Entering the Next Dimension:Cargo Revenue Management
Anand MedepalliVP, Freight Transportation
Anand MedepalliVP, Freight Transportation
The Market is Poised for Growth
“The air cargo freighter fleet alone willdouble in the next 20 years. Meanwhile shippers moving
freight on passenger aircraft will drive even more growth. Our global marketforecast foresees investment
in freight-bearing aircraft exceeding $3.5 trillion in thattime frame.”
John Leahy, COO for Airbus
Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
“The air cargo freighter fleet alone willdouble in the next 20 years. Meanwhile shippers moving
freight on passenger aircraft will drive even more growth. Our global marketforecast foresees investment
in freight-bearing aircraft exceeding $3.5 trillion in thattime frame.”
John Leahy, COO for Airbus
But IATA Says 2012 Looks Tough…
Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
Capacity Growth + Yield Pressures =Perfect Case for Revenue Management!
Source: http://www.iata.org/pressroom/pr/pages/2011-09-20-01.aspx
Yet Cargo RMS Adoption is Low...
Only 21 out of 70 carriers listed in Air Cargo World’s “Top50 Carriers in 2010” list* have invested in RMS
Only 16 of them use their RMS in some form!
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Capacity Management OnlyUsing Short-term RMS
Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
Only 21 out of 70 carriers listed in Air Cargo World’s “Top50 Carriers in 2010” list* have invested in RMS
Only 16 of them use their RMS in some form!
* http://www.aircargoworld.com/Air-Cargo-News/wp-content/uploads/2011/09/Top-50.jpg
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Using Short-term RMSUsing Allotment PlanningUsing BothAbandoned RMSUnhappy with RMS
Origins of Cargo RM
Passenger RM provided a guideline…
A sophisticated shiny solutionwas the answer…
Errr... what was the question again?
Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
Passenger RM provided a guideline…
A sophisticated shiny solutionwas the answer…
Errr... what was the question again?
Question: “Can the RMS Cope withThese Issues?”
Cargo businesses: B2B isrelationship-driven anddecentralised
Multi-dimensional capacity &Multiple timeframes
Few customers havenegotiated rates & allocations
Multiple decision makingpoints
Decision making times arereally short
Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
Cargo businesses: B2B isrelationship-driven anddecentralised
Multi-dimensional capacity &Multiple timeframes
Few customers havenegotiated rates & allocations
Multiple decision makingpoints
Decision making times arereally short
Cargo RM Set About Answering thatQuestion by Enabling These Processes...
Capacity ForecastingOverbookingDemand ForecastingCustomer “Tendering” BehaviourAllotment PlanningRouting & CostsHurdle RatesBooking Control
Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
Capacity ForecastingOverbookingDemand ForecastingCustomer “Tendering” BehaviourAllotment PlanningRouting & CostsHurdle RatesBooking Control
It Made Sense...
STRATEGIC
SUPPLYDEMAND
SupplyCalendar
Network &Equipment
Value ofNetworkChanges
Contracts &Sales Targets
TargetMarkets
Products
StrategicMarketing
Product &Network
DevelopmentTargeting
Relationships
Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
TACTICAL
OPERATIONAL
SupplyCalendar
Value ofCapacityChanges
AvailableCapacity
Value ofAd Hoc
Capacity
Contracts &Sales Targets
ContractPerformance
Bookings &Forecasts
ContributionGuidelines
CustomerRelationshipManagement
Sales &Promotions
CapacityPlanning
Routing &Capacity
Forecasting
AllotmentPlanning
BookingAcceptance
What has Worked Thus Far?
Capacity Forecasting & Allotment Planning =Have Worked Reliably and There Has BeenAcceptance!
Demand Forecasting & Optimal Hurdle Rates =Proved Hard to Get it Right. But Math wasGreat!
Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
Capacity Forecasting & Allotment Planning =Have Worked Reliably and There Has BeenAcceptance!
Demand Forecasting & Optimal Hurdle Rates =Proved Hard to Get it Right. But Math wasGreat!
Let us Break this Down...
As long as RM supported natural business processes,there were no arguments
But when RM forced some business processes, thefighting started
And not enough attention was paid to demandforecasting – it was seen more as a means to an end; notas a fundamental business process
Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
As long as RM supported natural business processes,there were no arguments
But when RM forced some business processes, thefighting started
And not enough attention was paid to demandforecasting – it was seen more as a means to an end; notas a fundamental business process
The Next Dimension of CargoRevenue Management
Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL 11
Natural Business Processes
The attitude that “Forecasting is a Means to an End” must change
Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
Adopt forecasting as a corecompetency
Collaboration within stakeholdersand customers is key
Forecasts are what they are;as long as Hurdle Rates are good
Natural Business Processes
Rate Optimisation
The natural thing to do is to set pricesrather than control availability
Advent of 3rd party data sources &recent advances in price optimisationtechnology will allow you to:• relate changes in price position to
changes in demand• increase awareness of how pricing
affects forwarder behaviour• recover some of the advantage that
a well informed forwarder has overyou!
“lift the profits, or someone else will”Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
Rate Optimisation
The natural thing to do is to set pricesrather than control availability
Advent of 3rd party data sources &recent advances in price optimisationtechnology will allow you to:• relate changes in price position to
changes in demand• increase awareness of how pricing
affects forwarder behaviour• recover some of the advantage that
a well informed forwarder has overyou!
“lift the profits, or someone else will”
Natural Business Processes
Allotment PlanningUse demand forecasts! If youroptimisation solution doesn’t know allthe alternatives, it cannot optimisefuture allotments• Just re-evaluating your old
allotments is not enough
No cherry picking! Customerallotments can be all-or-nothing, nopartial acceptance. Model linkedtraffic flows.
Remember risk! We offer allotmentsto make our revenues morepredictable – unreliable traffic flowsbelong in the spot market.
Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
Allotment PlanningUse demand forecasts! If youroptimisation solution doesn’t know allthe alternatives, it cannot optimisefuture allotments• Just re-evaluating your old
allotments is not enough
No cherry picking! Customerallotments can be all-or-nothing, nopartial acceptance. Model linkedtraffic flows.
Remember risk! We offer allotmentsto make our revenues morepredictable – unreliable traffic flowsbelong in the spot market.
Natural Business Processes
Overbooking
Move away from the traditionalcapacity-orientated focus onoverbooking to what it really is: afunction of customer tenderingbehaviour
Unlike passenger RM, there is noreliable metrics associated with“denied boarding”
Use acceptable offload riskmodels to estimate service levelfailure “costs”
Explicitly model under-booking aswell
Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
Overbooking
Move away from the traditionalcapacity-orientated focus onoverbooking to what it really is: afunction of customer tenderingbehaviour
Unlike passenger RM, there is noreliable metrics associated with“denied boarding”
Use acceptable offload riskmodels to estimate service levelfailure “costs”
Explicitly model under-booking aswell
And, Trust the SystemAutomated Booking Control
Ensure the routes you sell arereflected accurately in the optimisationengine
Capture costs accurately
Ensure unbiased forecasts andincorporate all available information• If demand forecasts are “accurate” or
acceptable, hurdle rates will be“correct” and “acceptable”
While setting the right rates is thenatural thing to do, controllingavailability on a given day is asignificant lever to improve profitability
Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
Automated Booking Control
Ensure the routes you sell arereflected accurately in the optimisationengine
Capture costs accurately
Ensure unbiased forecasts andincorporate all available information• If demand forecasts are “accurate” or
acceptable, hurdle rates will be“correct” and “acceptable”
While setting the right rates is thenatural thing to do, controllingavailability on a given day is asignificant lever to improve profitability
Don’t let Perfect be the Enemyof Good
Focus on natural business processes
“Race” through the implementation ofbasic end-to-end solution: Use the80/20 rule; Stop spending “years”perfecting one module
Focus on low hanging fruit; avoid thecomplicated bits (as a first step)
Measure benefits, spot opportunities,and improve the most promising areas
Automate prioritisation of the requestqueue; Get to automated bookingcontrol “fast”
Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
Focus on natural business processes
“Race” through the implementation ofbasic end-to-end solution: Use the80/20 rule; Stop spending “years”perfecting one module
Focus on low hanging fruit; avoid thecomplicated bits (as a first step)
Measure benefits, spot opportunities,and improve the most promising areas
Automate prioritisation of the requestqueue; Get to automated bookingcontrol “fast”
For the Benefits are Tremendous
“Companies using revenue and profit optimization modules for revenue management reportednet revenue increases of 2.5 to 7.5 percent”
- Nucleus Research; http://www.nucleusresearch.com
“The Capacity Forecasting module has improved our accuracy by over 15% resulting in Millionsof dollars in benefits – and this is just Phase 1 of the project!.”
- Vice President, Revenue Management
Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
- Vice President, Revenue Management
“Our demand forecasting accuracy improved by over 10% with a longer horizon that allows usto plan budgets, forecast revenue and optimize prices with better information.”
- Managing Director, Revenue Management
“Our revenue management solution has delivered 2.5% revenue improvements year on year.”- Managing Director, Revenue Management
Carriers have a done a good job of focusing on business processes;change management and training
– But focus was primarily around RMS– There is a need to move to being RM principles-centric
This means:– The organisation is “militant” about “one number truth”– CEO demands a budget that is based on consensus-based demand and sales
forecasting– Sales forecasts are based on rigorous and collaborative demand planning– Rates are set based on system profit and are not seen as one-offs– When sales demand an allocation or a rate for a transaction, they mean to say
“profitable” allocation or “profitable” rate– Sales incentives are aligned with RM principles– Operations are working with RM to understand preliminary loading plans– RM-based metrics and reports drive decision making– Etc. etc.
Finally, Shift to a RM Principles-Centric Organisation
Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
Carriers have a done a good job of focusing on business processes;change management and training
– But focus was primarily around RMS– There is a need to move to being RM principles-centric
This means:– The organisation is “militant” about “one number truth”– CEO demands a budget that is based on consensus-based demand and sales
forecasting– Sales forecasts are based on rigorous and collaborative demand planning– Rates are set based on system profit and are not seen as one-offs– When sales demand an allocation or a rate for a transaction, they mean to say
“profitable” allocation or “profitable” rate– Sales incentives are aligned with RM principles– Operations are working with RM to understand preliminary loading plans– RM-based metrics and reports drive decision making– Etc. etc.
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