Exploring Capacity Constraints in Revenue Management

If you work a lot with revenue management (RM), you are well-acquainted with the six pillars that uphold RM strategies: relatively fixed capacity, the balance of fixed and variable costs, perishable inventory, customer price sensitivity, fluctuating demand, and the potential to inventory demand. Yet, these elements manifest differently across sectors, each with unique challenges and opportunities. What, then, are the industry-specific nuances we need to navigate? In this edition of Revenue Mosaic, let's delve into the concept of 'relatively fixed capacity.'

Capacity Unpacked

Typically, we think of capacity as a tangible quantity – airline seats, hotel rooms, or stadium seating. But in RM, the pivotal form of capacity is the bottleneck that hampers revenue growth. It's not merely a question of physical space but of optimizing any constraint that limits our profit potential.

Take, for example, an experience from my tenure in Singapore about a decade ago. Several restaurants were failing to match their table mix to their customer group size. While my initial advice was to adjust the table configuration for increased turnover, it was quickly apparent that staffing, not space, was the true limiting factor. This oversight taught me a valuable lesson: RM must always account for the bottleneck resource.

Beyond the Physical

Reflecting on this, let's consider a spa's operational dynamics. Is it the number of treatment rooms or the available therapist hours that dictate capacity? My students and I tackled this very question in various projects in my non-traditional RM class. Our findings consistently pointed to specialized therapist hours as the critical capacity constraint. Thus, the road to enhanced revenue was through optimizing labour scheduling, not merely the allocation of physical space.

Maximizing Your Constraint

RM isn't just about filling seats or rooms; it's about leveraging the most restrictive aspect of your operation, whether it's production, labour, raw materials, or something else entirely.

How do we, as RM and pricing experts, navigate these subtleties to enhance profitability?

Let's embark on this journey to understand capacity and unlock the full potential of our revenue management strategies.

Refining 'Relatively' Fixed Capacity in Revenue Management

The concept of 'relatively' fixed capacity often raises the question: how malleable is "fixed"? Let's take the example of a fast-food restaurant to probe this further. At first glance, it may seem that the number of seats dictates capacity, but as industry dynamics evolve with takeout, delivery, and drive-through services, the question of capacity becomes more complex.

Is it labor, or perhaps the production system, that forms the crux of the capacity issue? During peak times, when demand may surpass what can be produced, some restaurants resort to 'throttling' their service channels. But is this necessary? According to Steve Crowley and Brian Reece from Service Physics , enhancing production systems can often be a simple yet effective way to expand capacity. Similarly, DynamEat has innovated with their pricing product by streamlining the menu to focus on items that are quick to produce and meet both popularity and profitability criteria.

Who Dictates Capacity?

This brings us to an insightful distinction made by Jeannette Ho—between 'operational' capacity and 'revenue management' capacity . Through our work with Fairmont-Raffles Hotels International, we observed that operational managers often set capacity limits based on staff comfort rather than potential revenue, raising the question of whether we're truly maximizing our revenue capabilities.? This trend isn't isolated to the hospitality industry; it's a common theme across the board. Time and again, I've witnessed scenarios in different sectors where customer opportunities were missed due to a cautious approach to capacity resulting in foregone earnings.?

This cautious stance on capacity utilization is evident in various industries. For instance, in the utilities sector, conventional wisdom held that a certain grid had a maximum fixed capacity for energy distribution, determined by historical trends and a desire to maintain operational comfort zones. However, a paradigm shift occurred when revenue managers and engineers united to reevaluate the grid's true potential and demand patterns. This collaboration led to a strategic enhancement of the grid's load management, allowing for a secure increase in capacity, especially during times when the demand surged.

Leveraging Capacity for Revenue Maximization

In RM, our mission extends beyond simply filling spaces—it's about understanding and then optimizing the limiting factors in our operations, whether that's physical space, labor, production, or otherwise. By challenging our preconceptions about capacity, we can uncover latent potential and drive our revenue strategies forward.

Conclusion: Navigating the Nuances of Capacity

In this edition of Revenue Mosaic, we've taken a journey through the intricate landscape of 'relatively fixed capacity' and its role in revenue management across various industries. From dining tables in Singapore to spa treatment rooms, we've seen that capacity is far more than a mere count of physical assets; it's about the delicate balance of resources that drive our businesses forward.

As we've explored, the real art of RM lies in identifying and optimizing these nuanced constraints, be they human, procedural, or material. It's a dynamic process that demands both agility and insight, requiring us to look beyond the traditional confines of space and time.?

1. As you reflect on the ideas shared and how they might apply to your own RM challenges, consider these questions to guide your strategy:
2. Where might your organization be underestimating its true capacity, and how can you uncover it?
3. What steps can you take to ensure your capacity planning is both flexible and responsive to market changes?
4. How can you better align operational comfort with revenue optimization without compromising service quality?
5. In what ways can cross-functional collaboration provide fresh perspectives on capacity constraints?
6. What metrics will best capture the improvements made through capacity optimization initiatives?

We've taken a peek into the world of revenue management and there's plenty more where that came from. The 'Revenue Mosaic' is rich with different pieces to explore, and we're just getting started. It's our curiosity and drive for innovation that'll see us not just meeting expectations but really wowing our industries and customers.

Stay tuned for our next installment. We'll dive into other areas of revenue management, unpacking the tools and insights that can really give us the edge. See you there!