Capacity Allocation for Demand of Different Customer-Product-Combinations with Cancellation, No-Shows, and Overbooking When There is a Sequential Delivery of Service

Abstract:     
We consider a problem where different classes of customers can book different types of service in advance and the service company has to respond immediately to the booking request confirming or rejecting it. Due to the possibility of cancellations before the day of service, or no-shows at the day of service, overbooking the given capacity is a viable decision. The objective of the service company is to maximize profit made of class-type specific revenues, refunds for cancellations or no-shows as well as the cost of overtime. For the calculation of the latter, information of the underlying appointment schedule is required. Throughout the paper we will relate the problem to capacity allocation in radiology services. Drawing upon ideas from revenue management, overbooking, and appointment scheduling we model the problem as a Markov decision process in discrete time which, due to proper aggregation, can be solved to optimality with stochastic dynamic programming. In an experimental study where we employ data from the radiology department of a hospital we show that the detrimental effects of the aggregation are negligible. Furthermore, we compare the optimal policy to four heuristic policies, of whom one is currently in use. We can show that the optimal policy significantly improves the currently used policy and that a nested booking limit type policy closely approximates the optimal policy and is thus recommended for use in practice.

Number of Pages in PDF File: 28

Keywords: Capacity Allocation, Services, Health Care Operations, Markov Decision Process, Dynamic Programming

JEL Classification: C61, I10, L80

working papers series