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Operations Management in Tourism and Hospitality Industry

First Semester/2021-2022
Module 1
Topics Covered:
Introduction to Operations Management.
Systems View of Operation
Service Operations vs. Manufacturing Operations
Operational Issues in Hotels
Week 2-5
October 11-November 5, 2021
An introductory module to the course Operations Management in tourism and hospitality industry.
This module will discuss the fundamental concept of operations management from definition,
importance and implications on the tourism and hospitality industry.

INTRODUCTION TO OPERATIONS MANAGEMENT

Operations Management Definition

Operations management is about the management of the processes that produce or deliver goods and
services. Operations management decisions directly affect the size, shape, quantity, quality, price,
profitability and speed of delivery of the output of travel, tourism and hospitality organizations,
whether at the luxury end of the market or a budget product or service.

- Every organization has an operations function, whether or not it is called ‘operations’. The goal
or purpose of most organizations involves the production of goods and/or services. To do this,
they have to procure resources, convert them into outputs and distribute them to their intended
users. The term operations embrace all the activities required to create and deliver an
organization’s goods or services to its customers or clients.

- Within large and complex organizations operations is usually a major functional area, with
people specifically designated to take responsibility for managing all or part of the
organization’s operations processes. It is an important functional area because it plays a crucial
role in determining how well an organization satisfies its customers. In the case of private-sector
companies, the mission of the operations function is usually expressed in terms of profits,
growth and competitiveness; in public and voluntary organizations, it is often expressed in
terms of providing value for money.

Operations management is concerned with the design, management, and improvement of the systems
that create the organization’s goods or services. The majority of most organizations’ financial and
human resources are invested in the activities involved in making products or delivering services.
Operations management is therefore critical to organizational success.
(ABE UK, 2018)
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The role of the operations manager

Some people (especially those professionally involved in operations management!) argue that
operations management involves everything an organization does. In this sense, every manager is an
operations manager, since all managers are responsible for contributing to the activities required to
create and deliver an organization’s goods or services. However, others argue that this definition is too
wide, and that the operations function is about producing the right amount of a good or service, at the
right time, of the right quality and at the right cost to meet customer requirements.

What do you think a typical operations manager does?

In service industries, managers in hotels, restaurants, banks and stores are operations managers. In the
not-for-profit sector, the manager of a nursing home or day center for older people is an operations
manager, as is the manager of a local government tax-collection office and the manager of a charity
shop staffed entirely by volunteers.
So, operations managers are responsible for managing activities that are part of the production of goods
and services. Their direct responsibilities include managing both the operations process, embracing
design, planning, control, performance improvement, and operations strategy. Their indirect
responsibilities include interacting with those managers in other functional areas within the
organization whose roles have an impact on operations. Such areas include marketing, finance,
accounting, personnel and engineering.

Operations managers' responsibilities include:

 Human resource management – the people employed by an organization either work directly to
create a good or service or provide support to those who do. People and the way they are
managed are a key resource of all organizations.
 Asset management – an organization’s buildings, facilities, equipment and stock are directly
involved in or support the operations function.
 Cost management – most of the costs of producing goods or services are directly related to the
costs of acquiring resources, transforming them or delivering them to customers. For many
organizations in the private sector, driving down costs through efficient operations
management gives them a critical competitive edge. For organizations in the not-for-profit
sector, the ability to manage costs is no less important.

Decision making is a central role of all operations managers. Decisions need to be made in:
 designing the operations system
 managing the operations system
 improving the operations system.

The five main kinds of decision in each of these relate to:

1. the processes by which goods and services are produced
2. the quality of goods or services
3. the quantity of goods or services (the capacity of operations)
4. the stock of materials (inventory) needed to produce goods or services
5. the management of human resources.
(Saylor Academy & Creative Commons, 2010)
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Characteristics of the travel, tourism and hospitality sector that impact on the management of
operations

Margaux and Cassie are heading out on a girls' trip to Coron Palawan, for the weekend. The hotel room
is booked, entertainment has been planned, and restaurants have been lined up for taste-testing some
of the local’s best dishes. Without trying to, the girls have made plans for three of the hospitality
industry's most important sectors: lodging, food and beverage, and entertainment.
The travel, tourism and hospitality industry is one of the most diverse and varied industries in the
world, employing millions of people and accounting for trillions of dollars in revenue every year. Not
only is it a great career choice for many, but it also encompasses many sectors we engage with on a
daily basis.
The travel, tourism and hospitality industry is part of the larger service-providing industry. It is heavily
based on customer satisfaction and meeting the needs and desires of both individuals and families,
typically more in a leisure capacity than a formal, business one.
The travel, tourism and hospitality industry boasts many characteristics that help set it apart from
other businesses. For example:
 Reliance on disposable income and leisure time: It is not typically focused on providing basic
human needs, but on providing services to people with extra time and cash on their hands.
 Focused on intangible products: It is not like a new shirt you purchased at an outlet mall. It's not
something you can touch, feel, or wear. It sells an experience or a feeling that is desirable.
 It is perishable, meaning that an experience will not last and the next experience will not be
like the last: Once a hospitality feature is consumed, it is gone.
 The industry never sleeps: The nature of the hospitality industry is 24-hours-a-day, seven-day-
a-week. This includes employees' availability and operations, from lodging to transportation to
entertainment.
 Heavily dependent on customer satisfaction: While an unhappy customer may continue to
shop at their local grocery store, an unhappy guest in the hospitality industry may never return
to consume that sector's products or services.

Sectors of hospitality and tourism industry

Operations management functions in travel, tourism and hospitality include a wide range of activities,
many of which are core to the experience of guests and visitors. In travel, tourism and hospitality, the
term operations management is not widely employed, with the preference being for functional
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management responsibilities in the title, given that most businesses in the sector operate a wide range
of product and service operations.

Examples of operations functions in travel, tourism and hospitality include:

 Food production under the management of a Head Chef;
 The dispatch function for an airline;
 The check-in function at an airport;
 Fast food restaurant production and service;
 City bus tours organization for visitors;
 Organization of guest transport arrangements from airport to accommodation;
 Guest reception and queuing at the entrance to a theme park or other major attraction, and
 Handling customer complaints at a major tourist venue.
(Heizer, Render, & Munson, 2017, pp. 4–20)
KEY TAKEAWAYS
 The goal of operations management is to maximize efficiency while producing goods and
services that effectively fulfill customer needs.
 Operations is one of the three strategic functions of any organization.
 Operations decisions include decisions that are strategic in nature, meaning that they have long-
term consequences and often involve a great deal of expense and resource commitments.
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THE TRANSFORMATION MODEL

The transformation model for analyzing operations is shown in Figure 1, which represents the three
components of operations: inputs, transformation processes and outputs.

Operations management involves the systematic direction and control of the processes that transform
resources (inputs) into finished goods or services for customers or clients (outputs). This basic
transformation model applies equally in manufacturing and service organizations and in both the
private and not-for-profit sectors.

Figure 1: The transformation model

Source: Saylor Academy, & Creative Commons. (2010).
Inputs

Some inputs are used up in the process of creating goods or services; others play a part in the creation
process but are not used up. To distinguish between these, input resources are usually classified as:

 transformed resources – those that are transformed in some way by the operation to produce
the goods or services that are its outputs
 transforming resources – those that are used to perform the transformation process.

Inputs include different types of both transformed and transforming resources.

Three types of resource that may be transformed in operations are:

 materials – the physical inputs to the process

 information that is being processed or used in the process
 customers – the people who are transformed in some way.

Many people think of operations as being mainly about the transformation of materials or
components into finished products, as when limestone and sand are transformed into glass or an
automobile is assembled from its various parts. But all organizations that produce goods or services
transform resources: many are concerned mainly with the transformation of information (for
example, consultancy firms or accountants) or the transformation of customers (for example,
hairdressing or hospitals).

The two types of transforming resource are:

 staff – the people involved directly in the transformation process or supporting it

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 facilities – land, buildings, machines and equipment.

The staff involved in the transformation process may include both people who are directly employed
by the organization and those contracted to supply services to it. They are sometimes described as
‘labor’.

The facilities of an organization – including buildings, machinery and equipment – are sometimes
referred to as ‘capital’. Operations vary greatly in the mix of labor and capital that make up their
inputs. Highly automated operations depend largely on capital; others rely mainly on labor.

Identify the principal inputs (both transformed and transforming resources)

used by each of the following organizations, and their principal outputs.

Organization Inputs Outputs

Restaurant
University
Casino
Bakeshop

Discussion
The transformed resources of a restaurant include food and drink, and its
transforming resources include equipment such as cookers, refrigerators,
tables and chairs, and the chefs and waiters. In a university, the transformed
resources include students and knowledge and the transforming resources
include lecturers, tutors and support staff, as well as classrooms, books and
instructional materials.

Outputs
The principal outputs of a casino are gamblers; the outputs of a bakeshop include breads and pastries.
Many transformation processes produce both goods and services. For example, a restaurant provides
a service, but also produces goods such as food and drinks.

Transformation processes may result in some undesirable outputs (such as gambling in the example
above) as well as the goods and services they are designed to deliver. An important aspect of
operations management in some organizations is minimizing the environmental impact of waste over
the entire life cycle of their products, up to the point of final disposal. Protecting the health and safety
of employees and of the local community is thus also the responsibility of operations management. In
addition, the operations function may be responsible for ethical behavior in relation to the social
impact of transformation processes, both locally and globally.
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Transformation Processes
A transformation process is any activity or group of activities that takes one or more inputs,
transforms and adds value to them, and provides outputs for customers or clients. Where the inputs
are raw materials, it is relatively easy to identify the transformation involved, as when milk is
transformed into cheese and butter. Where the inputs are information or people, the nature of the
transformation may be less obvious. For example, a hospital transforms ill patients (the input) into
healthy patients (the output).

Transformation processes include:

 changes in the physical characteristics of materials or customers

 changes in the location of materials, information or customers
 changes in the ownership of materials or information
 storage or accommodation of materials, information or customers
 changes in the purpose or form of information
 changes in the physiological or psychological state of customers.

Often all three types of input – materials, information and customers – are transformed by the same
organization. For example, withdrawing money from a bank account involves information about the
customer's account, materials such as cheques and currency, and the customer. Treating a patient in
hospital involves not only the ‘customer's’ state of health, but also any materials used in treatment
and information about the patient.

One useful way of categorizing different types of transformation is into:

 manufacture – the physical creation of products (for example cars)

 transport – the movement of materials or customers (for example a taxi service)
 supply – change in ownership of goods (for example in retailing)
 service – the treatment of customers or the storage of materials (for example hospital wards,
warehouses).

Several different transformations are usually required to produce a good or service. The overall
transformation can be described as the macro operation, and the more detailed transformations
within this macro operation as micro operations. For example, the macro operation in a brewery is
making beer (Figure 2). The micro operations include:

 milling the malted barley into grist

 mixing the grist with hot water to form wort
 cooling the wort and transferring it to the fermentation vessel
 adding yeast to the wort and fermenting the liquid into beer
 filtering the beer to remove the spent yeast
 decanting the beer into casks or bottles.
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Figure 2 Macro and micro operations

Source: Saylor Academy, & Creative Commons. (2010).
Identify the principal resources (inputs), the type of transformation process
and the principal outputs (goods or services) in each of the following
operations.

Inputs Type of transformation Outputs

Refining steel
Assembling cars
Delivering cars to dealers
Repairing cars
Designing cars
Discussion
You may have identified various inputs such as materials, energy, machines,
equipment, buildings and people. For example, the inputs used by a car
assembly plant include components, equipment, buildings, labor, and
energy. You may also have included less tangible inputs to the
transformation process, such as information and skills.

You might have noticed that, midway down the list, the activities changed
from primarily the production of goods to the provision of services. In the
case of car designing, the principal inputs are ideas and the outputs are
materials used to communicate the finished idea, such as blueprints or
computer models.
Feedback
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A further component of the transformation model in Figure 1 is the feedback loop. Feedback
information is used to control the operations system, by adjusting the inputs and transformation
processes that are used to achieve desired outputs. For example, a chef relies on a flow of information
from the customer, through the waiter, about the quality of the food. Adverse feedback might lead the
chef to change the inputs (for example by buying better quality potatoes) or the transformation
process (for example by changing the recipe or the cooking method).

Feedback is essential for operations managers. It can come from both internal and external sources.
Internal sources include testing, evaluation and continuously improving goods and services; external
sources include those who supply products or services to end-customers as well as feedback from
customers themselves. (Heizer, Render, & Munson, 2017, pp. 13–20)

The Boundary of the Operations System

Operations management is a functional area that interacts with and is supported by other functional
parts of the organization. This section discusses about the suppliers and customers as areas outside
of the control of the organization.
The simple transformation model in Figure 1 provides a powerful tool for looking at operations in
many different contexts. It helps us to analyze and design operations in many types of organization at
many levels.

This model can be developed by identifying the boundaries of the operations system through which
an organization's goods or services are provided to its customers or clients. Figure 3, shows this
boundary and added three components that are located outside it:

 suppliers
 customers
 the environment.

Figure 3 The operations boundary

Saylor Academy, & Creative Commons. (2010).

Suppliers provide inputs to the operations system. They may supply raw materials (for example a
quarrying company providing limestone to transform into glass), components (as in car assembly),
finished products (for example a pharmaceutical company providing drugs to a hospital, or an office
supplies company providing it with stationery) or services (as in the case of a law firm providing legal
advice).
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The customers (or clients) are the users of the outputs of the transformation process. The boundary
drawn in Figure 3 around the transforming process can be thought of as the boundary of the
organization, so that the whole organization is viewed as an operations system, with its customers
external to it. This may be an appropriate way of viewing a small organization, whose outputs go
directly to its external customers.

However, most macro operations are made up of a number of micro operations, or sub-systems. Only
the outputs of the final micro operation go directly to a customer or client who is not part of the
organization that is carrying out the macro operation. The final user or client of the good or service is
the organization's external customer, and the users or clients of the outputs of the other micro
operations internal customers. Most of the operations in a large organization serve internal, rather
than external customers. For example, if you are the manager of a human resources department, a
printing unit or a building maintenance section within a large organization, your customers are
internal: they are other sub-systems within the larger organization that are external to your
operations system but internal to the organization as a whole.

All operating systems are influenced by the organization's environment. This environment includes
both other functional areas within the organization, each with its own policies, resources, forecasts,
goals, assumptions and constraints, and the wider world outside the organization – the legal, political,
social and economic conditions within which it is operating. Changes in either the internal or the
external environment may affect the operations function.
(Heizer, Render, & Munson, 2017, pp. 13–20)

Functional Structure
This section covers the functional structure that is common in many organizations. Operations is a
function within the organization. It is important to understand the other functional units and how
operations fit within the overall structure.

An organization with a functional structure is divided based on functional areas, such as IT, finance,
or marketing.

Advantages of a Functional Structure

- Functional departments arguably permit greater operational efficiency because employees

with shared skills and knowledge are grouped together by functions performed. Each group of
specialists can therefore operate independently with management acting as the point of cross-
communication between functional areas. This arrangement allows for increased
specialization.

Disadvantages of a Functional Structure

- A disadvantage of this structure is that the different functional groups may not communicate
with one another, potentially decreasing flexibility and innovation.
- Functional structures may also be susceptible to tunnel vision, with each function perceiving
the organization only from within the frame of its own operation. Recent trends that aim to
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combat these disadvantages include the use of teams that cross traditional departmental lines
and the promotion of cross-functional communication.

Functional structures appear in a variety of organizations across many industries. They may be most
effective within large corporations that produce relatively homogeneous goods. Smaller companies
that require more adaptability and creativity may feel confined by the communicative and creative
silos functional structures tend to produce.

Functional structure at FedEx: This organizational chart shows a broad functional structure at FedEx.
Each different functions (e.g., HR, finance, marketing) is managed from the top down via functional
heads (the CFO, the CIO, various VPs, etc.).
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MANAGING OPERATIONS

Service operations vs. Manufacturing operations.

Though the primary function of both manufacturers and service providers is to satisfy customer
needs, there are several important differences between the two types of operations.

 Intangibility. Manufacturers produce tangible products—things that can be touched or

handled, such as automobiles and appliances. Service companies provide intangible products,
such as banking, entertainment, or education.
 Customization. Manufactured goods are generally standardized; Services, by contrast, are often
customized to satisfy the specific needs of a customer. When you go to the barber or the
hairdresser, you ask for a haircut that looks good on you because of the shape of your face and
the texture of your hair. When you go to the dentist, you ask him or her to fill or pull the tooth
that’s bothering you.
 Customer contact. You could spend your entire working life assembling cars in Detroit and
never meet a customer who bought a car that you helped to make. But if you were a waitress,
you’d interact with customers every day. In fact, their satisfaction with your product would be
determined in part by the service that you provided. Unlike manufactured goods, many
services are bought and consumed at the same time. (Barrows, Powers, & Reynolds,
2012, pp. 683–688)

Operations Planning

When starting or expanding operations, businesses in the service sector must make a number of
decisions quite similar to those made by manufacturers:

 What services (and perhaps what goods) should they offer?

 How will they provide these services?
 Where will they locate their business, and what will their facilities look like?
 How will they forecast demand for their services?

Operations Processes

Service organizations succeed by providing services that satisfy customers’ needs. Companies that
provide transportation, such as airlines, have to get customers to their destinations as quickly and
safely as possible. Companies that deliver packages, such as FedEx, must pick up, sort, and deliver
packages in a timely manner. Colleges must provide quality educations. Companies that provide both
services and goods, such as Domino’s Pizza, have a dual challenge: they must produce a quality good
and deliver it satisfactorily.

Service providers that produce goods can, like manufacturers, adopt either a make-to-order or a make-
to-stock approach to manufacturing them. BurgerKing, which encourages patrons to customize
burgers and other menu items, uses a make-to-order approach. BurgerKing can customize products
because it builds sandwiches one at a time rather than batch-process them. Meat patties, for example,
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go from the grill to a steamer for holding until an order comes in. Then the patty is pulled from the
steamer and requested condiments are added. Finally, the completed sandwich chutes to a counter
worker, who gives it to the customer. In contrast, many of BurgerKing’s competitors, including
McDonald’s, rely on a make-to-stock approach in which a number of sandwiches are made at the same
time with the same condiments. If a customer wants, say, a hamburger without onions, he or she has
to wait for a new batch of patties to be grilled. The procedure could take up to five minutes, whereas
BurgerKing can process a special order in thirty seconds.

Like manufacturers, service providers must continuously look for ways to improve operational
efficiency. Throughout its sixty-year history, BurgerKing has introduced a number of innovations that
have helped make the company (as well as the fast-food industry itself) more efficient. BurgerKing,
for example, was the first to offer drive-through service (which now accounts for 70 percent of its
sales. (Krummert, 2009)

It was also a BurgerKing vice president, David Sell, who came up with the idea of moving the drink
station from behind the counter so that customers could take over the time-consuming task of filling
cups with ice and beverages. BK was able to cut back one employee per day at every one of its more
than eleven thousand restaurants. Material costs also went down because customers usually fill cups
with more ice, which is cheaper than a beverage. Moreover, there were savings on supply costs
because most customers don’t bother with lids, and many don’t use straws. On top of everything else,
most customers liked the system (for one thing, it allowed them to customize their own drinks by
mixing beverages), and as a result, customer satisfaction went up, as well. Overall, the new process
was a major success and quickly became the industry standard.

Facilities

When starting or expanding a service business, owners and managers must invest a lot of time in
selecting a location, determining its size and layout, and forecasting demand. A poor location or a
badly designed facility can cost customers, and inaccurate estimates of demand for products can result
in poor service, excessive costs, or both.

Site Selection

People in the real estate industry often say that the three most important factors to consider when
you’re buying a home are location, location, location. The same principle applies when you’re trying
to locate a service business. To be successful in a service industry, you need to be accessible to your
customers. Some service businesses, such as cable-TV providers, package-delivery services, and e-
retailers, go to their customers. Many others, however—hotels, restaurants, stores, hospitals, and
airports—have to attract customers to their facilities. These businesses must locate where there’s a
high volume of available customers.

“Through the light and to the right.” This is a favorite catchphrase among BK planners who are looking
for a promising spot for a new restaurant. In picking a location, BK planners perform a detailed
analysis of demographics and traffic patterns, yet the most important factor is usually traffic count—
the number of cars or people that pass by a specific location in the course of a day.
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Size and Layout

Because manufacturers do business out of plants rarely visited by customers, they base the size and
layout of their facilities solely on production needs. In the service sector, however, most businesses
must design their facilities with the customer in mind: they must accommodate the needs of their
customers while keeping costs as low as possible. Performing this twofold task isn’t easy.

For its first three decades, almost all BK restaurants were pretty much the same. They all sat on one
acre of land (located “through the light and to the right”), had about four thousand square feet of space,
and held seating for seventy customers. All kitchens were roughly the same size. As long as land was
cheap and sites were readily available, this system worked well enough. By the early 1990s, however,
most of the prime sites had been taken, if not by BK itself, then by one of its fast-food competitors or
other businesses needing a choice spot, including gas stations and convenience stores. With everyone
bidding on the same sites, the cost of a prime acre of land had increased.

To continue growing, BK needed to change the way it found and developed its locations. Planners
decided that they had to find ways to reduce the size of a typical BK restaurant. For one thing, they
could reduce the number of seats, because the business at a typical outlet had shifted over time from
90 percent inside dining and 10 percent drive-through to a 50-50 split. BK customers tended to be in
a hurry, and more customers preferred the convenience of drive-through “dining.”

David Sell (the same executive who had recommended letting customers fill their own drink cups)
proposed to save space by wrapping Whoppers in paper instead of serving them in the cardboard
boxes that took up too much space in the back room of every restaurant. So BK switched to a single
paper wrapper with the label “Whopper” on one side and “Cheese Whopper” on the other. To show
which product was inside, employees just folded the wrapper in the right direction. Ultimately, BK
replaced pallets piled high with boxes with a few boxes full of wrappers.

Ideas like these helped BK trim the size of a restaurant from four thousand square feet to as little as
one thousand. In turn, smaller facilities enabled the company to enter markets that were once cost
prohibitive. Now BK could locate profitably in airports, food courts, strip malls, center-city areas, and
even schools. The company even designed 10-foot-by-10-foot kiosks that could be transported to
special events, stadiums, and concerts.

Capacity Planning

Estimating capacity needs for a service business isn’t the same thing as estimating those of a
manufacturer. A manufacturer can predict overall demand, produce the product, store it in inventory,
and ship it to a customer when it’s ordered. Service providers, however, can’t store their products for
later use: hairdressers can’t “inventory” haircuts, hospitals can’t “inventory” operations, and
amusement parks can’t “inventory” roller-coaster rides. Service firms have to build sufficient capacity
to satisfy customers’ needs on an “as-demanded” basis. Like manufacturers, service providers must
consider many variables when estimating demand and capacity:

 How many customers will I have?

 When will they want my services (which days of the week, which times of the day)?
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 How long will it take to serve each customer?

 How will external factors, such as weather or holidays, affect the demand for my services?

Forecasting demand is easier for companies like BK, which has a long history of planning facilities,
than for brand-new service businesses. BK can predict sales for a new restaurant by combining its
knowledge of customer-service patterns at existing restaurants with information collected about each
new location, including the number of cars or people passing the proposed site and the effect of nearby
competition.

Managing Operations

Overseeing a service organization puts special demands on managers, especially those running firms,
such as hotels, retail stores, and restaurants, that have a high degree of contact with customers. Service
firms provide customers with personal attention and must satisfy their needs in a timely manner. This
task is complicated by the fact that demand can vary greatly over the course of any given day.
Managers, therefore, must pay particular attention to employee work schedules and (in some cases)
inventory management.

Scheduling

In manufacturing, managers focus on scheduling the activities needed to transform raw materials into
finished goods. In service organizations, they focus on scheduling workers so that they’re available to
handle fluctuating customer demand. Each week, therefore, every BK store manager schedules
employees to cover not only the peak periods of breakfast, lunch, and dinner, but also the slower
periods in between. If he or she staffs too many people, labor cost per sales dollar will be too high. If
there aren’t enough employees, customers have to wait in lines. Some get discouraged, and even leave,
and many may never come back.

Scheduling is made easier by information provided by a point-of-sale device built into every BK cash
register. The register keeps track of every sandwich, beverage, and side order sold by the hour, every
hour of the day, every day of the week. Thus, to determine how many people will be needed for next
Thursday’s lunch hour, the manager reviews last Thursday’s data, using sales revenue and a specific
BK formula to determine the appropriate staffing level. Each manager can adjust this forecast to
account for other factors, such as current marketing promotions or a local sporting event that will
increase customer traffic.

Inventory Control

Businesses that provide both goods and services, such as retail stores and auto-repair shops, have the
same inventory-control problems as manufacturers: keeping levels too high costs money, while
running out of inventory costs sales. Technology, such as the point-of-sale registers used at BK, makes
the job easier. BK’s system tracks everything sold during a given time and lets each store manager
know how much of everything should be kept in inventory. It also makes it possible to count the
number of burgers and buns, bags and racks of fries, and boxes of beverage mixes at the beginning or
end of each shift. Because there are fixed numbers of supplies—say, beef patties or bags of fries—in
each box, employees simply count boxes and multiply. In just a few minutes, the manager knows
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whether the inventory is correct (and should be able to see if any theft has occurred on the shift).
(Saylor Academy & Creative Commons, 2010)

Key Take Away

· While manufacturers produce tangible, generally standardized products, service firms provide
intangible products that are often customized to satisfy specific needs. Unlike manufactured
goods, many services are bought and consumed at the same time.
· Operational efficiency is just as important in service industries as it is in manufacturing.
· Operations managers in the service sector make many decisions that are similar to those made
by manufacturers: they decide which services to offer, how to provide these services, where to
locate their businesses, what their facilities will look like, and what the demand will be for their
services.
· Service providers that produce goods can, like manufacturers, adopt either a make-to-order
approach (in which products are made to customer satisfaction) or make-to-stock approach
(in which products are made for inventory) to manufacturing them.
· Estimating capacity needs for a service business is more difficult than for a manufacturer.
Service providers can’t store their services for later use: services must be delivered on an as-
needed basis.
· Overseeing a service organization puts special demands on managers, especially services
requiring a high degree of contact with customers.
· Given the importance of personalized service, scheduling workers is more complex in the
service industry than in manufacturing. In manufacturing, operations managers focus on
scheduling the activities needed to produce goods; in service organizations, they focus on
scheduling workers to ensure that enough people are available to handle fluctuating customer
demand.
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OPERATIONAL ISSUES IN HOTELS

Most businesses you visit for an hour or less and receive the services they provide. In the hotel business,
travelers can be at the hotel for twenty hours or more. These distinctive aspects come with challenges,
including employee turnover, operating costs, and natural disasters.
The first most common operational issue in the hotel business is employee turnover. The around-the-
clock hours means staff around the clock too. It is not your typical Monday through Friday office hours’
job. Therefore, finding long-term employees to work these hours can be difficult, not to mention ones
that will work weekends and holidays.
Hotels are trying to keep up with the technology trends and each change adds expenses; for example,
increasing Wi-Fi speeds and making it possible for travelers to check in on their phones. Having fast
Wi-Fi networks adds costs. Hotels have to change out equipment and make sure their systems are
compatible.
Have you been to a hotel recently and realized that they just renovated? Why bother? Well, some hotel
companies require their hotels to renovate every two to four years to stay up to date. Renovating
hotels can mean millions of dollars. All of these costs are increasing, while revenue may not, at least
not at the same rate.
Lastly, natural disasters can have a big detrimental impact on the hotel industry. It seems like every
time you turn on the news there's a new natural disaster that has occurred. These natural disasters
often times occur in tourism areas, like seasides or islands.
Dealing with a disaster like an earthquake or hurricane involves taking care of the travelers, and of
course, the immense cleanup time. Hotels that are affected by natural disasters can take years to
rebuild. The employees are, therefore, out of work, and the hotel, being closed, doesn't make any
money. When they do reopen, they will basically have to start over when it comes to hiring.

Organization of Lodging Structures

Fig. 1 Organization of Lodging Structures

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Executive Management
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The executive management group serves as the leadership of a property and includes the general
manager and, in the case of larger hotels, one or more assistant managers.

Fig.2 Executive management group

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General Manager

The general manager is the overall manager of the property and is ultimately responsible for the
hotel. This person must work with all department managers and their teams to ensure that the
property runs smoothly, problems are handled, and the teams work together.

Assistant Manager

Assistant managers are often responsible for supporting the general manager and handling specific
issues assigned, and are considered part of the executive management team.The assistant manager
may directly oversee one or more departments and handle the issues related to that team. Because
hotels are 24-hour-a-day businesses, the general and assistant managers may vary their hours to
ensure that a manager is onsite throughout both days and evenings. The assistant manager will also
manage the hotel in the event the general manager is unavailable.

Functional Groups
The functional groups of a hotel handle issues that are directly related to guests. These teams must
handle requests, problems, and services for customers.

Fig.3 Functional groups

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Housekeeping

Housekeeping is an area that greatly affects the satisfaction of guests at any hotel. If a guest finds his
or her room to be dirty or poorly cared for, they may not remain at the property and may not return
in the future. While most guests will not come into contact with the person who cleans their room,
their ultimate satisfaction with their stay at a property will be largely dependent on how well the
room was cleaned and maintained. Housekeeping staff should understand their important role within
a hotel and strive to provide excellent service to all guests.
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Food and Beverage

The food and beverage department manages any restaurants, cafés, coffee shops, bars, lounges, or
other types of food-preparing facilities provided at the property. This department is important for
providing convenience to guests and increasing revenue for the hotel. The food and beverage areas
must be very clean, provide excellent products, and offer superior service. Guests are more likely to
be satisfied with the property and spend their food budget at a hotel when they are offered exceptional
food and beverages.
Front Desk and Guest Services
The front desk most often addresses questions, concerns, and problems of the guests. The staff
members at the front desk or concierge desk must be well-educated about the property, and they must
know the area around the hotel well. The more informed these staff members are, the better able they
are to meet the needs of the guests.

Administrative Groups

The administrative groups handle the behind-the-scenes details that keep the property running
smoothly. These teams organize systems and processes that minimize chaos and manage
administrative details.

Fig. 4 Administrative groups

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Malcolm Baldrige Award: Purpose

When was the last time you won an award? Maybe it was a trophy for a winning soccer season or
completing a dance recital. Businesses also love to win awards, as it appeals to their competitive spirit.
The award was created by the U.S. Congress in 1987 and is named after a former Secretary of
Commerce, Malcolm Baldrige Jr. The award offers commendation to U.S. companies that have
executed strong quality management systems. The award is given yearly in six different categories,
including education, service, manufacturing, small business, healthcare, and nonprofit.
Setting the Bar

In every industry, there is a leader that sets the standard that the others in the industry aspire to
achieve. In the hotel industry, the Ritz-Carlton Hotel Company has perennially been setting that
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standard to the envy of its competitors. As a result of its outstanding reputation, Ritz-Carlton received
the Malcolm Baldrige National Quality Award, also known as the Baldrige Award, in 1992 and
1999. Only one other company has won the award more than once, and the Ritz-Carlton is the only
company in the hotel industry to win the award. In this lesson, we will look at the requirements of the
award, and then analyze in-depth why the Ritz-Carlton won the award.

The Baldrige Award requires businesses to show achievement or improvement in these seven areas.
Baldrige Criteria

Fig. 5 The Baldrige Award

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1. Leadership: This includes how the managers lead the company as well as how the company
helps lead the local community.
2. Strategy: The company needs to show how it strategically plans its directions.
3. Customers: How the company maintains strong and lasting customer relationships.
4. Measurement, analysis, and knowledge management: The company shows how it acquires the
data needed to function as well as to determine performance.
5. Workforce: How the employees and staff are involved and empowered.
6. Operations: The company shows how it creates, manages, and makes its operations and key
processes better.
7. Results: How satisfied customers are with the company. How its finances, suppliers, partners,
human resources, governance, and social responsibility measure up to the competition.

Deserving the Award

As mentioned earlier, Ritz-Carlton received this award in 1992 and 1999. In its applications for the
awards, Ritz-Carlton showed how the business promoted excellence in both quality of leadership as
well as quality of service. But it was not just on paper that Ritz-Carlton showed its excellence. During
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site inspection, the NIST examined if the business really did meet all the required criteria. Ritz-Carlton
received stellar marks on its site inspections.

What Makes Ritz-Carlton Special?

The name Ritz-Carlton itself is synonymous with quality and luxury. As of 2017, it operates 91 luxury
hotels in 30 different countries. You can find them in the United States, in Mexico, in China, and in
Egypt, among other countries. It has 40,000 employees which are thoroughly trained. In 1991, a
survey of employees showed that 96 percent were fully aware that excellent guest service is a priority
for the hotel, showing the hotel's excellence and quality in leadership. Furthermore, the motto for the
corporate business is ''ladies and gentlemen serving ladies and gentlemen.'' When problems arise,
workers are given the right to do whatever is needed to satisfy the customer. Other employees, no
matter what their job, are required to provide help if asked by fellow employees in solving customer
issues.

Hotel Management Companies vs. Franchises

Types of Hotel Operations

There are a few ways in which a hotel can operate. First, there are independent hotels that operate
under their own name like a small bed and breakfast or an inn. In independent hotels, the owner is
present and involved in the day-to-day operations. Other hotels operate using a management
company. A management company runs the operations and manages the process for the owner and
shares in the profits. The owner uses his funds to purchase an existing property or build a new hotel,
then hires a company to take care of the rest. Those who are interested in owning a hotel but do not
want to risk failure may purchase a franchise by buying the rights to operate under a brand name, like
Hilton or Holiday Inn. The type of operation an hotelier uses depends on the level of involvement,
access to capital and the amount of risk one is willing to take.

Role of a Management Company

So, if a potential hotel investor prefers to work with a management company, they should know that
company is responsible for:

 Running all departments, like front desk, housekeeping and maintenance

 Hiring, training and terminating employees
 Paying salaries and wages to employees
 Revenue management
 Marketing and public relations
 Managing capital expenses, like furniture and fixtures
 Financial reporting
 Making purchases and reconciling with vendors and suppliers
 Developing and adhering to an annual budget
 Compliance with the brand standards
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The owner of a non-branded hotel that is not affiliated with a chain hotel may contract a
management company for a term of 3-10 years. A contract for a branded hotel, one that is affiliated
with a brand name chain, may extend from 10-30 years. This longer term is mostly because a branded
hotel has a proven track record and strong brand recognition so the rate of success is higher than an
independent hotel.
Management companies are compensated in two ways: a base fee and incentive fees. The base fee is
a set percentage, between 2% and 4%, of the gross revenue. An incentive fee is like a bonus and is
given to the management company for meeting goals, like increased revenue or occupancy.
Advantages and Disadvantages

There are several advantages to using a management company. One advantage is that the hotel owner
does not have to be involved in the day-to-day business of running the hotel. Management companies
also have expertise in running a hotel and compensation is linked to performance, so management
companies have an incentive to work hard to make the hotel a success.
Let's not forget the downside. While using a management company the owner has little say in
decision-making. This can lead to conflicts, as poor decision making on the part of the management
company ultimately affects the owner of the hotel. For a hotel investor, the advantages may outweigh
the disadvantages. But if a hotel owner wants to be more involved in the property, franchising may be
a better option.

How Does a Hotel Franchise Work?

A franchise is an agreement between the branded hotel company that allows the use of the brand
name, management and marketing plans in exchange for a fee. The agreement is between
the franchisor, or the owner of the brand, and the franchisee, or the person or entity purchasing the
rights.

A Hilton Hotel Franchise

Opening up and running your very own hotel is an exciting venture. To help you, some large hotel
chains offer franchising opportunities. By purchasing a franchise, you immediately get to operate
under a trusted name, helping you to get customers right away. One hotel chain that offers such a
franchise is the Hilton brand.

A franchise is a license that you purchase for the right to operate under someone else's trademark
using the procedures that have already been proven to work in that business. For example, a
McDonald's franchise gets access to the brand name, all the recipes, and all the operating procedures
for that brand. The Hilton brand actually offers franchises under many of its names, such as Waldorf
Astoria, DoubleTree, and Hampton. Franchisees can choose to open up under any of these recognized
brand names that are available in their area. In this lesson, though, you'll see what is involved in
opening up a Hilton Hotels & Resorts franchise.
The information in this lesson is taken from the latest development brochure provided by Hilton
Worldwide, as of August 2017. According to this brochure, more than 1,200 Hilton Hotels have been
opened in the past six years. That's a lot of franchises!
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Fees
According to this brochure, there were 557 Hilton Hotels & Resorts in April 2015, with a total of
200,360 rooms. Of these properties, 40.5% are franchised.
The initial license fee to start a franchise is $75,000. This fee covers the first 250 rooms. After that,
there is a $400 per room charge. So if you wanted to open up a 300-room hotel, your initial license fee
is $75,000 + $400 * 50 (for all the rooms past 250 rooms) = $75,000 + $20,000 = $95,000.
In addition to the initial license fee, you also have monthly fees based on the amount of sales you make
each month. Each month, you have to pay 5% of your monthly room revenue as royalty and 4% for
the program fee. That's a total of 9% right there. There is also a food and beverage fee of 3% of your
food and beverage sales. If you want to operate a spa, then you'll also need to pay 5% of your spa sales.
All these fees are in addition to any costs you need to develop and build your hotel. Your total could
be as much as $100 million. The franchise fees are so that you can operate under the Hilton brand.

Calculating Net Monthly Cost

Let's see how this all adds up for your 300-room Hilton Hotel.
Imagine that you've now been in business for a while. You are now calculating the fees you need to
pay for the month that has just passed. You've already paid the initial license fee of $95,000, so now
your monthly fees are simply the percentages of sales that you make. You have this list of your gross
sales for your rooms, your food and beverages, and your spa:

Gross
Category
Sales
Rooms $1,056,938
Food and
$298,385
Beverage
Spa $873,529
Now, you can calculate your net monthly cost for this past month.
You need to pay a royalty fee of 5% of your gross room sales. This amounts to $1,056,938 * 0.05 =
$52,846.90.
The franchise program fee is 4% of your gross room sales, which amounts to $1,056,938 * 0.04 =
$42,277.52.