Strategies for Managing Capacity in Western Australian Hotels: An Exploratory Study.(Statistical Data Included)

Abstract

In Western Australia (WA), the Asian economic downturn has depleted tourism demand significantly and due to the development of several large new hotel properties, there is a potential oversupply problem. It has been predicted that the demand/supply imbalance in the State will lower occupancies, lower room rates and lower yields in the near future. Against this background, this paper reports on an exploratory research study into capacity management strategies used by managers in hotels in Western Australia operating in the current competitive business climate. Personal interviews were hem with the general managers of twenty-five hotels in the Perth Metropolitan area.

The results indicate that the capacity management problem in WA was of topical concern amongst all hoteliers and a number of strategies were being adopted to manage capacity during this difficult period. However these strategies were being implemented in a reactive manner, resulting in a short-term approach to capacity management. Similarly, there was low awareness amongst many hoteliers of the broad range of chase-demand and level-capacity management techniques available. The findings suggest that capacity management strategies are an area of concern for many hoteliers, but much more research is required as to when, where and how these strategies should be adopted.

Keywords: Capacity Management, Hotel Occupancy, Yield Management, Demand strategy

Introduction

The Western Australian (WA) hotel industry is suffering a room capacity crisis. The Asian economic downturn has depleted tourism demand significantly from its key markets of Indonesia, Malaysia, Thailand and Singapore, (DIST 1998) and due to the development of several large new hotel properties, there is a potential oversupply problem, at least in the short-term. It has thus been predicted that the demand/ supply imbalance in the State will lower occupancies, lower room rates and lower yields in the near future, (Pattern 1998; Pownall, 1996). In periods of low demand and strong competitive pressures, hotel managers are faced with the constant challenge of balancing customer demand against available room capacity to cover the relatively high fixed costs in hotel properties, at the same time as achieving operational efficiency. Hotels are characterised by high fixed costs, with no scope for product inventory and, as a result, experience problems with capacity (Donaghy, McMahon and McDowell 1995). A critical element for the success of any hotel manager is thus to make the most efficient use of the operation's capacity to satisfy the needs of owners without disrupting customer service quality. By using various means to establish capacity, managers are more easily able to control the work and ensure utilisation of facilities, thus ensuring both resource productivity and customer satisfaction (Harris 1989).

The capacity problem for hoteliers should not be underestimated. Unlike their counterparts in manufacturing firms, service marketers cannot rely on inventories of finished products to act as a buffer between a tightly constrained level of supply and a widely fluctuating level of demand (Lovelock 1988). Indeed future success will, in large measure, continue to be a function of management's ability to use available productive capacity (ie. staff, labour, equipment and facilities) as efficiently and effectively as possible. The productivity goal is to smooth the peaks and valleys of demand to avoid both excess demand (which cannot be satisfied) and excess capacity (which represents unproductive use of resources (Lovelock and Young 1979).

With the potential room capacity crisis in Western Australia, it is essential that hoteliers have as detailed an understanding as possible of the capacity management problems they may face and the many strategies and techniques available to them for achieving optimum capacity usage. This research study investigates the extent to which WA hoteliers have applied the possible range of capacity strategies open to them to help them during this period of demand/supply imbalance.

Capacity Management Strategies in Hotels

Capacity management is the ability to balance demand from customers and the ability of the service delivery system to satisfy that demand (Armistead and Clarke 1994). Defining capacity in a service organisation causes some difficulties, since most research has been focused on the manufacturing sector. The real-time element of the service product and its characteristics of intangibility, perishability, simultaneous production and consumer participation makes the balancing of supply and demand very important, particularly in capacity constrained industries like the hotel business (Cousins 1994).

As research into services management has evolved, several writers have addressed the capacity management problems in service industries and, to a lesser extent, the hospitality industry. Sasser (1976), Lovelock (1988), Armistead and Clark (1992), Armistead and Clark (1994) and Showalter and White (1991) have all discussed the demand-capacity problem in service industries in general, while Sill (1991) and Brotherton and Coyle (1990) have specifically focused on the hospitality industry.

The success of a hotel operation is closely linked to its use of room capacity and the prices charged per room. The key factor here is perishability, thus, if a hotel room is not sold for a night, revenue is immediately lost and cannot be recouped. Capacity management therefore involves certain trade-offs between the objectives of profit maximisation and operational cost efficiency. Matching the ability of the operation to provide the services to the expected volume of business (i.e. achieving full occupancy levels) must take into account all the costs of providing service and where possible, match these costs with the volume of business, i.e. maintain consistent room rates, (Cousins 1994). …