Services have distinct characteristics that set them apart from tangible products. The fact that services are intangible accounts for the majority of these characteristics. Services, in other words, cannot be held, inspected before purchase, or inventoried. As a result, the consumer is now a part of the manufacturing process, making it difficult to maintain the consistency and efficiency that a firm can experience when producing tangible products.
Conflicts Between Operations and Marketing
There will always be tensions between those in charge of sales and marketing and those in charge of operations in any service-based organisation. Those working in operating departments in almost every hotel could tell you stories about how sales and marketing personnel made promises to clients that were impossible to keep to the client’s satisfaction. Hotel salespeople, for example, will sometimes price banquet meals below the catering department’s benchmark in order to book a group into the hotel. Similarly, sales and marketing personnel could share stories about how inflexible operating personnel cost them business.One of the best ways to keep the conflicts to a minimum is to try to look at things from the other person’s perspective. Sales and marketing personnel tend to view the world from a revenue perspective.
That is, everything they do is aimed at increasing revenue. Every new group that is booked into the hotel is viewed as additional revenue. The goal of creating a promotion to increase the number of covers served in the dining room is to increase revenue. From this standpoint, having many options and flexibility when providing a service is preferable.
Operations personnel, on the other hand, tend to see the world through the lens of cost containment. All efforts are directed toward increasing efficiency and lowering costs to the bare minimum required to keep the operation running smoothly. The primary goal of production and operations is to standardise as much as possible in order to reduce the cost per unit of service provided. Sales, marketing, and operations all want to increase profits, but they concentrate on different aspects of the profit equation.
When it comes to offering more products and services to gain a competitive advantage, the sales and marketing staff will be eager to provide many options. They may, however, fail to consider how the new products and services will interact with those that already exist. Operations personnel will tend to be conservative in their approach, attempting to keep the operation as simple and straightforward as possible. Some of the tension between the two functions stems from how they are evaluated.
The performance of a salesperson is based on revenue generation and meeting quotas, whereas those in operations are rewarded for cost reduction and quality control. Even though a collaborative effort would benefit the company as a whole, there is little incentive for the two departments to collaborate.j
Christopher Lovelock recommends several ways that managers can be persuaded to build bridges between the functional areas:2
- Transfer managers across functional areas. In other words, have them work in different departments so that they gain an understanding of the nuances of each area.
2.Create cross-functional teams. Top management’s goal should be to build on the energy of managers who have been working in different departments instead of letting their energies evolve into internal disputes.
- Cross-train associates to perform a broader variety of tasks. Moving hourly associates across departmental lines can serve to break down barriers and build relationships that can help the departments work together more effectively.
4.Delegate authority to individual units. Historically, operational managers in the hospitality industry have focused on cost containment. By transforming cost centers into profit centers and empowering managers and associates to take greater responsibility for both revenue generation and spending decisions, managers and associates focus more on the big picture.
- Institute gain-sharing programs. Allowing managers and associates to share in the results from improved profits provides an incentive to continue to seek better ways to operate the business.
Managing Supply and Demand
Managing supply and demand in a service organization such as a hotel or restaurant is very difficult. Demand for services comes in waves and often is not as consistent as one would like. The demand may be seasonal, as with a resort hotel, or it may fluctuate by time of day, as with restaurants. It might also fluctuate by day of the week, as is the case with business-oriented hotels that are busy Monday through Thursday but quite slow on Friday through Sunday. Managing the fluctuations in demand and the corresponding supply is perhaps one of management’s greatest challenges.
Two calculations can be used to evaluate the extent to which the supply and demand is being successfully managed: asset revenue generating efficiency (ARGE) and revenue per available room (REVPAR). ARGE evaluates the relationship between actual revenue and maximum potential revenue. For example, within a hotel operation, ARGE takes into account the occupancy percentage and the average daily rate to determine the extent to which the revenue potential is being realized. Suppose that a hotel has 500 available rooms each day with a rack rate of $150.
If all of the rooms were sold each day at this maximum rate, the maximum daily revenue would be $75,000. However, it is rare that a hotel would be able to do this consistently. Assume that over a period of time, say, a month, the hotel achieved a 70 percent occupancy rateand had an average daily rate of $85. This means that on average, 350 rooms were sold each day at an average daily room rate of $85, resulting in total revenue of $29,750. This figure is then divided by the maximum potential daily revenue of $75,000, and the ARGE is calculated to be 51 percent (29,750 / 75,000 x 150). The ARGE is useful as an evaluation tool for sales and marketing personnel because it measures performance against potential revenue at full capacity.
REVPAR, or revenue per available room, is calculated by multiplying the average daily rate by the occupancy percentage. For example, if a hotel has an average daily rate of $95 and is running an occupancy percentage of 75 percent, then the REVPAR would be $95 x 0.75 = $71.25. This figure, like ARGE, accounts for the amount of unused capacity. An alternative calculation would be to multiply the average daily rate by the number of occupied rooms to get the total room revenue, and then divide total room revenue by the total number of rooms in the hotel to get the REVPAR. The main difference between ARGE and REVPAR is that REVPAR does not compare actual revenue to maximum potential revenue. However, REVPAR does give a measure that can be tracked over time to assess the hotel’s performance. Higher values of REVPAR would denote more effective use of available resources.
One of the major issues facing service industries such as hospitality and tourism is the inability to inventory the product. Unused capacity is lost forever when there are empty hotel rooms, tables in restaurants, or seats on airplanes. The following strategies can be used to manage supply and demand.
1.MODIFY PRICE. Prices can be used to transfer demand from peak periods to nonpeak periods. Many restaurants in tourist areas use “early bird” prices to encourage price-sensitive consumers, such as families and senior citizens, to eat earlier. Restaurants are able to offer a limited selection of meals at lower prices, enabling them to purchase and prepare in larger, more efficient volumes. This shifts the demand to a period when there are empty tables and the customers can be easily accommodated. This results in less waiting and fewer people turned away during the peak period between 7 P.M. and 10 P.M. Firms can also raise prices during peak demand periods in an effort to shift demand to nonpeak periods. Hotels and fine-dining restaurants use this practice to maximize the potential revenue from limited capacity.
2.DEVELOP PROGRAMS TO BOOST NONPEAK DEMAND PERIODS.When the fast-food companies first began operation they were open only for lunch and dinner. They did not offer breakfast. After many years of operation, most began to develop breakfast programs that resulted in a very significant increase in total revenue. This represents an example of how fastfood restaurants stimulated demand during a nonpeak period. In the case of fast-food companies that did not have any type of breakfast menu, they were stimulating business during a zero-volume period. Business-oriented hotels adopt the same sort of strategy when they offer special weekend rates and packages to boost occupancy during low-demand weekends.
3.SHIFT DEMAND THROUGH RESERVATIONS. All of the major hotel chains offer toll-free telephone reservations. If demand for a specific location exceeds capacity, they will simply offer to make a reservation at a nearby hotel. If a hotel company owns, franchises, or operates multiple brands and the hotel where the guest wants to stay is full, the reservations agent will offer to make a reservation at a nearby hotel that is owned, franchised, or operated by the same company.For example, if a customer wants to make a reservation at a Quality Inn and all of the rooms are reserved, the reservations agent would try to make a reservation at a nearby Comfort Inn or a Sleep Inn because they are part of the same organization. In this way, the company still realizes the revenue, while providing a valuable service to the guest.
4.INCREASE PERSONNEL EFFICIENCY. Management can increase employee productivity by using part-time employees and cross-training employees to perform two or more jobs. Restaurants can reduce the time it takes to take orders and prepare meals, allowing them to serve more customers in the same amount of time.
5.INCREASE CONSUMER INVOLVEMENT IN SELF-SERVICE ASPECTS,OF THE SERVICE DELIVERY SYSTEM. By involving consumers in the service delivery process, service firms can reduce labour costs while increasing supply. Buffet-style service is a popular trend in restaurants. In fact, many of the food service operations at Epcot Center in Disney World use this method to increase capacity, revenues, and profits. The airline industry has also attempted to cut costs by allowing customers to make their own reservations and seating assignments online. Customers are sometimes given bonus miles for their frequent flyer accounts when they make reservations through the airline’s website.