Case Studies

Hertz Develops Yield Management System

William J. Carroll and Richard C. Grimes, (1995) Evolutionary change in product management experiences in the car rental industry, Interfaces, 25:5, 84-104.

Hertz faces a series of inventory management challenges that in some ways parallel that of the airline industry. Demand for rental vehicles is uncertain and can be dichotomized between business and leisure rentals with different fee structures. Demand varies by day of week and location (at airport vs. in town). As in the case of airlines, Hertz faces the problem of no-shows as well as last minute "walk-up" customers who arrive with no advance reservations.

However, the issues that Hertz must deal with are in many ways more complex that seat reservations for an airline. Unlike the seat on a plane, a car reservation can be for multiple consecutive days and the variable costs associated with the vehicle are highly sensitive to the length of the multi-day rental. In the airline situation, it is never advantageous to leave a seat unsold. In contrast, because of multi-day demand and net revenue structure, it may be worthwhile to leave a car unrented for a day in order to have available for a different duration rental.

There is a wide variety of product types that Hertz must keep in its fleet in order to satisfy different customer preferences. (airlines have basically three seat types - economy, business, and first class) In addition, 10% to 20% of the people who rent a vehicle do not keep it as long as they originally intended. Also, cars are returned at various times during the day. As a result, Hertz's reservation system is not as centralized as an airline's. The local pool manager has the authority to make on the spot adjustments to the pricing structure, based on a mathematical model's analysis of the marginal cost and marginal revenue.

In the 1980s, Hertz began the development of a sophisticated decision support system to determine rental fleet size and strategies for geographically redistributing vehicles as demand varied. Over time, these systems evolved into an integrated set of models that can answer the following questions.

  • How many cars should Hertz have?
  • Where should it deploy those cars?
  • What products should it offer?
  • What products should it sell at a given moment?
In the early 1990s, Hertz launched its yield management system that guides regional managers to establish policies, as far as six months in advance, as to how to deal with peak demand days by controlling product availability and limiting the number of discounts and the duration of the rental period. The system is also used by local city managers to make adjustments to rental policies a few days before the rental date. Headquarters staff use the decision support system to make fleet level decisions, typically a year to six months in advance. Due to the linkages, the system has also facilitated communication between the different levels or organization from headquarters down to the local level.

Back to Case Study Listing

Website by:
QuIC Solutions, Inc