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American Shipper

Revenue management ? not ?if? but ?how?

Revenue management ù not æifÆ but æhowÆ

      Since deregulation, carriers across all modes have struggled to profitably market their services to meet shipping industry demand.

      When rates were fixed, profitability was easier to understand. Now dynamic market conditions have increasingly created chaos with supply-and-demand forecasts resulting in dramatic rate volatility, which makes accurate pricing all the more difficult.

      'This is a diabolical issue for cargo carriers operating very expensive assets. Lost opportunities can mean the difference between profit and loss,' said Anand Medepalli, vice president of industry strategy for supply chain technology provider JDA Software, based in Scottsdale, Ariz. 'Carriers are under tremendous pressure to maximize opportunities.'

      Historically, demand forecasting and revenue optimization technologies have offered a more sophisticated approach to revenue management in the hospitality and passenger travel business. Freight transportation providers share many of the same issues with these industries, such as operating expensive assets, overseeing perishable inventories, and dealing with a highly fragmented competitive landscape.

      'Revenue management helps these companies understand how to use perishable inventory, how to market and price capacity, and who to sell them to,' Medepalli said. 'How do you balance the pulling needs of supply and demand? This challenge is where the system steps in.'

      More than ever, carriers need to understand what capacity they have to sell, at what price to market that capacity, and to whom to sell it. Carriers conduct these exercises on a minute-to-minute basis, so the issue here isn't if they're managing revenue, it's how. Simply put, revenue management systems allow users to forecast supply and demand and appropriately align their marketing.

      'Statistical techniques exist to look at historical data and map that to the future,' Medepalli said. 'Cargo interests are looking 15 to 30 days out; the JDA system uses statistical algorithms to make that forecast.

      'Trust the system to do a very good job on most forecasts and allow analysts to focus on the exceptions,' he added. 'For everyone you have to fix there are a thousand others the system has done a good job on.

      'These are decision support systems. They give organizations a scalpel to go after business,' Medepalli said.

      Continental Airlines' cargo division implemented its first revenue management application in 1998, and is in the process of implementing a second version. 'The initial decision to implement a revenue management system was driven by the value recognized from passenger revenue management,' said Ed O'Meara, managing director of cargo revenue management at Continental Airlines, Inc., based in Houston.

      'Continental Cargo uses two JDA products; they work together,' O'Meara said 'The first is their demand forecasting engine and the second is cargo revenue optimization (CRO).'

      O'Meara outlined the functionality Continental's JDA systems provide. 'The system does two things for us. First, it accurately forecasts the capacity we have to sell each day. Second, it creates a demand forecast that allows us to route freight across the network,' he said.


'These are decision support systems. They give organizations a scalpel to go after business.'
Anand Medepalli
vice president of industry strategy,
JDA Software

      It terms of routing, their systems do not only suggest the shortest path for freight to move, but the most profitable for the carrier based on an array of variables. If a customer demand cannot be met profitably, Continental's cargo managers can offer alternatives to take advantage of that opportunity. 'The system gives us the ability to up sell or meet that customer's demand through alternative routing,' O'Meara said.

      Clearly, the network air carrier business model lends itself to a sophisticated revenue management approach, but transportation operators of all modes and freight handling models can benefit.

      'We leverage technology for costing, competitive analysis, and buyer behavior,' said Woody Richardson, who spent five years as vice president of revenue management at truckload carrier Schneider National, based in Green Bay, Wis. 'Competitive analysis can be more art than science.'

      In all cases, a revenue management program cannot rely solely on technology. 'You need to let the technology be visible to the artist,' said Richardson, who now serves as vice president of business transformation and engineering for Schneider National. 'If they don't know what's going on inside the 'black box' the user won't use the information.

'Users need to understand the technology to know where the limitations are,' he said. 'This allows the user to work with the tool instead of fighting against it.'

      In terms of return on investment (ROI), profitability results and time-to-value will vary across industries and transportation modes and models. 'Typical revenue management systems promise 3 to 7 percent revenue improvement,' Medepalli said. 'Revenue management projects generally take 12 to 15 months, but ROI can be seen in a matter of months.

      'When we have measured the benefits we have seen a 2 to 2.5 percent increase in new freight revenue,' O'Meara said. 'The system is helping us make decisions on which freight gives us the best margin. The new system will be at the higher end of that range.'

      It's important to understand that implementing a revenue management system may not be a small undertaking. Depending on your company's current practices and technology this could be a dramatic change to 'business as usual,' which comes with its own obstacles.

      'There is bound to be resistance,' Medepalli said. 'Companies are used to doing business in a certain way and here is a system that gives you more than any group of people could do.'

      With any systems investment, the devil's in the details. It is difficult ' maybe impossible ' for one recommendation to apply in all circumstances. In the case of revenue management, the ROI for carriers in terms of improved margins and time-to-value appears to be very compelling.

      'The cargo industry has the advantage of being able to 'leapfrog' technology,' Medepalli said. 'You can get involved now without the pain of developing this technology.

      'If nothing else, at least you can get your forecast right,' he said.

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