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Transportation Research Part E 42 (2006) 272–292 Modeling and solving the short-term car rental logistics problem Andreas Fink *, Torsten Reiners Institute of Information Systems, University of Hamburg, Von-Melle-Park 5, 20146 Hamburg, Germany Received 19 March 2004; received in revised form 20 September 2004; accepted 29 October 2004 Abstract Logistics management in the car rental business involves short-term decisions about the transportation and deployment of cars with regard to optimizing fleet utilization while maintaining a high service level. We model and solve this problem by means of minimum cost network flow optimization under consideration of essential practical needs such as multi-period planning, a country-wide network, customized transportation relations, fleeting and defleeting, and car groups with partial substitutability. Experiments were conducted on substantial real-world data, using a simulation model to assess optimization results for different scenarios. The results indicate that the proposed approach can significantly improve efficiency. Ó 2005 Elsevier Ltd. All rights reserved. Keywords: Car rental logistics; Transportation in car rental networks; Minimum cost network flow model 1. Introduction We consider the logistics processes in the short-term car rental industry. This industry faces certain developments such as a disproportionate growth of car holding costs relative to pricing levels as well as the general demand for an improved service quality in a competitive market. As car rental companies provide substitutional products, price and service quality are critical success * Corresponding author. Tel.: +49 40 42838 4706; fax: +49 40 42838 5535. E-mail address: (A. Fink). 1366-5545/$ - see front matter Ó 2005 Elsevier Ltd. All rights reserved. doi:10.1016/j.tre.2004.10.003 A. Fink, T. Reiners / Transportation Research Part E 42 (2006) 272–292 273 factors. This underlines the importance of optimizing car rental logistics in terms of the utilization of the fleet of cars while maintaining a high degree of customer satisfaction. In this regard, sophisticated control systems have to be developed and used. According to the Economist Intelligence Unit (2000) the car rental industry is polarized between the major international companies providing services to both business and leisure customers on the basis of international networks including outlets at all major airports and city centers, and small companies operating locally and primarily serving the leisure market. While the general concepts described in this paper may be applied to any car rental company that operates a substantial integrated network of rental locations, we are influenced by our work in an industry project with the German subsidiary of a major international car rental company. Our focus is on the short-term deployment of passenger cars for a planning horizon from a few days up to about two weeks. In this context, yield management basically involves optimizing car deployment with regard to the number and type of deployed cars as well as the incurred transportation costs due to car movements between rental locations and/or depots. The main contribution of this paper is the description of an effective solution method that supports decision making in short-term logistics management under consideration of essential practical needs. We disregard affecting demand from a revenue management perspective (by means of pricing policies depending on the short-term relation between supply and demand); see Geraghty and Johnson (1997). The paper is organized as follows: First, we describe the major system components and core processes of car rental operations and we introduce the resulting decision problem (Section 2). Section 3 focuses on modeling and solving the short-term car rental logistics problem. This includes determining the supply of available cars, forecasting demand, balancing supply and demand on the basis of a minimum cost network flow model, and eventually validating the generated plan by means of a simulation model. Computational results are presented in Section 4. In Section 5, we describe the architecture of an integrated decision support system supporting car rental logistics. Finally, in Section 6, we summarize the lessons learned and discuss requirements for future research. 2. Problem description In this section we present an overview of car rental operations (network, fleet, rental and logistics processes) and introduce the core decision problems. 2.1. Network and fleet The major car rental companies operate cross national. However, logistics management is mainly split in accordance with national subsidiaries. Such organizations run a network of rental locations (stations), where customers can pick up (check-out) and return (check-in) cars. Typically, a national rental network exhibits some hierarchical structure—e.g., by means of grouping stations in districts (pools), and districts in regions. Fig. 1 shows a possible structure of a car rental network in Germany with four regions, and, as an example, the Munich district, which includes all stations in and around this city. The map also shows some depots, marked by squares, which serve for the dispersal of new cars (fleeting) and eventually collecting cars once the holding 274 A. Fink, T. Reiners / Transportation Research Part E 42 (2006) 272–292 Hamburg NORTH Berlin Cologne WEST EAST District Munich Airport Munich Frankfurt Landsberg Munich SOUTH Fig. 1. Possible structure of a car rental network. period expires (defleeting). Depots act as an intermediate layer between stations on one side and manufacturers and resellers on the other. The car rental company is affiliated with different kinds of stations. A corporate station operates by means of staff and cars that are both part of the car rental company. A station with autonomous staff but without a separate fleet of cars is called corporate agent. In addition, franchise partner (licensee) stations as well as foreign stations generally operate a separate fleet of cars and are for the main part autonomous regarding logistics management. Consequently, we focus on corporate stations and corporate agents, where the car rental company can centrally decide about the deployment of their own cars. A car rental company usually operates up to about 15 car groups where each group contains different cars with comparable quality (e.g., concerning size and equipment). Each group represents a homogeneous good with a base rental fee per day (rate). In case that a customer made a reservation for a certain group in advance and no corresponding car being available at the time of check-out an upgrade to a superior car group can be granted by the station. In practice, single upgrades and double upgrades correspond to one or two additional quality levels, respectively. There are some common rules that define feasible upgrade relations (see Table 1). Double upgrades should only be granted if no car from a single upgrade car group is available. Note that the rules are partly treated as suggestions and the station staff may make exceptions to satisfy particular customers. Table 1 Car groups Group Type Rate Single Double Holding costs per day A B C ... Sub-compact Compact Economy ... r1 r2 r3 ... B, J C D, K ... C D E ... h1 h2 h3 A. Fink, T. Reiners / Transportation Research Part E 42 (2006) 272–292 275 Car rental companies generally enter into agreements with car manufacturers and resellers, which define criteria for the car usage (in particular, in terms of a maximum holding period and mileage). For our purposes holding costs per day (including interest, depreciation, maintenance, etc.) of a car of some car group are assumed to be constant during the standard holding period (e.g., 6 months). If a car rental company continues to use some car for rental operations in spite of an applicable defleeting criterion, penalty costs may have to be taken into account. 2.2. Rentals A rental starts with a check-out at some station where the customer signs the contract and ends with a check-in at the same or a different station where the car is returned. Check-out data includes the planned check-in station and rental length. The revenue due to a rental is composed by the base rate per day (multiplied by the rental days) as well as additional services, e.g., fees for insurance, gasoline, or extra equipment. In case of an upgrade, the revenue is based on the rate of the car group originally reserved. In general, the rate may depend on factors such as the season, day of the week, or special contracts with certain groups or companies. Customers make reservations specifying at least the check-out and check-in station and time as well as the requested car group. The typical policy of car rental companies is to accept reservations for passenger cars without examination—however, these reservations are usually not binding on either side. Achieving a high service level, in particular providing all customers that hold a reservation with a car of the requested group (or an upgrade), is extremely important. Although this may be unprofitable from a short-term perspective on some cases, a high service level is crucial to build long-term customer relationships in competitive markets. Achieving a high utilization of cars is a main goal of the planning concepts discussed in Section 3, but nonetheless requires the efficient execution of operations processes. In particular, car rental companies aim at a short turnaround with regard to the time needed from a check-in until a check-out of the car is possible again (e.g., due to refueling and cleaning). For standard cases the turnaround time should be shorter than 1 h. In general, there is a high degree of uncertainty in the processes throughout the day. For example, there may be delayed check-ins, returned cars may be in need of repair, reservations may expire when no customer turns up (‘‘no-show’’), or a lot of walk-in customers may unexpectedly arrive. Furthermore, the current status of cars is often inaccurately represented in the information system (e.g., shortly after check-in or during turnaround). Balancing supply and demand throughout the day is complicated by these uncertainties. One consequence is that car rental companies usually do not operate by fixed and automated preassignments of specific cars to (forecasted) customers, but by flexibly handling the allocation when the customer arrives—with some degree of manual forward planning by a rough matching of reservations with the pool of available cars for different groups. 2.3. Logistics processes The typical life cycle of a car is illustrated in Fig. 2. New cars are delivered from the manufacturers to feasible depots where the cars are prepared for rental operations including supplementing special equipment and registering a vehicle license. Cars are brought into the active fleet (fleeting) using trucks (with a capacity of up to eight cars) from the depots to designated—with 276 A. Fink, T. Reiners / Transportation Research Part E 42 (2006) 272–292 Transfer Car Manufacturer Reseller Depot and/or New cars Cars for sale Fleeting Defleeting Station Cars on yard Rental Fig. 2. Life cycle of cars. respect to direct fleeting—stations within the districts. This applies analogously for defleeting (transporting a car at the end of the holding period from some station to some depot). Ideally, foreseeable car shortages at some stations are balanced by arranging fleeting and defleeting appropriately. Nonetheless, there is generally also the need to schedule car transfers between stations. We distinguish transfers via truck—keeping the mileage of the car—or by driving the car itself (by axle, carried out by station staff or staff from service providers). While combining several car transfers on one truck usually leads to lower costs, it may also stand for inflexibility because of longer transfer times, mandatory advance planning procedures, and delays resulting from the combination of more than one car transfer. Transportation by axle is typically faster and more flexible but also more expensive than transportation via trucks. Transportation by axle may be combined with transportation via truck as some designated stations may act as collection points where trucks drop and pick-up cars (in particular in connection with fleeting and defleeting). Note that transportation services are for the most part assigned to external shipping companies on the basis of basic agreements, which include certain service guarantees and cost structures. We generally found that shipping companies charge fixed costs per car depending upon the transportation relation, the distance as well as the mode of transport. The question marks shown in Fig. 2 indicate the logistics processes that are the subject of this paper. That is, we aim to optimize car deployment by means of fleeting, transfers between stations, and defleeting, focusing on short-term logistics decisions for a planning horizon from a few days up to one or two weeks. We assume tactical and strategic decisions as given. In particular, there are generally fixed arrangements for the range of aggregate fleeting and defleeting contingents with fixed charges per car provided. Agreements with car manufacturers and wholesalers determine to what extent the holding period of cars in the active fleet can be flexibly adjusted to resolve shortages or to reduce over-capacity. The strategic management of the purchase, dispersal, and disposal of cars is an important issue of the car rental industry; see Economist Intelligence Unit (1997). More detailed plans are generally determined through some hierarchical fleet planning process. This mainly includes forecasting rental demand as well as controlling the availability of cars at different aggregate levels (in particular, with respect to the planning horizon, regions, and car groups). The management of car deployment is highly complex due to the connection of car availability across time, the station network, and different car groups. Furthermore, the detailed planning of short-term car logistics involves thousands of potential rental cases each day. For these reasons, effective decision support by appropriate information systems seems indispensable. The literature A. Fink, T. Reiners / Transportation Research Part E 42 (2006) 272–292 277 that considers the car rental business mainly encompasses revenue management and pool control systems as descriptive tools. Edelstein and Melnyk (1977) describe a pool control system with the purpose to clarify and evaluate alternatives for, e.g., assigning cars within a pool of cities or accepting reservations. The system is a descriptive interactive tool that leaves the actual deployment decisions to the manager. A yield management system was designed at Hertz by Carroll and Grimes (1995) to combine various stand-alone decision support systems addressing mainly tactical and strategic questions concerning the fleet size and deployment as well as product design. This yield management system supports decision making by gathering information from the corresponding subsystems as well as presenting alternatives for mid- and short-term planning. Geraghty and Johnson (1997) focus on revenue management, especially capacity management, pricing, and reservations control. Pachon et al. (2003) describe a prescriptive model for daily fleet planning within a pool of neighboring rental locations. All papers mentioned provide valuable insight into the car rental business. However, the literature generally lacks prescriptive optimization methods for short-term logistics management under consideration of important requirements from practice such as multi-period planning, a country-wide network, customized transportation relations, fleeting and defleeting, and car groups with partial substitutability. Our aim is to provide an efficient solution method that takes these aspects into account and effectively supports decision making in car rental logistics management. 3. Modeling and solving the car logistics problem The car logistics problem is modeled with the objective of maximizing profit by balancing supply and demand from the perspective of short-term logistics management. (As discussed in Section 2.3, we assume strategic and tactical decisions such as the station network or the available car types as given. In Section 5, we outline the integration of the proposed optimization model within a decision support system, which also includes mid- and long-term planning functionality as well as affecting demand by flexible rate adaptations in the sense of revenue management.) On the one hand, revenue may be increased by serving rental requests. On the other hand, we strive for an efficient deployment of cars with regard to transportation costs as well as holding costs according to the number and type of used cars. These conflicting goals are integrated by the objective of maximizing profits, as defined by subtracting the incurred variable costs from the obtained revenue. We model and solve the car logistics problem on the basis of a rolling planning horizon of one week. Resulting plans are re-optimized each night on the basis of new data, assuming that all check-outs and check-ins are generally keyed into the information system not later than by the end of the day. The assumption of time periods of half days results in partitioning a week into 14 periods. (Different planning horizons or definitions of time buckets are of course possible.) We aim at a robust car logistics plan, which provides the stations in each period with enough cars of the different car groups, without fully automating the detailed decisions in the stations during the course of the day. The station staff should be enabled to handle customer requests by flexibly deploying locally available cars. That is, we do not propose an automatic assignment of specific cars to customers by the decision support system. This is due to the uncertainties of the actual processes in the stations in conjunction with the often delayed availability of events (in particular, 278 A. Fink, T. Reiners / Transportation Research Part E 42 (2006) 272–292 check-ins) in the information system. In the following sections, we describe the determination of supply and demand and define the decision model and a corresponding minimum cost network flow model. 3.1. Supply The determination of the supply of available cars throughout the planning horizon is complicated due to the connection of car availability across time and space. The option of car transfers between stations and the partial substitutability of car groups due to the possibility of upgrades mean that in theory almost any particular car may serve any future rental request at some arbitrary station. This is related to the problem of deploying empty freight cars in rail system networks; see, e.g., Spieckermann and Voß (1995). It is reasonable to assume that the information system of a car rental company provides at the end of each day accurate data concerning the number of cars of different groups being available at a station, the cars currently on rent, which will become available at some station in the future, and the number of new cars of different groups being available at a depot (with a fleeting option). This provides accurate data for the initial period of the planning horizon. The availability of cars in subsequent periods is influenced by possible check-outs due to future rental requests, which may or may not be served, as well as check-ins due to cars currently on rent. Future rental requests have to be estimated on the basis of demand forecasts (see the next section), and one also has to rely on tentative check-in plans which are requested at check-out and updated during the rental time. In combination, car availability may depend on uncertain check-in data of forecasted rental requests. Therefore, the accuracy of data about car availability decreases for future periods, which sets limits on an adequate planning horizon for detailed car logistics planning. We assume pre-defined fleeting and defleeting contingents at the depots, which define upper and lower bounds for how many new cars of different groups are available and how many cars have to be taken out of the active fleet, respectively. Specific cars may eventually become unavailable for rental at the end of the contracted holding period or as a result of a repair necessity. While one can estimate the former events, the latter ones are uncertain. 3.2. Demand The planning of car logistics crucially depends on a sensible demand forecast. The main problem is that a substantial proportion of rental requests are not due to a reservation. Therefore, we generally need to establish detailed short-term forecasts of rental requests over the planning horizon. First of all, a forecast of a rental request must include information about the check-out station and time as well as the requested car group. For rental requests that are linked to a reservation we also know, from the corresponding reservation data, about the planned check-in station and rental length (and so we usually have an accurate estimate of the revenue). However, to forecast walk-in customers one has to rely on past data to guess the check-in station and the rental length. Consequently, forecast data becomes increasingly inaccurate after the average rental length of five days. In practice, the demand forecast might be adapted by the local station staff, which may have additional information available that affect demand (e.g., some new local event or weather A. Fink, T. Reiners / Transportation Research Part E 42 (2006) 272–292 279 conditions). Nevertheless, detailed demand forecasts can at best provide a reasonable basis for a short-term planning horizon, while mid- or long-term decision problems—which are not subject of this paper—generally rely on aggregate data. Furthermore, influencing factors such as seasonality or local events are ignored in the current model due to a restricted access to historic data. Within the car rental logistics decision support system, as introduced in Section 5, the forecast module may exploit aggregate data over a long time period together with information about relevant (external) events. We assume that linear regression functions can map reservations to a forecast of rental requests, i.e., to an estimate of the requested number of check-outs of a car of some car group at some station in some period. We have identified four main factors that affect such a regression function: the station, the period (for which we forecast) within a week, the lead time (between the current period and the period for which we forecast), and the car group. This results in the following general regression function (the subscripts/indices represent factor combinations): #check-outs½station;period;leadtime;group ¼ a½station;period;leadtime;group þ b½station;period;leadtime;group  #reservations½station;currentperiodþleadtime;group The parameters a and b of these regression functions are estimated on the basis of past data. Furthermore, we estimate a walk-in factor that represents the average proportion of walk-in customer requests on the total demand (for each station, period within a week, and car group). The length and the check-in station of forecasted walk-in rental requests have to be guessed by sampling from past rentals with the same characteristic (for each station, period within a week, and car group). The revenue of forecasted walk-in rentals is estimated on the basis of the average revenue per day that has been obtained in the past for the relevant car group. 3.3. Network flow model The decision model is based on detailed data about the car supply at the stations (corporate stations and corporate agents) and depots (i.e., number of available cars of some car group at some location at some period) as well as short-term demand forecasts (i.e., potential number of check-outs of some car group at some station in some period), as elaborated in Sections 3.1 and 3.2, respectively. Moreover, we rely on cost parameters concerning holding costs per day and car group as well as transportation costs depending on the different modes of transport. The objective is to maximize short-term profits as measured by the revenue of the satisfied rental requests minus the sum of the variable costs, considering additional or saved car holding costs and the incurred transportation costs. Within the planning horizon of about one week, decision variables represent the number of cars of different car groups that are to be moved between different locations at different time periods. This includes transfers between stations as well as fleeting and defleeting (moving cars from depots to stations and vice versa) under consideration of different transportation options. A solution must meet the constraints set by the availability of cars (initial and inferred supply), the forecasted rental requests (demand), and the allowed upgrade relations. Because of the size of problem instances from practice it is crucial to devise an efficient solution method. Our solution approach rests on modeling the problem as a specific minimum cost network flow problem, which makes available polynomial time algorithms from network flow theory; 280 A. Fink, T. Reiners / Transportation Research Part E 42 (2006) 272–292 see, e.g., Ahuja et al. (1993) or Kennington and Helgason (1980). On the basis of a directed graph that consists of a set of nodes N and a set A of arcs (i, j) that connect nodes, a general minimum cost network flow model can be formalized as follows: X eij xij Minimize zðxÞ ¼ subject to X j:ði;jÞ2A ði;jÞ2A xij  X xji ¼ qi 8i 2 N; j:ðj;iÞ2A lij 6 xij 6 uij 8ði; jÞ 2 A A node i 2 N comes with a parameter qi that represents, if different from null, a positive (source node) or a negative (sink node) amount of goods (in this case, cars) in the sense of a given supply or demand,P respectively. In total, the supply and demand of all network nodes must equal each other (i.e., i2N qi ¼ 0Þ. Arcs represent a potential ‘‘flow’’ of goods. The variable flow quantity xij on an arc (i, j) 2 A is restricted by a lower bound lij and an upper bound uij. Each arc (i, j) has a cost parameter eij. Multiplying this parameter by the flow quantity results in the costs that are incurred by the flow on a particular arc. Solving a minimum cost network flow problem means determining feasible (integer) values for the arc flow variables xij in such a way that at each node i the quantity of in-flow minus out-flow equals qi and the sum of incurred costs is minimized. Such minimum cost network flow models can be solved to optimality by efficient algorithms. Modeling the short-term car rental logistics problem by means of a network flow model requires on original transformation of the characteristics of the described decision problem. Our approach is based on a time expanded network (time–space network), where specific points in time (periods) and space (stations and depots) are represented as corresponding nodes. Arcs that connect these nodes are related to temporal and spatial movements in the sense of different deployment options. Time expanded networks have been applied in application fields such as railroad systems (see, e.g., Kwon et al., 1998), air traffic systems (see, e.g., Gu et al., 1994), or freight shipping (see, e.g., Chardaire et al., in press). We must also take into account different car groups and upgrade relations. Modeling this additional dimension by means of multiple commodity types would lead to a multi-commodity flow problem, which presumably cannot be efficiently solved to optimality for realistic (i.e., large size) problem instances (see the discussion in Section 6). Therefore, we integrate the possibility of upgrades into a single-commodity minimum cost network flow model as described below (note the example in Fig. 3). First of all, for each combination of some station s = s1, . . . , sS, period t = t1, . . . , tT, and car group g = g1, . . . , gG, a stock node is defined that represents the number of cars of group g that are available at station s at the beginning of period t. Some of the stock nodes i are source nodes with a positive supply qi which results from the initial car stock as well as anticipated check-ins due to cars on rent at the beginning of the planning horizon. In the same manner, we introduce fleeting nodes and defleeting nodes for each depot c = c1, . . . , cC, period t = t1, . . . , tT, and car group g = g1, . . . , gG, which define fleeting and defleeting options, respectively. The corresponding parameter values qi represent fleeting and defleeting contingents. Arcs (i, j) represent flow variables xij with regard to different options for car deployment. If not defined otherwise, we assume the parameter values as lij = 0, uij = 1, and eij = 0. For cars that are neither deployed for a check-out nor transported to a different location we define, for all locations A. Fink, T. Reiners / Transportation Research Part E 42 (2006) 272–292 281 (stations and depots), periods, and car groups, carryover arcs that allow keeping cars on the yard in the sense of movement in time. That is, such arcs connect (stock and fleeting) nodes of the subsequent period. Furthermore, for each station, period, and car group, each stock node is connected to a corresponding rental node (see the discussion below) that is traversed by cars that are actually deployed for rental requests with a preceding reservation. Such a rental request is represented by a reservation rental arc between the applicable rental node (with respect to the checkout) and the applicable stock node (with respect to the check-in). Forecasted walk-in customers are represented by walk-in rental arcs that connect two corresponding stock nodes. The cost parameter eij of a reservation rental arc is set to the negative value of the expected revenue according to the reservation data, while the costs of walk-in rentals are estimated on the basis of historic average revenues. In each case, the destination node of a rental arc is determined as follows: If the expected check-in is within the considered planning horizon at a station inside the considered network, the arc leads to the corresponding stock node of the period that follows the check-in period. (Our experiments have shown that the following—nonetheless rather conservative—approach may also be reasonable: A check-in before 8 a.m. or 1 p.m. still leads to assigning the arc to the morning or afternoon period, respectively, while later arrivals lead to the subsequent period.) If the check-in is after the considered planning horizon or at a station outside the considered network, the arc ends at a virtual super-sink node, which means that such a car (flow) cannot be used again within the planning horizon. Each rental arc has an upper bound uij = 1. Eventually, the resulting flow on such arcs, one or zero, indicates whether the rental request is served (xij = 1) or turned-down (xij = 0). (Rental requests with identical parameters can also be represented by a common arc with a resulting upper bound larger than one.) For each combination of a station and a period, upgrade arcs are introduced that start from the superior car groupÕs stock node and lead to the inferior car groupÕs rental node in accordance with the feasible upgrade relations. To prevent from unnecessary upgrades, we define the cost parameter of upgrade arcs as a small value d > 0. (By increasing this penalty factor, one can decrease the probability for granting upgrades—in general at the cost of more transportation or unfulfilled rental requests.) There are two reasons for distinguishing between stock nodes and rental nodes (instead of directly connecting stock nodes by upgrade arcs). First, this prevents a concatenation of upgrades which would unintentionally result in the transitive closure of the upgrade relations. Second, this restricts upgrades to be applied in direct connection with a rental request (but not before a transportation or while waiting at a station). Note that this modeling of upgrades leads, for each car that is used in connection with an upgrade, to irrevocable group degradation until the end of the planning horizon. As a result, the model is slightly more restrictive than the underlying application. However, this does not severely affect the soundness of the model as we assume an average rental length of five days in connection with a planning horizon of about one week. Fig. 3 illustrates the basic structure of the network flow model by means of an example for two stations, one depot, and two car groups, where car group B is a feasible upgrade option for car group A. At station 1 in period 2, there are two rental requests for a car of group A, both of which with an estimated check-in at station 2 in some future period k. While the reservation rental arc starts at the rental node and thus can be served by the superior car group B, a walk-in customer must not receive an upgrade. Therefore, the walk-in rental arc starts at the stock node. Every reasonable transportation option between stations is represented by a transportation arc. Such arcs are connected to stock nodes. Essentially in conformance with industry practices 282 A. Fink, T. Reiners / Transportation Research Part E 42 (2006) 272–292 period 1 keep on yard A up +5 ad gr e A B B ... A A wa lk B B ... A A ) xle (a +3 period k A n tio r ta po ns tra station 1 +1 period 2 -in re re se nt rv al at ar ion c re tra n ta nsp la or t rc atio n( tru ck) B B A A station 2 stock node A A +4 B B depot 1 fleeting ... B ing t lee f B depot 1 defleeting A ... rental node +10 A B B +10 A A de fle +20 B B A A B B eti ng ... +10 B -10 A -15 B ... Fig. 3. Basic structure of the network flow model. transportation costs are assumed to be proportional to the number of cars according to the particular cost parameter value depending upon the transportation relation, the distance as well as the mode of transport. Possible upper bounds (transportation capacities) and destination nodes (in accordance with the transportation times) are defined depending on each specific transportation relation. Consequently, one can flexibly map different modes of transport such as by axle (expensive, fast, flexible) or via truck (cheap, not so fast, some minimum lead time due to advance planning) with regard to different distances and network structures. For each depot and car group, fleeting arcs and defleeting arcs from depot nodes to stock nodes of specific stations and vice versa represent fleeting and defleeting options, respectively, which also includes the actual transportation (fleeting is usually done via truck). Car holding costs are taken into account by means of the cost parameters of fleeting and defleeting arcs. That is, the cost parameters of fleeting and defleeting arcs represent the transportation costs plus the additional or minus the saved holding costs. Minimum and maximum fleeting and defleeting contingents primarily result from the supply and demand at the depot nodes, but can also be constrained by suitable lower and upper bounds on specific arcs from depots to stations and vice versa. Some minimum lead times may have to be taken into account, which restricts the periods where fleeting arcs may start and lead to. If defleeting takes longer than the planning horizon, such arcs are connected to corresponding depot nodes at period T (to allow for defleeting even at the end of the planning horizon). Fleeting and defleeting contingents that are not pre-assigned to specific depots A. Fink, T. Reiners / Transportation Research Part E 42 (2006) 272–292 283 are represented, for each car group, by virtual super-fleeting nodes and super-defleeting nodes. These nodes are connected to corresponding depot fleeting and defleeting nodes, respectively. In order to balance supply and demand, we introduce a general super-sink node that eventually absorbs all remaining cars at the end of the planning horizon in accordance with the resulting negative supply value. Solving the network flow model generates flow values for each arc (variable), which essentially results in a short-term car logistics plan with regard to proposed transfers between stations as well as fleeting and defleeting decisions. Reservation rental arcs with no flow indicate the possible need for special action to enable serving such rental requests. Detailed examinations of the resulting solution are possible by means of sensitivity analysis. For example, one can evaluate the effect of modifying the initial availability of cars at some station, or determine the additional revenue that is a necessary to serve an unserved rental request. The introduced network flow model does not comprise all aspects of the short-term car logistics problem and thus should be embedded in a more general decision support system, which provides the fleet manager with a flexible interactive planning environment. In particular, a solution of the network flow model does not determine specific cars for defleeting. Moreover, detailed restrictions with regard to the transportation options (e.g., fixed track routes throughout a day or a minimum truck loading) cannot be represented. Therefore, the core optimization model must be complemented by appropriate pre- and post-optimization steps depending on the specifics of the practical situation. First, particular cars with a defleeting status may be scheduled separately before solving the network flow model. Second, the results of the network flow optimization should be adapted regarding detailed transportation procedures. In general, the planning process may involve different scenarios (e.g., different demand estimations or different fleeting and defleeting contingents), which are evaluated by a combined application of the network flow optimization, pre- and post-optimization steps, and a simulation system. 3.4. Simulation model For a given scenario the described network flow model generates a schedule how cars should be deployed. Due to the uncertainties of the rental operations throughout the day it is reasonable to evaluate the generated car logistics plan by means of simulation experiments before being implemented in practice. Fig. 4 shows the combined iterative application of demand forecast, network flow optimization, and simulation experiments as elements of a general logistics planning process. Simulation experiments are based on initial data in a global database (in particular, information about the state of the car fleet and existing reservations at the day of planning), which is developed through a simulation of seven days. Based upon a rolling planning horizon of one week, the sequence of forecast, optimization, and simulation is executed each day until a whole week has been simulated. The results of the detailed simulation of car rental operations for 24 h, considering the scheduled car transfers as well as fleeting and defleeting decisions due to the network flow optimization, lead to modified data, which serves as input for the next iteration. Depending on the outcome the whole process can either be repeated using a variation of the input parameters (e.g., adapted fleeting and defleeting contingents), or the deployment plan can be put into practice. To enable the assessment of the application of an optimized car rental logistics planning in comparison to historic processes, we distinguish between two modes of simulation. In replay 284 A. Fink, T. Reiners / Transportation Research Part E 42 (2006) 272–292 Logistics Planning Process Database Forecast Input from stations Optimization 7 days Reservations, fleet Simulation Anticipated rentals Logistics Plan Assessment 24 hours 7 days Results: car fleet, pending transports and rental s Accepted? Yes: Apply Repeat until a week is simulated No: Repeat with changed input parameters Fig. 4. Logistics planning process. mode, historic processes (rentals, transfers, fleeting, and defleeting) are simulated in accordance with historic data. This mode is mainly used to obtain reference values such as the incurred costs and revenues as well as the resulting service level. In evaluation mode, initial data is given as before, but rental requests are stochastically generated on the basis of demand forecasts. Furthermore, the transfers between stations as well as the transports between stations and depots and vice versa due to fleeting and defleeting decisions, respectively, are generated using plans due to the network flow optimization. Since the simulation is more detailed than the network flow model (in particular by estimating and using the exact time when a customer appears at the station counter instead of using time buckets of half days) and depends on stochastic influences, the implementation of the generated car logistics plan is not always completely feasible. For example, if a customer unexpectedly extends the rental length a previously planned transfer of this particular car may become impossible. In such cases we abandon the respective element of the plan, while in practice there may be the possibility of some flexible short-term action to improve matters. Such deviating developments of the rental and logistics operations are eventually taken into account at the next iteration of the planning process (i.e., at the end of each day). Fig. 5 demonstrates the basic simulation process in more detail. Following the model initialization, a generator calls a procedure every specified time unit to handle the queued events in the event calendar. Such events are primarily due to the start and the end of rentals and transports. Method rental_start (rental_nr) Reading Data Event Calendar Create Model Start Simulation Loop Generator event_checker Check_event Call event Get planned rental agreement Assign car Update fleet, region, station Create real agreement Method rental_end (rental_nr) Update fleet, region, station Method transport_start (transport_nr) Get planned transport Check if transport can be performed Update fleet, region, station Method transport_end (transport_nr) Update fleet, region, station Fig. 5. Simulation process. Fleeting, defleeting Transfer between stations (by truck, per axle) A. Fink, T. Reiners / Transportation Research Part E 42 (2006) 272–292 285 For each event, a corresponding procedure has to be executed, which adapts the state of the simulation model. During the simulation every event is recorded and eventually stored in the database together with accumulative data (e.g., revenues, costs). Report generators produce various reports for different purposes of logistics management. The simulation model has been implemented using the simulation system eM-Plant from Tecnomatix. By means of an ODBC interface to a relational database, the simulation system obtains all relevant data and finally writes back the new state of the car fleet after simulation. 4. Results Our results are based on data of the German subsidiary of one of the major international car rental companies. We generalize some of our findings from this case study. The problem data is characterized by the following parameters: There are a few hundred stations and about ten depots. The active fleet typically includes up to 18,000 cars from 15 car groups. There are up to 3000 new rentals (check-outs) each day. Therefore, we have to consider about 20,000 rental requests simultaneously, for a planning horizon of one week. 4.1. Forecast quality The parameters of the regression functions introduced in Section 3.2 were estimated on realworld data that cover the past rental operations for a period of 4 months. Each combination of some station, some period (for which we forecast) within a week, the lead time (between the current period and the period for which we forecast), and the car group leads to a specific regression function, which maps the number of reservations to an estimate of the number of potential check-outs. Despite processing several gigabytes of data, each least-squares estimate results from considering only 16 data points (one for each week). The quality of the demand forecast was evaluated pffiffiffiffi taking into account the coefficient of deter2 mination (r ) and the expected forecast error ( s2 ). As an example, we consider the forecast of rental requests for car group B for a Monday at some large airport station. Carrying out the demand forecast on Friday evening means applying the following regression function: #checkouts = 6.26 + 0.97 * #reservations. This regression function comes with a coefficient of determination of r2 = 0.84 and thus a rather high correlation between the number of reservations and the number of check-outs. If we need to carry out the forecast already on Wednesday evening one expects that the parameter b is larger than one taking into account the reservations yet to be received. This is confirmed by the following regression function for the described scenario: #checkouts = 14.06 + 1.21 * #reservations. For this regression function the coefficient of determination drops to r2 = 0.49. In the considered scenario, the t-statistics values for the slope regression coefficients are 8.5 and 5.0 when forecasting with a look-ahead of two (Friday) or four (Wednesday) periods, respectively, which means statistical significance (assuming a level of significance of 99% and a degree of freedom of 14 which corresponds to a theoretical t-value of 3.0). Fig. 6 illustrates the effects of the look-ahead period on the forecast quality for the same scenario as discussed before pffiffiffiffi (with an average number of check-outs per day of about 45). The expected forecast error ( s2 ) approximately doubles throughout the planning horizon of one week. That is, the expected forecast error is critical, at least for a look-ahead of more than very 286 A. Fink, T. Reiners / Transportation Research Part E 42 (2006) 272–292 12 Forecast error 10 8 6 4 2 0 1 2 3 4 5 6 7 Look-ahead [days] Fig. 6. Expected forecast error depending on the look-ahead period. few days. (For a look-ahead of more than five days the regression becomes statistically insignificant.) The situation worsens for small stations with only a minor number of check-outs per day. However, such forecast errors partly offset each other with regard to different car groups that may serve as substitutes due to upgrades. The same effect is to be expected when aggregating over different stations (in the same district or region). Therefore, the demand forecast is useful to estimate such aggregate demand values for a planning horizon of one week (which is important to decide about fleeting and defleeting contingents), while detailed short-term forecasts for the next few days allow balancing supply and demand at the stations on the basis of planning individual car transfers between stations. This is in agreement of using a rolling planning horizon of one week with a re-optimization each night on the basis of new data. There are two main options to improve the forecast quality. First, one may estimate the parameters of the regression functions on the basis of a larger data set (covering complete data about operations of some years), which should lead to an improved forecast quality. This option includes applying medium range forecast models, which would also allow taking into account effects of seasonality, local events, and specific incentive plans. Second, we observed that information systems of car rental companies often do not include complete information about all relevant events. For example, the staff in small stations sometimes misses to key-in local reservations into the global reservation system (partly handling them in a paper and pencil manner). Moreover, not every checkout that is due to a reservation is actually labelled accordingly, and not all rental requests that are turned-down at the counter (usually in connection with a walk-in customer) are recorded. Car rental companies should generally take action to completely record all relevant business processes in their information system, which might substantially improve the general forecast quality. 4.2. Optimization by means of the network flow model Beside transportation costs, car holding costs due to the active fleet constitute the main cost factor in car rental operations. Consequently, the logistics management in car rental companies A. Fink, T. Reiners / Transportation Research Part E 42 (2006) 272–292 287 generally aims at reducing the fleet size as far as possible and keeping transportation costs to a reasonable amount without inducing too many turned-down rental requests. Even if lowering the service level might be profitable in the short-term in certain situations, maintaining a high service level (e.g., above 99%) is extremely important from a long-term perspective (with regard to building stable customer relationships and a resulting strong market share). Under consideration of these essential demands of practical logistics management we are primarily interested in means for reducing the fleet size without significant negative side effects. Therefore, we analyze, first, the effect of applying the network flow model in comparison to the present manual practices, and, second, modifying upgrade restrictions in order to increase the overall fleet utilization. A typical problem instance leads to a network flow model with more than 100,000 nodes and 3,000,000 arcs (variables). The resulting problem instances were solved by using the network solver of ILOG Cplex (version 6.6). The data structure of the network model was constructed on the basis of real-world data stored in a relational database, which was accessed through an ODBC interface, using the programming language C++ and accessing Cplex in the form of a dynamic link library (dll). We used a standard personal computer with an 1.8 GHz CPU and 512 MB main memory. All problem instances considered were solved to optimality in about 1 min, requiring about 300 MB of main memory. That is, computation time is no critical factor for the scenarios examined, which allows an integration of the network optimizer in an interactive decision support system. Assuming demand forecast data as deterministic data and solving the network flow model to optimality for different fleet sizes should result in an upper bound for the potential profit increase. However, our analysis of real-world data has shown that a significant proportion of check-outs in practice are not handled in accordance with the allowed upgrade relations, which complicates comparing real-world conditions with results from the network flow optimization. For example, the comparative assessment is problematic if in practice up to 10% of rental requests have not been served by a car from a feasible group, while the solution of the network flow model includes up to 3% of rental requests that are turned-down fully conforming to the feasible upgrade options. A deployment plan that conforms to strict rules but turns-down a few rental requests may be perfectly adequate if it enables the station staff to serve these requests by disregarding some of these rules. We examine the effects of fleet size reductions with regard to the percentage of rental requests that are turned down as well as the resulting profit change. Hypothetical fleet size reductions are generated by applying rules such as ‘‘if there are initially three cars of some group at some station, remove one of these’’. By using different rule sets we created various reduced fleet size scenarios that match the data points shown in Fig. 7. The depicted results are typical for various periods considered in different experiments. Starting with an initial fleet size from practice of 100% (e.g., 15,500 cars), according to the upper diagram one might save more than 20% of the cars (e.g., more than three thousand cars) before the service level drops below 99%. That is, in theory we are able to significantly reduce the active fleet size without losing a high service level. The lower diagram illustrates the effects of analogue fleet size reductions on the revenue as well as the revenue minus the additional transportation costs (in each case normalized with reference to the revenue obtained for the initial fleet size). As may be expected, lost revenues and additional transportation costs are only moderately affected at the critical point where the service level begins to drop sharply, since the optimized deployment plan generally gives preference to the most 288 A. Fink, T. Reiners / Transportation Research Part E 42 (2006) 272–292 100.00% 99.50% Service level 99.00% 98.50% 98.00% 97.50% 97.00% 96.50% 96.00% 10000 11000 12000 13000 14000 15000 16000 15000 16000 Reduction in comparison to initial revenue Fleet size 100.00% 99.50% 99.00% 98.50% 98.00% 97.50% Revenue Revenue - transportation costs 97.00% 96.50% 96.00% 10000 11000 12000 13000 14000 Fleet size Fig. 7. Influence of fleet size reductions. profitable rental requests. Without disclosing tangible and detailed revenue and cost figures in this paper, in our experiments reductions of car holding costs offset lost revenues and additional transportation costs by a factor of more than ten. Assuming car holding costs of 10 Euro per day, this results in a profit increase of more than a million Euro per year by means of reducing the average fleet size by a few hundred cars. The general profitability of the proposed approach even holds if the currently suboptimal forecast quality is taken into account. In order to assess the impact of upgrades we examine the effect of modifying upgrade restrictions. In comparison to the existing upgrade rules from practice, we consider two alternative scenarios. On the one hand, we prohibit all kinds of upgrades. On the other hand, we use the transitive closure of upgrade options in the sense that a rental request may be served by any car with a quality that is not lower than the requested car group. Fig. 8 shows that the possibility of granting upgrades is crucial to achieve a high service level. In case that one enables all conceivable upgrade options, the effects on the service level and resulting profit figures are slightly better in comparison with present practices. Consequently, more upgrade flexibility constitutes an option for increasing profitability in connection with an improved fleet utilization. However, note the possible long-term aspects of loose upgrade rules. Namely, if the probability of being granted a valuable upgrade is high enough, customers might be tempted to make reservations for car groups of lower quality than actually wanted, which results in overall revenue degradation. A. Fink, T. Reiners / Transportation Research Part E 42 (2006) 272–292 289 100.00% Service level 95.00% Normal upgrades All upgrades No upgrades 90.00% 85.00% 80.00% 75.00% 10000 11000 12000 13000 14000 15000 16000 14000 15000 16000 Fleet size Revenue minus transportation costs 101.00% 100.50% Normal upgrades All upgrades 100.00% 99.50% 99.00% 98.50% 98.00% 10000 11000 12000 13000 Fleet size Fig. 8. Influence of upgrade rules. 4.3. Validation per simulation We analyzed the effects of implementing the car logistics plan from the network flow model by simulation experiments. As a basis for comparison we used the simulation model to replay rental and logistics processes of periods of one week based on historic data. With regard to this reference measurement, we validated optimized car logistics plans by assessing the results in comparison to both the historic processes as well as the network flow scenario. We found that the general potential for improvement due to the network flow optimization is confirmed by results from simulation experiments. As an example, some simulation experiment for a given week may result in an approximate revenue of 3 million Euro and transportation costs of less than 100,000 Euro. Removing one thousand cars from the active fleet, and simulating the same seven day period on the basis of the car logistics plan generated by the network flow model, essentially led to a rental service level of 99.9% with about the same transportation costs and an acceptable upgrade ratio of about 16%. 5. Decision support system In Fig. 9 we propose the system architecture of a car rental logistics decision support system. We distinguish between a core system database and an events database. Core data are fixed over a 290 A. Fink, T. Reiners / Transportation Research Part E 42 (2006) 272–292 Network Station/Depot/Region: - name/id - location Fleet Core System Database Information: - id - group/type - holding cost/period - fleeting/defleeting date Data Warehouse Decision Support System Logistics Planning Process Forecast Simulation Database Management System Reservation/Rental/Transport: - check-out station/date - check-in station/date - car group/extras Optimization Events Database Analysis Tools Evaluation Strategic Planning Tactical-operational Planning Car Status: - on yard - on rent - on transport Fig. 9. Architecture of a car rental logistics decision support system. certain period (such as the station network, car groups with holding costs, and basic information about the cars in the active fleet). Data about incoming reservations, check-outs and check-ins, and the start and end of transports are stored in the events database. In addition to the described logistics planning process, we propose the implementation of a data warehouse that stores aggregate data for further processing by appropriate analytical tools. On the one hand, resulting insights (e.g., with regard to the profitability of specific stations or the contribution of different customer segments) will be a valuable input for strategic planning. On the other hand, aggregate data (e.g., concerning empirical distributions for the length and reliability of transportation processes or probabilities for the unexpected extension of the rental length) may also be used in the logistics planning process. In particular, the data warehouse may provide longterm data for enhancing the demand forecast model. 6. Conclusion In this paper we considered logistics management in the car rental business. After giving an overview of car rental operations, we presented a novel quantitative decision model to efficiently solve short-term car rental logistics problems by means of network flow optimization. Our decision model includes essential practical aspects such as multi-period planning, a country-wide network, specific transportation relations, fleeting and defleeting, and different car groups. Experiments were conducted on substantial real-world data, using a simulation model to assess A. Fink, T. Reiners / Transportation Research Part E 42 (2006) 272–292 291 optimization results for different scenarios. Our experience from an industry research project indicates that the approach can significantly improve profits by reducing the costs for the fleet of cars and limiting transportation costs. From a practical point of view, the crucial requirement for the implementation of our approach is the availability of an integrated information system with data about the current state of the rental system as well as a sensible short-term demand forecast model. From a methodological point of view, modeling and solving the problem by means of a multi-commodity network flow formulation may pose an interesting research subject. In such a model, different commodity types represent the various car groups. As rental requests can be served by different car groups according to the allowed upgrade relations, the sum of respective flow variables is linked to corresponding demand data. Because of the large network size, special techniques such as Dantzig–Wolfe decomposition and Lagrangian relaxation may have to be exploited to solve the problem to optimality in a reasonable time horizon; cf. Kennington and Helgason (1980) or Minoux (1986). A crucial question of car rental logistics is the degree of central vs. local planning. Implementing a nation-wide car logistics plan restricts the degrees of freedom for local actions. On the one hand, our proposal intentionally does not prescribe the operations in the stations during the course of the day—in particular, we do not recommend centrally assigning specific cars to customers. However, our empirical experience is that local planning of car transfers often leads to an uncoordinated and inefficient use of the rental network resources. The local cause for car transfers can only be avoided by means of an effective car logistics planning and implementation, which provides the stations with adequate availability of cars throughout each day. Central planning depends on the availability of rather complete and accurate data in information systems. The quality of data can be improved by technical and organizational measures. From a technical point of view, the use of transponder systems and the global positioning system may contribute to the automatic representation of the status of each car at each time in the information system. Moreover, the planning and execution of car transportation via truck in collaboration with external shipping companies requires online interfaces between relevant information systems. From an organizational point of view, there are two main sources of information that we have to deal with: the customers and the companyÕs staff in rental stations. For both we need to introduce reasonable incentives for making available their mental knowledge as data in the information system. To increase the information about short-term demand, one must think about incentives for customers to make serious reservations in advance. Today, reservations are usually not binding on either side, which means that customers often make reservations at different car rental companies and eventually select only one (e.g., by entering the first station with an empty queue at the counter upon arrival at the airport). For a car rental company it is difficult to introduce penalty charges for no-shows. First, non-binding reservations are the norm in the car rental business. Second, if a customer expects that enough cars are available at the station even without a reservation the customer might be tempted to refrain from making reservations. Therefore, car rental companies generally strive to make it as easy as possible to make reservations (e.g., by phone or by web), in combination with incentives such as the possibility of being granted an upgrade (which is not possible for walk-in customers). Considering the station staff, a strong negative incentive to key-in information about a check-in may arise in case that the station staff must reckon with a decision from central planning that a particular car (e.g., an attractive sports car which might attract additional walk-in customers) will 292 A. Fink, T. Reiners / Transportation Research Part E 42 (2006) 272–292 soon be transferred to a different station. However, the check-in must eventually be keyed-in with the correct check-in time. Thus, if station performance is measured by taking into account the costs of unutilized cars the station staff may indeed strive to properly enter data about the availability of this car for the general network as soon as possible. In this respect we draw attention to the importance of a deliberate measurement of station performance by an incentive-compatible assignment/sharing of costs (in particular, holding and transportation costs) and revenues in the context of intertwined central and local decisions. This poses a rather complex problem, which is even more true in the case of licensees, which might over-exploit resources of the franchise system—in this case by stockpiling cars of others—while under-investing in own resources (see, e.g., Dnes, 1996 for a general economic analysis of franchise systems). References Ahuja, R.K., Magnanti, T.L., Orlin, J.B., 1993. Network Flows: Theory, Algorithms, and Applications. Prentice Hall, Englewood Cliffs. Carroll, W.J., Grimes, R.C., 1995. Evolutionary change in product management: Experiences in the car rental industry. Interfaces 25 (5), 84–104. Chardaire, P., Harrison, S.A., McKeown, G.P., Richardson, S.B., 2005. 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