Aggregate Planning

(session 1,2)

Outline
; The Planning Process
; The Nature of Aggregate Planning
; Aggregate Planning Strategies
; Capacity Options
; Demand Options
; Mixing Options to Develop a Plan

; Methods for Aggregate Planning

; Graphical Methods
; Mathematical Approaches
; Comparison of Aggregate Planning Method

Outline Continued
; Aggregate Planning in Services
; Restaurants
; Hospitals
; National Chains of Small Service
Firms
; Miscellaneous Services
; Airline Industry

; Yield Management
3

Aggregate Planning
Determine the quantity and timing of
production for the immediate future
; Objective is to minimize cost over the
planning period by adjusting
; Production rates
; Labor levels
; Inventory levels
; Overtime work
; Subcontracting rates
; Other controllable variables
4

Aggregate Planning
Required for aggregate planning
; A logical overall unit for measuring sales
and output
; A forecast of demand for an intermediate
planning period in these aggregate terms
; A method for determining costs
; A model that combines forecasts and
costs so that scheduling decisions can
be made for the planning period
5

The Planning Process

Long-range plans
(over one year)
Research and Development
New product plans
Capital investments
Facility location/expansion
Top
executives

Operations
managers

Intermediate-range plans
(3 to 18 months)
Sales planning
Production planning and budgeting
Setting employment, inventory,
subcontracting levels
Analyzing operating plans

Short-range plans
(up to 3 months)
Operations
managers,
supervisors,
foremen
Responsibility

Job assignments
Ordering
Job scheduling
Dispatching
Overtime
Part-time help
Planning tasks and horizon

Aggregate Planning

Jan
150,000

Apr
100,000

Jul
180,000

Quarter 1
Feb
120,000
Quarter 2
May
130,000
Quarter 3
Aug
150,000

Mar
110,000

Jun
150,000

Sep
140,000
7

Aggregate Planning
Aggregate planning is a part of larger
production planning system;
therefore understanding the
interfaces between plan and several
internal and external factors is
essential for effective aggregate
planning.

Aggregate Planning

Aggregate Planning
(Required Inputs to the Production
Planning System)
Competitors
behavior
External
capacity

Current
physical
capacity

Raw material
availability
Planning
for
production

Current
workforce

Inventory
levels

Market
demand

External
to firm

Economic
conditions

Activities
required
for prod.

Internal
to firm
10

Few Aggregate Planning

Strategies
1. Use inventories to absorb changes in
demand
2. Accommodate changes by varying
workforce size
3. Use part-timers, overtime, or idle time to
absorb changes
4. Use subcontractors and maintain a stable
workforce
5. Change prices or other factors to
influence demand
11

Capacity Options
1. Changing inventory levels
; Increase inventory in low demand
periods to meet high demand in
the future
; Increases costs associated with
storage, insurance, handling,
obsolescence, and capital
investment 15% to 40%
; Shortages can mean lost sales
due to long lead times and poor
customer service
12

Capacity Options
2. Varying workforce size by hiring or
layoffs
; Match production rate to demand
; Training and separation costs for
hiring and laying off workers
; New workers may have lower
productivity
; Laying off workers may lower morale
and productivity
13

Capacity Options
3. Varying production rate through
overtime or idle time
; Allows constant workforce
; May be difficult to meet large
increases in demand
; Overtime can be costly and may
drive down productivity
; Absorbing idle time may be
difficult
14

Capacity Options
4. Subcontracting
; Temporary measure during
periods of peak demand
; May be costly
; Assuring quality and timely
delivery may be difficult
; Exposes your customers to a
possible competitor

15

Capacity Options
5. Using part-time workers
; Useful for filling unskilled or low
skilled positions, especially in
services

16

Demand Options
6. Influencing demand
; Use advertising or promotion
to increase demand in low
periods
; Attempt to shift
demand to slow
periods
; May not be
sufficient to
balance demand
and capacity
17

Demand Options
7. Back ordering during highdemand periods
; Requires customers to wait for an
order without loss of goodwill or
the order
; Most effective when there are few
if any substitutes for the product
or service
; Often results in lost sales
18

Demand Options
8. Counter seasonal product and
service mixing
; Develop a product mix of
counterseasonal items
; May lead to products or services
outside the companys areas of
expertise

19

Methods for Aggregate

Planning
; A mixed strategy may be the best
way to achieve minimum costs
; There are many possible mixed
strategies
; Finding the optimal plan is not
always possible

20

Mixing Options to
Develop an aggregate Plan
; Chase strategy
; Match output rates to demand
forecast for each period
; Vary workforce levels or vary
production rate
; Favored by many service
organizations

21

Mixing Options to
Develop a Plan
; Level strategy
; Daily production is uniform
; Use inventory or idle time as buffer
; Stable production leads to better
quality and productivity

; Some combination of capacity

options, a mixed strategy, might be
the best solution
22

Graphical Methods
; Popular techniques
; Easy to understand and use
; Trial-and-error approaches that do
not guarantee an optimal solution
; Require only limited computations
23

Graphical Methods
1. Determine the demand for each period
2. Determine the capacity for regular time,
overtime, and subcontracting each period
3. Find labor costs, hiring and layoff costs,
and inventory holding costs
4. Consider company policy on workers and
stock levels
5. Develop alternative plans and examine
their total costs
24

Example 1
ABC a manufacturer of roofing tiles has
developed monthly Forecasts for roofing tiles
and presented the period January-June in the
table 1.
To represent the projected demand, ABC also
draws a graph (figure 1) that charts the daily
demand each month. The dotted line across the
chart represents the production rate required to
meet average demand which is computed by
dividing the total expected demand by number of
production days.
25

Table 1: Expected demand and number of production days.

Production
Days

Demand Per Day

(computed)

Month

Expected Demand

Jan

900

22

41

Feb

700

18

39

Mar

800

21

38

Apr

1,200

21

57

May

1,500

22

68

June

1,100

20

55

6,200

124
26

Total expected demand

Average
requirement = Number of production days

Production rate per working day

6,200
= 50 units per day
124
Forecast demand

70
60

Level production using average

monthly forecast demand

50
40
30

Jan

Feb

Mar

Apr

May

June

22

18

21

21

22

20

Figure 1

= Month
= Number of
working days
27

Possible Strategy 1
Constant Workforce

Cost Information
Inventory carrying cost

$ 5 per unit per month

Subcontracting cost per unit

$10 per unit

Average pay rate

$ 5 per hour ($40 per day)

Overtime pay rate

Labor-hours to produce a unit
Cost of increasing daily production rate
(hiring and training)
Cost of decreasing daily production rate
(layoffs)

$ 7 per hour
(above 8 hours per day)
1.6 hours per unit
$300 per unit
$600 per unit

Table 2
28

Possible Strategy 1
Cost Information
Production at
Month carry
50 Units
Inventory
cost per Day
Subcontracting
cost
per unit
Jan
1,100

Feb pay rate 900

Average
Mar

1,050

Overtime pay rate

Apr
1,050
Labor-hours to produce a unit
May
1,100

Monthly
Demand Inventory
Ending
Forecast $ 5Change
per unit per Inventory
month
900
700
800
1,200
1,500

Cost of increasing daily production rate

June
1,000
1,100
(hiring and training)
Cost of decreasing daily production rate
(layoffs)

$10 +200
per unit

200
$ 5 per
hour ($40 per
day)
+200
400
+250
650
$ 7 per
hour
(above 8 hours per day)
-150
500
1.6 hours per unit

-400

$300 per unit

-100

$600 per unit

100

0
1,850

Total units of inventory carried over from one t workforce

tan = 1,850 units
s
n
o
Table 13.3
c
monthnto
the
next

Pl a 1
Workforce required to produce 50 units per day = 10 workers
29

Possible Strategy 1
Monthly
Costs
Calculations
Cost Information
Production at
Demand
Inventory
Ending
Month carry
50
Units
Forecast
Inventory
$ 5Change
perunits
unit per
month
Inventory
cost per Day $9,250
Inventory
carrying
(= 1,850
carried
x $5
unit)
$10
per unit
Subcontracting
cost
per unit
Jan
1,100
900 per
+200
200
Regular-time
labor
49,600
x $40per
per
$ 5 workers
per
hour ($40
day)
Feb pay rate
900
700 (= 10
+200
400
Average
124 days) 650
Mar
1,050
800 day x+250
Overtime pay rate

Other
Apr costs (overtime,
1,050
1,200
hiring,
layoffs,
Labor
-hours
to produce a unit
May
1,100
1,500
0
subcontracting)
Cost of increasing daily production rate
June
1,000
1,100
Total
cost
$58,850
(hiring
and training)
Cost of decreasing daily production rate
(layoffs)

$ 7 per hour
(above 8 hours per day)
-150
500
1.6 hours per unit

-400

$300 per unit

-100

$600 per unit

100

0
1,850

Total units of inventory carried over from one

Table 13.3
month to the next = 1,850 units
Workforce required to produce 50 units per day = 10 workers
30

Possible Strategy 1
Cumulative demand units

7,000
6,000
5,000
4,000

Reduction
of inventory
6,200 units

Cumulative level
production using
average monthly
forecast
requirements

3,000
2,000

Cumulative forecast
requirements

1,000

Excess inventory

Jan

Feb

Mar

Apr

May

June

Figure 2
31

Possible Strategy 2
Subcontracting

Month
Jan
Feb
Mar
Apr
May
June

Expected Demand
900
700
800
1,200
1,500
1,100
6,200

Production
Days
22
18
21
21
22
20
124

Demand Per Day

(computed)
41
39
38
57
68
55

Minimum requirement = 38 units per day

32

Production rate per working day

Possible Strategy 2
Forecast demand

70
Level production
using lowest
monthly forecast
demand

60
50
40
30

Jan

Feb

Mar

Apr

May

June

22

18

21

21

22

20

= Month
= Number of
working days
33

Possible Strategy 2
Cost Information
Inventory carrying cost

$ 5 per unit per month

Subcontracting cost per unit

$10 per unit

Average pay rate

$ 5 per hour ($40 per day)

Overtime pay rate

Labor-hours to produce a unit
Cost of increasing daily production rate
(hiring and training)
Cost of decreasing daily production rate
(layoffs)

$ 7 per hour
(above 8 hours per day)
1.6 hours per unit
$300 per unit
$600 per unit

34

Possible Strategy 2
Cost Information
Inventory carry cost

In-house
production
Subcontracting
cost
per unit
Average pay rate
Overtime pay rate

$ 5 per unit per month

= 38$10units
per unitper day
x $124
5 perdays
hour ($40 per day)
= 4,712
$ 7 perunits
hour

Labor-hours
to produce a unit
Subcontract
units

(above 8 hours per day)

1.6 hours
per unit
6,200
- 4,712

=
Cost of increasing daily production rate
$300 per
unit
=
1,488
units
(hiring and training)
Cost of decreasing daily production rate
(layoffs)

$600 per unit

35

Possible Strategy 2
Cost Information
Inventory carry cost

In-house
production
Subcontracting
cost
per unit
Average pay rate
Overtime pay rate

$ 5 per unit per month

= 38$10units
per unitper day
x $124
5 perdays
hour ($40 per day)
= 4,712
$ 7 perunits
hour

Costs-hours
Labor
to produce a unit
Subcontract
units

(above 8 hours per day)

1.6 hours
per unit
Calculations
6,200
- 4,712

=
Regular-time
labor
$37,696
(=
7.6 workers
Cost
of increasing
daily production
rate
$300
per
unit x $40 per
=
1,488
units
(hiring and training)
day x 124 days)

Cost
of decreasing daily production
unitx $10 per
Subcontracting
14,880rate (= $600
1,488per
units
(layoffs)

unit)

Table 13.3

Total cost

$52,576
36

Possible Strategy 3
Hiring and firing

Month
Jan
Feb
Mar
Apr
May
June

Expected Demand
900
700
800
1,200
1,500
1,100
6,200

Production
Days
22
18
21
21
22
20
124

Demand Per Day

(computed)
41
39
38
57
68
55

Production = Expected Demand

37

Production rate per working day

Possible Strategy 3
Forecast demand and
monthly production

70
60
50
40
30

Jan

Feb

Mar

Apr

May

June

22

18

21

21

22

20

= Month
= Number of
working days
38

Possible Strategy 3
Cost Information
Inventory carrying cost

$ 5 per unit per month

Subcontracting cost per unit

$10 per unit

Average pay rate

$ 5 per hour ($40 per day)

Overtime pay rate

Labor-hours to produce a unit
Cost of increasing daily production rate
(hiring and training)
Cost of decreasing daily production rate
(layoffs)

$ 7 per hour
(above 8 hours per day)
1.6 hours per unit
$300 per unit
$600 per unit

39

Possible Strategy 3
Basic
Production
Cost
Inventory carrying
cost (demand x
Daily
1.6 hrs/unit x
Prod
Forecast
Subcontracting
cost
per
unit
$5/hr)
Rate
Month
(units)

Cost Information

Extra Cost of
Extra Cost of
$ 5 perDecreasing
unit per month
Increasing
Production
Production
$10
per
unitcost) Total Cost
(layoff
(hiring cost)

Jan
900 rate 41
Average
pay

$ 7,200

Feb
700
Overtime
pay rate39

5,600

Mar -hours
800 to produce
38
6,400
Labor
a unit

$ 5 per hour
($40 per$ day
7,200)
$1,200
$ 7 per hour
6,800
(= 2 x $600)
(above 8 hours per day)
$600
7,000
1.6 hours
per
unit
(= 1 x
$600)

$5,700$300 per unit

Cost
rate

Apr of increasing
1,200
57daily production
9,600
(=
19
x $300)
(hiring and training)
$3,300

May of decreasing
1,500
68daily production
12,000
Cost
rate
$600 per unit
(= 11 x $300)
(layoffs)
June

1,100

Table 13.3

55

8,800
$49,600

15,300
15,300

$7,800
(= 13 x $600)

16,600

$9,000

$9,600

$68,200

40

Comparison of Three Strategies

Cost

Plan 1

Plan 2

Inventory carrying

$ 9,250

Regular labor

49,600

37,696

49,600

Overtime labor

Hiring

9,000

Layoffs

9,600

Subcontracting

14,880

$58,850

$52,576

$68,200

Total cost

Plan 3
$

Plan 2 is the lowest cost option

41

Example 2:Unit Demand & Cost Data

Suppose
Supposewe
wehave
havethe
thefollowing
followingunit
unit
demand
demandand
andcost
costinformation:
information:
Demand/mo

Jan

Feb

Mar

Apr

May

Jun

4500

5500

7000

10000

8000

6000

Materials
Holding costs
Marginal cost of stockout
Hiring and training cost
Layoff costs
Labor hours required
Straight time labor cost
Beginning inventory
Productive hours/worker/day
Paid straight hrs/day

$5/unit
$1/unit per mo.
$1.25/unit per mo.
$200/worker
$250/worker
.15 hrs/unit
$8/hour
250 units
7.25
8

42

Cut-and-Try Example: Determining

Straight Labor Costs and Output
Given
Giventhe
thedemand
demandand
andcost
costinformation
informationbelow,
below,what
what
are
arethe
theaggregate
aggregatehours/worker/month,
hours/worker/month,units/worker,
units/worker,and
and
dollars/worker?
dollars/worker?
Demand/mo
Jun

Jan

Feb

Mar

4500
5500
7000
Productive hours/worker/day
6000
Paid straight hrs/day

22x8hrsx$8=$140
Jan
8
Days/mo
Hrs/worker/mo
Units/worker
$/worker

22
159.5
1063.33
$1,408

Feb
19
137.75
918.33
1,216

Apr

May

7.25x2
2

10000
7.25 8000

Mar
21
152.25
1015
1,344

7.25/0.15=48.33 &
48.33x22=1063.33
Apr
21
152.25
1015
1,344

May
22
159.5
1063.33
1,408

Jun
20
145
966.67
1,280
43

Mixing Option: Chase Strategy

Days/mo
Hrs/wo rker/mo
Units/worker
$/wo rker

Demand
Beg. inv.
Net req.
Req. workers
Hired
Fired
W orkforce
Ending inventory

Jan
22
1 59.5
1,063.33
$1,408

Jan
4 ,5 0 0
2 50
4 ,2 5 0
3 .9 97
3
4
0

Lets
Letsassume
assumeour
ourcurrent
currentworkforce
workforceis
is77
workers.
workers.

First, calculate net requirements for

production, or 4500-250=4250 units

Then, calculate number of workers

needed to produce the net
requirements, or
4250/1063.33=3.997 or 4 workers
Finally, determine the number of
workers to hire/fire. In this case we
only need 4 workers, we have 7, so
3 can be fired.
44

Below
Beloware
arethe
thecomplete
completecalculations
calculationsfor
forthe
theremaining
remaining
months
monthsin
inthe
thesix
sixmonth
monthplanning
planninghorizon
horizon
Days/mo
Hrs/worker/mo
Units/worker
$/worker

Demand
Beg. inv.
Net req.
Req. workers
Hired
Fired
Workforce
Ending inventory

Jan
22
159.5
1,063
$1,408

Feb
19
137.75
918
1,216

Mar
21
152.25
1,015
1,344

Apr
21
152.25
1,015
1,344

May
22
159.5
1,063
1,408

Jun
20
145
967
1,280

Jan
4,500
250
4,250
3.997

Feb
5,500

Mar
7,000

Apr
10,000

May
8,000

Jun
6,000

5,500
5.989
2

7,000
6.897
1

10,000
9.852
3

8,000
7.524

6,000
6.207

2
8
0

1
7
0

3
4
0

6
0

7
0

10
0

45

Below are the complete calculations for the remaining months in

the six month planning horizon with the other costs included
Demand
Beg. inv.
Net req.
Req. workers
Hired
Fired
Workforce
Ending inventory

Material
Labor
Hiring cost
Firing cost

Jan
4,500
250
4,250
3.997
3
4
0

Feb
5,500

Mar
7,000

Apr
10,000

May
8,000

Jun
6,000

5,500
5.989
2

7,000
6.897
1

10,000
9.852
3

8,000
7.524

6,000
6.207

2
8
0

1
7
0

6
0

7
0

10
0

Jan
Feb
Mar
Apr
May
Jun
$21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00
5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83
400.00
200.00
600.00
750.00
500.00
250.00

Costs
203,750.00
53,958.62
1,200.00
1,500.00
$260,408.62
46

Mixing Option: Level Strategy

Surplus and Storage allowed
Lets
Letstake
takethe
thesame
sameproblem
problem
as
asbefore
beforebut
butthis
thistime
timeuse
usethe
the
Level
LevelWorkforce
Workforcestrategy
strategy

Demand
This
Thistime
timewe
wewill
willseek
seekto
touse
use
Beg. inv.
aaworkforce
workforcelevel
levelof
of66workers
workers
Net req.
Workers
Production
Ending inventory
Surplus
Shortage

Jan
4,500
250
4,250
6
6,380
2,130
2,130
47

Below
Beloware
arethe
thecomplete
completecalculations
calculationsfor
forthe
theremaining
remaining
months
monthsin
inthe
thesix
sixmonth
monthplanning
planninghorizon
horizon

Demand
Beg. inv.
Net req.
Workers
Production
Ending inventory
Surplus
Shortage

Jan
4,500
250
4,250
6
6,380
2,130
2,130

Feb
5,500
2,130
3,370
6
5,510
2,140
2,140

Mar
7,000
2,140
4,860
6
6,090
1,230
1,230

Apr
10,000
1,230
8,770
6
6,090
-2,680

May
8,000
-2,680
10,680
6
6,380
-1,300

Jun
6,000
-1,300
7,300
6
5,800
-1,500

2,680

1,300

1,500

Note,
Note, ifif we
we recalculate
recalculate this
this sheet
sheet with
with 77 workers
workers
we
we would
would have
have aa surplus
surplus
48

Below
Below are
are the
the complete
complete calculations
calculations for
for the
the
remaining
remaining months
months in
in the
the six
six month
month planning
planning
horizon
horizon with
with the
the other
other costs
costs included
included
Jan
4,500
250
4,250
6
6,380
2,130
2,130

Jan
$8,448
31,900
2,130

Feb
5,500
2,130
3,370
6
5,510
2,140
2,140

Feb
$7,296
27,550
2,140

Mar
7,000
10
4,860
6
6,090
1,230
1,230

Mar
$8,064
30,450
1,230

Apr
10,000
-910
8,770
6
6,090
-2,680

May
8,000
-3,910
10,680
6
6,380
-1,300

Jun
6,000
-1,620
7,300
6
5,800
-1,500

2,680

1,300

1,500

Apr
$8,064
30,450

May
$8,448
31,900

Jun
$7,680
29,000

3,350

1,625

1,875

Note,
Note,total
total
costs
costsunder
under
this
thisstrategy
strategy
are
areless
lessthan
than
Chase
Chaseat
at
$260.408.62
$260.408.62
$48,000.00
181,250.00
5,500.00
6,850.00

Labor
Material
Storage
Stockout

$241,600.00
49

Mathematical Approaches
; Useful for generating strategies
; Transportation Method of Linear
Programming
; Produces an optimal plan

; Management Coefficients Model

; Model built around managers
experience and performance

; Other Models
; Linear Decision Rule
; Simulation
50

Transportation Method
Demand
Capacity:
Regular
Overtime
Subcontracting
Beginning inventory
Regular time
Overtime
Subcontracting
Carrying

Mar
800

Sales Period
Apr
May
1,000
750

700
700
50
50
150
150
100 tires

700
50
130

Costs
$40 per tire
$50 per tire
$70 per tire
$ 2 per tire per month
51

Transportation Example
Important points
1. Carrying costs are $2/tire/month. If
goods are made in one period and held
over to the next, holding costs are
incurred
2. Supply must equal demand, so a
dummy
column
called
unused
capacity is added
3. Because back ordering is not viable in
this example, cells that might be used to
satisfy earlier demand are not available
52

Transportation Example
Important points
4. Quantities in each column designate the
levels of inventory needed to meet
demand requirements
5. In general, production should be
allocated to the lowest cost cell
available without exceeding unused
capacity in the row or demand in the
column

53

Transportation Example

54

Management Coefficients
Model
; Builds a model based on managers
experience and performance
; A regression model is constructed
to define the relationships between
decision variables
; Objective is to remove
inconsistencies in decision making
55

Other Models
Linear Decision Rule
; Minimizes costs using quadratic cost curves
; Operates over a particular time period

Simulation
; Uses a search procedure to try different
combinations of variables
; Develops feasible but not necessarily optimal
solutions
56

Summary of Aggregate
Planning Methods
Techniques
Graphical
methods

Solution
Approaches
Trial and
error

Transportation
Optimization
method of linear
programming

Important Aspects
Simple to understand and
easy to use. Many
solutions; one chosen
may not be optimal.
LP software available;
permits sensitivity
analysis and new
constraints; linear
functions may not be
realistic.

57

Summary of Aggregate
Planning Methods
Techniques

Solution
Approaches

Important Aspects

Management
coefficients
model

Heuristic

Simple, easy to implement;

tries to mimic managers
decision process; uses
regression.

Simulation

Change
parameters

Complex; may be difficult

to build and for managers
to understand.

58

Aggregate Planning in Services

Controlling the cost of labor is critical
1. Accurate scheduling of labor-hours to
assure quick response to customer
demand
2. An on-call labor resource to cover
unexpected demand
3. Flexibility of individual worker skills
4. Flexibility in rate of output or hours of
work
59

Few Service Scenarios

; Restaurants
; Smoothing the production
process
; Determining the optimal
workforce size

; Hospitals
; Responding to patient demand

60

Few Service Scenarios

; National Chains of Small Service
Firms
; Planning done at national level
and at local level

; Miscellaneous Services
; Plan human resource
requirements
; Manage demand
61

Few Service Scenarios

; Airline industry
; Extremely complex planning
problem
; Involves number of flights,
number of passengers, air and
ground personnel, allocation of
seats to fare classes
; Resources spread through the
entire system
62

Yield Management
Allocating resources to customers at
prices that will maximize yield or
revenue
1. Service or product can be sold in
advance of consumption
2. Demand fluctuates
3. Capacity is relatively fixed
4. Demand can be segmented
5. Variable costs are low and fixed costs
are high

63

Yield Management: An Example

Demand
Curve

Room sales

Potential customers exist who

are willing to pay more than the
$15 variable cost of the room

100

Passed-up
contribution
50
Total
$ contribution
= (Price) x (50
rooms)
= ($150 - $15)
x (50)
= $6,750

$15
Variable cost
of room

Some customers who paid

$150 were actually willing
to pay more for the room

Money left
on the table
$150
Price charged
for room

Price
64

Yield Management: An Example

Demand
Curve

Room sales
100

Total $ contribution =
(1st price) x 30 rooms + (2nd price) x 30 rooms =
($100 - $15) x 30 + ($200 - $15) x 30 =
$2,550 + $5,550 = $8,100

60

30

$15
Variable cost
of room

$100
Price 1
for room

$200
Price 2
for room

Price
65

Yield Management Matrix

Predictable
Unpredictable

Duration of use

Price
Tend to be fixed

Tend to be variable

Quadrant 1:

Quadrant 2:

Movies
Stadiums/arenas
Convention centers
Hotel meeting space

Hotels
Airlines
Rental cars
Cruise lines

Quadrant 3:

Quadrant 4:

Restaurants
Golf courses
Internet service
providers

Continuing care
hospitals

66

Making Yield Management Work

1. Multiple pricing structures must
be feasible and appear logical to
the customer.
2. Forecasts of the use and duration
of use.
3. Changes in demand
67