Pricing and Revenue Management in the Supply Chain 17

 

Pricing and Revenue Management in the Supply Chain

 

Outline  The

Role of Revenue Management in the Supply Chain

 Revenue

Management for Multiple Customer

Segments  Revenue Management for Perishable Assets  Revenue

Management for Seasonable Demand

 Revenue

Management for Bulk and Spot Customers

 sing

Revenue Management in Practice

 Summary

of !earning "b#ectives

 

The Role of Revenue Management in the Supply Chain  Revenue

management managem ent is the use of pricing to increase the profit generated from a limited supply of supply chain assets

 Supply

assets e$ist in t%o forms& capacity and inventory

 Revenue

management managem ent 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

 Most

common e$ample is probably in airline pricing

 

Conditions Under Which Revenue Management Has the Greatest Effect  The

value of the product varies in different market segments ()$ample& airline seats*  The product is highly perishable or product %aste occurs ()$ample& fashion and seasonal apparel*  Demand has seasonal and other peaks ()$ample&  products ordered at Ama+on,com ma+on,com**  The

product is sold both in bulk and on the spot market ()$ample& o%ner of %arehouse %ho can decide %hether to lease the entire %arehouse through long-term contracts or save a portion of the %arehouse for use in the spot market*

 

Revenue Management for  Multiple Customer Segments  .f

a supplier serves multiple customer segments %ith a fi$ed asset' the supplier can improve revenues by setting different prices for each segment

 Prices

must be set %ith barriers such that the segment %illing to pay more is not able to pay the lo%er price

 The

amount of the asset reserved for the higher price segment is such that the e$pected marginal revenue from the higher priced segment e/uals the price of the lo%er price segment

 

Revenue Management for  Multiple Customer Segments  p! 0 the price charged to the lo%er price segment  p1 0 the price charged to the higher price segment D1 0 mean demand for the higher price segment σ1 0 standard deviation of demand for the higher price segment

C1 0 capacity reserved for the higher price segment s egment R 1(C1* 0 e$pected marginal marginal revenue from reserving more capacity 0 Probability(demand from higher price segment 2 C 1* $ p1 R 1(C1* 0 p!  Probability(demand from higher price segment 2 C 1* 0 p! 3 p1 C  0 4-5(5- p 3p ' D 'σ * 0 6"RM.67(5- p 3p ' D 'σ * 1

!

1

1

1

!

1

1

1

 

Eample ! To "rom Truc#ing Revenue from segment A 0 p A 0 89,:; per cubic ft Revenue from segment B 0 p B 0 89,:; per cubic ft Mean demand for segment A 0 D A 0 9';;; cubic ft Std dev of segment A demand 0 σA 0 5';;; cubic ft C A  0 6"RM.67(5- pB3pA' DA'σA* 0 6"RM.67(5- (<,;;39,:;*' 9;;;' 5;;;* 0 <'=<; cubic ft .f pA increases to 8:,;; per cubic foot' then C A  0 6"RM.67(5- pB3pA' DA'σA* 0 6"RM.67(5- (<,;;3:,;;*' 9;;;' 5;;;* 0 9'<:9 cubic ft

 

Revenue Management for $erisha%le &ssets  Any

asset that loses value over time is perishable

 )$amples&

high-tech products such as computers and

cell phones' high fashion apparel' underutili+ed capacity' fruits and vegetables  T%o

basic approaches&

 >  7ary price over time to ma$imi+e e$pected revenue  >  "verbook sales of the asset to account for cancellations

 

Revenue Management for $erisha%le &ssets  "verbooking

or overselling of a supply chain asset is valuable if order cancellations occur and the asset is  perishable

 The

level of overbooking is based on the trade-off  bet%een the cost of of %asting the asset if to too o many cancellations lead to unused assets and the cost of arranging a backup if too fe% cancellations lead to committed committe d orders being larger than the available capacity

 

Revenue Management for $erisha%le &ssets  p 0 price at %hich %hich each unit of the asset is sold c 0 cost of using or producing each unit of the asset  b 0 cost per unit at %hich a backup ccan an be used in the case of asset shortage C% 0 p > c 0 marginal cost of %asted capacity Cs 0 b > c 0 marginal cost of a capacity shortage "? 0 optimal overbooking level s? 0 Probability(cancellations @ "?* 0 C% 3 (C%  Cs*

 

Revenue Management for $erisha%le &ssets .f the distribution of cancellations is kno%n to be normal %ith mean µc and standard deviation σc then -5

c

c

c

c

"? 0 4 (s?' µ ' σ * 0 6"RM.67(s?' µ ' σ * .f the distribution of cancellations is kno%n only as a function of the booking level (capacity !  overbooking "* to have a mean of µ(!"* and std deviation of σ(!"*' the optimal overbooking level is the solution to the follo%ing e/uation& " 0 4-5(s?'µ(!"*'σ(!"** 0 6"RM.67(s?'µ(!"*'σ(!"**

 

Eample Cost of %asted capacity 0 C % 0 85; per dress Cost of capacity shortage 0 C s 0 8: per dress s? 0 C% 3 (C%  Cs* 0 5;3(5;:* 0 ;, µc 0 =;; σc 0 E;; "? 0 6"RM.67(s?' µc'σc*

0 6"RM.67(;,'=;;'E;;* 0 F9 .f the mean is 5:G of the booking level and the coefficient of variation is ;,:' then the optimal overbooking level is the solution of the follo%ing e/uation& " 0 6"RM.67(;,';,5:(:;;;"*';,;:(:;;;"** sing )$cel Solver' "? 0 5'55:

 

Revenue Management for Seasonal 'emand  Seasonal

peaks of demand are common in many supply

chains 

)$amples& Most retailers achieve a large portion of total annual demand in December (Ama+on,com (Ama+on,com**  "ff-peak

discounting can shift demand from peak to non-peak periods

 Charge

higher price during peak periods and a lo%er  price during off-peak off-peak periods

 

Revenue Management for  (ul# and Spot Customers 

Most consumers of production' %arehousing' and transportation assets in a supply chain face the problem of constructing a  portfolio of long-term long -term bulk contrac contracts ts and short-term sho rt-term spot market contracts



The basic decision is the si+e of the bulk contract



The fundamental trade-off is bet%een %asting a portion of the lo%-cost bulk contract and paying more for the asset on the spot



market Hiven that both the spot market price and the purchaserIs need for the asset are uncertain' a decision tree approach as discussed in Chapter  should be used to evaluate the amount of long-term

 bulk contract contra ct to sign

 

Revenue Management for  (ul# and Spot Customers 4or the simple case %here the spot market price is kno%n  but demand is uncertain' a formula can be used cB 0 bulk rate cS 0 spot market price J? 0 optimal amount of the asset to be purchased in bulk   p? 0 probability that the demand for the asset does not e$ceed J? Marginal cost of purchasing another unit in bulk is c B, The e$pected marginal cost of not purchasing another unit in bulk and then purchasing it in the spot market is (5-p?*cS,

 

Revenue Management for  (ul# and Spot Customers .f the optimal amount of the asset is purchased in bulk' the marginal cost of the bulk purchase should e/ual the marginal cost of the spot market purchase' or ce$pected B 0 (5-p?*cS  Solving for p? yields p? 0 (cS > cB* 3 cS .f demand is normal nor mal %ith mean µ and std deviation σ' the optimal amount J? to be purchased in bulk is J? 0 4-5(p?'µ'σ* 0 6"RM.67(p?'µ'σ*

 

Eample Bulk contract cost 0 cB 0 85;';;; per million units Spot market cost 0 cS 0 85<':;; per million units µ 0 5; million units σ 0 E million units

 p? 0 (cS > cB* 3 cS 0 (5<':;; > 5;';;;* 3 5<':;; 0 ;,< J? 0 6"RM.67(p?'µ'σ* 0 6"RM.67(;,<'5;'E* 0 ,9 The manufacturer should sign a long-term bulk contract for ,9 million units per month and purchase any transportation capacity beyond that on the spot market

 

Using Revenue Management in $ractice  )valuate

your market carefully

 Juantify

the benefits of revenue management

 .mplement a forecasting process  Apply optimi+ation to obtain the

revenue

management decision  .nvolve

both sales and operations

 nderstand  .ntegrate

and inform the customer 

supply planning %ith revenue management

 

Summary of )earning O%*ectives  Khat

is the role of revenue managem management ent in a supply chainL

 nder

%hat conditions are revenue management tactics effective effectiveLL

 Khat

are the trade-offs that must be considered %hen making revenue management decisionsL

 

  THANK YOU