Yield Management (OM) Introduction (Revenue management)

Yield Management (OM) Introduction (Revenue management) Ing.J.Skorkovský, CSc, Department of Corporate Economy FACULTY OF ECONOMICS AND ADMINISTRATION Masaryk University Brno Czech Republic

Some OM methods Theory of Constraints Balanced Scorecard Project Management methods (Critical Chain, SCRUM, ) Material Requirement Planning and Just-in-Time CONWIP Six Sigma – quality management Boston, SWOT and Magic Quadrant Matrices Little s Law (relations between WIP, Throughput and Cycle time) Linear programming (will be presented 26.4.2021) Yield Management (will be presented 26.4.2021) Kepner-Tregoe (support of decision making) Decision Trees Drum-Buffer-Rope

Another point of view This will be modified in following South African project show (use of Balanced Score Card) Project management Workflow SCRUM Production Linear programming Total quality management Drum –BufferRope MRP-MRPII,JIT,APS Cutting, blending Pareto, ishikawa CONWIP Logistics Pareto, Ishikawa EOQ and BEP analysis Six Sigma Theory of constraints Critical chain Product postitioning Boston Matrix Gartner QM Business Intelligence Decision Making Product Life Cycle Kepner-Tregoe Yield management Hurwitz Prospect Theory ABC LEAN Little s law Function block Logistic more in detail will be presented later in this show Used abbreviations : QM– Quadrant Matrix; CONWIP – Constant Work in Progress; EOQ – Economic Order Quantity ; MRP - Material Requirement Planning

Definice (CZ) Yield management (YM) je strategie využívající technik pro maximalizaci obsazení kapacit. YM je soubor technik, které s cílem dosáhnout maximálních výnosů kolektivně určují, kterou rezervaci přijmout, a kterou odmítnout Tato metoda byla původně vyvinuta pro leteckou dopravu, ale později byla aplikována také železničními společnostmi, organizátory okružních plaveb, touroperátory, reklamními agenturami, autopůjčovnami a hlavně v neposlední řadě hotely. Cíle a důvody užívání YM Obecně řečeno, cílem yield managementu je tedy stanovení optimální ceny, která bude vyhovovat podniku a zároveň zákazníkům, s ohledem na specifické podmínky dané organizace a segmentu trhu, ve kterém daný podnik působí.

Definice (CZ) a specifika Mezi hlavní kritéria k úspěšnému provozování tohoto druhu managementu patří: - relativně vysoký podíl fixních nákladů na celkových nákladech firmy - produkt musí být ve své podstatě pomíjivým - poptávka musí být rozumně předvídatelná - musí být možné provést segmentaci trhu - produkt je prodáván předem

Yield Management (YM)-definition YM seeks to maximize yield or profit from timesensitive products and services. Used in industries with flexible and expensive capacities, perishable products and uncertain demand. It is part of revenue management. Type of problems : – – – overbooking (airlines, hotel industry,.) partitioning demand into fare classes single order quantities YIELD : to produce or furnish (payment, profit, or interest): a trust fund that yields ten percent interest annually; That investment will yield a handsome return.

Yield Management (YM)-definition Simply put, the purpose of Yield Management is to achieve maximum revenue/profit. To do this, a yield management strategy needs to be both reflective and forward-looking. That is, yield managers should attain a clear yet detailed understanding of what has happened before, and what is happening now. The most efficient way to do this is to draw from historical data to predict what may then happen in the future. So, the process of effective yield management involves understanding, anticipating and reacting to consumer behavior (to ultimately maximize revenue!).

Single Order Quantity Newsboy problem – see next slide and slide number 11 as well !!!

Newsboy problem Often managers have to make decisions about inventory level over a very limited period, This is the case, for example with seasonal goods such as Christmas cards that should satisfy all demand in December, but any cards left in January have almost no value. These single-period decision models are phrased as the Newsboy Problem. For a newsboy who sells papers on a street corner, the demand is uncertain, and the newsboy must decide how many papers to buy from his supplier. If he buys too many newspapers he is left with unsold papers that have no value at the end of the day. If he buys too few newspapers he has lost the opportunity of making a higher profit.

Prices and demand Prices can be determined by: – Service – Group of services – Market (consumer type or geographical area) or – A combination of the above And the demand side is characterized with: – Variability of demand – Variability of value

Overbooking (hotels, airlines,.) 7 % out of 311 22 311-31 280 311-22 289 289 31 320 320-311 9- 31-22 10%-30 % of no-show (traveler reserved ticket, but cancel it at the last minute) So airline companies overbook their capacities. The no-show ratio is sometimes lower than overbooking ratio, so „bumped“ client will be compensated by providing the free of charge service at another time or place. They are so called „offloaded“ to other routes. Example: 311 economy seats, estimation of 10 % no-show- 31 places would be lost (only 280 seats occupied). If overbooked by 10 % (31 more tickets offered) and no-show ratio on reality is only 7 %- only 22 clients cancelled - 311-22 289 seats occupied - 289 31 320- 320-311 9 clients have to be „bumped“ (or 31-22 9) and provided by free air tickets, which is better than the loss of not sold 31 places. You have to calculate loss of 31 places -22 sold tickets amount which must cover expenses for 9 bumped clients

Ovebooking - No-show Full aircraft Planned No-show Planned No-show Overbooked Reality NS Overbooked Final status OB B B NS OB bumped client no show passangers overbooked passangers Overbooked OB B Cost of B Cost of NS

Overbooking - claims Do not settle! Instead get up to 600 hotel meals expenses new ticket !! Delta Air Lines has increased the amounts passengers can be offered to give up their seats to up to almost US 10,000 in extreme cases — something passengers can take advantage of if they act in collusion (secret deal).

Single order quantities Newspapers Magazines Florists Bakeries Fresh fishes

Single order quantities N number of items that can be sold (co může být prodáno) X number of items ordered (počet objednaného zboží) C0 Cost of overestimating demand (rest of the flowers faded and are not sold) – náklad způsobený přehnaným odhadem Cu Cost of underestimating demand (customers like to buy more and you do not have enough of roses) - náklad ušlého zisku podceněnému odhadu poptávky – objednáme méně aby nám náhodou něco nezbylo. Cu C0 P(N X) probability of overestimating demand or no-show – objednáno více P(X N) probability of underestimating demand or no-show - objednáno méně P(X N)*Cu P(N X)*C0 P(X N) P(N X) 1 - P(X N) 1-P(X N) (1-P(X N))*Cu P(N X) * C0 - OPTIMUM PROBABILITY Cu P(N X) --------------Cu C0 (1-p)*Cu pCo Cu pCu pCo Cu p(Cu Co) Final formula for over estimating demand díky

Example 1 - Single Order Quantity (hotel industry) Manager Simon Stein of the Best Western in Las Vegas is tired of customers who make reservation and do not show up. Rooms rent is 100 USD a nigh and cost 25 USD to maintain per day. Overflow („bumped“) customers can be sent to Motel 7 for 70 USD a night. Simon s records of no-show over past six months are given below. Should Best Western start overbooking If so, how many rooms should be overbooked? No-Show 0 1 2 3 Probability 0,15 0,25 0,30 0,30 Solution : C0 70 USD - cost of overestimating demand Cu 100 USD-25 USD 75 USD - cost of underestimating demand Cu P(N X) ---------- 75/(75 70) 75/145 0,517 Cu C0 No-Show 0 1 2 3 Probability 0,15 0,25 0,30 0,30 P(N X) 0,00 0,15 0,40 0,70 Probabilities are cumulating and choice in 0,40- 0,517 Optimal probability of no-show falls between 0,40 and 0,70. So if we take less of equal to 0,517, so next lower value is 0,40. So two rooms have to be overbooked !!! 0,15 0,25 0,40 and 0,40 0,30 0,70

Example 2 - Single Order Quantity- Airlines Příklad pro domácí studium FlyUS Airlines is unhappy with the number of empty seats (same with hotel rooms) on its NY-Miami flights. To remedy the problem, the airline is offering a special discounted rate of 89 USD instead of standard fare 169 USD, but only for 7-days advance purchases and for a limited number of seats per flight. The aircraft flown from NY to Miami holds max 100 passengers. Last month s distribution of full-fare passengers is shown below. How many seats FlyUS reserve for full–fare passengers ? Aircraft capacity Full fare No-Show Frequency 50 50 15 55 45 20 60 40 35 65 35 20 70 30 10 50 50 55 45 60 40 65 35 100 Probability 0,15 0,20 0,35 0,20 0,10 P(N X) 0,00 0,15 0,35 0,55 0,65 Cu 169-89 80,Co 89 P(N X) Cu/(Cu Co) 80/169 0,473 So 60 full-fare passengers have to be reserved

Děkuji za pozornost (další 4 snímky jsou určeny pro jiný kurz MPH-AOPR)

Demand curve – extra service 2000 P 2000-2*400 2000-800 1200, REV 1200*400 480000 Max seats 400 see next slide. https://www.utdallas.edu/ metin/FuJen/Folios/scpricing s.pdf

Demand curve – extra service Segmentation by extra service

Demand curve – extra service 2000

Demand curve – extra service