield Management
– Example:
• Another 10% were satisfied with being “walked” (or transferred) to
another hotel, at no cost to Hotel California
• The remaining guests were so upset by this decision that the hotel
had to repair broken lobby furniture at a cost of $150
• The hotel’s no-show experience is summarized in the table below
• What should be the overbooking policy of the hotel?
• Yield Management
– Example:
• We will discuss three approaches to answering the question
• Hotel California no-show experience
No-shows % of experience Cumulative % of Experience
0 5 5
1 10 15
2 20 35
3 15 50
4 15 65
5 10 75
6 5 80
7 5 85
8 5 90
9 5 95
10 5 100
• Yield Management
– Example:
– Overbooking Approach 1: (using averages)
• In the table, the average number of no-shows is calculated by
– 0(0.05) + 1(0.10) + 2(0.20) + 3(0.15) + ... + 10(0.05) = 4.05
• Since the average number of no-shows is 4, it might seem
reasonable to take up to 4 overbooking
• This approach offers the advantages of being intuitive and easy to
explain
• It fails, however, to weigh the relevant costs
• For instance, if the cost of a disgruntled customer is nothing, then
the best policy would be to overbook 10 every night
• That is, if all the customers who had reservations and didn’t get
rooms, simply left, at no cost to hotel, the hotel would just be
concerned about losing the potential $50 of a paying guest
• Yield Management
• Overbooking approach 2: (Spread sheet Analysis)
– In this case, the two costs to consider are:
– Co = Overage (customers denied advance reservations
with rooms left unoccupied, often called “spoilage”
– Cs = Stock outs (customers with reservations are turned
away because no rooms are left, called “walked”
customers in the hotel industry and “spill” by the airlines
– In this case, Co = $ 50, the cost of the room, and
– Cs = 0.2($ 0) + 0.8($ 150) = $ 120
– One way to put the relevant costs into the picture is to use
the spread sheet as shown in the table below:
• Overbooking approach 2: (Spread sheet Analysis)
• No: of reservations overbooked
No- Prob. 0 1 2 3 4 5 6 7 8 9 10
show
0 0.05 0 120 240 360 480 600 720 840 960 1080 1200
1 0.10 50 0 120 240 360 480 600 720 840 960 1080
2 0.20 100 50 0 120 240 360 480 600 720 840 960
3 0.15 150 100 50 0 120 240 360 480 600 720 840
4 0.15 200 150 100 50 0 120 240 360 480 600 720
5 0.10 250 200 150 100 50 0 120 240 360 480 600
6 0.05 300 250 200 150 100 50 0 120 240 360 480
7 0.05 350 300 250 200 150 100 50 0 120 240 360
8 0.05 400 350 300 250 200 150 100 50 0 120 240
9 0.05 450 400 350 300 250 200 150 100 50 0 120
10 0.05 500 450 400 350 300 250 200 150 100 50 0
Total 203 161 137 146 181 242 319 405 500 603 714
cost
• Overbooking approach 2: (Spread sheet Analysis)
– This spreadsheet calculates the expected cost for every
possible scenario
– For example, if no overbooking is done, then the column
labeled “0” shows that on the 5% of days when there is
zero no-show, there is no cost at all, but on the 10% of
days, when there is one no-show, the cost is $50.
– The total cost at the bottom sums up to
• 0.05(0) + 0.10(50) + ... + 0.05(500) = $203
– The overbooking level with the lowest expected cost is to overbook 2
rooms, with an expected cost of $137
– The advantages are it incorporates relevant cost. Also, if the costs and
revenues are uncertain or not, it is easy to figure out and this method
can be used.
– Two Disadvantages are (i) it requires accurate data and (ii) it does not
increase a manager’s intuition about the problem.
• Overbooking approach 3: (Marginal Cost Approach)
– This method comes at the problem mathematically by noting
that one would like to keep accepting bookings until the
expected revenue is less than or equal to the expected loss
from the last booking. Mathematically increase bookings
until
• E(revenue of next booking) ≤ E(cost of next booking)
– That is, Revenue of filling a room x probability of more no-
shows than overbooked rooms ≤ Cost of dissatisfied
customer x Probability of fewer or the same number of no-
shows than overbooked rooms
– Or, in mathematical terms used previously
• Co x P(Overbookings < No-shows) ≤ Cs x P(Overbookings ≥ no-shows)
• Overbooking approach 3: (Marginal Cost Approach)
– The formula after further simplification can be written as
• Co / (Co + Cs) ≤ P(Overbookings ≥ No-shows)
– In the preceding problem, this calculation leads to
• $50 / ($50 + $120) = 0.29
– Looking at the first table, the smallest number of
overbooking which satisfies this is 2, where the cumulative
probability of no-shows reaching this level is 0.35
– This basic formula is easy to remember and apply
– Co may be easy to figure in most cases but Cs is not, and
usually must be estimated
– Also, the cumulative probability distribution of no-shows is
not accurately known
– The drawback of this formula is that it assumes linear cost
of dissatisfied reservation holders
• Dynamic Overbooking
– The overbooking decision is often not a one time, “static”
decision
– It is “dynamic”, i.e. It changes over time
– In a typical situation for a firm that takes reservations a long
time in advance, the dynamic overbooking curve is shaped
as shown in the figure
– When the event is still a long time in the future, the allowed
number of overbooking is at a peak
– As the event nears, the number of allowed overbooking
drops
– This practice reaches its logical conclusion, at the time the
event takes place, when allowed overbooking drop to zero
• Dynamic Overbooking
– The overbooking decision is often not a one time, “static”
decision
– It is “dynamic”, i.e. It changes over time
– In a typical situation for a firm that takes reservations a long
time in advance, the dynamic overbooking curve is shaped
as shown in the figure
– When the event is still a long time in the future, the allowed
number of overbooking is at a peak
– As the event nears, the number of allowed overbooking
drops
– This practice reaches its logical conclusion, at the time the
event takes place, when allowed overbooking drop to zero
• Allocating Capacity
– A difficult problem face by many firms is allocating capacity
among their customer groups
– That is, when to say “no, we are full” to one customer while
holding open capacity in the hope that more profitable
customer will arrive later
– For airlines and hotels, especially, reservation activity
follows the shape shown in the figure
– In the airline industry, the price conscious vacationers make
reservations months in advance, while high paying business
travellers may make reservations close to the event
– For hotels, price-conscious may make reservations months
in advance, while more profitable transient business may
just walk into the door that day
– For the sake of simplicity, we focus on segmenting capacity
between just two customer groups
• Allocating Capacity
– The situation is complex, because one cannot simply let all
reservations be taken first-come, first-served
– This will cause the firm to turn away a substantial portion
of their profitable customers while filling up on the less
profitable ones
– Also, most firms cannot simply say “no” to lower-revenue
business, because they cannot fill their capacity solely with
high revenue business
– Consequently, the firm must decide ahead of time, at what
point to shut off the low revenue business in anticipation
of high revenue bookings later
• Allocating Capacity
– The general methods used to solve the problem of
capacity allocation can be classified as under:
• Nested versus distinct
• Static versus dynamic
– To demonstrate the differences in these methods, let us
consider an example
– Example:
• Chancey Travel is offering a cruise to the Antartic and wants to fill
the 100 cabins available
• Its primary market is Premium customers who pay $12000 for the
trip and the variable costs of serving these customers is $2000 per
trip, as they are pampered endlessly
• According to market analysis, the demand from premium
passengers is uniformly distributed between 51 and 100
• Allocating Capacity
– Example:
• It means a 2% chance that 51 premiums will sign up, a 2% chance
that 52 will go and so on up to a 2% chance that the entire boat will
be filled with 100 premiums
• It means that if the entire boat were reserved were reserved for
premiums, an average of 75 premiums will be on board
• Because of the substantial probability that the entire boat cannot
be filled with premiums, another market is sought
• The other group of discount customers who were price sensitive
paid $2500 for the trip, but the marginal cost of serving them was
$0, as heat was turned off to their cabins they received no food
• Demand was such that the ship could be entirely filled with
Discounts, and these customers were willing to book far in advance
• The dilemma for Chancey Travel is how many cabins should be
reserved in the hope of getting premium customers?
• Capacity Allocation Approach 1
• Static Methods: Fixed Number, Fixed Time Rules
– A fixed time rule means that a firm will accept discount
bookings until a specific date
– No limit is set on the number of discount sales, however, it
is not close to being optimal
– A fixed number rule may be to, reserve exactly 75 slots for
premium customers and exactly 25 slots for discount
customers
– He problem with this rule is that, if 75 premiums and 20
discounts are currently signed up, and a premium
customer wants to pay, he must be turned away
• Capacity Allocation Approach 2
• Nested Static Methods:
– In this method, since 75 premium bookings is expected, we
reserve 75 slots for premium
– Instead of the remaining 25 slots being given to Discounts,
these 25 are sold on first-come first-served basis
– In this manner, 75 slots for premium can be thought of as
“protection level”, i.e. At least 75 rooms are protected for
premiums, but they can get more
– The other groups are not allowed into the nest of 75
protected rooms, but the protected group can go outside
that number
– To show how some basic calculations can lead to a better
strategy, the expected marginal seat revenue (EMSR) is
considered
• Capacity Allocation Approach 2
• Nested Static Methods:
– The EMSR allocates capacity one at a time
– For the present problem, the 1st to 51st room will go to
premiums
– For deciding about 52nd room, we compare the expected
marginal revenue from each group and assign the room to
the group that provides most expected revenue
• For 52nd room, there is 98% chance a premium customer will request
• Hence, Premium: 98%($12000 - $200) = $9800 expected revenue
• Discount: 100%($2500) = $2500 expected revenue
– So, the 52nd room will go to premium group
• Capacity Allocation Approach 2
• Nested Static Methods:
– For the 53rd room, the calculation is
• Premium: 96%($10000) = $$9600 expected revenue
• Discounts: $2500 expected revenue
– So, this room will also go to Premium group
– This process continues until we reach the 88th seat:
• Premium: 24%($10000) = $2400 expected revenue
• Discount: $2500 expected revenue.
• So, this room will go to Discount group
– Hence, as per EMSR, we should allocate 87 rooms to
Premium and 13 to Discount group
– However, in practice, this would result in 75 Premium
passengers, 13 Discount passengers, and 12 empty rooms
• Capacity Allocation Approach 3:
• Dynamic Methods
• The methods described so far describe one-time decisions
made in advance
• However, in many cases, a better but more complicated
method is available
• The probability distribution used earlier is a forecast
• But forecasts become more accurate as the event gets closer
in time and early activity tends to be a good predictor of what
will eventually happen
• We may apply this notion to the yield management problem
discussed earlier with EMSR analysis
• The diagram is shown below:
• Dynamic Capacity Allocation
• As shown in the figure, if we are continually forecasting
demand from the early reservations history, reservation
activity 35 days before the event may look as though we are
on “low demand” curve for high revenue customers
• However, 30 days before the event, reservation activity looks
as though a “medium” number of high revenue customers will
be forthcoming, so the protection level for high revenue
customers is increased
• 20 days before the event, the activity is such that the entire
service capacity can be taken up with high revenue customers
• Of course, this scenario can happen in reverse order as well,
with more and more capacity being allocated over time to
lower revenue customer classes
 Complexities of Capacity Allocation
• So far we have considered allocating capacity for single
events. However, the situation is often more complex
• Consider a low revenue customer booking a hotel room for
Thursday night versus booking for both Thursday and Friday
nights
• If the hotel has mainly a business clientele, then Thursdays
tend to be fairly full of high revenue customers, but on Friday
night, the hotel is relatively empty
• Consequently, allowing a low revenues customer to take up a
valuable Thursday room might be unprofitable, but if he also
uses a Friday room that would ordinarily go unoccupied, the
profitability changes
• Consequently, the protection level for high revenue customer
for a Thursday depends on the low revenue customer’s length
of stay
 Pricing
• We now discuss the difficult topic of setting prices in a yield
management system.
• The general idea is to break up a market into a number of
different customer segments and charge different prices for
each segment. The figure below shows the traditional supply
and demand curves:
•
 Pricing
• The market-clearing price creates “consumer’s surplus” for
customers who would have been willing to pay more and
economic rent for suppliers whose costs are lower
• The idea of yield management is to segment different
customer categories with separate market clearing prices, so
that high prices are charged to those who would be willing to
pay them and low prices are charged to those who would
ordinarily not use the service if the single market clearing
price were in place.
• The figure below shows a general representation of three
markets for for airline seats:
 Pricing

• Customer class 1 (first class passengers) wants premium

service and flexibility, and cares little about cost
• Customer class 2(business class) values the flexibility of
making last-minute changes over price
• Customer class 3 (often vacation families) makes plans well in
advance and are highly sensitive to price
• The consumer surplus from each group is the area formed by
the triangle of the market price, demand curve and the
vertical line extending from the dotted line to the customer
class bar.
• Large portions of consumer surpluses are shifted to the
supplier , and bringing on customers who would not ordinarily
use the service can expand the market itself.
 Pricing

• Several difficulties arise in creating these customer segments

• Firstly, price discrimination per se is illegal
• Consequently, it is up to the imagination of the marketing
department to determine a legal and enforceable method for
segmenting markets
• For example, airlines want to charge higher prices to price-
insensitive business customers and lower prices to price-
sensitive vacationers
• However, these markets can only be attacked indirectly, by
segmenting pricing on how far in advance one makes a
reservation
 Pricing
• The yield management issues of overbooking and capacity
allocation lend themselves well to numerical analysis once
pricing is set, but determining the best overall combination of
prices, capacity allocation and overbooking is difficult
• In practice, marketing usually sets prices in coordination with
company policy and competitive response, and then
operations area sets capacity allocation numbers after pricing
is determined.
• The overall lesson for pricing in yield management
environment:
– Traditional reasoning regarding price elasticity does not apply, and
pricing depends on the relative demand/capacity relationships that
must be judged on individual case-by-case basis
 Implementation Issues
• There are some practical problems in yield management
systems that must be addressed in both customer relations
and employee relations
• Alienating Customers
• Some yield management practices can alienate customers
• From the customers’ viewpoint, the fact that they are told a
service is full to capacity, when they find out it is not so, is
unbelievable to many customers
• Further pricing issues can create ill-feeling among customers
• A key in many industries is – to be blunt – to keep customers
ignorant of the rates available to other customer classes
 Implementation Issues
• Customer Class “Cheating”
• If customers become knowledgeable about a system, they can manipulate
it to their advantage
• Business-oriented hotels are more willing to bargain with customers who
are providing revenue on otherwise empty week-end nights
• Consequently, one tactic used by some customers is to make a hotel
reservation for three nights, Thursday through Saturday, then stay only
Thursday night (their true original intention)
• Another tactic works in reverse: if a hotel is booked solid for week days,
make a reservation only for Saturday night, then refuse to leave for several
days
• Even if the law allows evicting such guests, hoteliers find the process of
evicting a paying customer both embarrassing and poor public relations,
because it often must be done in front of other guests
 Implementation Issues
• The complexity of airline customer class regulations lead often to
customer cheating
• A number of firms specialize in the illegal (by airline rules) buying and
selling of frequent flyer miles, and a few travel agents find added methods
to avoid airline regulations as an added service to their customers
• The airlines invest substantial sums in information systems to keep
customers obeying the rules
• For example, customers were able to avoid the expense of an expensive,
mid-week round trip by purchasing two overlapping round-trip tickets
with Saturday night stopovers and throwing away the other half of both
tickets.
• The solution to this type of problem usually requires both employee
vigilance and investments in software
 Implementation Issues
• Employee Empowerment
• Strategic decisions must be made regarding how much power is given to
employee to make decisions
• If a system is seen as reducing employee discretion, employees often can
make-up for this by sabotaging the system.
• For example, in a hotel industry, the responsibility of assigning proper
customer class and room rates vests in the clerk at the front desk.
• If the system lacks enough structure, clerks may whimsically decide
whether a customer gets higher or lower rate, rather than the customer’s
true class
• However, a system with too much too much structure, leads to loss of
bargaining power by clerks and can result in needlessly empty rooms
• Consequently, it is important for anyone with such responsibility to
understand the overall managerial goals of such a system
 Implementation Issues
• Cost and Implementation Time
• Fully implementing a yield management system is not simple
• No off-the-shelf software is available to address yield
management issues
• The leading companies providing yield management software
are Sabre, PROS Strategic Solutions etc.
• Implementation costs for such software can run into several
million dollars and it can take several months to implement
such software
• Further, once a system is running, training and system
updating are also costly