1 Productivity and Yield

Operations
Management

1-1
 The Hard Rock Cafe

 First opened in 1971

 Now – 129 restaurants in over 40 countries
 Rock music memorabilia
 Creates value in the form of good food
and entertainment
 3,500+ custom meals per day in Orlando
 How does an item get on the menu?
 Role of the Operations Manager

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1-2

 What Is Operations
Management?
Production is the creation of
goods and services
Operations management (OM)
is the set of activities that
create value in the form of
goods and services by
transforming inputs into
outputs
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1-3
 Organizing to Produce
Goods and Services
 Essential functions:
1. Marketing – generates demand
2. Production/operations – creates
the product
3. Finance/accounting – tracks how
well the organization is doing,
pays bills, collects the money

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1-4

 Organizational Charts
Commercial Bank

Operations Finance Marketing

Teller Investments Loans
Scheduling Security Commercial
Check Clearing Real estate Industrial
Collection Financial
Transaction Personal
processing Accounting
Mortgage
Facilities
design/layout
Vault operations Auditing
Maintenance Trust Department
Security
Figure 1.1(A)
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1-5
 Organizational Charts
Airline

Operations Finance/ Marketing

Ground support accounting Traffic
equipment Accounting administration
Maintenance Payables Reservations
Ground Operations Receivables Schedules
General Ledger Tariffs (pricing)
Facility
maintenance Finance Sales
Catering Cash control Advertising
Flight Operations International
exchange
Crew scheduling
Flying
Communications
Dispatching
Management science
Figure 1.1(B)
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1-6
 Organizational
Manufacturing
Charts
Operations Finance/ Marketing
Facilities accounting Sales
Construction; maintenance Disbursements/ promotion
Production and inventory control credits Advertising
Scheduling; materials control Receivables Sales
Quality assurance and control Payables
General ledger Market
Supply-chain management research
Manufacturing Funds Management
Tooling; fabrication; assembly Money market
Design International
Product development and design
exchange
Detailed product specifications Capital requirements
Industrial engineering Stock issue
Efficient use of machines, space, Bond issue
and personnel and recall
Process analysis
Development and installation of
production tools and equipment
Figure 1.1(C)
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1-7
 Why Study OM?
1. OM is one of three major functions of
any organization, we want to study
how people organize themselves for
productive enterprise
2. We want (and need) to know how
goods and services are produced
3. We want to understand what
operations managers do
4. OM is such a costly part of an
organization
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1-8
 Options for Increasing
Contribution
Finance/
Marketing Accounting OM
Option Option Option

Increase Reduce Reduce

Sales Finance Production
Current Revenue 50% Costs 50% Costs 20%

Sales $100,000 $150,000 $100,000 $100,000

Cost of Goods – 80,000 – 120,000 – 80,000 – 64,000
Gross Margin 20,000 30,000 20,000 36,000
Finance Costs – 6,000 – 6,000 – 3,000 – 6,000
Subtotal 14,000 24,000 17,000 30,000
Taxes at 25% – 3,500 – 6,000 – 4,250 – 7,500
Contribution $ 10,500 $ 18,000 $ 12,750 $ 22,500

Table 1.1
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 What Operations
Managers Do
Basic Management Functions
 Planning
 Organizing
 Staffing
 Leading
 Controlling

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 10

 Ten Critical Decisions
Ten Decision Areas Chapter(s)
1. Design of goods and services 5
2. Managing quality 6, Supplement 6
3. Process and capacity 7, Supplement 7
design
4. Location strategy 8
5. Layout strategy 9
6. Human resources and 10
job design
7. Supply-chain 11, Supplement 11
management
8. Inventory, MRP, JIT 12, 14, 16
9. Scheduling 13, 15
10. Maintenance 17
Table 1.2
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 11
 The Critical Decisions
1. Design of goods and services
 What good or service should we
offer?
 How should we design these
products and services?
2. Managing quality
 How do we define quality?
 Who is responsible for quality?

Table 1.2 (cont.)

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 12
 The Critical Decisions
3. Process and capacity design
 What process and what capacity will
these products require?
 What equipment and technology is
necessary for these processes?
4. Location strategy
 Where should we put the facility?
 On what criteria should we base the
location decision?

Table 1.2 (cont.)

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 13
 The Critical Decisions
5. Layout strategy
 How should we arrange the facility?
 How large must the facility be to meet
our plan?
6. Human resources and job design
 How do we provide a reasonable
work environment?
 How much can we expect our
employees to produce?

Table 1.2 (cont.)

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 14
 The Critical Decisions
7. Supply-chain management
 Should we make or buy this
component?
 Who should be our suppliers and how
can we integrate them into our strategy?
8. Inventory, material requirements
planning, and JIT
 How much inventory of each item
should we have?
 When do we re-order?

Table 1.2 (cont.)

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 15
 The Critical Decisions
9. Intermediate and short–term
scheduling
 Are we better off keeping people on
the payroll during slowdowns?
 Which jobs do we perform next?
10. Maintenance
 How do we build reliability into our
processes?
 Who is responsible for maintenance?

Table 1.2 (cont.)

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 16
 Where are the OM Jobs?
 Technology/methods
 Facilities/space utilization
 Strategic issues
 Response time
 People/team development
 Customer service
 Quality
 Cost reduction
 Inventory reduction
 Productivity improvement
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 17
 Opportunities

Figure 1.2

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 18

 Certifications
 APICS, the American Production and
Inventory Control Society
 American Society of Quality (ASQ)
 Institute for Supply Management (ISM)
 Project Management Institute (PMI)
 Council of Supply Chain Management
Professionals
 Charter Institute of Purchasing and
Supply (CIPS)

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 19

 Significant Events in OM

Figure 1.3
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 20
 The Heritage of OM
 Division of labor (Adam Smith 1776;
Charles Babbage 1852)
 Standardized parts (Whitney 1800)
 Scientific Management (Taylor 1881)
 Coordinated assembly line (Ford/
Sorenson 1913)
 Gantt charts (Gantt 1916)
 Motion study (Frank and Lillian Gilbreth
1922)
 Quality control (Shewhart 1924; Deming
1950)

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 21

 The Heritage of OM
 Computer (Atanasoff 1938)
 CPM/PERT (DuPont 1957, Navy 1958)
 Material requirements planning (Orlicky
1960)
 Computer aided design (CAD 1970)
 Flexible manufacturing system (FMS 1975)
 Baldrige Quality Awards (1980)
 Computer integrated manufacturing (1990)
 Globalization (1992)
 Internet (1995)

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 22

 Eli Whitney
 Born 1765; died 1825
 In 1798, received government
contract to make 10,000 muskets
 Showed that machine tools could
make standardized parts to exact
specifications
 Musket parts could be used in any
musket

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 23

 Frederick W. Taylor
 Born 1856; died 1915
 Known as ‘father of scientific
management’
 In 1881, as chief engineer for
Midvale Steel, studied how tasks
were done
 Began first motion and time studies
 Created efficiency principles

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 24

 Taylor’s Principles
Management Should Take More
Responsibility for:
 Matching employees to right job
 Providing the proper training
 Providing proper work methods and
tools
 Establishing legitimate incentives for
work to be accomplished

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 25

 Frank & Lillian Gilbreth
 Frank (1868-1924); Lillian (1878-1972)
 Husband-and-wife engineering team
 Further developed work
measurement methods
 Applied efficiency methods to their
home and 12 children!
 Book & Movie: “Cheaper by the
Dozen,” “Bells on Their Toes”

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 26

 Henry Ford
 Born 1863; died 1947
 In 1903, created Ford Motor
Company
 In 1913, first used moving assembly
line to make Model T
 Unfinished product moved by
conveyor past work station
 Paid workers very well for 1911
($5/day!)
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 27
 W. Edwards Deming
 Born 1900; died 1993
 Engineer and physicist
 Credited with teaching Japan
quality control methods in post-
WW2
 Used statistics to analyze process
 His methods involve workers in
decisions

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 28

 Contributions From
 Human factors
 Industrial engineering
 Management science
 Biological science
 Physical sciences
 Information technology

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 29

 New Challenges in OM
From To
 Local or national focus  Global focus
 Batch shipments  Just-in-time
 Low bid purchasing  Supply-chain
partnering
 Lengthy product  Rapid product
development development,
alliances
 Standard products  Mass
customization
 Job specialization  Empowered
employees, teams
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 30
 Characteristics of Goods
 Tangible product
 Consistent product
definition
 Production usually
separate from
consumption
 Can be inventoried
 Low customer
interaction

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 31

 Characteristics of Service
 Intangible product
 Produced and
consumed at same time
 Often unique
 High customer
interaction
 Inconsistent product
definition
 Often knowledge-based
 Frequently dispersed
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 32
 Industry and Services as
Percentage of GDP
90 −
Services Manufacturing
80 −
70 −
60 −
50 −
40 −
30 −
20 −
10 −
0−
France

South Africa
Czech Rep

Hong Kong

Japan

Mexico

Russian Fed

Spain
Australia

Canada

China

Germany

US
UK
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 33
 Goods and Services
Automobile
Computer
Installed carpeting
Fast-food meal
Restaurant meal/auto repair
Hospital care
Advertising agency/
investment management
Consulting service/
teaching
Counseling
100% 75 50 25 0 25 50 75 100%
| | | | | | | | |

Percent of Product that is a Good Percent of Product that is a Service

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 34

 Manufacturing and Service
Employment
120 –

100 –
Employment (millions)

Service
80 –

60 –

40 –
Manufacturing
20 –

| | | | | | |
0 – 1950 1970 1990 2010 (est)
1960 1980 2000
Figure 1.4 (A)
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 35
 Manufacturing Employment
and Production
– 150
Industrial
production
Employment (millions)

(right scale) – 125

Index: 1997 = 100

– 100

– 75

40 – Manufacturing
employment – 50
30 – (left scale)
20 – – 25
10 –
0 – | | | | | | |
– 0
1950 1970 1990 2010 (est)
1960 1980 2000

Figure 1.4 (B)

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 36
 Development of the
Service Economy
United States
Canada
France
Italy
Britain
Japan
W. Germany | | | | |
40 50 60 70 80
1970 2010 (est) Percent

© 2011 Pearson Education, Inc. publishing as Prentice Hall

Figure 1.4 (C)
1 - 37
 Organizations in Each Sector
% of all
Service Sector Example Jobs
Education, San Diego Zoo, Arnold 25.8
Legal, Medical, Palmer Hospital
other
Trade (retail, Walgreen’s, Wal-Mart, 14.9
wholesale) Nordstrom’s
Utilities, Pacific Gas & Electric, 5.2
Transportation American Airlines
Professional and Snelling and Snelling, Waste 10.7
Business Management, Inc.
Services

Table 1.3
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 38
 Organizations in Each Sector
% of all
Service Sector Example Jobs
Finance, Citicorp, American Express, 9.6
Information, Prudential, Aetna
Real Estate
Food, Lodging, Olive Garden, Motel 6, Walt 8.5
Entertainment Disney
Public U.S., State of Alabama, Cook 4.6
Administration County

Total 78.8

Table 1.3
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 39
 Organizations in Each Sector
% of all
Other Sectors Example Jobs
Manufacturing General Electric, Ford, 11.2
Sector U.S. Steel, Intel
Construction Bechtel, McDermott 8.1
Sector
Agriculture King Ranch 1.4
Sector
Mining Sector Homestake Mining 0.5
Total 21.2

Table 1.3
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 40
 Changing Challenges
Traditional Reasons for Current
Approach Change Challenge
Ethics and Public concern over High ethical and
regulations pollution, corruption, social
not at the child labor, etc. responsibility;
forefront increased legal
and professional
standards
Local or Growth of reliable, low Global focus,
national cost communication international
focus and transportation collaboration

Lengthy Shorter life cycles; Rapid product

product growth of global development;
development communication; CAD, design
Internet collaboration

Figure 1.5
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 41
 Changing Challenges
Traditional Reasons for Current
Approach Change Challenge
Low cost Public sensitivity to Environmentally
production, environment; ISO 14000 sensitive
with little standard; increasing production; green
concern for disposal costs manufacturing;
environment; sustainability
free
resources
(air, water)
ignored
Low-cost Rise of consumerism; Mass
standardized increased affluence; customization
products individualism

Figure 1.5
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 42
 Changing Challenges
Traditional Reasons for Current
Approach Change Challenge
Emphasis on Recognition of the Empowered
specialized, employee's total employees;
often manual contribution; knowledge enriched jobs
tasks society

“In-house” Rapid technological Supply-chain

production; change; increasing partnering; joint
low-bid competitive forces ventures,
purchasing alliances

Large lot Shorter product life Just-In-Time

production cycles; increasing need performance;
to reduce inventory lean; continuous
improvement

Figure 1.5
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 43
 New Trends in OM
 Ethics
 Global focus
 Environmentally sensitive production
 Rapid product development
 Environmentally sensitive production
 Mass customization
 Empowered employees
 Supply-chain partnering
 Just-in-time performance

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 44

 Productivity Challenge
Productivity is the ratio of outputs (goods
and services) divided by the inputs
(resources such as labor and capital)

The objective is to improve productivity!

Important Note!
Production is a measure of output
only and not a measure of efficiency

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 45

 The Economic System
Inputs Transformation Outputs

Labor, The U.S. economic system Goods

capital, transforms inputs to outputs and
management at about an annual 2.5% services
increase in productivity per
year. The productivity
increase is the result of a
mix of capital (38% of 2.5%),
labor (10% of 2.5%), and
management (52% of 2.5%).

Feedback loop

Figure 1.6

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 46

 Improving Productivity at
Starbucks
A team of 10 analysts
continually look for ways
to shave time. Some
improvements:
Stop requiring signatures Saved 8 seconds
on credit card purchases per transaction
under $25
Change the size of the ice Saved 14 seconds
scoop per drink
New espresso machines Saved 12 seconds
per shot
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 47
 Improving Productivity at
Starbucks
A team of 10 analysts
continually look for ways
to shave time. Some
improvements:
Operations improvements have
Stop requiring signatures
helped StarbucksSaved 8 seconds
increase yearly
on credit card purchases perby
revenue per outlet transaction
$200,000 to
under $25 $940,000 in six years.
Change the sizeProductivity
of the ice hasSaved
improved by 27%,
14 seconds
scoop or about 4.5% per
peryear.
drink
New espresso machines Saved 12 seconds
per shot
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 48
 Productivity

Units produced
Productivity =
Input used

 Measure of process improvement

 Represents output relative to input
 Only through productivity increases
can our standard of living improve

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 49

 Productivity Calculations
Labor Productivity
Units produced
Productivity =
Labor-hours used

1,000
= = 4 units/labor-hour
250

One resource input  single-factor productivity

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 50

 Multi-Factor Productivity
Output
Productivity =
Labor + Material + Energy
+ Capital + Miscellaneous
 Also known as total factor productivity
 Output and inputs are often expressed
in dollars

Multiple resource inputs  multi-factor productivity

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 51

 Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day

Old labor 8 titles/day

productivity = 32 labor-hrs

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 52

 Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day

Old labor 8 titles/day

productivity = 32 labor-hrs = .25 titles/labor-hr

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 53

 Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day

Old labor 8 titles/day

productivity = 32 labor-hrs = .25 titles/labor-hr

New labor 14 titles/day

productivity = 32 labor-hrs

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 54

 Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day

Old labor 8 titles/day

productivity = 32 labor-hrs = .25 titles/labor-hr

New labor 14 titles/day

productivity = 32 labor-hrs = .4375 titles/labor-hr

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 55

 Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day

Old multifactor 8 titles/day

productivity = $640 + 400

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 56

 Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day

Old multifactor 8 titles/day

productivity = $640 + 400 = .0077 titles/dollar

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 57

 Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day

Old multifactor 8 titles/day

productivity = $640 + 400 = .0077 titles/dollar

New multifactor 14 titles/day

productivity = $640 + 800

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 58

 Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day

Old multifactor 8 titles/day

productivity = $640 + 400 = .0077 titles/dollar

New multifactor 14 titles/day

productivity = $640 + 800 = .0097 titles/dollar

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 59

 Measurement Problems
1. Quality may change while the
quantity of inputs and outputs
remains constant
2. External elements may cause an
increase or decrease in
productivity
 Precise units of measure may be
lacking

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 60

 Productivity Variables
1. Labor - contributes
about 10% of the
annual increase
2. Capital - contributes
about 38% of the
annual increase
3. Management -
contributes about
52% of the annual
increase
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 61
 Key Variables for Improved
Labor Productivity
1. Basic education appropriate for the
labor force
2. Diet of the labor force
3. Social overhead that makes labor
available
 Challenge is in maintaining and
enhancing skills in the midst of rapidly
changing technology and knowledge

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 62

 Labor Skills
About half of the 17-year-olds in the U.S. cannot
correctly answer questions of this type

Figure 1.7
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 63
 Investment and Productivity
10
Percent increase in productivity

0
10 15 20 25 30 35
Percentage investment

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 64

 Service Productivity
1. Typically labor intensive
2. Frequently focused on unique
individual attributes or desires
3. Often an intellectual task performed by
professionals
4. Often difficult to mechanize
5. Often difficult to evaluate for quality

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 65

 Productivity at Taco Bell
Improvements:
 Revised the menu
 Designed meals for easy preparation
 Shifted some preparation to suppliers
 Efficient layout and automation
 Training and employee empowerment
 New water and energy saving grills

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 66

 Productivity at Taco Bell
Results:
Improvements:

 Preparation
Revised the time
menucut to 8 seconds

 Management
Designed mealsspanforofeasy
control increased
preparation
from 5 to 30
 Shifted some preparation to suppliers
 In-store labor cut by 15 hours/day
 Efficient layout and automation
 Stores handle twice the volume with half
 the
Training
labor and employee empowerment
 Conserve
 New water300andmillion
energygallons
savingofgrills
water and
200 million KwH of electricity each year
saving $17 million annually

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 67

 Ethics and
Social Responsibility
Challenges facing
operations managers:
 Developing and producing safe,
quality products
 Maintaining a clean environment
 Providing a safe workplace
 Honoring stakeholder commitments

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 68

 Yield Management
Allocating resources to customers at
prices that will maximize yield or
revenue
1. Service or product can be sold in
advance of consumption
2. Demand fluctuates
3. Capacity is relatively fixed
4. Demand can be segmented
5. Variable costs are low and fixed costs
are high
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 69
 Yield Management Example
Room sales Demand
Curve
Potential customers exist who
100 are willing to pay more than the
$15 variable cost of the room,
but not $150

Passed-up Some customers who paid

contribution $150 were actually willing
Total 50 to pay more for the room
$ contribution
= (Price) x
(50
rooms)
= ($150 - Money left
$15) on the table
x (50)
= $6,750 $15 $150 Price
Variable cost Price charged
of room for room Figure 13.5
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 70
 Yield Management Example
Room sales Demand
Curve
Total $ contribution =
100 (1st price) x 30 rooms + (2nd price) x 30 rooms =
($100 - $15) x 30 + ($200 - $15) x 30 =
$2,550 + $5,550 = $8,100

60

30

$15 $100 $200 Price

Variable cost Price 1 Price 2
of room for room for room Figure 13.6
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 71
 Yield Management Matrix
Price
Tend to be fixed Tend to be variable
Quadrant 1: Quadrant 2:
predictable
Tend to be

Movies Hotels
Stadiums/arenas Airlines
Convention centers Rental cars
Duration of use

Hotel meeting space Cruise lines

Quadrant 3: Quadrant 4:
Tend to be
Uncertain

Restaurants Continuing care

Golf courses hospitals
Internet service
providers

Figure 13.7
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 72
 Making Yield Management
Work
1. Multiple pricing structures must
be feasible and appear logical to
the customer
2. Forecasts of the use and
duration of use
3. Changes in demand

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 73