OM : SESSION 16

AGGREGATE PLANNING
IN SERVICES
 Aggregate Planning for Services

1. Most services can’t be inventoried,

2. Demand for services is difficult to predict,
3. Capacity is also difficult to predict,
4. Service capacity must be provided at the
appropriate place and time,
5. Labor is usually the most constraining
resource for services.
 Aggregate Planning in Services

Controlling the cost of labor is critical

1. Close scheduling of labor-hours to assure

quick response to customer demand,
2. Some form of on-call labor resource,
3. Flexibility of individual worker skills,
4. Individual worker flexibility in rate of output
or hours.
Operations planning in Services
Business plan

Sales & Operational

Forecasting plan

Aggregate planning

Resource planning
•Workforce schedule,
•Materials & Facility
resources.
Scheduling
• Employee schedules,
•Facility schedules,
• Customer schedules.
 Aggregate planning in Services

 Aggregate planning in services vary from that in

manufacturing, mainly due to the fact that the capacity of
service operations is often viewed as highly perishable –
cannot be saved or inventoried ;
 Services always use ‘chase strategy’, i.e. capacity must
be available when the customer wants it.
 A ‘service’ should have the following characteristics :
 Market segmentation – will prevent all the
customers taking advantage of price reductions when
they are offered , e.g. to offer lower prices only on
specific days or weeks,
Aggregate planning in Services
(contd.)

High fixed & low variable costs – to offer significant

discounts while still being able to cover variable
costs,
 Product perishability – the service manager should
try & maximize capacity utilization whenever
possible, even if it means offering large discounts,
 Presold capacity – lower priced capacity can be
sold in advance – limiting the availability to the
higher priced market segments.
 Scheduling Services

Strategies for influencing demand pattern :

 Maintenance of a fixed schedule,
 Use of appointment system,
 Delayed delivery,
 Providing economic incentives for off-peak
demand.
 Strategies for coping with non-uniform demand :
 Staggered work-shift schedules,
 Part-time staff,
 Scheduling Services

 Let the customer select a level of

service,
 Auxiliary capacity or sub-
contracting,
 Multi-skilled floating staff,
Customer self-service,
 A production-line equivalent.
 Unique Aggregate problems in services

 Doctors, Lawyers, & other professionals have

emergency or priority calls for their service that
must be meshed with regular appointments,
 Hotels & Airlines routinely overbook their
capacity in anticipation of customers who do not
show up;
 Airlines design complex pricing structures for
different routes & classes of customers;
 Planners incorporate these decisions in a
process called Yield Management.
 Yield Management
 Yield management (also called Revenue
management) seeks to maximize yield or profit from
time-sensitive products or services;
 It is used in industries with inflexible & expensive
capacity, perishable products or services, segmented
markets, advanced sales, and uncertain demand;
 The types of problems addressed by yield
management include :
 Overbooking,
 Fare classes, and
 Single order quantities.
 Five Service Scenarios

 Restaurants
 Smoothing the production process
 Determining the workforce size
 Hospitals
 Responding to patient demand
 Five 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
 Five Service Scenarios

 Airline industry
 Extremely complex planning
problem
 Involves number of flights, number
of passengers, air and ground
personnel
 Resources spread through the entire
system
 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.
 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
Yield Management
Yield Management (cont.)
 Numerical for overbooking for single order
quantity problem
• The manager of a hotel is tired of customers who
make reservations and then don’t show up. Rooms rent
for $100 a night and cost $25 to maintain per day.
Overflow customers an be sent to the nearby motel for
$70 a night. The manager’s records of no-shows over
the last six months are given below. Should the hotel
start overbooking? If so, how many rooms should be
overbooked?
No-shows Probability
0 0 .15
1 0.25
2 0.30
3 0.30
 Yield Management: Example

NO-SHOWS PROBABILITY P(N < X)

0 .15 .00
1 .25 .15
2 .30 .40 .517
3 .30 .70

Optimal probability of no-shows

Cu 75
P(n < x)  = = .517
Cu + Co 75 + 70

Hotel should be overbooked by two rooms