Supply Chain Management chap 17

PowerPoint presentation to accompanyChopra and Meindl Supply Chain Management, 5e

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Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

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Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

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16Pricing and Revenue

Management in a Supply Chain

16-2Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

Learning Objectives

1. Understand the role of revenue management in a supply chain

2. Identify conditions under which revenue management tactics can be effective

3. Describe trade-offs that must be considered when making revenue management decisions


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


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 exist1. The value of the product varies in different market

segments2. The product is highly perishable or product waste

occurs3. Demand has seasonal and other peaks4. The product is sold both in bulk and on the spot

market


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?



Figure 16-1



Figure 16-2


Pricing to Multiple Segments

Subject to

For capacity constrained by Q





Same price to both segments



Total production capacity is limited to 4,000 units

Subject to



Figure 16-3


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


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


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


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


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


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


Dynamic Pricing

Figure 16-4


Dynamic Pricing

Figure 16-5


Evaluating Quantity with Dynamic Pricing

d1 = 300 – p1, d2 = 300 – 1.3p2, and d3 = 300 – 1.8p3

Subject to


Evaluating Quantity with Dynamic Pricing

Figure 16-6


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


Overbooking

Cost of wasted capacity, Cw = $10 per dress

Cost of capacity shortage, Cs = $5 per dress


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


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


Pricing and Revenue Management for Bulk and Spot Contracts


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


Using Pricing and Revenue Management in Practice

1. Evaluate your market carefully2. Quantify the benefits of revenue

management3. Implement a forecasting process4. Keep it simple5. Involve both sales and operations6. Understand and inform the customer7. Integrate supply planning with revenue

management


Summary of Learning Objectives

1. Understand the role of revenue management in a supply chain

2. Identify conditions under which revenue management tactics can be effective

3. Describe trade-offs that must be considered when making revenue management decisions


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Supply Chain Management chap 17