Managing Demand And

Capacity
(Yield Management)
 Overview
• Theoretical concept.
• Business perspective.
• Corporate Outlook: Taj Mahal Palace And Tower,
Mumbai
• The Underlying Issue: Lack of Inventory
Capability
• Understanding Capacity Constraints
• Understanding Demand Patterns
• Strategies for Matching Capacity and Demand
• Yield Management
• Conclusion
 Theoretical Concept
• Demand
– The amount of a particular economic
good or service that a consumer or
group of consumers will want to
purchase at a given price.
– The demand curve is usually
downward sloping, since consumers
will want to buy more as price
decreases.
– Demand for a good or service is
determined by many different factors
other than price, such as the price of
substitute goods and
complementary goods.
– In extreme cases, demand may be
completely unrelated to price, or
nearly infinite at a given price.
– Along with supply, demand is one of
the two key determinants of the
market price.
 Theoretical Concept

• Capacity

– Capacity is the ability to hold, receive or absorb, or a

measure thereof, similar to the concept of volume.
– Capacity (Economics), the point of production at which a
firm or industry's average (or "per-unit") costs begin to rise,
usually because some factor is fixed (often capital or land).
– Capacity (Law), the legal ability to engage in certain acts,
such as making a contract.
– In decision theory, a capacity is a subjective measure of
likelihood of an event, similar to a membership function in
fuzzy logic.
 Business Perspective
GAPS MODEL
Expected
Service
CUSTOMER
Customer
Gap
Perceived
Service

External
COMPANY Service
Communications
Delivery Gap 4 to Customers
Gap 3
Gap 1 Customer-Driven
Service Designs and
Standards
Gap 2
Company Perceptions
of Consumer
Expectations
 Business Perspective

• Customer Gap:
– Difference Between Customer Expectations And Perceptions
• Provider Gap 1 (The Knowledge Gap):
– Not Knowing What Customers Expect
• Provider Gap 2 (The Service Design & Standards Gap):
– Not Having The Right Service Designs And Standards
• Provider Gap 3 (The Service Performance Gap):
– Not Delivering To Service Standards
• Provider Gap 4 (The Communication Gap):
– Not Matching Performance To Promises
 Corporate outlook

The Taj Mahal Palace And Tower,

Mumbai
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LAST MINUTE RATE

 The Underlying Issue: Lack Of
Inventory Capability

• Four basic Conditions:

1. Excess Demand.
2. Demand Exceeds Optimum Capacity.
3. Demand And Supply Are Balanced At The
Level Of Optimum Capacity.
4. Excess Capacity.
The Underlying Issue: Lack Of
Inventory Capability
 Capacity Constraints
• Resources
Nature of the constraint Type of service
Time Legal
Consulting
Accounting
Medical
Labor Law firm
Accounting firm
Consulting firm
Health clinic
Equipment Delivery services
Telecommunication
Utilities
Health club
Facilities Hotels
Restaurants
Hospitals
Airlines
Schools
Theaters
Churches
 Capacity Constraints
• Utilization
– Optimal versus Maximum Use of Capacity.
– Optimal = Maximum Capacity
• Ex., Football Game.
– Optimal < Maximum Capacity
• Ex., University Class Room.
 Demand Patterns
• Charting demand patterns
– Ex., Automobile Service Station.
• Predictable cycles
– Ex., A Fast Food Joint.
• Random demand fluctuations
– Ex., Medical Service in Case Natural Calamity.
• Demand patterns by market segment
– Ex., A Aerobic Center or Gym.
 Finding Solutions

• Matching Capacity And Demand.

– Shifting Demand To Match Capacity.
– Adjusting Capacity To Meet Demand.
– Combined Demand And Capacity Strategies
– Yield Management (An Approach)
 Shifting Demand To Match
Capacity.
Demand Too High Shift Demand
• Use signage to
communicate busy days
and times.
• Offer incentives to
customers for usage
during non-peak times.
• Take care of loyal or
“regular” customers first.
• Advertise peak usage
times and benefits of non-
peak use.
• Charge full price for the
service--no discounts.
Demand Too Low
• Use sales and advertising to
increase business from current
market segments.
• Modify the service offering to
appeal to new market segments.
• Offer discounts or price
reductions.
• Modify hours of operation.
• Bring the service to the
customer.
 Adjusting Capacity To Meet
Demand
Adjust Capacity
Demand Too High Demand Too Low
• Stretch time, labor, facilities • Perform maintenance,
and equipment. renovations.
• Cross-train employees.
• Schedule vacations.
• Hire part-time employees.
• Request overtime work from • Schedule employee training.
employees. • Lay off employees.
• Rent or share facilities.
• Rent or share equipment.
• Subcontract or outsource
activities.
• Outsource.
 Yield Management
• Concept:
– Revenue Management.
– The process of allocating the right type of capacity to
the right kind of customer at the right price so as to
maximize revenue or yield.
• Basis:
– Balancing capacity Utilization.
– Pricing
– Market segmentation
– Financial Return
• Aim :
– To produce the best possible financial return from a
limited available capacity.
 Yield Management
• Implementation:
– Mathematical model:
Yield= actual revenue/potential revenue
Where,
Actual revenue = actual capacity used X average actual price.
Potential revenue = total capacity X maximum price
– Requirements:
• Different Market segments.
• Price Sensitivity.
– Basis:
• High first:- Ex., A football game or Music Concert.
• Low first:- Ex., Airline Booking.
 Real Time Example
• Hotel Industry
• 200 room Hotel with max. room rate of Rs.1000 per room
per night.
1. Potential Revenue = 1000 X 200 = Rs.2,00, 000 lac
2. All rooms at discount @ 50% i.e Rs.500 per room per
night and full occupancy.
Yield = 500 X 200 / 2,00, 000 = 50%
4. No discount but the occupancy is 40% i.e 80 rooms
Yield = 1000 X 80 /2,00,000 = 40%
6. 40% rooms i.e 80 @ Rs.1000 and 120 rooms @ Rs.500
Yield = (1000 X 80 + 120 X 500) / 2,00,000 = 70%
 Conclusion

• No precise Calculation.
• It is a mixture of experience and numbers.
• It is an art as well as science.