Managing Capacity

Service capacity
Objective:

match the level of operations with the level of demand, finding the best balance between cost and service levels. Capacity is perishable
Non- inventoriable High contact brings uncertainty (time, quality) intangibility brings difficulty into the measurement of capacity
2

Bad capacity decisions

Increasing

the wrong kind of capacity

(airlines) Not increasing all round capacity (hotel) Not considering competitive reaction (Disney) Undercutting ones own service (package delivery)
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Strategies for capacity management

Control

supply: Chase strategy vary capacity to follow changes in demand

Low skill, training, high turnover Seasonal fluctuations

Level

capacity: peak demand

Skilled employees, long term success

Alter

demand: proactive
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Strategies for Matching Supply and Demand for Services

DEMAND STRATEGIES SUPPLY STRATEGIES

Developing complementary services Developing reservation systems

Partitioning demand Sharing capacity Establishing price incentives Promoting off-peak demand Crosstraining employees Using part-time employees Yield management

Increasing customer participation

Scheduling work shifts

Creating adjustable capacity

Queuing

Hotel Overbooking Decision Matrix

Number of Reservations Overbooked
NoProbshows ability 0 .07 1 .19 2 .22 3 .16 4 .12 5 .10 6 .07 7 .04 8 .02 9 .01 Expected loss, $ 0 0 40 80 120 160 200 240 280 320 360 121.60 1 2 3 4 5 100 200 300 400 500 0 100 200 300 400 40 0 100 200 300 80 40 0 100 200 120 80 40 0 100 160 120 80 40 0 200 160 120 80 40 240 200 160 120 80 280 240 200 160 120 320 280 240 200 160 91.40 87.80 115.00 164.60 231.00 6 600 500 400 300 200 100 0 40 80 120 311.40 7 8 9 700 800 900 600 700 800 500 600 700 400 500 600 300 400 500 200 300 400 100 200 300 0 100 200 40 0 100 80 40 0 401.60 497.40 560.00

Controlling Supply
Customer

participation: capacity just when it is needed.

Lower price, faster service Less control over quality of service

Creating

adjustable capacity: through design (i.e. Layout)

Controlling Supply
Maximizing

efficiency:

only essential tasks at peak demand periods; shift some processes to slack periods increase the use of effective capacity: identify tasks done by people with higher skills
Cross

training of employees: creates flexible capacity to meet localized peaks Subcontracting: expand capacity by using the capacity of others.
Subcontractor quality; subcontractor capacity
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Controlling Supply
Expansion

in ante Sharing capacity

Lease underutilized capacity to others Share capacity for ancillary services (ground personnel) Share capacity of equipment (dialysis machine, ambulance, police, fire)

Controlling Supply
Using

part-time employees

Minimal skill (training) requirements Ready pool of labor availability Back-room operations; least customer contact
Alternatively

Place off-duty personnel on standby Longer working hours for full time employees

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Controlling Supply
Scheduling

Staggered overlapping shifts Daily workshift scheduling Weekly workforce scheduling with 2 consecutive days-off constraint

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Strategies for Matching Supply and Demand for Services

DEMAND STRATEGIES SUPPLY STRATEGIES

Developing complementary services Developing reservation systems

Partitioning demand Sharing capacity Establishing price incentives Promoting off-peak demand Crosstraining employees Using part-time employees Yield management

Increasing customer participation

Scheduling work shifts

Creating adjustable capacity

Queuing

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Yield Management
Using

reservation systems Overbooking Partitioning demand

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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
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Seasonal Allocation of Rooms by Service Class for Resort Hotel

Percentage of capacity allocated to different service classes First class 30% 20% 20% 30% 20%

Standard 60% Budget 10% Peak (30%) Summer

50%

50%

30% Shoulder (20%) Fall

50%

30% Shoulder (10%) Spring

Off-peak (40%) Winter

Percentage of capacity allocated to different seasons

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Demand Control Chart for a Hotel

300
Expected Reservation Accumulation

250
Reservati ons

2 standard deviation control limits

200 150 100 50 0

1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81

Days before arrival

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