 Preconditions
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Fixed Capacity
Revenue Management is suitable for service industries where
capacity is constrained and therefore service cannot be inventoried.
Simply put, exhibition space, is a service that is perishable.
Capacity can be changed by, for example, adding a number
of exhibition halls, however this would involve a large financial
investment in terms of equipment and plant.
High Fixed Costs and low Variable Costs
Related to fixed capacity is the high cost of adding incremental
capacity. The cost of adding capacity to an aeroplane, hotel
or cruise liner is extremely high and the capacity cannot
be rapidly adjusted. The cost of putting an additional customer
in unused capacity is relatively inexpensive. The incremental
cost in the car hire business, is the valet of that vehicle.
The cost in the hotel industry, is the cost of cleaning and
servicing that room. According to Kimes (1997) because of
this capacity constrained organisations should be willing
to sell their unused capacity for a value above their variable
cost.
Time-Varied Demand
Capacity constrained organisations capacity is fixed, these
organisations cannot easily adjust their capacity to meet
peaks and troughs in demand. Kimes (1997) explains that when
demand varies, organisations can benefit from controlling
capacity when demand is high and relaxing that control when
demand is low. This management of time varied demand can
be achieved through managing the uncertainty of arrivals
and duration. Kimes and Chase (1998) state capacity constrained
firms must protect themselves from no shows or late arrivals.
Therefore firms can use both internal (not involving customers
and external (involving customers) approaches to decrease
uncertainty of demand. Decisions can also be made on reducing
the duration uncertainty, which would enable management to
better gauge capacity requirements and hence make better
decisions as to which reservations to accept.
Similarity of Inventory Units
As a general rule, RM assumes that inventory units are fairly
similar. Most airline RM systems are designed to deal solely
with seats, with configuration between different grades of
seating. Similarly in the car rental business, cars are to
considered easily interchangeable. Rates for different cars
are sorted and placed within rate tiers and then rate tiers
and all corresponding rates are opened and closed as necessary
(Cross 1997a)
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