Revenue Management In Manufacturing: A Research Landscape

Abstract

Revenue management is the science of using past history and current levels of order activity to forecast demand as accurately as possible in order to set and update pricing and product availability decisions across various sales channels to maximize profitability. INTRODUCTION AND BACKGROUNDevenue management, as a science, has its origins in the airline industry. Early 70's saw some of the airlines offering discounted fare. This was a practice adopted by the airlines to obtain additional revenue from the seats which would otherwise fly empty. This practice brought forth the problem of determining the number of seats which should be protected for late full fare booking requests. If more than enough seats were protected for future full fare booking, then the flight would depart with empty seats. On the other hand, if sufficient seats were not protected, then the airline would lose a full fare customer, which is tantamount to losing the opportunity to make additional revenues. It quickly became clear that development of effective control of the number of discount seats to be offered required some kind of tracking of booking histories, enhanced information system capabilities, and careful research and development of seat inventory control decision rules. Littlewood (1972) of British Airways proposed that as long as the revenue value exceeded the expected revenue of future full fare booking, discount fare bookings should be accepted. This proposal marked the beginning of the science of revenue management.A revenue management system encompasses creative methods and practices to improve operations and ultimately the bottom line. It is about "selling the right product to the right customer at the right price at the right time" (Talluri and van Ryzin, 2004). Revenue management deals with maximizing revenue for a fixed capacity of a product or service. It saves the capacity for the most valuable customer by proper capacity allocation and constantly attempts to understand, anticipate, and then react to consumer behavior in order to maximize revenue/profit.As the initial myopia of seeing the principles only in airline specific terms gave way, from the early 90's, researchers began looking at the applications of revenue management principles to the field of manufacturing. In a R

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