Assignment Problem: Capacity Allocation at the Sunrise
Mindy Lee is a software engineer who works for a company that is known for its inventory management software suite. She specializes in designing interfaces that help a business migrate its inventory data to cloud computing. Mindy has loved the Internet since her school years; she used e-mail services and browsers before any other kid in her class. She books all her travel arrangements online, including flight tickets, car rentals, and hotel rooms.
After an unexpected loss in her family, Mindy has inherited some money that she thinks is enough to invest in a small hotel. Mindy has decided to buy a controlling stake in the Hotel Sunrise, a 140-room independent limited-service midscale property. Mindy has 80 percent ownership and her silent partner owns 20 percent, allowing Mindy total control in operating decisions. Mindy sees a lot of potential for the hotel, which has struggled over the years to gain market share. The previous owner, an old hotelier, had refused to buy into a franchise and had cherished the hotel's independence, hoping to compete on service quality and reputation. The average occupancy of the Sunrise was about 40 percent on an annual basis for the last couple of years.
Mindy doesn't pretend to know how to run a hotel's daily operations, but is convinced that she can boost sales by embracing OTAs to sell the Sunrise's rooms. She pins her high hopes on working with Expedia. After her first two quarters of being in charge, Mindy sees her optimism justified: the monthly average occupancy of her hotel is up at 67 percent, which is a significant improvement. Her ranking for her location on Expedia searches is first-page placement since last month. Her ADR has taken a bit of a beating, though: it has decreased from $130 to $96.40. Expedia takes a commission of 27 percent out of that. Virtually all rooms are sold through Expedia, as even regular guests book on the OTA website rather than pay the $130 rate posted on the Sunrise's home page.
After her hotel manager presents Mindy with the performance metrics, it is clear to Mindy that, after occupancy gains, the Sunrise has a lower RevPAR than it had before. Mindy needs to think about room rates, distribution costs, and overall profitability, as both she and her co-investor are getting impatient.
Required: How might Mindy improve the RevPAR of the Sunrise without raising room rates?