Category Archives: Aggregate Planning

High-Fixed and Low- Variable Costs

High-Fixed and Low- Variable Costs

High-fixed and low-variable co ts allow a firm to offer significant discounts while still being able to cover variable costs. When a service firm has this type of cost profile, profits are directly related to sales. In other words, the more sales generated. the more profits made. For example, if the variable cost associated with having a hotel room cleaned is estimated at $25 (which would include the labor to clean the room and the replacement of any material that was consumed. such as soap and shampoo, as well as fresh sheets and towels),  then any price that the hotel could get for the room above the S25 variable cost would be financially beneficial (as opposed to leaving the room empty for the night).

YIELD MANAGEMENT AT NATIONAL CAR RENTAL

YIELD MANAGEMENT AT NATIONAL CAR RENTAL

Faced with possible liquidation in 1993 by General Motors, its parent company, National Car Rental was under significant pressure to produce both a substantial and sustainable profit. To accomplish this, management decided to adopt a comprehensive revenue management system. Instead of a constant car rental price all the time, the revenue management system demonstrated that a variable pricing policy that would fluctuate with demand would result in significantly· higher profits.

The revenue management system was implemented in two phases. The first phase was introduced in July 1993, with the goal of showing immediate profits, which it did. The second phase focused on developing a state-of-the art revenue management system for the car rental industry. This phase was successfully implemented in July 1994. As a result of revenue management system, profits were significantly increased, and General Moors was able to sell National Car Rental in 1995 for 3Il amount in excess of $1 billion.

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In order to take maximum advantage of yield management, a service should have the following characteristics: (a) the ability to management its markets. (b) high-fixed and low variable costs, (c) product perishability, and (d) the ability to presell capacity.

signs, Symbols, and Artifacts

signs, Symbols, and Artifacts

These refer to aspects of the service operation that have social significance, For example, bank buildings often include columns and stone to gave the feeling of security. The offices of large law firms and consulting practices frequently are done in dark woods and thick carpets to connote success and traditional values  waters in tuxedos and waiters in white shirts. hats, and aprons each gives certain signals term of establishing the customers’ expectations of the operation.

Yield Management

Yield Management

Aggregate planning in services is very different from that in manufacturing. This is due, in large part, to the fact that the capacity of service operations is often viewed as highly perishable  because it cannot be saved or inventoried for future use. For example, the empty seats in a restaurant on Monday morning cannot be saved for use on Saturday night when  it is very busy. Thus. services do not have the luxury to choose between chase and level strategies. as do manufacturing firms, but rather always must use the chase strategy. In other words. capacity must be available when the  customer wants it.  However, even within this constraint. the service manager has considerable latitude n planning. For those services that have high fixed costs and low variable costs. it is important  o  maximize capacity utilization even if it means reducing prices to attract additional customers during slow periods of demand. This method, known as yield management or revenue management, attempts to simultaneously integrate demand management (by changing prices) and supply management (by controlling availability). The goal of yield management is to sell all available capacity. even at discount prices, but. at the same time. not turn away a full-paying customer because the capacity had been previously sold to a bargain hunter.  Examples of Industries that apply yield management concept. include airlines that offer di -counts for advanced reservations and car rental agencies and hotels that offer discounts on  weekend. (See OM in Practice on National Car Rental.) The concept of yield management is introduced in this chapter: the detailed mathematical theory behind yield management is
explained in the ne t chapter. It also is mentioned in the forecasting chapter. After yield management has been applied to a service operation, the service manager would then determine the aggregate workforce requirements in a manner similar to that described previously for a manufacturing company.

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Aggregate Planning Applied to Services: Tucson Parks and Recreation Department

Aggregate Planning Applied to Services: Tucson Parks and Recreation Department 

Charting and graphic techniques are also very useful for aggregate planning in service applications. The following example shows how a city's parks and recreation department  could use the alternatives of full-time employees. part-time employ and. ubcontractingto meet its commitment to provide service to the city. The Tucson Parks and Recreation Department is responsible for developing and maintaining open space, all public recreational programs. adult sports leagues. golf courses, tennis courts, pools, and so forth. There are 336 Ill-tire-equivalent employee, (FTEs). Of these, 216 are full-time permanent personnel who provide the administration and year round maintenance to all areas. The remaining 120 year-long FTE positions are part time, with about 75 percent of them being used during the summer and the remaining 25 percent being used in the fall, winter. and spring seasons. The 75 percent (or 90 Fre positions)

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show up as approximately 800 part-time summer jobs: lifeguards, baseball umpires, and instructors in summer programs for children. The 800 part-time jobs are derived from 90 Fl'Es because e many of these positions last only for a month or two while the FTEs are based on employment for an entire year. Currently, the parks and recreation w re that is subcontracted amounts to less than S100.000. This is for the golf and tennis pros and for grounds  maintenance at the library and veterans cemetery. Because of the nature of city employment, the probable bad public image. and civil service   rules. the option to hire and fire full-time help daily and/or weekly to meet seasonal demand  is pretty much out of the question. However, temporary part-time help is authorized.

and traditional. Also, it is virtually impossible to have regular (full-time) staff for all of the summer jobs. During the summer months, the approximately 800 part-time employees are staffing many programs that occur simultaneously, prohibiting level scheduling over a normal 40-hour week. Also, a wider variety of skills are required than can be expected from full-time employees (e.g., umpires; coaches; lifeguards; teachers of ceramics, guitar, karate, belly dancing, and yoga). Under t ese conditions, the following three options are open to the department in its
aggregate planning.

I. The present method, which is to maintain a medium-level full-time staff and schedule work during off seasons (such as rebuilding baseball fields during the winter months) and to use part-time help during peak demands