Elegant Hotels is a chain of twenty hotels across the country. Each hotel is wholly owned

by the company. Four years ago the chain was bought by a group of investors who installed a new management team.

The new management team introduced a new reward scheme for the hotel managers in an attempt to motivate managers to improve the revenue and profitability of the chain. The salary package devised for each manager comprised:

– A relatively low fixed salary

– A bonus payment based on high room occupancy rate. The occupancy rate is the percentage of usable hotel beds filled every night. Managers who achieved more than 90% occupancy rate receive a significant bonus. This target is aimed at keeping the hotel full.

– A smaller bonus payment based on the net profit margin achieved by the hotel. This is aimed at improving the profitability of the hotel.

However, despite these incentives the overall performance of the company is still declining. Managers are generally achieving a high occupancy rate but are largely failing to deliver higher net margins. It is also clear that some managers have achieved a high occupancy rate by declaring that some bedrooms were unfit for use or were being used as seminar rooms.

Also, the pursuit of high occupancy and high net profit appears to be affecting the perceived image of the hotel chain.

Once regarded as a mid-market hotel chain, the chain now seems to be perceived as a budget buy. A large percentage of bookings are received through the Internet broker lastsecondhotels.com and their view of the chain is given below, together with some visitor quotes from their web site.

Comments

‘Great last minute bargain … very easy to get rooms at half the advertised rate’

‘Full of school children on a trip … will not be using this chain again’

‘No Internet connections in the rooms or public areas, very disappointing’

‘The bath was cracked and the windows were dirty. Cheap, but badly in need of a clean’

‘Receptionists were very off-hand and unable to help. Did not seem to know much about the area surrounding the hotel’

‘The staff were surly and uncommunicative. Much worse than last time we visited it. It used to be such a lovely hotel’

‘Cheap, but don’t eat there. The price for breakfast was extortionate’

‘Cheap and cheerful but don’t pay the full rate! Always lots of cheap beds available’

‘Food was expensive and dull. The serving staff were uncommunicative, the cutlery was dirty and damaged. Staff were more interested in talking to each other than to the customers’

‘Restaurant food was very expensive and of poor quality. The two nights I stayed there I was the only customer in the restaurant’

Lastsecondhotels.com says: ‘Value for money hotels with rooms always available. Perfect for those last minute breaks’

Required:

(a) Analyse the unanticipated consequences of the management reward scheme at Elegant Hotels. (15 marks)

(b) The DMAIC methodology of Six Sigma includes five steps: Define, Measure, Analyse, Improve and Control.

Evaluate the potential benefits of using the DMAIC methodology at Elegant Hotels. (10 marks)