Cornell University School of Hotel Administration

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Articles and Chapters School of Hotel Administration Collection

9-1-1995

Evolutionary Change in Product Management: Experiences in the Car Rental Industry

William J. Carroll
Cornell University, wjc28@cornell.edu

Richard C. Grimes
Decision Focus Incorporated

Follow this and additional works at: http://scholarship.sha.cornell.edu/articles Part of the Hospitality Administration and Management Commons Recommended Citation
Carroll, W. J., & Grimes, R. C. (1995). Evolutionary change in product management: Experiences in the car rental industry [Electronic version]. Interfaces, 25(5), 84-104.

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Evolutionary Change in Product Management: Experiences in the Car Rental Industry

Abstract

[Excerpt] Car rental companies offer customers various combinations of car types, rental periods, and pickup and return locations, as well as insurance and refueling options. Hertz developed its yield management system (YMS) to help decide the availability of these combinations of products over time. The YMS integrates information management technology, sophisticated operations research techniques, and information from existing Hertz decision support models that solve the closely-related problems of pricing, fleet planning, and fleet deployment.
Keywords

Hertz, yield management system, YMS, car rental

Disciplines

Hospitality Administration and Management

Comments

Required Publisher Statement INFORMS. Reprinted with permission. All rights reserved.

This article or chapter is available at The Scholarly Commons: http://scholarship.sha.cornell.edu/articles/79

Evolutionary

Change

in Product

Management:

Experiences
William J. Carroll

in the Car Rental

Industry

The Hertz Corporation 225 Brae Boulevard Park Ridge, New Jersey 07656-0713

Richard

C. Grimes

Decision

Focus

Incorporated

650 Castro Street, Suite 300 Mountain View, California 94041-2055

offer customers various combinations companies car rental periods, and pickup and return locations, types, as temporary insurance well and refueling Hertz options.

Car

rental

of as devel

oped

its yield management

these information research

system

(YMS) to help decide

of products and over time. technology, information

the
The

of availability YMS integrates cated

combinations

management

operations techniques, Hertz decision that solve the closely-re support models isting fleet planning, lated problems of pricing, and fleet deployment.
car rental business
It was a business.

sophisti from ex

began
Local

in 1918.

product

is a specific

combination

of car

opera simple The a set of standard cars to indi tors provided viduals for a fixed per-day charge plus a per-mile charge. Over time that simple

insurance, pickup location, type, temporary return location, and length of keep) through internal and external computer In the 1990s, systems. they began using price and yield manage ment systems that allow them to control the price and availability of these products. In the US, the car rental industry is di vided ment into the travel, markets. The lease, and replace largest of these is the is a major is a wholly player owned ized reservations

In became more complicated. proposition the 1930s, Hertz created the concept of
rent-it-here and leave-it-there. By the

1950s, rental car companies made available types of cars at airports, railroad multiple In the stations, hotels, and other locations. companies availabilities for car rental products
Copyright ? 1995, Institute forOperations Research and theManagement Sciences 0092-2102/95/2505/0084$01.25 This paper was refereed.

1970s,

distributed

the rates and (a

travel market, in that market.

and Hertz Hertz

TRANSPORTATION?ROAD FORECASTING-APPLICATIONS

INTERFACES

25: 5 September-October

1995

(84-104)

CAR RENTAL
In subsidiary of the Ford Motor Company. the US, it has 1,300 locations and a fleet of 250,000. the past decade, the travel-related car rental market has changed dramati of the airlines changed cally. Deregulation the number and mix of customers cars. The advent 1977 increased of discount the number renting air fares in Over ers can book
travel agents,

car rentals. Working

the newer car rental

with
firms at

tracted prices

customers

plays."

prominently rate These are simple low-to-high that permit travel agents to base displays decisions purely on price. list car rental firms based

their low by displaying in CRS "shoppers dis

of customers

rental cars and the proportion of needing leisure renters. Computerized reservation (CRS), such as SABRE and cars facilitated their booking APOLLO, systems and comparing prices among firms. Initially, the major car rental firms were and Budget. The Avis, National, firms their base of rentals major expanded the commercial market. They con through tract with large corporations to provide car Hertz, rental services to their employees for a loca price across all or most

These displays on the rates type they offer for a particular of car, for pickup at a specific location on a particular date and time, and return on a particular date and time. A standard cod ing system is used for various car types in the airline CRS, and most car rental firms their car models try to categorize according to this system. The displays typically show rates for rentals exclusive of insurance or such other
seats.

services

as ski racks and baby

period of time. The fees normally vary based upon volume and can include alternate levels of insurance pro tection. Prices by class of vehicle and loca tion are set by contract for a period of time and cannot be managed in periods upward when demand exceeds car supply. With increased 1980s, more
and leisure

fixed-per-day tions for a given

Hertz

is a wholly owned subsidiary of Ford.

The increase in leisure demand has

changed

the market

shares of rental com

panies (Figure 1). Today, both the com mercialand leisure-based firms seek a mix
of commercial and leisure rentals to sustain

in the competition small business nonaffiliated,

entered the market.

airline

customers

firms, such as Alamo and took of these changes. Dollar, advantage These firms relied on low prices, leisure lo Leisure-oriented
cations, gain market travel agents, prominence. and tour operators to

improve this Against backdrop, Hertz began devel decision oping support tools like the fol lowing to help manage market changes: Fleet Planning and System, Daily Planning Distribution Competitive Aid, Rates Cost Allocation System; and Model, the Yield

growth

and

fleet utilization.

A major factor in the types of changing firms serving the car rental market was the growing importance of new global distri bution channels?computerized airline res ervation systems?through which custom

Management System. In the 1980s, Hertz

systems developed to support its decisions about rental fleet levels and the geographic redistribution of vehicles to shifts in demand. in response

September-October

1995

85

CARROLL, GRIMES
1982 1994

Budget 15%
National

National

Other 19%

14% Budget 14%

17%
Figure increased market 1: The the shares. airport demand market for share rental of revenue especially has in since 1982. changed the leisure segment,

Airline changing

deregulation company

cars,

For

example,

in major

metropolitan

areas,

mercial

contract was

business.

An

additional

demand
weekends

in downtown
as customers

locations
rent cars

spikes on
to pursue

to the capability challenge developing in display various prices for its products
the internal reservation systems (Hertz res

leisure or family activities. At airports, de to in response mand spikes mid-week business travel requirements. These early for use in areas designed in size from major metropolitan ranging areas with multiple rental offices at air systems downtown(s), the multiple locations are (collectively areas called a pool) to smaller metropolitan a with the single airport location. Typically ports), about fleet airport office makes decisions size for the entire pool and, of course, for
smaller fice or areas location. that have only one rental of

ervation

centers) and in the external limitations where different display (CRSs), Hertz has developed
support systems

ones

were

exist.

many
over

of its various
time to ad

decision

and in the suburbs

dress

four major strategic questions: (1) How many cars should Hertz have? it deploy should should Should those cars? it offer? and it sell? Hertz Have?

should (2) Where (3)What products (4)What products How Many Cars

cars one should how many Deciding a or in fleet at keep pool single-location car to successful any time is fundamental rental operations. The decision is compli cated by three factors: the structure of car manufacturers' purchase plans; disposing of used cars through retail car sales or through wholesale the need to meet and (auction) markets; customer demand for

The yield management in 1990 extended ployed and responded

leisure-based,

system Hertz these systems to the emergence

entrants to the

de

further
low-priced

of

market. compete
business

The

for Hertz was to challenge on the basis of price for leisure

yet preserve and service its com

INTERFACES25:5 86

CAR RENTAL
cus types of cars. Typically, particular tomer demand for different types of cars does not match the least costly mix from the manu that could be purchased cars for retail facturers. The most desirable
and car by auctions rental also customers. match Conse those de forecast

?Utilization,
rent"

the percent
hands

of the fleet "on

per month;

of cars

in customers'

?Turndowns, customers ?Vehicle

the expected number to be turned away; costs that include

of

sales manded

quently, particular

meeting car types must

customer

demand also balance

for

mated

costs as depreciation and and through a both individually and separate business planning model;
per average car per month, as the estimated ex revenue

such holding interest, esti

costs by car type, manufacturers' holding and retail and schedules, production
wholesale car sales needs.

?Revenue pected

Hertz makes and composition els. Itmust make overall fleet

decisions

about fleet

size lev about

through These four variables

the business

planning model. are estimated overall individual use fleet fleets. levels

at two organizational corporate decisions

and for pool and smaller Hertz does not exclusively

size and composition tiate effectively with manufacturers

to nego and to

that are optimal from a purely economic because from a strategic perspective,
standpoint, tribution it may to maintain sacrifice market short-term share, con encour

it those decisions, arrange financing. Given about long-term fleet then makes decisions size and composition and near-term fleet planning adjustments single location operations. From a purely economic can base decisions defined
expected

age customer
able service?three

loyalty,

and ensure
factors that

depend
can pro

for the pools

and

vide standpoint, about fleet size on be

Hertz

long-term profitability. Hertz's fleet planning models These tools have spreadsheets.

began as to evolved

contribution,
tween above a car's the

as the difference
revenue costs and generation the

the trade permit Hertz to better evaluate share: contribution and market off between To what extent must Hertz offset maximiz to expand
in order

transaction

car's

costs over a given period. A car holding should be added to a fleet as long as its over its operational contribution life in the fleet is positive. The models Hertz overall fleet uses to establish

ing short-term
share of market

contribution
revenue

its

to sustain

Demand
opti a set of

mal

linear equations the number information,

levels are basically rental that use historical of customers

locations

in downtown on weekends. spikes

turned away through the reservation sys tem (called turndowns), and estimated fleet to produce aggregate fleet re utilization In Hertz's fleet planning sys quirements. the from shifts the focus tem, op deriving timum to the use of these equations to

and profit longer-term market prominence It ex makes to decisions maintain ability? cess cars or shortages (overfleeting) relative to these estimated forecasts of the number (under require of

fleeting) ments using cars on-rent

by day into the future (car on rent patterns) and taking into account its

September-October

1995

87

CARROLL, GRIMES
current revenue share position in a given

market

(Figure 2). Over a planning horizon into the future, up to 18 months extending decisions to vary its fleet size. In the near

available). Where Should Hertz

Hertz

Hertz makes

decisions

term, it can vary the fleet size or decelerating acquisitions by accelerating or deletions or by diverting deliveries to Itmust make pur other pools or locations. chase commitments for the overall fleet with manufacturers It now bases 12 months in advance. on direct information from

to support developed about the optimal distribution of cars because it needed to better manage the movement of cars within
cars among

Deploy the system

Its Cars?

a pool.
locations

The

decision

to move

within

a pool is driven by the patterns demand for each city. Because demand different days locations can peak on different of the week, utilization

of at

these decisions forecast

feeds of demand

improves

movement managing and revenue for the

the yield management modules, ?The

suming

system

forecasting as

including forecasted demand

Hertz serves all

for the fleet,

customers at

itmay reduce the profitabil pool, although a of location. ity particular Hertz uses the current distribution model, Aid the Daily and Distribution Planning [Edelstein and Melnick 1977],

com

petitive
and

prices,

or unconstrained

demand;

?Forecasted Hertz maintains various While

assuming rejected demand, a selected fleet level at

(DPDA) at the pool level. A sig almost exclusively nificant source of complexity is its active
rent-it-here and leave-it-there program.

times during the planning horizon. rejecting demand may provide

DPDA on-rent,

uses

actual

information

about

cars

reservations

short-term

profits, it also adversely affects the retention of customers and service lev is defined
car or car

ture, and recent historical tion about movement within

movement

for pickup in the fu rental informa of rented cars both to create

to fore

els (service
a requested

in terms of waits
type that is not

for

and between
distributions

pool

cities
that

it uses

Cars

Forecast Rejected Demand

Forecast Cars Available For Rent

Forecast of Unconstrained Cars On-Rent

Demand

Future Days Figure 2: Cars on-rent versus available identifies days with excess demand. fleet: A typical car on-rent pattern by day quickly

INTERFACES25:5

88

CAR RENTAL
cast future vehicle returns or check-ins.

DPDA

in applies its forecasting capabilities new with deliv fleet conjunction projected interpool moves made of management, idle vehi
shop counts, and

eries and deletions, at the direction

cle counts,

In making interpool move decisions, Hertz uses aggregate data from a pool-level fleet tracking, and esti DPDA, nationwide mates of improved contribution the despite costs of moving vehicles. DPDA relies on key variables, either which are

maintenance

history-based dict dates when will

cars.

forecast each

information location

to pre in the pool with

for input by the user or estimated the user for each pool location during the

be oversupplied

or undersupplied

are less Interpool moves frequent than and decisions intrapool moves, regarding such transfers are made at intermediate these
event,

planning period (Figure 3). For the first day of the planning period for each location, the user enters an actual count of idle cars (starting
rives this

idle); subsequently,
value. Then, the user

the DPDA
enters

de
pro

and corporate
moves are

levels. Generally,
by a major

necessitated

and deletions jected net fleet additions net vehicles scheduled adds/deletes), and out of maintenance to

(net in

such as the Super Bowl; an emergency, such as a natural disaster; or the need rebalance the overall vehicles distribution to "owning

of fleet pools."

by returning Cars

city transfers, als. Given the expected drop-off locations of existing active rentals and patterns for

(net shop), inter and a forecast of future rent

Starting Idle

Net Adds/Delete model

Net Shop

Intercity Checkins Checkouts Transfers Gain/Loss logic to calculate

Area

Starting Idle

Figure 3: The fleet distribution

for each location in a pool

uses this underlying

forecasts change.

car availability

whenever

September-October

1995

89

CARROLL, GRIMES
future booking rives estimated and shows
cation each

forecasts, vehicle

the system returns

de

advance

reservation

or

requirement

that

the number
day. The

(check-ins) of cars at each lo

can evaluate al

the car be kept over a Saturday night. or "fences" allow Hertz These conditions to offer price discounts for leisure custom ers in trough periods like weekends, with out diluting the prices paid by commercial or midweek is the demand renters, whose primary driver of fleet costs. Critical in developing for both products is the collection and comparison markets
of Hertz's prices and its competitors'.

user

ternative

scenarios

input variables.
users can produce

by varying each of the these simulations, Using

alternate forecasts of

each

location's

fleet

levels

for the purpose or to

Users at independent of fleet balancing. can also use DPDA cities location single predict

future fleet shortages or imbalances in accelerate fleet additions and, response, or visits to the maintenance or deletions
shop.

Hertz's

began into an automated polls CRSs uses an artificial

competitive as a manual

rate collection system

system and has evolved device that

What

Products

Should

Hertz

Offer?

canvassing and other sources intelligence

car products are designed to meet the diverse needs of leisure and commer Rental
cial customers. For commercial customers,

It regularly. to align logic

Hertz vice

provides for individual

fast, efficient customers,

car rental ser 24-hour and efficient a

usu

road

competitive comparable products with scans the data to It Hertz's then (Table 1). from strategic price gap detect variances market and type of product. The targets by report on competitive pricing is available on-line at headquarters and at field loca tions; it displays Hertz rates by car type rates, compared with its major competitors'
along with the advance reservation re

liability protection, for the client enterprise?at accounting

competitive price. Corporate contracts

service,

the corporate ally require Hertz to make rate available if it has the type of car re
quested. For leisure customers, Hertz pro

vides

a competitive rate for the size and of vehicle needed, along with such style and related services as driving directions
road service. Additional services,

quired to the attention

managers when

for the rate. The

report of headquarters
the system

is brought pricing
a price

detects

variance

outside

24-hour

management competitive
a rate

such as extended
loss or damage

liability protection
waivers, are available

and
at

by a limits desired (the represent in a particular price position

weekly, weekend, or

the limits established

segment?daily,

slightly higher price. The important dis tinction between these two broad types of markets is that Hertz can vary the base of additional services) to based on market supply
custom

monthly).
to change

They
rates.

can then decide whether

price (exclusive leisure customers and demand

To segment

In developing its products, Hertz manag ers also need to understand contribution by product developed evaluate
product, cation

conditions.
commercial market

and by mix of products. Hertz a cost allocation model that can the contribution provided
segment, computer

at the
and lo ar

ers from those

can invoke

in the leisure market,

conditions, such

Hertz
as an

account, levels. A

market client-server

certain

INTERFACES25:5 90

CAR RENTAL
Advance Reservations Hertz 2 Hours 27.99 EXAR 29.99 ECAR 32.99 CCAR 36.99 ICAR 36.99 40.99 SCAR 43.99 FCAR 52.99 PCAR 55.99 LCAR SFAR61.99
Table 1: A

Avis 0 Day

National 0 Day 26.90 31.97 34.97 36.97 39.97 42.97 48.97

Budget 1 Day 26.99 36.90-HO 31.90 35.90 39.90 42.90 59.90-HO40.00 60.90-HO

Alamo Dollar 0 0 Day Day

27.99 32.99 36.99 40.99 43.99 49.99 55.99 55.9959.00

shows

26.99 31.9933.00 35.9935.00 39.9937.00 42.99,37.00 49.99-D1

33.00

IDAR

43.00

competitive

price

report

Hertz's

prices

and

those

of

its

competitors.

chitecture

provides ers throughout marketing,

operators.

with a graphical user interface to decision mak this information the organization, including sales, finance staff, and field Should Hertz Sell?

levels,

or offsell
reservation

the system posted a nonavailability status to internal and external

systems. However, CAPS

What

Product

Since have

the industry

used

began, car rental firms to rudimentary mechanisms

car supply and about the impact on revenue of the prescribed capacity controls. with Integrating Strategic Decisions lacked information about Yield Management In 1989, Frank Olson, CEO of Hertz, chairman and chief Focus

such as product availability, "blackout periods" during major events or like the Super Bowl or the Olympics, control
seasonal surcharge periods. These control

operating

officer,

and Craig Koch, engaged Decision

now

mechanisms Hertz when

duced as part

became

more

formalized

at intro
re

re (DFI) to apply operations Incorporated to search and computer science techniques

design, the-art develop, revenue and or yield implement management a state-of sys

the offsell
of the

system was

reservation

system

write

in 1980. This

system

with the ability managers vations for a specified set of products that could range from all cars to all mid-sized cars to any car with a special feature (like a ski rack) on a particular date. In 1982, Hertz added a rudimentary capacity man agement
managers

provides to turn off reser

Hertz

tem (YMS). Similar

to an airline's

management system, it integrated and demand information. How supply

ever, from the project's start, Hertz

yield both

de

cided not

to adapt

management agement has

existing airline yield technology. While yield man

system
at various

(CAPS). CAPS
levels in the

allowed
organiza

its origins in the airline indus for car rental ismore try, its application rental Car systems must deal complex. a more migratory a more inventory, of management inventory, options than

tion to set maximum for particular Hertz reached

levels of availability rates and car types. When these maximum booking

with

decentralized

and a larger set of customer

September-October

1995

91

CARROLL, GRIMES
do airline or hotel yield management sys mation ditional about the marginal value of an ad

tems (Table 2). In fact, because complex had to decide

managing yield was so in the car rental industry, Hertz how to handle range the large ar in size from a
lux

car, how should Hertz purchase and dispose of cars over time? its fleet, given informa (2) In deploying tion on the total available fleet and the

ray of car types. Cars

two-door subcompact

to a four-door

ury model.

They convertibles, ing

and

also vary four-wheel

sports cars.

in style, includ drive vehicles,

Ultimately,

an additional value of deploying marginal car at a location, how should Hertz deploy cars within a pool? revenue or yield, given (3) In managing the available fleet by location, the product environment, offering, and the business what mix vide of product availability net revenue the maximum will pro for Hertz?

mini-vans,

Hertz

among vehicle groupings so cars with spe that it could handle types cial styling features differently for yield
purposes.

established

management

inte Conceptually, yield management the four decisions grates major strategic Hertz faces. These decisions are linked

cost of offering the marginal (4) Given more of a particular product and the com what mix of services petitive environment, should Hertz Because offer? of these conceptual linkages, the designed yield management

[Boyd and Phillips 1992]:

(1) In planning its fleet levels, given infor

Hertz

sys

Varying Complexities
among Airlines, Hotels and Rental Cars

Inventory

Seat 1-3

Car 5-20+

Number of Unit Types Total Units By Location Mobility of Inventory Rates Per Unit
Duration Corporate of Use Discounts

Fixed Small Many (3-7+) Fixed No

Central

Variable
Considerable

Many (4-20+)
Variable Yes

Managed Inventory

Central/Regional/
Local

Table 2: This comparison of yield management applications why Hertz chose not to adapt existing airline methodologies

some of the reasons highlights for its yield management system.

INTERFACES25:5

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CAR RENTAL
tern from the start to be integrated with support systems for fleet its From a systems perspective, information flows this is how are inte

other decision

the various

and distribu for daily planning planning, for and for cost al tion, product offerings,
location. Information about the total avail

grated into the Hertz YMS (Figure 4). The a daily feed Hertz counter system provides to the YMS describing recent check-outs,
check-ins, and no-shows. The Hertz reser

able fleet

system the fleet planning system fleet acquisition ticipated Information tion comes ments bution product gine"
products,

is input to the yield management from through automated snapshots that describe an and disposition. fleet by loca

system passes to the YMS all recent as well as any and cancellations bookings non-YMS tem uses various a YMS availability accounting cost categories, restrictions. information The about sys

vation

about

available

from anticipated fleet move from the daily planning and distri aid. The YMS takes data about from the Hertz the different
and their

activity-based lish the variable costs of rentals

in conjunction with cost model, to estab so that it of differ rentals

offerings that specifies

their

"rate en types of
restrictions.

can consistently evaluate ent products for different The YMS also passes

rates,

lengths of time. some of its results to

CRSs

Reservation Functions

Availability Control

Fleet Planning DPDA Rates M

YMS

Graphical User Interface

Cost Allocation

Field Workstation

Figure 4: The yield management system integrates data from many other Hertz information and field systems provides personnel with a graphical interface for working with it.

September-October

1995

93

CARROLL, GRIMES
other Hertz systems. It feeds the reserva sus commercial, customer-booked and so forth). versus Once

restrictions that tion system availability turn off availability by city, pickup date, car type, rate code, and length of keep. Users choose which of these to implement the YMS recommendations after reviewing through a graphical user interface. The also feeds and the DPDA
mand.

travel-agent-booked,

these segments
take actions

are identified,

Hertz
or

can
alter

to eliminate

violations

to calibrate the YMS to account natively for such activity. The YMS forecasts the capacity of cars available locations for rent at each location. These can be independent or part of a this ca multi-location pool. To establish pacity, it combines the results of two of the strategic decision processes: long-range fleet planning and short-range fleet de These fleet planning decisions ployment. for cars and approxi provide quantities mate dates for acquisitions and deletions. Management level about but can make decides a year on the basic fleet of rentals, in advance about

YMS

the fleet planning system its forecasts of rental de

Rental

at Hertz Car Yield Management a car is perishable The rental product on any specific pickup date. How product is perishable in a strict the product sense only for the single day of pickup. An car can be used the following unrented In some in is sufficient. day if demand ever,
stances, Hertz can generate more revenue

by saving ture date. Customers' use also affects

a car to meet

demand varied

on a fu of

duration

the demand

of cars. A car rented available until

for and supply for three days is not and its actual

90 days changes ahead. Hertz sets the specific dates for fleet 90 to seven days and deletions acquisitions to in advance of the deliveries. Decisions the existing
one location

it is returned,

deploy
from

fleet?to
to another?are

move

cars
much

return may turn out to be in two days, or it may be in five days. A car may not be re it turned to the same location from which
was rented. The Hertz YMS creates, up

shorter

term and have

a stronger

impact a
air

on the YMS. Sometimes

pool is

balancing

the fleet within

For example,

on distributions dates, and uses probability the actual amount of time the car was kept by the customer (length of keep), given the This time. length specified at reservation the ap allows the YMS to represent 10 to 20 percent of customers proximately rental change their length of keep after output, the YMS booking. As an additional monitor statistics that attempts by provides customers to circumvent the conditions set

straightforward.

York City port have midweek demand peaks; Manhattan rental locations have demand peaks on
weekends. Cars are transported from the

locations

that serve New

who

airports to the city locations on Thursdays and Fridays and returned to the airports at the beginning
decisions to

of the week.
transport cars

Within
from one

pools,
loca

tion to another must issues of market

trade-offs nue available between from

take into account service

incremental the car

the

by the YMS for a rate by length of keep. efforts to circum Using such information, can vent the system be traced to particular
market segments (for example, leisure ver

share,
the

level, and
reve at an

renting

other

location

and the cost of transporting

INTERFACES25:5 94

CAR RENTAL
it. The YMS provides baseline information to users making this decision by forecast revenue to be generated the ing projected or rejected
maker as must

be limited commercial The Hertz sive demand

it creates

to meet rentals YMS

demand

for near

term

at each
evaluate costs,

location.
other service

The decision
variables, levels, and such mar

at higher prices. includes a comprehen system. Each day forecasting

of unconstrained de

forecasts

transport

mand?the

using the market by offering segments with products differing services, prices, and restrictions. The car rental industry Hertz has been less successful than the airlines customers
How

ket revenue,

that information.

independent separate forecasts of gross booking de mand and cancellations. It varies the fore

total possible rental demand of actual fleet levels. Itmakes

and some hotels

by requiring

at segmenting
reservations.

casts by the time prior to the pickup date them for each city, pickup date, and makes bucket (a set of similar products producing similar revenue), and length of rental. The forecasts also distinguish those between
who reserve customers in advance who walk and up to a

advance

in the late 1980s, Hertz ever, beginning has successfully used Saturday over-keep and weekend rates to stimulate demand from Thursday when demand
declines.

customers "walk-ups,"

through Monday, customers from commercial

noon

Hertz
out

counter
a reservation.

on the day of pickup with

To establish is able to segment

commercial and

Hertz
tween

demand

be

leisure

customers

of marginal tions, the Hertz rate forecasts acteristics. based modified changes One

set the revenue-maximizing values and availability restric that have two sepa char different very is estimate of demand YMS combines demand for that date of This

cov by type of car, by financial protection to erage, by response price, by length of rental, and by day of pickup. Commercial customers size vehicles; typically select mid- and full have financial protection for are not pay their firm included in the rate;

on historical

assessments by user-supplied in the business environment.

and rent on ing for the rental themselves; for shorter time periods. Leisure weekdays
customers are willing to drive smaller cars

estimate provides history-based and is generally more accurate

stability than other

(or want
convertibles);

specialty

vehicles
apt

like vans
to need

and
finan

Hertz

makes size.

decisions

to vary

are more

its fleet
estimates

cial protection
for the rental

for themselves;
themselves; and

are paying
rent over

far in advance

weekends The Hertz ports

and for longer periods

of time. sup

and for nonstandard days. The second

of a pickup date dates, such as holi is produced by a that uses recent

system yield management separate leisure and commercial

estimate model

It limits the availability of low products. cars are in short leisure rates on days when when ad supply. It identifies opportunities vance reservation low leisure rates should

Bayesian updating to update a prior forecast that observations reflects the pace of bookings and cancella tions over The model the previous incorporates one to two months. to

techniques

September-October

1995

95

CARROLL, GRIMES
the prior when avoid updating availability limit the bookings for a particu restrictions lar bucket. buckets It applies other techniques future booking demand for which to
zation to describe a revenue surface over

which over

for a global maximum the entire planning horizon. The YMS to search all forecasts for rentals to

can also convert

is high that have been found to increase the forecast accuracy. The YMS combines fore and bookings-based history-based a forecast whose standard to produce of error is lower than that of ei deviation casts Hertz ther separate forecast. Periodically for combining determines optimal weights

for use in of on-rent patterns projections deci and fleet deployment fleet planning
sions.

The YMS

sets recommended

overbook

net reve ing levels in a way that optimizes a specified quality nue while maintaining service level; this service level is measured in terms of the likelihood that a customer will have to with
wait

Interpool necessitated

moves by

are a major event.

historical
outcomes.

a confirmed
for a car. From

reservation
Hertz's

perspective,

the customer

should

not have

to wait more of its

than a few minutes the two forecasts

forecasts and the

for a car. Because

by comparing
corresponding

commitment not use

to quality service, Hertz did the traditional airline approach of

The YMS makes tailed

forecasts

city, day of the of week, bucket, rental, and time length this prior to pickup. Because we needed use we not such tradi did level of detail, tional which We as Box-Jenkins, forecasting methods less accurate. proved forecast

level, specifying for a particular bookings

at a very de future net expected

and trading off the cost of a de estimating nied customer against the cost of having and left-over fleet [Smith, Leimkuhler, Darrow 1992]. Instead, we constrained the that

overbooking optimization by requiring the likelihood of a customer with a con firmed

or, worse,

reservation
not being

having

to wait

for a car
is

accommodated,

(nor use or to local regional managers) mally their local knowledge of the competitive situation. The YMS forecasts are stochastic and include distributions of forecast accu

user-supplied incorporated in the YMS to allow users overrides

small probabil kept below a pre-specified, the of probability ity. The YMS calculates
various overbooking outcomes by convo

luting distributions
mand with "show"

of future booking
rates, using informa

de

tion about
show

current booking calculates

levels and no

racy established performance. mand?limited

by analyzing past forecast de Forecasts of constrained

forecasts.

The YMS availabilities

by the fleet available for estimates of the will rental?incorporate to buy-up, customers ingness of different car type is not

the set of product net revenue that maximizes

that is, to agree to a higher-priced or rate level if the one they desire
available. These state-specific

called values, sometimes using marginal bid prices [Phillips 1994]. The objective function specifies the total net revenue over tion also the planning includes horizon. The formula that set a set of constraints values to a feasible

constrained

forecasts

are used

by the revenue

optimi

limit the marginal

INTERFACES25:5 96

CAR RENTAL
described by the city's available cars over the planning horizon. The solution to this provides values, one for the optimal set of for each pickup date. rized
value

levels by booking
represents

class. A marginal
net revenue

the minimum

problem

Hertz

marginal The time periods used by the YMS optimi zation are different from calendar pickup values reflect the sup dates; the marginal

to accept for a one-day is willing rental on that date. In the car rental indus
try, marginal values are a more effective

trade-off at the peak hours of ply/demand the day at each location. Peak hours vary pat by city and result from hour-by-hour terns of pickups and returns often deter mined
The

way to optimize net revenue than calculat levels. They allow rental ing authorized to calculate availabilities companies by a in of rental way, length straightforward without struc requiring complex nesting tures that prespecify product desirability. to take They also allow the optimization

by airline
marginal

schedules.
values also serve as a very

concise

shorthand

that describes

hundreds

of revenue-maximizing prod uct availabilities. Since the YMS looks at over the entire generated it is that alter planning horizon, possible native product availabilities could generate more
However,

or thousands

Hertz

can vary the base to leisure customers.

into account agement the limitations

price

the revenue

revenue
the

on a single pickup
proper longer-term

date.
perspec

making requested
uses net

that corporate the rate available is available.

revenue?total

on yield man contracts impose, if the type of car

revenue less vari

The optimization

tive the YMS provides helps Hertz to avoid short-term decision making. unprofitable The Hertz YMS revenue optimization solves a nonlinear stochastic problem using as primary inputs forecasted distributions of future (mean and standard deviation) net booking
corresponding

a simple evaluate

using cost model?to activity-based rentals of different lengths cor the variable rental costs are rectly. Because associated with the rental transaction itself,
three one-day as rentals one are usually rental. not as

able rental costs

that are determined

and walk-up
rates over

demand
the

and the

economically

profitable

three-day

set of marginal values or availabil ity scenarios; predicted fleet levels avail able to serve future demand; and the rec sensible ommended using show levels calculated overbooking forecasts of cancellation and no

field personnel understand mar ginal values and the YMS replicates how they think about the problem of determin Because ing product availability, was smooth. The YMS marginal values its implementation converts optimal to optimal product avail

rates. The explicit uncertainties in into the model include the corporated of the booking
forecasts, and

accuracy
walk-up

forecasts,
the no-show

the
rates.

The marginal values are the dual vari ables of a traditional airline revenue man agement formulation solving for autho

for review by the ability YMS users prior to implementation (Figure 5). Field personnel accept or reject these YMS bucket availability recommendations that compare generated the expected by each bucket net revenue to the marginal

recommendations

September-October

1995

97

CARROLL,

GRIMES

Sun Mon Tue Wed Thu

Fri Sat Sun Mon Tue Wed Thu

Fri

Sat

Date

= Value"31

40

50

15 0

45

30 35

10

For

rental on Tuesday

the 8th:

[40 | 40 50 15 0 |

5q|

Accept 2-day rental ifNet Revenue > $90 Accept 4-day rental ifNet Revenue > $105

For rental on Tuesday the 15th: | | 45 30 45 301 Accept 2-day rental ifNet Revenue > $75 Accept 4-day rental ifNet Revenue > $120

35

101

Figure 5:Marginal values for each pickup date are derived by the YMS optimization. Manag ers review the marginal values and the corresponding availabilities by pickup date, bucket, and length of rental.

values

that represent of the available fleet. When

the opportunity

costs

managers

can

view

various

user

screens,

and
data

those authorized
and execute actions.

to do so can enter
Maintenance and

field personnel their implement to the decisions YMS through availability

the Hertz tion agents and or external travel CRS, agents Hertz can sell reserva or con

central
ing

(headquarters)
are also

control
available

and monitor
in the sys

functions

firm booking requests only for the products that are available. The travel agent, using a CRS can also see the availability status of each product?sell (s) or screen, (c). The YMS shows users a set of them
and

functionality sign are critical and proprietary Hertz YMS.

tem. This

and

the screen de parts of the

closed

Yield Management System Development Hertz based its early methodologies for its its in fleet and distribution the planning to
exe

system displays
its

easy-to-use
understand

that allows

1980s primarily on the operational needs of the field and the available information It built up system infrastructure. tems and the associated business for making decisions its sys

recommendations

managers

city managers, regional for multi (who are responsible managers ple pools), and headquarters have access to the system. Each of these

cute

them. Local

processes over a number of

them, years. It added to systems, modified and reconfigured them without paying

INTERFACES25:5 98

CAR RENTAL
much among attention decisions to the overall or to the need relationship for manag
processes.

The commitment ers was vital

at ing yield. The growing use of computers Hertz reinforced the need for greater inte
gration At the of same business time, processes rates and and rate systems. structures

tant initially process and tem. At

of senior Hertz manag to the process. Itwas impor to expedite the development later when deploying the sys Hertz established a to facilitate the collabo

the outset, committee

were

becoming CRSs were better This

more able

complex to display

and airline them. field

steering ration between mittee

Hertz

and DFL This com headquarters per

managers

planning systems starting with yield management. In developing the yield management we in tried to integrate a 1989, system of the existing
allowing to share

complexity prompted to press for integrated

Hertz

included Hertz

department and members personnel, team. The varied perspectives bers of the steering committee DFI with a comprehensive of Hertz's

sonnel, MIS

staff, key field of the DFI project of the mem provided

number
ness rate

systems
the consistent

and busi
sepa The

processes, systems

formerly data.

generates recom and optimal product availability mendations for future pickup dates using wide Hertz variety systems. of information In developing from other and deploy

YMS

detailed

demand

forecasts a

understanding strategic goals and directions, field operations, and information systems, and made Hertz aware of some of the is sues
a yield

involved
management

in developing
system.

and applying
The commit

tee also addressed during

mentation:

five issues

that arose and imple interface;

system

development

Car rental systems deal with

migratory inventory.
we had

?Design

?Required Hertz systems; ?Interfaces the and

of the graphical enhancements

user

to existing

ing yield management systems, to opportunity integrate these systems

reengineer business processes and

the yield manage ment system and other Hertz systems; ?Review of the modeling approaches
demand forecasting, fleet forecasting,

between

for
reve

organi

zation strategic
In establish

structures decisions

related

to the four main and Reck

we were business

nue optimization,
system ?System to rollout

and

implementation
and user training.

of

[Gulden
our goals,

1991].
able pro

recommendations; and

reengineering new

cross-functional

cesses

that would

of incremental management performance fleet planning,

support the generation revenue from the yield

of our goals tem was to minimize One costs, and risks. We

in developing

the sys

system and to improve the of existing Hertz systems for

two main

time, development in faced challenges areas. The first was developing

fleet deployment, pricing, and product specification. To help us, we in outside consultants (DFI) who brought did not have a stake in existing systems or

models for forecasting future sophisticated demand and fleet size, optimizing total net
revenue over the planning horizon, and

applying
and airline

YMS

actions

through
systems.

the Hertz
Hertz was

reservation

September-October

1995

99

CARROLL, GRIMES
the first company management
value approach

a yield to implement a that used system marginal

to revenue optimization.

during prototyping, team was able skilled DFI development provide greater and more curacy, while of unfocused reduced
costs.

into the development lowing for discovery

activities

and by al a to ac

The

challenge tecture of the computer for car rentals agement

second

concerned

the archi

applied locally, pool level. To facilitate

system. Yield man ismost successfully at the city level, and at the this local applica a batch, main

functionality the potential pitfalls As a result, we development. avoiding development time and

overall

tion, the YMS?primarily frame application?uses field decentralized workstations with graphical user interfaces to present information in an organized manner and facilitate use of the system. More than 100 cities use the Hertz YMS; all the city managers and the regional yield field workstations. have The managers field workstations
processing frame and database.

The graphical user interface also took of rapid prototyping advantage techniques, a of iterations number among a allowing wide audience of potential system users from city managers
to headquarters

and regional managers

and executives.

managers

Once

also provide
on-line access

cooperative
to a main

about the had reached agreement we the of interface, design proceeded with and coding. We es system development tablished external interfaces with existing systems, databases, and on-line through formal design, devel This testing, and implementation. team of DFI took the development and analysts

we

Hertz we used to develop

technique the system and to improve user acceptance was rapid prototyping. DFI developed pro used them modules and totype forecasting to analyze
evaluate

Another

functionality opment,

process and Hertz about

historical
alternative

rental data and to

forecasting methodolo

programmers 18 months.

we discovered these modules, gies. Using two techniques effective res that provided
ervations-based forecasts and demon

System Implementation We also took advantage prototyping

system. Hertz

approach
chose a

in rolling
paced

of the rapid out the

implementa

strated

the circumstances is preferable.

revenue

under which

the

use of each

type optimization
nature of the

DFI used proto to establish the programs

surface we needed

in mid beginning for initial testing. The YMS evolved use quickly as we gradually incorporated 1990 ful new Hertz features. selected For the initial five cities whose those of most testing, characteris cities.

tion over

12 months

to optimize. After the development realized that traditional nonlinear zation

team

techniques would revenue the optimum on the nonunimodal to investi surface, we used the prototypes home of the grown opti gate performance mization counted

optimi not ensure finding

tics represented They included

US

an independent commercial an a is of that part city, airport large met ropolitan multi-location pool with mixed commercial leisure and leisure demand, a major and two airport rental lo that are part of smaller city-wide that have primarily commercial de location,

that explicitly ac approaches for the nature of the problem. By this sort of learning process incorporating

cations pools

INTERFACES25:5 100

CAR RENTAL
mand mand. but also some We rolled seasonal leisure de time canvassing competitive had only the DPDA system identify future sellout dates mated rates. They to help them and no auto

the YMS out to the initial so that we

test locations had

over five months, and

incorporate change requests made by users and by the The initial roll out in steering committee. dicated that some capabilities required for a large independent
clude a very small,

time to evaluate

tools to help them decide what to set. They imple restrictions availability mented restrictions using a availability
time-consuming manual process that in

city?which
nonautomated

can in
loca

cluded most

a lot of data entry. They now spend of their time working with the YMS

for pool cities where typically all locations are large and automated. We needed different modeling a pool from one city to another and different business processes for pool were distribution than personnel required at independent cities. After the 12-month initial testing, Hertz rolled out the system to the remaining major US locations in
three months.

tion?were

not needed

graphical user interface to review and re fine the automated forecasts and the opti mal availability restrictions. They also work with managers for fleet responsible to make decisions and distribution consis yield management. second group of primary the YMS is local city managers. The the YMS product to review forecasts, tent with users

approaches cars within

to forecast

the movement

of

of use

They to control

Maturing System Hertz ment

of the Yield Management the yield manage 1990 and by July

and to stimulate de availability, when mand, appropriate, during the few days prior to rental. Since their responsibil ities include many other tasks, we de signed the YMS dates to signal to them what require attention. user interface
the results

first deployed system in August

1991 was The users.

using system has

it in its largest 55 cities. three groups of primary

pickup The YMS graphical

calendar screen to

uses
and

organize

The first is regional managers who oversee multiple use the sys pools. They tem to identify the dates of peak demand and to control product availability by limit ing the number of discount products avail able during the peak and controlling them carefully for length of rental. They also

provide to four-month various

days that

users with

an overview horizon.

of a two It uses

colors
require

planning and shadings

management

to indicate
attention.

ac For example, it shows days on which tion must be taken to restrict availability due to excess demand (red) or to stimulate demand
(green).

during periods of low demand by making lower priced products are generally available. Regional managers for determining the availability responsible posture for future pickup dates during the six months to several days before rental. the YMS, re Before Hertz implemented gional managers spent a great deal more

stimulate

volume

due
From

to excess
this

fleet availability
the user can se

screen,

lect a specific date using a mouse. For the selected date, the program then shows de tailed information about forecasts or avail ability recommendations. overrides Users take action to the de implement

by entering mand or fleet

or inputs forecasts, or by

September-October

1995

101

CARROLL, GRIMES
recommendations ing desired availability one day at a time, sending availabilities di to Hertz the The CRS. system pro rectly vides
terface.

rectly

integrate

YMS

and DPDA

use. The

help

screens
are

throughout
referenced to

the user
the users'

in

for the exchange system provides of information if manag that is necessary ers are to coordinate their decisions rather than making
focuses on the

a focus

These

them

in isolation.
impact

The YMS
on reve

current screen position and available through an index system. The system allows users to graph and view many variables
function

near-term

also

nue of accepting
als. This allows

or rejecting
managers

potential

rent

provided
allows users

key A the YMS. by diary

to store pertinent in

to evaluate

trade-off
decisions share,

impacts
concerning and

systematically
such value. issues

in making
as market

formation
ence or

about dates
communication

for historical
to other users.

refer
This

service,

Over

feature

is particularly

useful

for managing

around key events or holidays. availability A third group of users is at the head and pricing func quarters in fleet planning tions and in the field as regional fleet plan ners and pool distribution managers. YMS helped improve communication tween these headquarter departments local region managers. agement requires information
levels, fleet deployment,

the primary sion making system

the first three years of YMS usage, focus was on integrated deci and user training. Users of the in through three phases

often went

The be and

the application. At first, understanding were of the they skeptical yield manage ment system and its recommendations. The system differed from the manual and process they understood a variety of new terms and this skepticism encouraged

Effective

yield man about fleet

and com

experience-based and introduced

rates,

petitive
now

response.
between

More

daily

interaction
and

capabilities. We as an important part of beta testing and user training so that we could prove to the users buy-in. the value Once of the system and get their that they become confident

occurs

headquarters

field staff about required and manage to plan

the intertwined

decisions

the fleet, deploy the fleet, yield. In fact, this interaction of YMS users.

recommen the YMS availability following dations well in advance of a pickup date? as soon as the sellout was resulted
tance and

has created

this third group

identified?still of their resis

evaporated.

in a sellout, much
operational

concerns

The

rental

car

product

is a
They making

also realized consistent

their

perishable

product.
now lev

that the system was economic trade-offs

At one airport

that
lo

increased

revenues.

fleet managers Field and headquarters use YMS to plan the appropriate fleet in advance; els 90 days to 12 months

de headquarters pricing managers monitor to when mand activity highlight periods Hertz needs to introduce discount prod di ucts; and pool distribution managers

employees see the competitors' carwash operations in, cleaning cars after rentals are checked on a noticed that sellout they Wednesday
one competitor was washing many more

cation where

the Hertz

could

cars than they were. mended allowing

The YMS had few one-day

recom rentals

very

INTERFACES25:5 102

CAR RENTAL
day, and therefore much of for the less profitable one-day rentals had gone to the competition. the previous the demand Once we the users had further focused accepted training on integrating the accu and improving the system, sensitive to the accuracy levels. of the forecasts of

future fleet

to the Future Looking In improving the yield management

tem, we expect to take three steps. First,

sys

strategic decisions racy of the YMS inputs from other Hertz to use the YMS systems. We also wanted over an extended
years under a

we

plan

to refine

the model

formulations

period
of

of one

to two
and

for forecasting demand and fleet to im their Hertz also plans to prove accuracy. enhance the system's ability to monitor and measure performance and headquarters feedback. Second, we to provide users personnel with better

variety

circumstances

then evaluate
past dates over

its capabilities.
a six-month

We
period

analyzed
exten

sively. We compared dates during tight the YMS was used ex fleet periods, when tensively, with comparable YMS was not used because cess fleet. With to dampen
mand

dates when Hertz

the

the decision plan to enhance and fleet for fleet support systems planning Hertz has already taken great deployment. in understanding the interrelation for cars ship between supply and demand over the short and long term. Car makers strides have recently increased for rental car companies their prices on cars the and extended

had ex able in de
aver

enough the random

data we were noise found

of the

outcomes.

Comparisons

age revenue per rental during indicated incremental periods through percent, with

these

two

gains the use of the YMS of one to five

required months.

the range due to variations en among cities with different competitive vironments and pricing and the magnitude of the sellout revenue

holding period from four to six It ismore important and valuable than in the past that Hertz plan its fleet By building new tools and en be bet existing models, to utilize YMS results make Hertz will

correctly. hancing ter able accurately off. These

incremental periods. Greater is possible when Tuesday through are of instead sellout only days, Thursday
Wednesday. Users came to appreciate the system as a

and more

the profit and share trade will explicitly in improvements

tool that simplified abstract ations through mathematical

Experienced users come to

rental car oper manipulation.

appreciate what

fleet deploy tegrate the fleet planning, and yield management decisions. ment, the strategic Third, we have to deploy decision support systems we have devel in the US to Hertz's world-wide op This will
have expectations, very

parts of the system

parts are more For

perform
to

best and what

input users values can use or

oped erations.
countries tomer

be challenging.
different business and

Different
cus

sensitive example,

cultures, informa

assumptions.

the system
changes,

to manage
such as airfare

major market
wars, special

in the business and large changes introduced environment like those by the events, Gulf War; however, the system remains

tion system environments, and competitive In Europe, for example, situations. there is a greater dispersion of car rental locations to support
non-common

rail than in the US. Also,

market countries have

some
re

September-October

1995

103

CARROLL, GRIMES
strictions on rent-it-here leave-it-there op

analysis and preparation will be needed to determine the specific re and needs for decision quirements support tools. Only then will we modify and train users ploy the models can use them to solve lems and obtain References
Boyd, Dean and Phillips, Robert planning/' 1992, paper "Inte pre grated Francisco. Edelstein, 'The No. Gulden, bining tional pp. and Melnick, 1977, Marty Myron control Vol. pool system," Interfaces, 1, Part 2, pp. 21-36. "Com and Reck, Robert 1991, Gary quality and reengineering Indications, Vol. for opera 8, No. transportation

eration.

Careful

and de so they prob benefits.

their business

the anticipated

sented at the ORSA/TIMS

Conference,

San

8,

superiority," 1-9.

1,

Phillips, Robert 1994, Proceedings of the 16th IFIP Conference on System Modeling and Opti
mization, York. Smith, Ross Barry; 1992, Leimkuhler, "Yield John; and Darrow, ed. J. Henry, Springer-Verlag, New

at American management Vol. 1 Airlines," 22, No. Interfaces, pp. 9-30. (January-February),

INTERFACES25:5 104