Academic journal article Management Accounting Quarterly

A Guide to Integrating Revenue Management and Capacity Analysis

Academic journal article Management Accounting Quarterly

A Guide to Integrating Revenue Management and Capacity Analysis

Article excerpt

Companies of all sizes are limited by any number of constraints: capacity of their plants and other physical structures, distribution channels, rules and regulations, size and education of the workforce, and access to raw materials, to name a few. Yet it is often not the resources you have--but what your organization does with them--that can make the difference between barely profitable and booming. Here is how to make the most of your opportunities.

Call it the neglected topic.

While revenue management has been popular in several industries since the mid-1980s, you really have to search to find any mention of it in the accounting and finance literature. That is a bit odd considering that revenue management utilizes differential pricing and other techniques to influence customer demand for an organization's products and services. Over time, both the techniques employed and the range of industries have expanded to the point where revenue management is now applied in a wide variety of organizations.

American Airlines is credited with introducing the practice of revenue management--then known as yield management--in 1985. (1) The first low-fare airlines, most notably People Express, had appeared on the scene, posing a major threat to the established carriers. American did not consider matching the low fares across the board to be an option, as the revenue loss would be too great. Instead, it sought ways to target fare reductions to customers, times, and flights in a way that would most impact its new competitors while maintaining its normal price structure in other circumstances. Thus, American's targeted price reductions tended to keep customers flying American. The strategy proved successful, and People Express and other new low-fare airlines did not survive for long.

Even after the competitive threat disappeared, however, yield management survived as a technique because it was seen as a way to maximize revenues and fill what would otherwise be empty seats by offering targeted price reductions. The technique spread to other airlines as well as other industries with economic characteristics similar to that of airlines, such as hotels, restaurants, and golf courses. Over time, the term yield management changed to revenue management.

Because revenue management is ultimately about generating additional revenue by selling unused capacity profitably, one of the important considerations in revenue management is an understanding and analysis of capacity. Specifically, this article addresses how the Computer-Aided Manufacturing--International (CAM-I) capacity model applies to revenue management. (2)

Traditional Characteristics of Revenue Management

Organizations that have adopted revenue management techniques tend to share certain characteristics. (3) They include:

* Capacity is fixed. The company cannot readily change either its total capacity or its response to changes in demand. An airline has a certain number of aircraft, each with a given seating capacity, deployed among various routes. Hotels have fixed numbers and types of rooms. Golf courses can accommodate only so many players each day. Capacity changes require some time and are usually costly. Of course, fixed capacity by itself is not unusual; virtually all organizations have a more or less fixed capacity.

* Service capacity is perishable. Unsold seats on a flight, vacant hotel rooms, empty tables at a restaurant, and rental cars remaining on the lot all represent permanently lost revenue opportunities. This characteristic is most common for service industries; product-based industries can usually inventory unsold goods for future sale, although some items, such as groceries and other perishables, are also short-lived.

* The cost structure includes high fixed costs and low variable costs. While this cost structure is not inherently necessary for revenue management, it was common among early users. …

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