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supply chain ppts
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yri
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t ©
20
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Dorl
ing
Kin
ders
ley (
Ind
ia)
Pvt.
Ltd
.
Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Chapter 16
Pricing and Revenue Management in a Supply Chain
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Dorl
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Ind
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Pvt.
Ltd
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Learning Objectives
• Understand the role of revenue management in a supply chain
• Identify conditions under which revenue management tactics can
be effective
• Describe trade-offs that must be considered when making
revenue management decisions
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Dorl
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Pvt.
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
The Role of Pricing and Revenue Management in the Supply Chain
• Revenue management is the use of pricing to increase the profit
generated from a limited supply of supply chain assets
• Supply assets exist in two forms – capacity and inventory
• Revenue management may also be defined as the use of
differential pricing based on customer segment, time of use, and
product or capacity availability to increase supply chain profits
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
The Role of Pricing and Revenue Management in the Supply Chain
• Revenue management has a significant impact on supply chain
profitability when one or more of the following four conditions
exist
The value of the product varies in different market segments
The product is highly perishable or product waste occurs
Demand has seasonal and other peaks
The product is sold both in bulk and on the spot market
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Pricing and Revenue Management for Multiple Customer Segments
• Differential pricing increases total profits for a firm
• Two fundamental issues must be handled in practice
How can the firm differentiate between the two segments and
structure its pricing to make one segment pay more than the
other?
How can the firm control demand such that the lower-paying
segment does not utilize the entire availability of the asset?
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Pricing and Revenue Management for Multiple Customer Segments
Figure 16-1
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Pricing and Revenue Management for Multiple Customer Segments
Figure 16-2
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Pricing to Multiple Segments
Subject to
For capacity constrained by Q
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Dorl
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Pvt.
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Pricing to Multiple Segments
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Pricing to Multiple Segments
Same price to both segments
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Pricing to Multiple Segments
Total production capacity is limited to 4,000 units
Subject to
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Pricing to Multiple Segments
Figure 16-3
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Allocating Capacity to a Segment Under Uncertainty
• Basic trade-off is between committing to an order from a lower-
price buyer or waiting for a higher-price buyer to arrive
Spoilage
Spill
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Allocating Capacity to a Segment Under Uncertainty
• Effective use of revenue management increases firm profits and
improves service for the more valuable customer segment
• Create different versions of a product targeted at different
segments
• Tactics for multiple customer segments
Price based on the value assigned by each segment
Use different prices for each segment
Forecast at the segment level
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Allocating Capacity to Multiple Segments
Revenue from segment A, pA = $3.50 per cubic foot
Revenue from segment B, pB = $2.00 per cubic foot
Mean demand for segment A, DA = 3,000 cubic feet
Standard deviation of demand for A, sA = 1,000 cubic feet
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Pricing and Revenue Managementfor Perishable Assets
• Any asset that loses value over time is perishable
• Two basic approaches
Vary price dynamically over time to maximize expected revenue
Overbook sales of the asset to account for cancellations
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Dynamic Pricing
• Effective differential pricing increases the level of product availability for the consumer willing to pay full price and total profits for the retailer
Subject to
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Dynamic Pricing
• Effective differential pricing increases the level of product availability for the consumer willing to pay full price and total profits for the retailer
d1 = 300 – p1, d2 = 300 – 1.3p2, and d3 = 300 – 1.8p3
Subject to
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Dynamic Pricing
Figure 16-4
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Dynamic Pricing
Figure 16-5
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Evaluating Quantity with Dynamic Pricing
d1 = 300 – p1, d2 = 300 – 1.3p2, and d3 = 300 – 1.8p3
Subject to
Cop
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Evaluating Quantity with Dynamic Pricing
Figure 16-6
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Overbooking
• Basic trade-off is between having wasted capacity because of
excessive cancellations or having a shortage of capacity because
of few cancellations requiring expensive backup
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Overbooking
Cost of wasted capacity, Cw = $10 per dress
Cost of capacity shortage, Cs = $5 per dress
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Pricing and Revenue Managementfor Seasonal Demand
• Seasonal peaks of demand common in many supply chains
• Off-peak discounting can shift demand from peak to non-peak periods
• Charge higher price during peak periods and a lower price during off-peak periods
• Increases profits for the owner of assets, decreases the price paid by a fraction of customers, and brings in new customers during the off-peak discount period
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Pricing and Revenue Management for Bulk and Spot Contracts
• Problems constructing a portfolio of long-term bulk contracts and
short-term spot market contracts
• Decide what fraction of the asset to sell in bulk and what fraction
of the asset to save for the spot market
• The amount reserved for the spot market should be such that the
expected marginal revenue from the spot market equals the
current revenue from a bulk sale
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Pricing and Revenue Management for Bulk and Spot Contracts
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Long-Term Bulk Contracts versus the Spot Market
Bulk contract cost, cB = $10,000 per million units
Spot market cost, cS = $12,500 per million units
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Using Pricing and Revenue Management in Practice
• Evaluate your market carefully
• Quantify the benefits of revenue management
• Implement a forecasting process
• Keep it simple
• Involve both sales and operations
• Understand and inform the customer
• Integrate supply planning with revenue management
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Dorl
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Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Summary of Learning Objectives
• Understand the role of revenue management in a supply chain
• Identify conditions under which revenue management tactics can be effective
• Describe trade-offs that must be considered when making revenue management decisions