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

PerceivedService

Expected Service

CUSTOMER

COMPANY

CustomerGap

Gap 1

Gap 2

Gap 3

External Communications

to CustomersGap 4ServiceDelivery

Customer-Driven Service Designs and

Standards

Company Perceptions of Consumer Expectations

GAPS MODEL

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

TAJ Inner Circle• MEMBERSHIP BENEFITSBesides earning points on all your eligible transactions, as a Taj InnerCircle member your check-in and departure

formalities will be easier, faster and more flexible. You will be privy to a series of member-special offers which will help you enjoy greater value from your transactions at the Taj. To enjoy your membership benefits we request you to quote your Taj InnerCircle membership number when making reservations and present the card at check-in and while settling your bills.

Membership benefits include: • 10% off on all Taj Holidays offers when you make your reservations directly with us, at the hotels or at Taj

Reservations Worldwide. When you reach Silver level, you will enjoy the following benefits at participating hotels. • 10% off on the Best Available Rate (BAR) Plan for Silver and Gold level members at all participating hotels

where BAR Plan is available • Double occupancy benefits for spouse at no extra charge at hotels in India (except for the Taj Safaris

Lodges) on bookings on rack, BAR or negotiated corporate rates • You will be greeted with flowers and fruits in the room • Enjoy access to Health Club and complimentary steam bath or sauna when you stay with us • 10% off on telephone and fax usage • 15% off on laundry services • 20% off on Business Centre services • 20% off on all treatments at Jiva Spas in India, subject to presenting your membership card When you reach Gold, additionally, you will enjoy: • A 5% off on rack rate when you charter a Taj Air aircraft (Falcon 2000 & Falcon 2000EX EASy, Avanti

P.180); fly 20 hours or more and enjoy 10% off the rack rate. • A non-alcoholic welcome drink on arrival at the hotel • Your preferred daily newspapers, when you stay at our metro hotels

Fare GameROOMS AND RATES• SUPERIOR ROOM DOUBLE BED CITY

INR 10,625.00 • SUPERIOR ROOM KING BED CITY INR

10,625.00 • SUPERIOR ROOM QUEEN BED CITY INR

10,625.00 • SUPERIOR ROOM TWIN BED CITY INR

10,625.00 • SUPERIOR ROOM KING BED SEA INR

11,900.00 • SUPERIOR ROOM QUEEN BED SEA INR

11,900.00 • DELUXE ROOM KING BED CITY VIEW

INR 13,175.00 • DELUXE ROOM TWIN BED CITY VIEW

INR 13,175.00 • DELUXE ROOM QUEEN BED CITY INR

13,175.00 • DELUXE ROOM KING BED SEA VIEW INR

14,450.00 • DELUXE ROOM QUEEN BED SEA VIEW

INR 14,450.00 • TAJ CLUB ROOM KING/DBL/QUEEN INR

18,063.00 • TAJ CLUB ROOM TWIN BED CITY INR

18,063.00

LAST MINUTE RATE

BREAKFAST INCLUSIVE RATE • SUPERIOR ROOM DOUBLE BED CITY

INR 12,500.00 • SUPERIOR ROOM KING BED CITY

INR 12,500.00 • SUPERIOR ROOM QUEEN BED CITY

INR 12,500.00 • SUPERIOR ROOM TWIN BED CITY

INR 12,500.00 • SUPERIOR ROOM KING BED SEA INR

14,000.00 • SUPERIOR ROOM QUEEN BED SEA

INR 14,000.00 • DELUXE ROOM KING BED CITY VIEW

INR 15,500.00 • DELUXE ROOM TWIN BED CITY VIEW

INR 15,500.00 • DELUXE ROOM QUEEN BED CITY

INR 15,500.00 • DELUXE ROOM KING BED SEA VIEW

INR 17,000.00 • DELUXE ROOM QUEEN BED SEA VIEW

INR 17,000.00 • TAJ CLUB ROOM KING/DBL/QUEEN

INR 21,250.00 • TAJ CLUB ROOM TWIN BED CITY

INR 21,250.00

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

• ResourcesNature 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.

• 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.

• 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.

Demand Too High Demand Too LowShift Demand

Adjusting Capacity To Meet Demand

• Stretch time, labor, facilities and equipment.

• Cross-train employees.

• Hire part-time employees.

• Request overtime work from employees.

• Rent or share facilities.

• Rent or share equipment.

• Subcontract or outsource activities.

• Outsource.

• Perform maintenance, renovations.

• Schedule vacations.

• Schedule employee training.

• Lay off employees.

Demand Too High Demand Too LowAdjust Capacity

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%

3. No discount but the occupancy is 40% i.e 80 rooms

Yield = 1000 X 80 /2,00,000 = 40%

4. 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.