April 1996 € Volume 23 € Number 2

OR Overhaul

Facing liquidation, National Car Rental refuels with fresh ideas, pulls a U-turn and heads toward profitability

By David Greenfield

Large corporations are cutting the fat from their operations in such a way to make even the most fastidious butcher proud. In the midst of this lean-sizing, numerous well-known and seemingly profitable companies are coming under the corporate ultimatum of increased revenue generation. If the demand is not met, the unprofitable company can be cut off from the parent corporation like so much excess gristle.

For organizations under such pressures to deliver higher revenues, operations research can be a life-saving tactic. Proof of this can be found in the example of National Car Rental (Edina, Minn.), a company that recently faced liquidation by its parent company, General Motors (Detroit), if profits were not increased significantly. To meet GM's demands, National Car Rental launched a revenue management program, with the help of Aeronomics Inc. (Atlanta), based on a suite of analytic models that handle capacity management, pricing and reservations control.

Kevin Geraghty, senior consultant at Aeronomics, and business manager for the National Car Rental project, said he first approached National's revenue problem using data analyses and simulation analyses. "This helped to identify 'low hanging fruit' -- the easiest, fastest techniques to get a quick return on investment," Geraghty says.

Examining this "low-hanging fruit" led to the discovery that National did not have effective pricing strategies in place. No central responsibility for pricing existed within the company. Therefore, a pricing strategy was the first obstacle to be overcome. This was done by developing a rate recommendation, albeit a simple one, but one that could arrive at rates dependent on demand.

A large number of technical problems faced the project team from the start, and each had to be resolved on a case-by-case basis. "Like a lot of software development projects, you just have to throw yourself into it," Geraghty says. "The difference with this project was that the time frame was significantly compressed. Initial implementation of a simple system to grab 'low-hanging fruit' had to be completed in three months."

Behind The Wheel
To develop a system for improved revenue management at National involved the implementation of methodologies used in the airline and hotel industries, and converting these methods for the particular need at hand. According to Geraghty, this involved significant changes not only in the methodologies, but within National Car Rental itself.

There was no problem getting top management involved in the project, however. "This program was a direct order from the CEO of National Car Rental," Geraghty says. "Basically they were told: 'This is it boys ... this is your last shot.'"

"We had to report back to GM frequently," adds Ernest Johnson, corporate vice president, revenue management, for National Car Rental. "I was the guy who advocated the changes; I led the project; and I was the one who committed to adding $56 million in revenue the first year we had this team and process in place. So we had our necks on the line."

The first thing Johnson did was go to senior management in order to get their financial commitment, and commitment to building a team to complete the project successfully. "I got them to support me in selecting a team, and we wound up interviewing over 300 people ... some from airlines and competitors, others from within National. And most importantly, we got senior management to commit to educating the company. In fact, we got them to agree to conduct seminars themselves once the system had been devised. We got them to tour the country and talk to rental agents at all locations, and talk to every reservation agent to explain the differences that they would see in the way pricing and inventory were now going to be handled. It all boils down to education, education and more education, and communication," he says.

But first the system had to be built, and that carried with it the burden of marrying the four systems that comprise National's car rental operations.

"Picture a system that handles the daily activity on the rental lot, another one that handles reservations, another that handles the actual prices, and then the airline CRS (centralized reservation systems) that we communicate information to," Geraghty says. "Now into the middle of that we had to drop our revenue management system. It had to be able to tie these different systems together so that a user could look at his monitor and see how many cars were on the lot, see what prices the company had to work with, and see how bookings were coming in."

The major problem in consummating this marriage was data volume. Typically, such revenue management systems run overnight, performing an overnight download of data. Then forecasting and optimization are done based on the information gathered from the download. Working within such parameters, however, did not suit what Geraghty and Johnson had in mind. Therefore, they had to download data continuously during the day -- on a transaction-by-transaction basis -- because overnight processing would not permit the system they were devising to be up on time for use in the morning. "This was somewhat of a first," Geraghty says, "because it provided close to real-time booking information on the users' computers."

During these initial stages of the project's development, distributed development (using people from different company locations) was attempted, but Geraghty and Johnson found that they really had to bring people together into one room -- one work area -- to get the kind of communication going that was necessary for the type of rapid development involved in their project. "You need people there to shout from their cubes at each other," Geraghty says.

"We decided to centralize all the functions involved in the development of this system with one group of people, and we took a lot of time talking about the pluses and minuses of centralization versus decentralization," Johnson says. "We knew that one of our competitors had a mix of centralized/decentralized operations. We knew that airlines split the functions, with one group controlling inventory and another group controlling price. So what we were proposing was radical. Not only were we going to be completely centralized, but we were going to combine pricing and inventory so that a group of experts that do nothing but focus on revenues would have control not only of pricing, but of the inventory to capture those prices."

Keeping track of the location of the cars in the fleet was the next problem the team had to deal with. Geraghty says that when you're planning on what rate to charge based on demand and availability, you need a forecast of where the cars will be. "So we had to figure out where the fleet was and where the fleet was going to be at a certain date. And we had to develop a system that would allow the user to override the system with updated information as necessary," he says.

"We lacked the time to build in user expertise in the first (three-month) phase," Geraghty says. "But in the second phase, we paid more attention to what was going to be required of the guys who would actually use the system. The second phase took 15 months, and resulted in a much more comprehensive and user-friendly system."

To tackle the problem of dealing with the fleet information in a more user-friendly way, Geraghty used capacity management methodology as a business problem, thereby matching cars to demand. A number of heuristics, called Expected Marginal Seat Revenue (EMSR) heuristics, were used to develop this part of the system. These heuristics are used in the airline industry (once the airplane takes off, the seat is gone and cannot be sold) and were easily applied to National (once the car is left on the lot overnight, that day's sale is lost). The bottom line is that one has to use the assets; the heuristics provide a method of assessing the value of those assets.

For handling the pricing issues National was facing in its reorganization under this new system, a constant elasticity model was employed.

"The main thing that we introduced," Geraghty says, "and which is probably unique in most of the car industry, is demand-based pricing. Stop following the competitors around. This has allowed National to become somewhat of a price leader."

The final program was a very comprehensive solution. The priorities of the system were set by the initial data analyses, and not much was taken out in the final form. Looking at the system as a whole, the capacity management function optimizes fleet utilization; the pricing function capitalizes on consumer's price sensitivity (which varies in response to competitive pressures in the marketplace); rate levels are linked with availability and booking activity; the reservation and control function maximizes revenues by accepting or rejecting booking requests; and length-of-rent controls are determined through mathematical programming to optimize management of National's rental car inventory.

Merging
For Geraghty, the pivotal point of the system developed for National involves the integration of two philosophies: automated decision making and decision support.

Automated decision-making, the methodology typically used for revenue management, helped the team implement numerous new ideas. "We wanted to build the users closely into the models to give a decision support feel as well," Geraghty says. "So, in terms of operations research, we had to take the actual users and insert them into the models so they could look at the system as it's halfway through generating its recommendations, make little changes, and then run the program again to see what-if scenarios. For example, if the user didn't agree with the forecast, he could go in, change the forecast, rerun the system and get new recommendations. It's the same with pricing, the user can change those recommendations and re-optimize the inventory controls. There was a lot of trade-off between automated decision making and decision support."

Using the methodologies employed by National also allows the company to expand its market downward. "Basically, if you're not managing your pricing and capacity very well, all you can do is pick a price, and it's got to be somewhere in a range where you get enough people booking, but not so much that you dilute your revenues too much," Geraghty says. "Now, if you can manage multiple pricing, it allows for people who are not willing to pay as much, the students of the world, etc., to make use of capacity that would otherwise just sit there. It has a beneficial effect and you can see this in the airline industry where airports have become more like bus terminals. And to my mind, that's a good thing; it's available to a lot more people. And National has certainly found that to be true for its operations. The company is now able to think in terms of stimulating its leisure customer base, which it wasn't able to do before because it was too busy concentrating on its business base."

This new way of thinking about entire business processes led to a sea change in National's company culture.

"We had to change the culture of the organization to implement Aeronomic's plan," Johnson says. "And this change enabled us to alter our control of leisure pricing, which had formerly been under the control of two people who handled pricing for the whole country without sophisticated systems to forecast demand, and no easy tool to change pricing or inventory. It was mostly done via a manual process. So it was very difficult, if not impossible, for us to get ahead of the demand curve.

"We also changed the way we handled inventory, which is done by means of reservation inventory through CRSs (computerized reservation systems). Through this change, we found that field management did not have the tools to make decisions on inventory that would maximize our return. So we took control of these inventories from our field locations all over the country and brought them into a centralized team here at headquarters."

Right of Way
National chose Aeronomics following extensive meetings with several top consultants in the industry that had experience with revenue management in the travel industry specifically.

"Aeronomics had a lot of experience, but we really liked their presentation," Johnson says. "They showed us what they were going to do with the needs assessment, and we liked the depth and breadth of how they were going to look at our business."

After reviewing National's data, Aeronomics said they would be able to inform the company of:

any opportunities to improve results using sophisticated revenue management technology;
what the system would look like;
what changes would have to be made in National's legacy systems;
what cultural changes should be made in the organization;
what the cost would be for Aeronomics to provide the service; and
how much money it would add to National's revenue stream with the same size fleet from the year examined.

"We liked that approach," Johnson says. "Aeronomics was different from other companies in that they said, 'We don't have a black box for you and we think anybody who says they've got something you can plug in immediately is probably doing you a disservice.' And there were other companies that did promise us they had something on the shelf that could be used for our problem."

Johnson maintains that for OR providers to be successful, they should be prepared to understand the client's business early and have a talent level available that could provide a number of different solutions to a problem. "They should be fearless in the sense that once they have understood a particular business, they can come up with solutions that may be politically unacceptable to the organization. But they should have the courage to stand up behind their recommendations," he says.

Commenting on the value of OR to business in these competitive times, Geraghty says, "People in my field (airline, hotels), where the methodology is more established, should recognize just how effective OR is. It basically saved National Car Rental. And you can go from the CEO of National on down, and they will all say: 'Just applying these OR models made the life or death difference for this company.'

"When you're in the back room of an airline tweaking these models, you just feel like you're the guy who's screwing up the consumer, because everyone complains about the number of different airfares that are out there. But the fact remains, OR generally does make the difference between life and death in most of these types of industry."

David Greenfield is the managing editor of OR/MS Today.

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