Revenue management

When companies shape demand (the combination of price, promotion, marketing, sales incentives, and new product launch), dollars are spent to stimulate purchase behavior and increase sales lift. Most often, these demand levers are not pulled singly or separately instead, they are used together. As a result, data analysis is difficult. 

There is tension. Sales groups are incented to sell. Sales organizations are incented on volume-based metrics. Marketing wants to stimulate demand to build market share. 

The organization wants to be profitable. So, how do they drive profitable volume What should be easy becomes complex quickly. Companies struggle to answer simple questions such as  

The processes of trade promotion management are complex with workflows involving four groups sales, marketing, finance, and supply chain. These teams work on an annual planning schedule where funds are allocated by brand/region and then executed by the sales teams. 

In the early stages of supply chain maturity, companies design programs based on historic information. The average time to measure effectiveness is six weeks. Despite these obstacles, trade promotion management remains the number one demand-shaping lever of consumer products and food and beverage companies. 

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Demand-oriented management concepts focus on sales price and sales quantity decisions to maximize turnover with a given or unrestricted supply. Demand-oriented research areas are micro-economics specifically for price mechanisms (Varian 1994), sales and marketing (Effort 1998 Kilter/Keller 2005) and recently revenue management (Cross 2001 Tallury/Van Ryzin 2005). 

Demand management concepts consider demand and sales as active areas of decision making with respect to pricing and sales quantity decisions. Research fields addressing these decisions are primarily micro-economics, sales marketing research as well as recently revenue management. 

Tallury and Van Ryzin differentiate three basic categories of demand management decisions in revenue management (Tallury/Van Ryzin 2005, P 3) ... 

Revenue management is focused on demand forecasting - aggregated and disaggregated - demand distribution models or arrival processes to... 

Cross formulates basic principles of revenue management (Cross 2001, p. 69) ... 

Revenue management is not a phrase-based management concept but a discipline based on quantitative methods such as statistics, simulation and optimization as well as systems including steps for data collection, estimation and forecasting, optimization and sales control (Cross 2001, pp. 17-18). 

Dedicated revenue management systems are increasingly developed to be applied in airline and non-airline industries (Secomandi et al. 2002). For several recently developed revenue management systems in airlines, hotels, car rentals, telecommunication systems and cargo transportation see Gosavi et al. (2007), Bartodziej et al. (2007), Lee at al. (2007), Defregger and Kuhn (2007), Reiner and Natter (2007). These papers focus on reve-... 

Boyd EA, Bilegan IC (2003) Revenue Management and E-Commerce. Management Science 49 (10) 1363-1386... 

Cross RG (2001) Ressourcen erkennen - Umsatze steigem mit Revenue-Management neue Einnahmequellen erschlieben, Ueberreuter Wirtschaft, Wien et al. 

Defregger F, Kuhn H (2007) Revenue management for a make-to-order company with limited inventory capacity. OR Spectrum 29 137-156... 

Gosavi A, Ozkaya E, Kahraman AF (2007) Simulation optimization for revenue management of airlines with cancellation and overbooking. OR Spectrum 29 21-38... 

N.N. (2005d) Blickpunkt Kapazitatsmanagement - Revenue Management gewinnt in der Prozessindustrie an Bedeutung. Frankfurter Allgemeine Zeitung, Frankfurt, 09.10.2005... 

Phillips RL (1999) Pricing and Revenue Management - Driving Profit Improvement from CRM. CRM Project 1 1-7... 

Secomandi N, Abbott K, Atan T, Boyd EA (2002) From Revenue Management Concepts to Software Systems. Interfaces 32 (2) 1-11... 

Tallury KT, Van Ryzin GJ (2005) The Theory and Practice of Revenue Management. Springer, New York... 

Vol. 575 R. Hellermann, Capacity Options for Revenue Management. XV, 199 pages, 2006. 

Vol. 596 M. Muller-Bungart, Revenue Management with Flexible Products Models and Methods for the Broadcasting Industry.XXI, 297 pages, 2007... 

The case of Arun may be a telling sign of an era coming to an end - an era where developers of these resources faced much less external scrutiny on their operations and where states, themselves, directed many resource development projects. It is plausible to argue that neither of those two conditions will hold in the future. With the advent of revenue management schemes on the Chad-Cameroon pipeline, in Azerbaijan, and other such arrangements emerging for oil resources, it is plausible to expect that gas projects could some day face similar intervention. 

In Section 4.1 examples are given of the formulation of such a revenue management problem with a single product at a single location as a dynamic program. 

Decisions can be made at predetermined discrete points in time. In the revenue management example, the decision maker may make a decision once per day regarding what prices to set during the day, as well as how much to order on that day. 

Describing the stochastic process for a given decision problem is an exercise in modeling. The modeler has to determine an appropriate choice of state description for the problem. The basic idea is that the state should be a sufficient, and efficient, summary of the available information that affects the future of the stochastic process. For example, for the revenue management problem, choosing the state to be the amount of the product in inventory may be an appropriate choice. If there is a cost involved in changing the price, then the previous price should also form part of the state. Also, if competitors prices affect the demand for the product, then additional information about competitors prices and behavior should be included in the state. 

In the revenue management example, the decisions involve how much of the product to order, as well as how to set the price. Thus, decision a = (q, r) denotes that quantity q is ordered tmd that the price is set at r. Suppose the supplier requires that an integer amount between a and b be ordered at a time. Also suppose that the state s denotes the current inventory, and that the inventory may not exceed capacity Q at any time. Then the order quantity may be no more than Q — s. Also suppose that the price can be set to be any retd number between r, and r. Then the set of feasible decisions is d(i) = a, a + 1, a + 2,, min <2 s. b X [r, rj]. 

In the revenue management example, suppose unsatisfied demand is back-ordered and that an inventory cost/shortage penalty of h s) is incurred when the inventory level is s at the beginning of the time period. Then f(s, (q, r ), s ) = r (s + q — s ) — h s) with s s s -H q. Thus,... 

For the revenue management problem, an example of a stationary deterministic policy is to order quantity q = if the inventory level s < ij, for chosen constants and to set the price... 

Supply Chain Focal Points for the Next Two Years Improving demand planning Saving costs Shortening cycles Network design New product launch effectiveness Channel sensing Revenue management... 

Supply Chain Policy Demand Shaping Contract Management Corporate Social Responsibility Revenue Management Working Capital Management Contract Management... 

Stage 4 The supply chain creates the adaptive enterprise. At this stage of development, the company develops mature processes for revenue management and makes trade-offs in chaimel strategies based on baseline lift factors. The focus is on sensing and shaping demand. This is often referred to as a demand-driven supply chain. 

Focus. In market-driven processes, the focus shifts from inside-out to outside-in. In traditional processes, the process focus is from inside the organization out, as opposed to from the outside (market-driven) in. To manage demand, focus is placed on revenue management as a horizontal process (this is covered in greater detail in Chapter 5). 

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