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Inventory Management in Services

In service operations, the "product" sold is considered highly perishable. As discussed in the previous chapter, hotel rooms that are unoccupied for one night cannot be saved for another night. Similarly, airline seats on a plane that.are not used on a given date cannot be saved for use at a future time

Yield Management or Revenue Management

Because the product sold in service operations is so perishable, the approach to managing te sale of the product is similar to that for the single-period inventory problem. As discussed in Chapter 15, a service should have certain characteristics in order to  take full advantage of yield management, including a cost structure that consists of high fixed and low-variable costs. Examples of such services, as mentioned earlier, include airlines, hotels, and car  rental co panties. For these types of services, profits are directly  related to sales because variable costs, as a percentage of sales, are very low. Consequently, the goal for these firms is to maximize sales or revenues by maximizing capacity utilization, even if it means selling some of the available capacity at reduced prices-as long as these prices are greater than the variable cost. For example, if the variable cost to clean and restock a hotel room with towels. soap. shampoo, and so forth is $25. then any room rate  greater than $25 will contribute to profit. Thus, it would be better to let a hotel guest have the room for $50 for a night than to let the room remain empty, even if the regular or "rack" rate is S 135 per night. The challenge for managers of these types of services is to determine what percentage of available capacity to allocate to different prices. On the one hand, substantial amounts of capacity can usually be sold in advance at rates that are significantly discounted. For