Report on Revenue

8/7/2019 Report on Revenue

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Role of Supply Chain Management inRevenue Enhancement

Over the years, our profession has been dominated with cost saving and costavoidance objectives. Correctly so, CEOs have focused on bottom line results andone obvious and important area of a CEOs focus is how well we spend money forcapital and operating expenses. As a profession, Supply Chain Managers haveestablished key dashboard metrics involving cost savings, cost avoidance, reducedsupplier base, quality, our value as related to earnings per share, internal customersatisfaction, and numerous other measurements that zero-in on either cost reductionsor process enhancements and efficiencies. Yes, it is important to be bottom linefocused, but we also need to be moving towards an effective supply chainorganization that can also be top line focused by contributing to revenues.

Objective.This workshop will review ways in which supply chain functions can helpour companies in Revenue Enhancement.

It Starts with Having the Right Supply Chain Attitude and Mindset.

Our profession continues to mature and it is evident that to be effective, we should beadopting Stephen R. Coveys Habit No. 4 from his well known book, The Seven

Habitsof

Highly Eff

ective People. Habit No. 4 states that to be effective, we mustestablish a Win-Win attitude. Effective Supply Chain organizations have moved out of

their organizational silos and have concentrated on becoming collaborative bothinternally with business units and externally with our supply base. We have learnedthat adhering to the old school SCM tactics of possessing a Win-Lose mindset (my

way or the highway) does not bode well in todays environment. Sure, the short termgains will be there for those supply chain organizations that continue to place littleemphasis on building long term, mutually beneficial relationships. But in the long run,these organizations will suffer by not having buy-in from internal business units andfrom receiving little, if any, innovative ideas from key suppliers. Covey hits at the

heart of achieving the correct attitude and mindset with Habit No. 4: Unless we arewilling to understand that a Win-Win attitude is truly the best in the long run, we aresetting ourselves up for extreme disappointment. The same is true in Supply ChainManagement. We must continue to market ourselves to the internal business unitsas an organization that adds value, and we must be able to foster long termrelationships with key suppliers in order to achieve optimum results. This mindset is


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the basis for having the opportunity to be recognized by executive management andour internal customers as a function that can produce value in the organization.

Three Reasons Not To Be Invited To the Party.

The correct mindset is only the beginning. Developing a good marketing planshould be a key objective within our supply chain organization strategy. To be aneffective component of our company operations and organizational scheme, we mustbe viewed as adding value. We should be constantly demonstrating to seniormanagement that we are credible and that we can add to the strategic objectives of thecompany. More often than not, supply chain organizations have individual strategiesand objectives that are not in tune with the companys key strategies. Part of oursupply chain strategy should be focused not only on the cost cutting/controllingobjectives, but also on how we as an effective supply chain function can assist in

helping the Top Line. Three reasons not to be invited to the party by our seniormanagement are:1. The organization does not regard SCM as a Strategic Function: If we are still in our

Win- Lose mindset, concerned only about tactical issues, we will not be asked toparticipate in the long term strategic planning for our companies. We mustdemonstrate that strategic sourcing and other similar collaborative efforts are thefoundation of any effective supply chain organization.2. The SCM department has difficulty executing its Core Responsibilities: If we havethe right intentions, but have difficulty getting it done, credibility will be lost. SCMdepartments should be constantly reviewing performance of core functions such as

sourcing, contract management, controlling assets, and developing key relationshipswith a supply base on primary spend areas.3. The SCM department has not demonstrated Strategic Objectives: Once we haveour SCM organization operating smoothly, we must constantly be searching foropportunities to get involved with the business units and their plans. Sure, operatingcollaboratively on key projects is important, but we must demonstrate to our internalcustomers the value of having us participate in planning, research and development,and early involvement with product development.

How Can SCM Organizati

ons C

ontribute t

oRevenue?

Traditionally, SCM organizations have excelled at cost reduction efforts and we havebeen extremely successful in recording and documenting our successes. The firstorder of business in understanding how we can contribute to Revenue Enhancementis learning to speak the same language used by our CEOs. This Financial Speak isdefined as converting cost reduction initiatives that will relate to financial reporting


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documents and ratios. In the world of Financial Speak, there are two ways toconvey our SCM contributions:(1.) Income Statement Ratios: The traditional way of relating to our cost reductionefforts is in terms of increasing the earnings per share, reducing the price earningsratios, reducing production unit cost, etc. And based on your particular businessoperations, there are a multitude of other measurements that can be tied to incomestatement information.(2.) Revenue Enhancement: We have been excellent in the past at relating to theincome statement ratios mentioned above. But we have an opportunity to gain theattention of our CLevel executives by also adding Revenue enhancement metrics toour Financial Speak. Conversing in language of Revenue Enhancement provides a

very effective and compelling business case for emphasizing our SCM value. Letsbegin relating in terms of not only how much we added to the bottom line, but whatour SCM efforts have done in terms of Top Line or Revenue Enhancement. In basic

terms, if our company has an after tax objective of 5% profit, then we know that forevery $1 dollar in cost savings, this is equivalent of increasing our revenues by $20. This is information that our Senior Management can and will appreciate. Statedotherwise, for example, if our SCM organization has documented savings of $5million, that is equivalent to the company having to generate $100 million in sales toproduce a $5 million profit.

Where Can SCM Contribute toIncreasing Revenues?

1. Recognizing that our SCM functions ability to lower Total System Cost

equates to increased revenues: As outlined above in our Financial Speaksection, it is imperative for us to begin speaking the same language as our seniormanagement and to establish Revenue Enhancement as one of our departmentaldashboard metrics.2. Optimize The Supply Chain: The following are examples where we as aprofession have always been involved to some degree in Revenue Enhancement, butfailed to equate or speak in terms of increasing revenues.a. Reduce Lead Time to Market:Whenever we have met or exceeded our internalbusiness units objectives of getting production materials to the manufacturing site

ahead of schedule, we have actually performed a basic revenue enhancementopportunity and case. If a key commodity is needed in the production cycle and weare successful in beating the current delivery schedules or market conditions, we arethen in a position to produce the end product at an earlier date. This relates toincreasing revenues sooner than anticipated and will be a

Top Line focused issue.


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b. Sourcing Alternative Components or Materials at a Better Price or Value:This allows our finished product to have a competitive marketing advantage. Whenwe have a relationship with our internal business units that allow us the opportunityto understand needs and requirements, we are in a great position to contribute to theoverall marketing strategy. By having their complete buy-in and being recognized as a

valued organization and contributor, our internal business units and marketingfunction can convey to us what our efforts really meant in terms of increasingrevenues by being more competitive in the marketplace.c. Free Up Warehousing Space for Manufacturing:A key objective of most SCMorganizations involves reduction of inventory and establishing the concept of VendorManaged Inventories when appropriate and practical. One reason, of course, is theemphasis on cash flow. But we can also state that the warehousing space that wassaved can be used for other internal manufacturing or administrative uses. Onceagain, we have the opportunity to relate to more than just cash flow. We have

contributed to increasing revenues via additional manufacturing floor space or use thewarehousing space for retail.d. Use Existing Supplier Relationships to Foster New Opportunities: Oftenoverlooked is the tremendous value that our key suppliers can provide to us for newopportunities. While strategic sourcing does foster a mindset of developing trustbetween us and our key suppliers, we should be taking advantage of our suppliersknowledge and their relationships with their customers. A key supplier not only canoffer suggestions regarding better and/or lower cost products, but they can lead us totheir other client companies and customers where we may have the opportunity to sellour products.

Summary. There are a number of ways that we can convey to our seniormanagement that we are contributing value both in cost reduction efforts and revenueenhancements. Now that our profession is being recognized by C level executives ashaving value and importance, we need to take advantage of that focus. We need tostep up our efforts to think and act like a CEO or Board member. We should bespeaking the Financial Speak language in relating our successes. We are beingchallenged to convert our day to day SCM function, activities, and successes intolanguage and terminology that our senior management and board membersunderstand. In conclusion, Revenue Enhancement should be added to our standard

dashboard of performance metrics.


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ABSTRACT

In many firms, revenue management (RM), pricing, customer relationshipmanagement, and distribution channel management are still a chain of separatedepartments with separate rulers, and in many cases separate goals measured on

separate databases, analytical processes, and skill sets. Centralizing and integratingthese functions to create a Profit Optimization department, using RM and pricingtheories and tools, will allow firms to move away from traditional revenuemanagement and towards Total Demand Profit Optimization. Under this umbrella,rather than simply managing existing demand, firms can create and direct demand byincorporating the demand generating capability and cost structure of customers andchannels into the revenue management decision. This goal can only be accomplished

with a centralized solution that integrates data from these disparate sources,automatically executes analytical processes, and provides a central view to alldepartments, so that demand management decisions are made according to acommon profit optimization goal.

INTRODUCTION

Revenue management programs increase revenue by four to eight percent on average(Smith et al. 1992). The majority of this incremental revenue goes straight to thebottom line since few variable costs are associated with each additional unit ofadditional demand. These impressive increases have turned revenue managementfrom a competitive advantage to a must-have for some industries. However, even

firms with relatively mature revenue management programs can still benefit frominnovative new programs. Future applications of revenue management willincorporate the capabilities of other departments within the firm and extend to othertypes of businesses. This paper discusses three general areas that relate to the futureof revenue management: synchronizing demand control and demand generating functions under a largerprofit optimization framework applying customer analytics in a systematic fashion to support customer centricpricing applying revenue management to non-traditional businesses


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WHEN IS ITS USE APPROPRIATE?

Revenue Management is an economic discipline appropriate to many serviceindustries in which market segment pricing is combined with statistical analysis toexpand the market for the service and increase the revenue revenue per unit of

available capacity. The intelligent use of revenue management principles can be usedto increase top line revenue and bottom line profitability in any service industrypossessing the following characteristics:

Demand for the service can be divided into clear market segments and sensitivity toprices varies among the market segments.

The firms capacity is relatively fixed; it is expensive or impractical to add or subtractinventory in the short run, though there may be some ability to shift it.

There is a time dimension to the provision of the service once that time haspassed, the inventory loses all of its value.

The cost of selling an additional unit of the existing capacity is low relative to theprice of the service.

There is an opportunity to evaluate and accept or reject order requests in advance ofthe performance of the service, or There is considerable flexibility to adjust pricesquickly to reflect variations in the balance of supply and demand.

There are definite peaks and valleys in demand, which can be predicted, but not witha high degree of certainty.

The most familiar and well developed example of revenue management in practice isthe Airline industry

where:

SEGMENTED MARKETS

Demand is segmented into business and leisure market segments using discount fare

restrictions. Relatively price insensitive business travelers are charged higher fares thanmore price sensitive leisure travelers.

FIXED CAPACITY

The number of seats on a flight is fixed once schedules are set.


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PERISHABLE INVENTORY

Once a flight has departed, the unsold seat inventory has no value.

LOW MARGINAL SERVICING COSTS

The out-of-pocket cost of adding a passenger to a flight is very low. (Meals andservicing expenses of less than $10.)

ADVANCE SALES

Booking requests are tendered in advance of departure and can be evaluated usinglogic programmed into the computerized reservation system. Fares can be changed onshort notice.

UNCERTAIN DEMAND FORECASTS Passenger demand varies by season, day-of-week, and time-of-day and can be

forecast by flight and fare category, but not precisely.

Airlines that practice revenue management well have found that they have added asmuch as five to ten percent to their bottom line revenues. Airlines consider theirrevenue management systems to be strategic systems and they continue to investheavily in them. Revenue management has also taken hold widely throughout the restof the Travel industry as well. Almost all major Hotel, Car Rental Agencies, CruiseLines and Passenger Railroad firms have, or are developing, revenue managementsystems. Other industries that appear ripe for the application of revenue managementconcepts include Golf Courses, Freight Transportation, Health Care, Utilities,

Television Broadcast, Spa Resorts, Advertising, Telecommunications, Ticketing,Restaurants and Web Conferencing. Let us go through the checklist to see if revenuemanagement is applicable to your industry. Are some or all of the followingcharacteristics applicable to your business?

?? Perishable inventory?? Relatively fixed capacity?? High fixed costs, low variable costs?? Advance reservations?? Time variable demand

?? Appropriate cost and pricing structure?? Segment able marketsIf your answer is yes, then your business will profit from the application of revenuemanagement principlesand systems.


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TOTAL DEMAND PROFIT OPTIMIZATION

Traditionally, revenue management departments have been responsible for controllingdemand. Revenue increases result from pricing strategies that encourage bookingsduring slow demand periods and restrict access to only the highest paying customers

during peak periods. Instead of accepting bookings in the order they come in, revenuemanagement techniques reserve space for the most valuable customers that areforecasted to arrive, allowing firms to say no to lower valued customers before therooms are fully booked. . Pure demand control techniques have increased revenue,but they generally fail to account for the impact of demand generating functions. Forexample, marketing departments manage loyalty programs that encourage customersto repurchase, but loyalty is not a factor in revenue management algorithms. Typically,revenue management decisions occur in the absence of specific customer preferences,

willingness to pay data, or the cost of the demand generated by different distributionchannels. Integrating marketing, pricing, and distribution with revenue managementsynchronizes demand control and demand generation. This integration moves thefirm from revenue management to demand management (Anderson and Carroll 2007)and towards the goal of total demand profit optimization.

MARKETING

The marketing department is responsible for demand generation through promotionsand loyalty program management. They manage customer databases that containpurchase data, product preference, frequency, and loyalty information. Promotions

and programming are designed to cultivate the customer base and encourage repeatbusiness. Usually the marketing department does not have access to revenuemanagements demand forecasts. This information could support revenuemanagement efforts by generating lists of customers that are more likely to bookduring off peak periods. Promotions could be designed to support revenuemanagements efforts to sell the product. Without access to the demand forecast, themarketing department might either dilute revenue by offering discount promotionsduring peak periods, or taking no action during periods when demand is needed.Integration between these two departments helps synchronize the decisions thatgenerate revenue by stimulating demand or protecting rates. This synchronization also

reduces promotional costs by making offers only when demand is needed and only tothe customers most likely to respond.PRICING

Traditional revenue management algorithms optimize on a pre-determined and fixedprice schedule. These price schedules introduce price variability that allows differentprices to be charged to different segments and during different periods. However,


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price schedules are typically not optimally calculated based on demand patterns orcustomer willingness to pay. Rather, they are derived by percentage increases over theprevious years schedule, calculated based on costs, or modeled after competitorsrates. Integrating dynamic pricing algorithms into the revenue management systemensures that prices reflect the customers willingness to pay.

DISTRIBUTION CHANNEL

Distribution channels have different costs and attract differently valued customers.For example, Internet bookings through a third party typically demand a highercommission than booking through a companys Web site. These customers can bemore price-sensitive and less loyal to a brand. Similarly, customers who are willing topay the same rate have different profitability based on the channel that is used.

Therefore, revenue management forecasts should consider the demand by market

segment as well as the distribution channel. Then optimization algorithms can accountfor the associated costs of each channel when determining the optimal mix ofbusiness to accept. This information enables a business to proactively andsystematically open or close distribution channels based on the level of demand andthe profitability of each channel. Firms can also refine their distribution channelstrategy from a marketing and brand management perspective, and drive business totheir most profitable channels.

PROFIT OPTIMIZATION

Integrating revenue management with marketing, pricing, and distribution representsa move from traditional revenue management to profit optimization (Pinchuk 2007).Some integration can happen manually through improved communication and betterdata sharing. However, true integration is achieved with a system that integrates datafrom each department, synchronizes analysis, and automatically alerts users whenaction is needed or conflicts arise. Using this systematic approach forecasts fromrevenue management drive the proper promotion strategies from the marketingdepartment, which offer customer-centric pricing based on customer willingness-to-pay, the value of the customer to the firm, and overall demand levels. These properlyincentives customers are encouraged to book through the most profitable channels.Under this integrated framework, all departments have a single view of thedata and can coordinate actions with the goal of overall profit optimization.


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CUSTOMERINTELLIGENCE AND CUSTOMER CENTRIC PRICING

Future benefits come from the tight coupling of revenue management and customerintelligence, a key component of any profit optimization solution. The firm mustcollect, integrate, and process even greater amounts of data than is already used in

traditional revenue management systems. In particular, incorporating informationabout specific customers requires tracking customer purchase history, productpreferences and buying behavior. Detailed records must be kept of every interactioneach customer has with the firm. This information is used to predict customer value,forecast likelihood to respond to offers, proactively respond to changes in customerbehavior and develop customer centric pricing. Sifting through volumes of customerdata is technologically intensive, as well as labor intensive for the analysts who have toprocess decisions and take action.The SAS Profit Optimization Global Practice is developing a new Customer Lifecycle

Analysis System (CLAS) to handle this data-intensive and processing-intensiveanalysis. Rather than manually executing analysis on an ad hoc basis and siftingthrough the reams of related results, CLAS automates routine analysis, providesactionable recommendations and alerts users when they must take action (Pinchuk2009). Freeing the analysts from having to design and conduct routine analysesprovides more time to proactively manage operations, execute special projects,and dive deeper into the data. Using advanced analytic techniques, firms can identifydesired customer behaviors; locate customers likely to exhibit these behaviors, andunderstand correct actions that encourage these behaviors. For example, casinocompanies are concerned with retaining their most profitable customers. Today,

analysts might run a database query to identify a set of high valued customers whohave not visited with their normal frequency, or who have stopped coming. Thesecustomers can be sent an offer to encourage them to return. Casinos might alreadyknow which offers are incentives for customers to resume play after they havedefected, but in many cases, it is already too late to recover the customer. Anadvanced customer intelligence system can identify behaviors that indicate whencustomers are about to defect, monitor the action of current customers in thedatabase, and issue an alert when customers begin to exhibit this type of behavior.Rather than reacting to customers after they stopped play, the casino is proactivelyretaining valued customers. Maintaining existing customers is much easier and

cheaper than to try to recover lost customers. An advanced customer intelligence system that is combined with revenuemanagement capability is even more powerful. Customer information can drivecustomer-centric pricing programs so that pricing is determined on a customer-by-customer basis based on purchase behavior, overall value to the firm, and expecteddemand patterns.


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Pricing and Revenue Management in the Supply Chain

Outline

y The Role of Revenue Management in the Supply Chainy Revenue Management for Multiple Customer Segmentsy Revenue Management for Perishable Assetsy Revenue Management for Seasonable Demandy Revenue Management for Bulk and Spot Customersy Using Revenue Management in Practicey Summary of Learning Objectives

The Role ofRevenue Management in the Supply Chain

y Revenue management is the use of pricing to increasethe profit generated from a limited supply of supplychain assets

y Supply assets exist in two forms: capacity andinventory

y Revenue management may also be defined as the useof differential pricing based on customer segment,time of use, and product or capacity availability toincrease supply chain profits

y Most common example is probably in airline pricingConditions Under Which Revenue Management Has the Greatest Effect

y The value of the product varies in different marketsegments (Example: airline seats)

y The product is highly perishable or product wasteoccurs (Example: fashion and seasonal apparel)

y Demand has seasonal and other peaks (Example:products ordered at Amazon.com)

yThe product is sold both in bulk and on the spotmarket (Example: owner of warehouse who candecide whether to lease the entire warehouse throughlong-term contracts or save a portion of the

warehouse for use in the spot market)


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Revenue Management for Multiple Customer Segments

y If a supplier serves multiple customer segments witha fixed asset, the supplier can improve revenues bysetting different prices for each segment

y Prices must be set with barriers such that the segmentwilling to pay more is not able to pay the lower price

y The amount of the asset reserved for the higher pricesegment is such that the expected marginal revenuefrom the higher priced segment equals the price of the lower price segment

Revenue Management for Multiple Customer Segments

pL = the price charged to the lower price segmentpH = the price charged to the higher price segmentDH = mean demand for the higher price segment

_H = standard deviation of demand for the higher price segmentCH = capacity reserved for the higher price segmentRH(CH) = expected marginal revenue from reserving more capacity= Probability(demand from higher price segment > CH) x pHRH(CH) = pLProbability(demand from higher price segment > CH) = pL / pHCH = F-1(1- pL/pH, DH,_H) = NORMINV(1- pL/pH, DH,_H)

Example 1: To From Trucking

Revenue from segment A = pA = $3.50 per cubic ftRevenue from segment B = pB = $3.50 per cubic ftMean demand for segment A = DA = 3,000 cubic ftStd dev of segment A demand = _A = 1,000 cubic ftCA = NORMINV(1- pB/pA, DA,_A)= NORMINV(1- (2.00/3.50), 3000, 1000)= 2,820 cubic ft

If pA increases to $5.00 per cubic foot, thenCA = NORMINV(1- pB/pA, DA,_A)= NORMINV(1- (2.00/5.00), 3000, 1000)

= 3,253 cubic ft


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Revenue Management for Perishable Assets

y Any asset that loses value over time is perishabley Examples: high-tech products such as computers and

cell phones, high fashion apparel, underutilizedcapacity, fruits and vegetables

y Two basic approaches:-Vary price over time to maximize expected revenue-Overbook sales of the asset to account for cancellations


y Overbooking or overselling of a supply chain asset isvaluable if order cancellations occur and the asset is

perishabley The level of overbooking is based on the trade-off

between the cost of wasting the asset if too manycancellations lead to unused assets and the cost ofarranging a backup if too few cancellations lead tocommitted orders being larger than the available capacity


p = price at which each unit of the asset is sold

c = cost of using or producing each unit of the assetb = cost per unit at which a backup can be used in thecase of asset shortageCw = p c = marginal cost of wasted capacityCs = b c = marginal cost of a capacity shortageO* = optimal overbooking levels* = Probability(cancellations < O*) = Cw / (Cw + Cs)


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If the distribution of cancellations is known to be normalwith mean c and standard deviation _c thenO* = F-1(s*, c, _c) = NORMINV(s*, c, _c)If the distribution of cancellations is known only as afunction of the booking level (capacity L +overbooking O) to have a mean of (L+O) and stddeviation of _(L+O), the optimal overbooking level isthe solution to the following equation:O = F-1(s*,(L+O),_(L+O))= NORMINV(s*,(L+O),_(L+O))

Example 2:

Cost of wasted capacity = Cw = $10 per dressCost of capacity shortage = Cs = $5 per dresss* = Cw / (Cw + Cs) = 10/(10+5) = 0.667c = 800; _c = 400O* = NORMINV(s*, c,_c)= NORMINV(0.667,800,400) = 973If the mean is 15% of the booking level and the coefficient of

variation is 0.5, then the optimal overbooking level is the

solution of the following equation:O = NORMINV(0.667,0.15(5000+O),0.075(5000+O))

Using Excel Solver, O* = 1,115

Revenue Management for Seasonal Demand

y Seasonal peaks of demand are common in many supplychains

y Examples: Most retailers achieve a large portion oftotal annual demand in December (Amazon.com)

y Off-peak discounting can shift demand from peak tonon-peak periods

y Charge higher price during peak periods and a lowerprice during off-peak periods


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Revenue Management for Bulk and Spot Customers

y Most consumers of production, warehousing, andtransportation assets in a supply chain face the problem ofconstructing a portfolio of long-term bulk contracts andshort-term spot market contracts

y The basic decision is the size of the bulk contracty The fundamental trade-off is between wasting a portion of

the low-cost bulk contract and paying more for the asset onthe spot market

y Given that both the spot market price and the purchasersneed for the asset are uncertain, a decision tree approach asdiscussed in Chapter 6 should be used to evaluate theamount of long-term bulk contract to sign


For the simple case where the spot market price is knownbut demand is uncertain, a formula can be usedcB = bulk ratecS = spot market priceQ* = optimal amount of the asset to be purchased in bulkp* = probability that the demand for the asset does notexceed Q*

Marginal cost of purchasing another unit in bulk is cB.The expected marginal cost of not purchasing anotherunit in bulk and then purchasing it in the spot market is(1-p*)cS.


If the optimal amount of the asset is purchased in bulk,the marginal cost of the bulk purchase should equal the

expected marginal cost of the spot market purchase, orcB = (1-p*)cSSolving for p* yields p* = (cS cB) / cSIf demand is normal with mean and std deviation _, theoptimal amount Q* to be purchased in bulk isQ* = F-1(p*,,_) = NORMINV(p*,,_)


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Example 3:

Bulk contract cost = cB = $10,000 per million unitsSpot market cost = cS = $12,500 per million units = 10 million units

_ = 4 million unitsp* = (cS cB) / cS = (12,500 10,000) / 12,500 = 0.2Q* = NORMINV(p*,,_) = NORMINV(0.2,10,4) = 6.63

The manufacturer should sign a long-term bulk contractfor 6.63 million units per month and purchase anytransportation capacity beyond that on the spot market 2004 Prentice-Hall, Inc. 15-18

Using Revenue Management in Practicey Evaluate your market carefullyy Quantify the benefits of revenue managementy Implement a forecasting processy Apply optimization to obtain the revenue

management decision

y Involve both sales and operationsy Understand and inform the customery Integrate supply planning with revenue management


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REVENUE MANAGEMENT FOR NON-TRADITIONAL INDUSTRIES

The success of revenue management in the hotel and airline industries has generatedinterest in other industries, within and beyond travel and tourism. Gaming and resortcompanies realize that opportunities exist beyond maximizing hotel room revenue.

These properties have revenue-generating ancillary outlets with capacity constraints.For example, spa, golf courses, restaurants, and retail space can be profit centers for ahotel, casino, or resort, represent cross-sell and up-sell opportunities, and meet thenecessary conditions for revenue management. Freight shipping companies need tomaximize the revenue for each shipment from limited cargo space in containers, railcars, airplane holds or trucks. Much like airlines, passenger bus, and rail companieshave a limited number of seats available for each leg of a trip and different demandpatterns for each location. The first step in applying revenue management to a newindustry is to identify whether the industry has the necessary conditions for revenuemanagement: These are relatively fixed capacity; high fixed and low variable costs; time-variable demand; segment able markets; and perishable inventory (Kimes 1989).

For example, golf courses have a limited number of tee-times available during the day;it costs relatively little to add one more group of golfers compared to the upkeep ofthe course; tee times early in the morning are more popular than those later in the day;golfers have different handicaps and price-sensitivities; and once the time has passed,the firm looses the opportunity to sell that tee-time on that day.Revenue management techniques are based on manipulating two strategic levers:

price and duration (Kimes and Chase 1998). The goal of a revenue managementprogram is to move the firm towards variable pricing and fixed duration. For example,

when booking a reservation at a hotel, the guest specifies the number of nights they will stay(fixed duration), whereas a guest making a restaurant reservation does not

specify the amount of time at the table(variable duration). Hotels can increase revenueby applying variable pricing for their hotel rooms, based on location of the room, thetime period, or the characteristics of the rooms. If restaurants were able to sell time asopposed to the dinner event, then they could more efficiently book reservations tomaximize the number of customers served and therefore increase revenue. In thepresence of duration uncertainty, however, restaurants must be are more conservative

with their reservation policies, resulting in booking fewer customers.


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After defining the necessary conditions and the strategic lever that has the mostimpact, the firm should collect data about their demand patterns, including no-shows,cancellations, and turned down customers. Market segments and demand patternsneed to be identified, as well as opportunities for overbooking to cover no shows andcancellations. Simple rules about pricing and demand management can be derivedfrom the demand analysis. For example, the golf course might always overbook byone party at 7:00 AM because a no-show always occurs at this time or establishpricing rules that never offer discounts during peak periods.Very basic data analysis and demand management rules generate revenue benefits andprovide the foundation for a revenue management culture within the organization.Once the firm has mastered the basics, (or while they are mastering the basics), theycan plan the development of more sophisticated forecasting and optimizationalgorithms. Out of the box solutions are not usually available for a new industry that

wants to establish a revenue management program. The business might have to build

solution from scratch or partner with a technology provider. A business with multiple types of revenue generating outlets or services has theopportunity to create bundles or packages. Packages enable the company to fill lowdemand outlets or to disguise discounted rates for certain services in a fixed pricebundle. When the firm designs fixed packages, suggests add-ons to bookings, orencourages dynamic packaging, all elements of the package must be revenue managedso that package buyers are not displacing higher paying customers. Forecasting andoptimization algorithms that optimize pricing and inventory allocation for each outletor each service determine when discounts on inventory like reservations or tee times,are offered and when bookings are restricted.

Dynamic packaging lets customers create their own packages from all the availableservices that a firm offers. Once the package is designed, the propertys revenuemanagement system calculates the demand levels for each outlet and derives anoptimal price (and/or time) for each component in the package. This set of prices isused to calculate a minimum acceptable price for the custom package. Dynamicpackages have the dual benefit of allowing the customer to select elements that havethe most appeal and ensures that the firm receives the full value for each product orservice. Clearly this type of flexibility in booking requires that demand levels andinventory availability be understood for each element of the package.


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CONCLUSION

Future applications of revenue management will integrate demand generating anddemand control functions, moving the firm towards total demand profit optimization.New applications will require intensive data collection, storage, and processing

capabilities. CLAS is being developed to support in-depth understanding of customerinteraction with the firm, future purchase behaviors, and customer centric pricing tosupport and enhance revenue management efforts. Revenue management techniques

will be extended beyond traditional applications, allowing firms to generate revenuefrom non-traditional sources, and explore dynamic packaging opportunities.

REFERENCES

Anderson, C.K. and B. Carroll. B. 2007. Demand Management: Beyond RevenueManagement. JournalofPricingandRevenue Management6(4):260-263. Kimes, S.E. 1989. Yield Management: A Tool for Capacity-Constrained ServiceFirms.JournalofOperationsManagement8(4): 348-363. Kimes, S.E. and R. B. Chase. 1998. The Strategic Levers of Yield Management.JournalofService Research1(2): 156-166. Pinchuk, S. 2008. A system profit optimization. Journal of Pricing and Revenue

Management,7(1), 106-110. Pinchuk, S. 2009. Changing revenue management and marketing using a new

customer lifecycle system. JournalofPricingandRevenue Management,8(1), 109-112. Smith, B. C., J.F. Leimkuhler, and R.M. Darrow. 1992. Yield Management atAmerican Airlines. Interfaces22: 8-31.Book References:

Covey, Stephen R. The SevenHabitsofHighlyEffective People, Simon & Schuster, NewYork, New York, 1990Journal or magazine article references:

Yuva, John and Duffy, Roberta J., The Revenue Stream Flows from SupplyManagement,Inside SupplyManagement,October 2002 page 34.

Gettinger, Marilyn, Documenting Your Value to Senior Management and InternalCustomers,Inside SupplyManagement, October 2002 page 38.

Yuva, John, Taking a Boards-Eye View, Inside Supply Management, April 2003 page

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REVENUE MANAGEMENT

Report on Revenue

Documents

Transcript of Report on Revenue