 Modelling
Yield Management Decisions |
A systems model of Revenue Management activity (Yeoman & Watson
1999) is presented in figure one. The systems based model
presents three activities of management; forecasting, people
and strategy.
- Forecasting - The ability to forecast accurately is an
enshrined principle of Revenue Management (Raeside 1997,
Bodily & Weatherford 1995, Glover et al 1982) . This
means knowing your consumer, their habits, their likes
and their movements. Fundamentally, producing a model of
your consumers. Cross (1997a) states that Revenue Management
is about the ability to make decisions on knowledge, not
feelings but forecasting. Forecasting is an essential element
of Revenue Management in order to predict consumer behaviour.
The better the forecast the better the business decisions,
therefore better profits. Accurate and reliable forecasts
provide a rational view of the market. The more accurate
the forecast, the less more chance of been right. Forecasting
means combining the factors of weather, risk, booking patterns,
no-shows, cancellations, supply factors market assessment
and historical data to name but a few. Combining these
factors, to make accurate forecasts relies on information
technology. As humans cannot digest such huge and growing
amounts of information about all these variables. Information
technology presents the information in order for the yield
manager to make a prediction, that is better, more accurate
and probable. The science element of Revenue Management
is drawn from Operational Research (Cross 1997a), in order
to manage all the variables to improve forecasting and
achieve revenue optimisation. Operational Research is the
engine behind RM. It is what makes the difference. Operational
Research approaches to RM allow the yield manager to concentrate
on making the decisions, rather than processing the data.
The RM forecasting sub-system is an on going process, as
information is constantly entering and leaving the sub-system
for evaluation. As Robert Cross states, RM is about forecasting,
reforecasting, reforecasting and.......
- Strategy - Revenue Management is a decision making process
(Yeoman & Ingold 1997). The design of that decision
making process, is a corner stone of effective and efficient
Revenue Management systems. A firm needs a Revenue Management
strategy in order to guide Revenue Management decisions.
Strategy needs to be developed based upon a range of scenarios
and options, so that a firm can maximise revenue in different
market segments. An evaluation of the customer buying behaviour
is required, through consumers willingness to pay. (Cross
1997a, Huyton & Peter 1997). From the forecasting sub-system,
the information that is provided needs to be evaluated
through a range of options and tactics. Scenarios need
to be measured for their effect on profit. What are the
options for high demand scenarios? What are the options
for low demand scenarios? Once the scenarios have evaluated,
what are the tactics that are available. These options
and tactics are developed from using a range of computer
simulations packages, that will quantify the benefits of
different scenarios. Simulation is about optimisation and
minimisation. Simulation (Cross 1997b) is all about revenue,
costs, displacements and profits. It is about modelling
risk without taking the risk. It is about modelling all
possibilities. This modelling process, is the corner stone
of good Operational Research practice. It is the OR community
that has developed effective algorithms, systems, processes
to enable the yield manager to make good decisions. The
contribution of OR in this sub-system allows decisions
on improving market share, employing pricing promotions,
reserving capacity for higher value consumers and changing
the demand and supply equation.
- People - The process of managing yield is basically
a human activity. Forecasting and strategy sub-systems
may produce information and options. But it is the yield
manager that takes the decision and is accountable for
those decisions. The sub-system of people requires an organisation
to make commitment in the terms of resources and authority
to the principles of Revenue Management . This requires
the organisation to evaluate the principles of Revenue
Management through defining, documenting and addressing
the issues of Revenue Management operations. This means
a commitment from the Managing Director to the shop floor
worker in understanding the principles of Revenue Management
. RM......is the buzz word, but not just with superficial
meaning, but with depth and breadth. To manage the Revenue
Management process, a team is required. RM is about commitment,
focus and boundaries within the organisation, teams and
the individuals concerned. Within these variables, RM is
about creating an environment where accurate decisions
are taken. One person must co-ordinate RM. This must be
somebody who is respected, commands leadership, team player,
articulate and a believer in the benefits of RM. This is
a person that is not necessarily a technical expert, but
rather a champion of a cause. This person, will lead a
Revenue Management team, which is made up of players that
are part of the RM equation. The RM team must have responsibility,
accountability and authority to manage yield within the
organisation. A RM team is responsible for the implementation
of policy, decisions and tactics. A RM team will integrate
with all aspects of the organisation. This RM team will
be responsible for the evaluation of this RM systems model
(Yeoman & Watson 1997).
- The systems model of RM in Figure 1 (above), allows
the reader to study RM in a holistic manner. The sub-systems
of forecasting,
strategy and people present the interrelationships and
dimensions of RM. No one sub-system is more important than
another. Each sub-system within the model has mutual interflows,
such that the outflows form some of the inflows to others.
One sub-systems residue becomes another sub-systems energy
source. This explains the interdependency nature of the
model. For RM to work, all of the sub-systems have to be
in place. No one sub-system can survive without the other,
therefore an organisation should take a preferred holistic
approach to RM.
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