Aggregate Planning

(session 1,2)

1
 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
2
 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 Intermediate-range plans
(3 to 18 months)
Sales planning
Production planning and budgeting
Operations Setting employment, inventory,
managers subcontracting levels
Analyzing operating plans

Short-range plans
(up to 3 months)
Job assignments
Operations Ordering
managers, Job scheduling
supervisors, Dispatching
foremen Overtime
Part-time help

Responsibility Planning tasks and horizon

6
 Aggregate Planning

Quarter 1
Jan Feb Mar
150,000 120,000 110,000

Quarter 2
Apr May Jun
100,000 130,000 150,000

Quarter 3
Jul Aug Sep
180,000 150,000 140,000

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.

8
Aggregate Planning

9
 Aggregate Planning
(Required Inputs to the Production
Planning System)
Competitors’ Raw material Market
behavior availability demand External
to firm
External Planning Economic
capacity for conditions
production

Current Current Inventory Activities Internal

physical workforce levels required to firm
capacity for prod.
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 high-

demand 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 company’s 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 Demand Per Day

Month Expected Demand Days (computed)
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
 Average Total expected demand
requirement = Number of production days

6,200
= = 50 units per day
124
Forecast demand
Production rate per working day

70 –
Level production using average
monthly forecast demand
60 –

50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
Ð Ð Ð Ð Ð Ð
22 18 21 21 22 20 = Number of
Figure 1 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)
$ 7 per hour
Overtime pay rate
(above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)
Table 2

28
 Possible Strategy 1
Monthly
Cost Information
Production at Demand Inventory Ending
Month carry
Inventory 50 Units
cost per Day Forecast $ 5Change
per unit per Inventory
month
Jan
Subcontracting 1,100
cost per unit 900 $10 +200
per unit 200
Feb pay rate 900
Average 700 +200
$ 5 per 400
hour ($40 per day)
Mar 1,050 800 +250
$ 7 per hour 650
Overtime pay rate
(above 8 hours per day)
Apr 1,050 1,200 -150 500
Labor-hours to produce a unit 1.6 hours per unit
May 1,100 1,500 -400 100
Cost of increasing daily production rate $300 per unit
June 1,000
(hiring and training)
1,100 -100 0
Cost of decreasing daily production rate $600 per unit 1,850
(layoffs)
Total units of inventory carried over from one t workforce
Table 13.3 monthnto c
theo n s
nexttan = 1,850 units
–
Pl a 1
Workforce required to produce 50 units per day = 10 workers
29
 Possible Strategy 1
Monthly
Costs
Cost Information
Production at Demand Calculations
Inventory Ending
Month carry
Inventory
Inventory 50 Units
cost per Day $9,250
carrying Forecast $ 5Change
perunits
(= 1,850 unit per Inventory
month
carried x $5
Jan
Subcontracting 1,100
cost per unit 900 per$10unit)
per unit
+200 200
Regular-time
Feb pay rate
Average labor
900 49,600
700 (= 10
$ 5 workers
+200
per x $40per
hour ($40 per
400day)
Mar 1,050 800 day x+250
124 days) 650
$ 7 per hour
Overtime pay rate
Other (above 8 hours per day)
Apr costs (overtime,
1,050 1,200 -150 500
hiring,
Labor layoffs,
-hours to produce a unit 1.6 hours per unit
May
subcontracting) 1,100 1,500
0 -400 100
Cost of increasing daily production rate $300 per unit
June
Total cost
(hiring
1,000
and training)
1,100
$58,850 -100 0
Cost of decreasing daily production rate $600 per unit 1,850
(layoffs)
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
7,000 –

6,000 – Reduction
Cumulative demand units

of inventory
5,000 – Cumulative level 6,200 units
production using
4,000 – 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

Production Demand Per Day

Month Expected Demand Days (computed)
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

Minimum requirement = 38 units per day

32
 Possible Strategy 2

Forecast demand
Production rate per working day

70 –
Level production
60 – using lowest
monthly forecast
50 – demand

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
Ð Ð Ð Ð Ð Ð
22 18 21 21 22 20 = 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)
$ 7 per hour
Overtime pay rate
(above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)

34
 Possible Strategy 2

Cost Information
Inventory carry cost $ 5 per unit per month
In-house
Subcontracting production
cost per unit = 38$10units
per unitper day
Average pay rate x $124
5 perdays
hour ($40 per day)

Overtime pay rate

= 4,712
$ 7 perunits
hour
(above 8 hours per day)
Subcontract
Labor-hours units
to produce a unit = 6,200 - 4,712
1.6 hours per unit

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

Cost of decreasing daily production rate $600 per unit

(layoffs)

35
 Possible Strategy 2

Cost Information
Inventory carry cost $ 5 per unit per month
In-house
Subcontracting production
cost per unit = 38$10units
per unitper day
Average pay rate x $124
5 perdays
hour ($40 per day)

Overtime pay rate

= 4,712
$ 7 perunits
hour
(above 8 hours per day)
Subcontract
Costs-hours
Labor units
to produce a unit = 6,200 - 4,712
Calculations
1.6 hours per unit
Regular-time
Cost labor
of increasing $37,696
daily production =
rate (= 7.6 workers
1,488
$300 unit x $40 per
units
per
(hiring and training) day x 124 days)
Cost of decreasing daily production
Subcontracting 14,880rate (= $600
1,488per unitx $10 per
units
(layoffs)
unit)
Table 13.3
Total cost $52,576

36
 Possible Strategy 3
Hiring and firing

Production Demand Per Day

Month Expected Demand Days (computed)
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

Production = Expected Demand

37
Production rate per working day Possible Strategy 3
Forecast demand and
monthly production
70 –

60 –

50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
Ð Ð Ð Ð Ð Ð
22 18 21 21 22 20 = 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)
$ 7 per hour
Overtime pay rate
(above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)

39
 Possible Strategy 3

Basic
Cost Information Production
Cost Extra Cost of Extra Cost of
Inventory carrying cost (demand x
Daily $ 5 perDecreasing
Increasing unit per month
Forecast Prod 1.6 hrs/unit x Production Production
Subcontracting
Month (units) cost
Rate per unit
$5/hr) $10
(hiring cost) per unitcost) Total Cost
(layoff
Average
Jan pay
900 rate 41 $ 7,200 — $ 5 per hour
— ($40 per$ day
7,200)
$1,200
$ 7 per hour
Feb
Overtime 700
pay rate39 5,600 — 6,800
(= 2 x $600)
(above 8 hours per day)
$600
Mar -hours
Labor 800 to produce
38 6,400
a unit — 1.6 hours per
(= 1 x unit
$600)
7,000

Cost
Apr of increasing
1,200 57daily production
9,600 rate
$5,700$300 per unit
— 15,300
(hiring and training) (= 19 x $300)
$3,300
Cost
May of decreasing
1,500 68daily production
12,000 rate $600 per unit
(= 11 x $300)
— 15,300
(layoffs)
$7,800
June 1,100 55 8,800 — 16,600
(= 13 x $600)
Table 13.3
$49,600 $9,000 $9,600 $68,200

40
Comparison of Three Strategies

Cost Plan 1 Plan 2 Plan 3

Inventory carrying $ 9,250 $ 0 $ 0
Regular labor 49,600 37,696 49,600
Overtime labor 0 0 0
Hiring 0 0 9,000
Layoffs 0 0 9,600
Subcontracting 0 14,880 0
Total cost $58,850 $52,576 $68,200

Plan 2 is the lowest cost option

41
Example 2:Unit Demand & Cost Data
Suppose
Supposewewehave
havethethefollowing
followingunit
unit
demand
demandand
andcost
costinformation:
information:
Demand/mo Jan Feb Mar Apr May Jun
4500 5500 7000 10000 8000 6000
Materials $5/unit
Holding costs $1/unit per mo.
Marginal cost of stockout $1.25/unit per mo.
Hiring and training cost $200/worker
Layoff costs $250/worker
Labor hours required .15 hrs/unit
Straight time labor cost $8/hour
Beginning inventory 250 units
Productive hours/worker/day 7.25
Paid straight hrs/day 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 Jan Feb Mar Apr May 7.25x2
Jun 2
Productive hours/worker/day
4500 5500 7000 7.25 8000
10000
6000
Paid straight hrs/day 8 7.25/0.15=48.33 &
22x8hrsx$8=$140 48.33x22=1063.33
Jan Feb Mar Apr May Jun
8
Days/mo 22 19 21 21 22 20
Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145
Units/worker 1063.33 918.33 1015 1015 1063.33 966.67
$/worker $1,408 1,216 1,344 1,344 1,408 1,280

43
 Mixing Option: Chase Strategy

Lets
Letsassume
assumeour
ourcurrent
currentworkforce
workforceis
is77
Jan workers.
workers.
Days/mo 22
Hrs/wo rker/mo 1 59.5 First, calculate net requirements for
Units/worker 1,063.33 production, or 4500-250=4250 units
$/wo rker $1,408

Then, calculate number of workers

Jan needed to produce the net
Demand 4 ,5 0 0
requirements, or
Beg. inv. 2 50
4250/1063.33=3.997 or 4 workers
Net req. 4 ,2 5 0
Req. workers 3 .9 97
Finally, determine the number of
Hired
Fired 3
workers to hire/fire. In this case we
W orkforce 4
only need 4 workers, we have 7, so
Ending inventory 0 3 can be fired.
44
 Below
Beloware
arethe
thecomplete
completecalculations
calculationsfor
forthe
theremaining
remaining
months
monthsin
inthe
thesix
sixmonth
monthplanning
planninghorizon
horizon
Jan Feb Mar Apr May Jun
Days/mo 22 19 21 21 22 20
Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145
Units/worker 1,063 918 1,015 1,015 1,063 967
$/worker $1,408 1,216 1,344 1,344 1,408 1,280

Jan Feb Mar Apr May Jun

Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250
Net req. 4,250 5,500 7,000 10,000 8,000 6,000
Req. workers 3.997 5.989 6.897 9.852 7.524 6.207
Hired 2 1 3
Fired 3 2 1
Workforce 4 6 7 10 8 7
Ending inventory 0 0 0 0 0 0
45
 Below are the complete calculations for the remaining months in
the six month planning horizon with the other costs included
Jan Feb Mar Apr May Jun
Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250
Net req. 4,250 5,500 7,000 10,000 8,000 6,000
Req. workers 3.997 5.989 6.897 9.852 7.524 6.207
Hired 2 1 3
Fired 3 2 1
Workforce 4 6 7 10 8 7
Ending inventory 0 0 0 0 0 0

Jan Feb Mar Apr May Jun Costs

Material $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 203,750.00
Labor 5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83 53,958.62
Hiring cost 400.00 200.00 600.00 1,200.00
Firing cost 750.00 500.00 250.00 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 Jan
Demand 4,500
This
Thistime
timewe
wewill
willseek
seektotouse
use
aaworkforce Beg. inv. 250
workforcelevel
levelof
of66workers
workers
Net req. 4,250
Workers 6
Production 6,380
Ending inventory 2,130
Surplus 2,130
Shortage
47
 Below
Beloware
arethe
thecomplete
completecalculations
calculationsfor
forthe
theremaining
remaining
months
monthsin
inthe
thesix
sixmonth
monthplanning
planninghorizon
horizon

Jan Feb Mar Apr May Jun

Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250 2,130 2,140 1,230 -2,680 -1,300
Net req. 4,250 3,370 4,860 8,770 10,680 7,300
Workers 6 6 6 6 6 6
Production 6,380 5,510 6,090 6,090 6,380 5,800
Ending inventory 2,130 2,140 1,230 -2,680 -1,300 -1,500
Surplus 2,130 2,140 1,230
Shortage 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 havehave aa surplus
surplus

48
Below
Below are
are the
the complete
complete calculations
calculations for
for the
the
remaining
remaining months
months inin the
the six
six month
month planning
planning
horizon
horizon with
with the
the other
other costs
costs included
included
Jan Feb Mar Apr May Jun
4,500 5,500 7,000 10,000 8,000 6,000 Note,
Note,total
total
250 2,130 10 -910 -3,910 -1,620 costs
4,250 3,370 4,860 8,770 10,680 7,300 costsunder
under
6 6 6 6 6 6 this
thisstrategy
strategy
6,380 5,510 6,090 6,090 6,380 5,800 are
areless
lessthan
than
2,130 2,140 1,230 -2,680 -1,300 -1,500
Chase
Chaseat at
2,130 2,140 1,230
2,680 1,300 1,500 $260.408.62
$260.408.62
Jan Feb Mar Apr May Jun
$8,448 $7,296 $8,064 $8,064 $8,448 $7,680 $48,000.00 Labor
31,900 27,550 30,450 30,450 31,900 29,000 181,250.00 Material
2,130 2,140 1,230 5,500.00 Storage
3,350 1,625 1,875 6,850.00 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 manager’s
experience and performance
; Other Models
; Linear Decision Rule
; Simulation
50
 Transportation Method
Sales Period
Mar Apr May
Demand 800 1,000 750
Capacity:
Regular 700 700 700
Overtime 50 50 50
Subcontracting 150 150 130
Beginning inventory 100 tires

Costs
Regular time $40 per tire
Overtime $50 per tire
Subcontracting $70 per tire
Carrying $ 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 manager’s

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
Solution
Techniques Approaches Important Aspects
Graphical Trial and Simple to understand and
methods error easy to use. Many
solutions; one chosen
may not be optimal.
Transportation Optimization LP software available;
method of linear permits sensitivity
programming analysis and new
constraints; linear
functions may not be
realistic.

57
 Summary of Aggregate
Planning Methods
Solution
Techniques Approaches Important Aspects
Management Heuristic Simple, easy to implement;
coefficients tries to mimic manager’s
model decision process; uses
regression.
Simulation Change Complex; may be difficult
parameters 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
Room sales Demand
Curve
Potential customers exist who
100 are willing to pay more than the
$15 variable cost of the room

Passed-up Some customers who paid

contribution $150 were actually willing
Total 50 to pay more for the room
$ contribution
= (Price) x (50
rooms)
= ($150 - $15)
x (50) Money left
= $6,750 on the table

$15 $150 Price

Variable cost Price charged
of room for room 64
 Yield Management: An Example

Room sales Demand

Curve
Total $ contribution =
100 (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 $100 $200 Price

Variable cost Price 1 Price 2
of room for room for room 65
Yield Management Matrix

Price
Tend to be fixed Tend to be variable
Quadrant 1: Quadrant 2:
Predictable

Movies Hotels
Stadiums/arenas Airlines
Duration of use

Convention centers Rental cars

Hotel meeting space Cruise lines

Quadrant 3: Quadrant 4:
Unpredictable

Restaurants Continuing care

Golf courses hospitals
Internet service
providers

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