CHAPTER 8
Demand and Capacity Management
This chapter has been designed to provide the reader with a clear understanding of:
a) the perishability factor in service industries
b) the nature of capacity and demand
c) the strategic options in managing demand and capacity
d) how yield management assists the alignment of demand and
capacity
e) how waiting and queuing can be addressed by service
management
Tutors should start by ensuring that students understand the basic problem, that of perishability. For some reason students do experience difficulty over this concept. They see the airline seat, the hotel bedroom as physically being there the following day, so how can it be perishable! Given that perishability stems from an excess of capacity over demand, tutors should examine that along with the other three conditions service organisations face:
• excess demand
• demand exceeds optimum capacity • demand and capacity well balanced
Figure 8.1 offers a framework for discussion. Students could be encouraged to think of other services where patterns of optimum
capacity, desirability of maximum capacity, and likely effects may differ. What is pertinent here is the word ‘desirability’ in terms of capacity
utilisation. From whose perspective are we considering this – management, employees, customers?
To further the implications of figure 8.1 tutors should illustrate the differing capacity make up of services emphasising the degree of
flexibility that implies or offers for whatever the service type, eg should trains be longer, should medical care be available in portacabins?
On the other side is demand (with capacity implications). How variable and predictable is it? Service examples should be encouraged. Which services follow the demand patterns in figure 8.2? Are there other patterns worthy of consideration?
The section on managing demand and capacity brings us to the practical steps or measures that can be taken by service organisations.
• The capacity options should be discussed against a number of criteria. Tutors may wish to list their own or consider practicality, desirability, profitability, relevance etc.
• Altering demand represents more of a challenge as it involves
changing or disrupting what may be established consumption/usage patterns. Price is regarded as the most potent tool for shifting demand for services.
By altering either or both, services aim to bring capacity and demand more into alignment.
Four options are available to service organisations: • Provide
• Match • Influence • Control
Each option should be explained in conjunction with figure 8.3. Students should be encouraged to identify service situations or types for which each option would be appropriate.
Turning to yield (revenue) management which services increasingly tend to be doing for managing demand and capacity, tutors should spend some time explaining where it appears to be ‘successfully applied’ and where it remains something of a challenge. Tutors should emphasise the key requirements for yield management to work, namely a fixed length of time within which the service is consumed. The text cites golf and restaurants where this is currently not the case. What other services come into this category and how could the variability and unpredictability of consumption of these services be overcome?
Just how yield management works merits close attention. The concepts of time and rate fences are integral to understanding yield management. In yield measurement the objective is one of maximising revenue given the nature and amount of available capacity. To achieve this, decisions need to be made over how and to whom that capacity is to be marketed. Students should be thinking of particular services and the challenge that revenue maximisation poses.
But what of customers? Does seeking to maximise revenues bring organisations into potential conflict with customers? Whose interests appear to prevail? Is revenue or yield management fair? The following articles should assist discussion:
Kimes, S.E. (1994), Perceived Fairness of Yield Management, The Cornell HRA Quarterly, Figure, 22-29.
Wirtz, J., Kimes, S.E., Ho Pheng Theng, J., and Patterson, P. (2003),
Revenue Management: Resolving Potential Customer Conflicts, Journal of
Revenue and Pricing Management, 2, 3, 216-226.
The final section deals with waiting and queuing. It perhaps ‘enjoys’ a cinderella status in the service literature, unavoidable, unattractive, annoying, frustrating and time consuming. However we do spend a substantial part of our life waiting and queuing, whether it be in a car, on the phone, in the post office etc. Why is this so? Can/should anything be done to reduce the time spent? If we regard it as wasted what can be done to mitigate that effect? Making a slide of the bullet points under Queuing: a behavioural perspective, usually offers scope for a lively discussion.
Assignment 8.1 : A Simple Case of Demand and Capacity Management
A hotel has 2 rooms:
Standard Executive
The pricing structure is as follows:
• Standard: £108 weekday, £90 weekend. (Weekend rate requires a 3-day stay that begins on a Friday).
• Executive : £180 weekday and weekend.
A number of reservation requests has been received.
Room Type Day of Arrival Length of Stay Room Rate
Standard Executive Executive Standard Standard Executive Friday Monday Monday Friday Sunday Sunday 2 2 1 3 2 1 £108 £180 £180 £90 £108 £180
• Complete the 2 tables below, one for customers treated on a first come, first served basis and, the other with the benefit of hindsight.
First Come First Served
Friday Saturday Sunday Monday Tuesday
Standard Executive
Total Revenue
Optimal
Friday Saturday Sunday Monday Tuesday
Standard Executive
Total Revenue
• From this simple example what conclusions would you draw about managing demand and capacity in service situations?
Adapted from Kimes, S (2002) Tourism Revenue Management Programme, Stirling Management Centre, 27-29 November.
Assignment 8.2 : The Revenue Implications of a Hotel Group Booking
A party of holiday makers has requested 25 single rooms at a hotel for a period of 14 days. They are willing to pay £65 per room (inclusive of breakfast). The hotel has 80 single rooms and is considering the financial implications of the group request. The following information has been made available to assist the hotel in arriving at a decision:
Room Sales and Average Daily Room Rate for same period last year
Day Room Sales Average Daily Room Rate £s 1 2 3 4 5 6 7 8 9 10 11 12 13 14 69 73 67 74 61 63 65 68 65 68 74 64 68 62 74 83 86 88 75 72 74 89 79 86 88 77 82 69 Average spend on breakfast in the hotel is £13 per person. Average spend on dinner in the hotel is £25 per person.
Net profit on food and beverage is around 25%.
The group stated that 22 would have breakfast and 5 for dinner. About 90% of all guests normally take breakfast and 35% usually dine at the hotel.
Calculate the financial implication of the group request. What decision would you arrive at?
Assignment 8.3 : Revenue Management
A manager of an inter-city train company has presented you with the following information:
Time of day Weekday train demand: Number of customers Train capacity: Number of seats 6:30 50 400 7:15 140 “ 8:00 320 “ 8:45 480 “ 9:00 580 “ 9:30 430 “ 10:15 390 “ 11:00 300 “ 11:45 250 “ 12:30 180 “ 13:15 140 “ 14:00 200 “ 14:45 170 “ 15:30 220 “ 16:15 420 “ 17:00 480 “ 17:45 520 “ 18:30 540 “ 19:15 400 “ 20:00 300 “ 20:45 220 “ 21:30 180 “ 22:15 170 “ 23:00 180 “
As input to a wider report the manager wants you to address the questions below.
a) Create a graph of the above data
b) What are the two basic problems highlighted by your graph?
c) What actions would you propose, and why, to address these problems?
d) How successful/practical do you believe your suggested actions are
likely to be?
e) Following on from d) what impact (in the medium to longer term) do
you believe your actions might have on train usage and other forms of travel?
