Supply Chain Management, Sourcing Pricing and Procurement Process , Presentations By Rajendran Ananda Krishnan, https://www.facebook.com/ialwaysthinkprettythings
2. Topics to be coveredSourcing and Pricing Sourcing In house
or Outsource 3rd and 4th PLs Supplier Scoring and Assessment
Selection, Design Collaboration Procurement Process, Sourcing
Planning and Analysis Pricing and Revenue Management for multiple
customers, Perishable products, seasonal demand, bulk and spot
contracts https://www.facebook.com/ialwaysthink prettythings
3. Sourcing In-house orOutsource The decision of a firm to
perform its activities internally or get those activities done from
an independent firm is known as the make versus buy decision.
Bharti Airtel, Indias number one private telecom service provider
announced its decision to outsource key network management
activities, IT services and call centre operations also
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4. Bharti Airtel : Outsourcing of NetworkOperations Network
Management to Ericsson, Nokia and Siemens Manage the existing
network and deploy and operate new base stations in the future. IT
Management to IBM IBM manages all IT services (billing, CRM),
operates data centres, help desk for IT support and application
development. Customer Service call centres to Hinduja, TMT, Mphasis
& IBM Daksh Managing customer service call centres for all
customers except corporate clients and high-value clients. Bharti
itself is maintaining customer service for these high-end
customers. https://www.facebook.com/ialwaysthink prettythings
5. Out sourcing Vs Off shoring Out sourcing - Owning the
facilities and giving them to third party and getting manufactured
. -Off shoring Not owning any facilities, but making others to
acquire facility and getting manufactured:
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6. Benefits from effective sourcingdecisions Better economies
of scale can be achieved if orders within a firm are aggregated.
More efficient procurement transactions can significantly reduce
the overall cost of purchasing. Design collaboration can result in
products that are easier to manufacture and distribute, resulting
in lower overall costs. Good procurement processes can facilitate
coordination with the supplier and improve forecasting and
planning. Better coordination lowers inventories and improves the
matching of supply and demand. Appropriate supplier contracts can
allow for the sharing of risk, resulting in higher profits for both
the supplier and the buyer. Firms can achieve a lower purchase
price by increasing competition through the use of auctions.
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7. In-house or OutsourceThe decision to outsource is based on
the growth in supply chain surplus provided by the third party and
the increase in risk incurred by using a third party. A firm should
consider outsourcing if the growth in surplus is large with a small
increase in risk.How do Third parties increase the Supply Chain
SurplusThird parties increase the supply chain surplus if they
either increase value for the customer or decrease the supply chain
cost relative to a firm performing the task in-house.Third parties
can increase the supply chain surplus effectively if they are able
to aggregate supply chain assets or flows to a higher level
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8. Capacity aggregation A third party can increase the supply
chain surplus by aggregating demand across multiple firms and
gaining production economies of scale that no single firm can on
its own. One of the reasons that Dell outsources design and
production of the processors in its PCs to Intel is that Intel
supplies many computer manufacturers and gains economies of scale
that are not available to Dell if it designs and produces its own
processors. Inventory Aggregation A third party can increase the
supply chain surplus by aggregating inventories across a large
number of customers. Aggregation allows them to significantly lower
overall uncertainty and improve economies of scale in purchasing
and transportation. They carry significantly less safety and cycle
inventory than would be required if each customer decided to carry
inventory on its own. https://www.facebook.com/ialwaysthink
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9. Transportation Aggregation UPS, FedEx and a host of LTL
carriers are examples of transportation intermediaries that
increase the supply chain surplus by aggregating transportation
across a variety of shippers. Each shipper wants to send less than
the capacity of the transportation mode. The transportation
intermediary aggregates shipments across multiple shippers, thus
lowering the cost of each shipment below what could be achieved by
the shipper alone. Warehousing Aggregation The growth in surplus is
achieved in terms of lower real estate costs as well as lower
processing costs within the warehouse. Savings through warehousing
aggregation arise if a suppliers warehousing needs are small or if
its needs fluctuate over https://www.facebook.com/ialwaysthink
time. prettythings
10. Procurement Aggregation A third party increases the supply
chain surplus if it aggregates procurement for many small buyers
and facilitates economies of scale in production and inbound
transportation. Lower costs and higher quality If these benefits
come from specialization and learning, they are likely to be
sustainable over the long term. A specialized third party that is
further along the learning curve for some supply chain activity is
likely to maintain its advantage over the long term.
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11. Risks of using a Third Party The process is broken The
biggest problems arise when a firm outsources supply chain
functions simply because it has lost control of the process as it
will make it worse and harder to control. Underestimation of the
cost of coordination Underestimate the effort required to
coordinate activities across multiple entities performing supply
chain tasks. This is especially true if a firm plans to outsource
specific supply chain functions to different third parties.
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12. Reduced Customer/supplier contact A firm may lose
customer/supplier contact by introducing an intermediary. The loss
of customer contact is particularly significant for firms that sell
directly to consumers but decide to use a third party to either
collect incoming orders or deliver outgoing product. Loss of
internal capability and growth in third party power A firm may
choose to keep a supply chain function in-house if outsourcing will
significantly increase the third partys power. Companies such as HP
and Motorola have moved most of their manufacturing to contract
manufacturers but are reluctant to move either procurement or
design even though contract manufacturers have developed both
capabilities. https://www.facebook.com/ialwaysthink
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13. Leakage of sensitive data and information Using a third
party requires a firm to share demand information and in some cases
intellectual property. If the third party also serves competitors,
there is always the danger of leakage.
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14. Third and Fourth Party LogisticsProviders A third party
logistics provider performs one or more of the logistics activities
relating to the flow of product, information and funds that could
be performed by the firm itself. Traditionally, 3 PLs focused on
specific functions such as transportation, warehousing and
information technology within the supply chain. Most 3PLs started
out by focusing on one of the functions in the supply chain. For
eg. https://www.facebook.com/ialwaysthink UPS started out as a
small package carrier. prettythings
15. A third-party logistics provider (abbreviated 3PL, or
sometimes TPL) is a firm that provides a one stop shop service to
its customers of outsourced (or "third party") logistics services
for part, or all of their supply chain management functions. Third
party logistics providers typically specialize in integrated
operation, warehousing and transportation services that can be
scaled and customized to customers needs based on market conditions
and the demands and delivery service requirements for their
products and materials. https://www.facebook.com/ialwaysthink
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16. Types of 3PL Freight forwarders Courier companies Other
companies integrating & offering subcontracted logistics and
transportation servicesHertz and Alfredsson describe two categories
of 3PL providers: Standard 3PL provider: This is the most basic
form of a 3PL provider. They would perform activities such as, pick
and pack, warehousing, and distribution (business) the most basic
functions of logistics. Service developer: This type of 3PL
provider will offer their customers advanced value-added services
such as: tracking and tracing, cross- docking, specific packaging,
or providing a unique security system.
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17. A third-party logistics provider (3PL) is an asset based
company that offers logistics and supply chain management services
to its customers. It commonly owns and manages distribution centers
and transport modes. A fourth-party logistics provider (4PL)
integrates the resources of producers, retailers and third-party
logistics providers in view to build a system-wide improvement in
supply chain management. They are non- asset based meaning that
they mainly provide organizational expertise.
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18. 4th Party Logistics Services (4PL) With the Increased
globalization of SC , customers are looking for players who can
manage virtually all aspects of their supply chain. This has led to
the concept of fourth party logistics provider. Anderson Consulting
( Accenture) defined 4th PL as An integrator that assembles
resources, capabilities and technology of its own and other
Organizations, to design, build and run comprehensive SC solutions.
3PL targets a function, 4PL entire
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19. A Fourth-party logistics provider (abbreviated 4PL), lead
logistics provider, or 4th Party Logistics provider, is a
consulting firm specialized in logistics, transportation, and
supply chain management. Typical fourth- party logistics providers
are CPCS, SCMO, BMT, Deloitte, Capgemini, 3t Europe, Accenture and
Geodis. https://www.facebook.com/ialwaysthink prettythings
20. 4TH PL company examples Menlo logistics manages all aspects
of the supply chain for Home Life , national home furnishing retail
chain Integrates transportation, warehousing, home delivery,
product set-up, repair, and reverse logistics. Kuehne & Nagel
AG - Swiss Freight forwarder, served as 4th PL for Nortel Network
for outbound logistics to customers. Handles 35 to 40 forwarders,
warehouse managers, truckers, and other log functions. Li &
Fung- served Reebok, managing sourcing and production across1000s
of factories in 32 countries. https://www.facebook.com/ialwaysthink
prettythings
21. The main factors behind the increasing role of 3PL and 4PL
are: The international division of production associated with
globalization helped set a global network of manufacturing
activities, implying that producers and consumers tend to have an
acute geographical separation requiring complex transportation
services. An increasing focus of manufacturers and retailers on
their core business (known as core competencies) and
sub-contracting activities such as logistics where they have less
expertise. Productivity gains in supply chain management in terms
of costs and reliability that can be derived from the managerial
and information technology expertise provided by 3/4PL. Better
utilization of transportation assets and resulting economies of
scale. 3PLs can make better use of transportation assets by
balancing the needs of multiple client shippers across
transportation and distribution. 3/4PLs are more prone to implement
novel supply chain management practices requiring a higher
expertise on material flows such as transloading , crossdocking and
shipment tracking. https://www.facebook.com/ialwaysthink
prettythings
22. Key Sourcing- Related Processes 2. Supplier1. Suppliers 5.
Sourcing selection and 3. Design 4.Scoring and Planning and
contract Collaboration Procurementassessment Analysis negotiation
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23. Supplier Scoring and AssessmentIn addition to quoted price,
the following factors must be considered when scoring and assessing
suppliers : 1. Replenishment Lead time 2. On- time performance 3.
Supply Flexibility 4. Delivery Frequency / Minimum lot size 5.
Supply Quality 6. Inbound Transportation Cost 7. Pricing Terms 8.
Information coordination capability 9. Design Collaboration
capability 10. Exchange rate , Tax and Duties 11. Supplier
Viability https://www.facebook.com/ialwaysthink prettythings
24. When scoring and assessing suppliers , the following
factors other than quoted price must be considered: Replenishment
Lead Time As the replenishment lead time from a supplier grows, the
amount of safety inventory that needs to be held by the buyer also
grows. On-time performance It affects the variability of the lead
time. A reliable supplier has low variability of lead time, whereas
an unreliable supplier has high variability. As the variability of
lead time grows, the required safety inventory at the firm grows
very rapidly. Supply Flexibility Supply flexibility is the amount
of variation in order quantity that a supplier can tolerate without
letting other performance factors deteriorate. The less flexible a
supplier is, the more https://www.facebook.com/ialwaysthink lead
time variability it will display as order quantities
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25. Delivery frequency/minimum lot size Affect the size of each
replenishment lot ordered by a firm. As the replenishment lot size
grows, the cycle inventory at the firm grows, thus increasing the
cost of holding inventory. Supply quality A worsening of supply
quality increases the variability of the supply of components
available to a firm. Quality affects the lead time taken by the
supplier to complete the replenishment order. Inbound
transportation cost Sourcing a product overseas may have lower
product cost but generally incurs a higher inbound transportation
cost, which must be accounted for when comparing suppliers.
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26. Pricing terms Include the allowable time delay before
payment has to be made and any quantity discounts offered by the
supplier. Allowable time delays in payment to suppliers save the
buyer working capital. Information Coordination Capability Affects
the ability of a firm to match supply and demand. Design
Collaboration Capability Good design collaboration for
manufacturability and supply chain can also decrease required
inventories and transportation cost. Exchange rates, taxes and
duties- Significant for a firm with a global manufacturing and
supply base. Supplier viability Supplier should be around to
fulfill the promises it makes.
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27. Supplier Selection - Auctions andNegotiationsA firm must
decide whether to use single sourcing or multiple suppliers. Single
sourcing guarantees the supplier sufficient business and proper
coordination is possible if there is a single source.Multiple
sources ensures a degree of competition and also the possibility of
a backup should a source fail to deliver.
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28. Selection of suppliers is done using:1. Auctions in the
supply chain Sealed-bid first price auction requires each potential
supplier to submit a sealed bid for the contract by a specified
time. Contract is assigned to the lowest bidder. English Auctions
The auctioneer starts with a price and suppliers can make bids as
long as each successive bid is lower than the previous bid. The
supplier with the lowest bid receives the contract. Dutch Auctions
The auctioneer starts with a low price and then raises it slowly
until one of the suppliers agrees to the contract at that price.
Second Price Auctions Each potential supplier submits a bid. The
contract is assigned to the lowest bidder but at the price quoted
by the second lowest bidder. https://www.facebook.com/ialwaysthink
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29. Basic Principles of NegotiationNegotiation is likely to
result in a positive outcome only if the value the buyer places on
outsourcing the supply chain function to this supplier is at least
as large as the value the supplier places on performing the
function for the buyer. The difference between the values of the
buyer and seller is referred to as the bargaining surplus. The goal
of each negotiating party is to capture as much of the bargaining
surplus as possible. https://www.facebook.com/ialwaysthink
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30. Contracts and Supply ChainPerformance Buyback or Returns
Contracts Allows a retailer to return unsold inventory upto a
specified amount, at an agreed upon price. Revenue-Sharing
Contracts The manufacturer charges the retailer a low wholesale
price and shares a fraction of the retailers revenue. Quantity
Flexibility Contracts The manufacturer allows the retailer to
change the quantity ordered after observing demand.
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31. Design Collaboration (withSuppliers) It is crucial for a
manufacturer to collaborate with suppliers during the design stage
if product costs are to be kept low. Working with suppliers can
speed up product development time significantly. This is crucial in
an era when product life cycles are shrinking. Finally, integrating
the supplier into the design phase allows the manufacturer to focus
on system integration, resulting in a higher quality product at
lower cost. Helps to reduce cost, improves Quality and reduce time
to market.Eg; Ford designed the car THUNDER BIRD through suppliers
involvement, they not only manufactured the components, but also
responsible for the design. This allowed Ford to bring the New
model to market with in 36 months of program approval..
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32. The Procurement Process There are two main categories of
purchased goods : Direct and Indirect materials. Direct materials
are components used to make finished goods. For eg. Memory, hard
drives and CD drives are direct materials for a PC manufacturer.
Indirect materials are goods used to support the operations of a
firm. PCs, stationary items are examples of indirect materials for
an automotive manufacturer. https://www.facebook.com/ialwaysthink
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33. Difference between Direct andIndirect Materials. Direct
Materials Indirect MaterialsUSE Production Maintenance. Repair and
support operationsAccounting Cost of Goods Sold Power , Fuel and
other Packing materials usedImpact on production Any delay will
delay in Less direct impact ProductionProcessing cost relative Low
Highto value of transactionNumber of Transactions Low High
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34. Product Categorization by Value and Criticality High
Critical Items (Nuts & Strategic Items Bolts) (Electronics for
Long LT, Ensuring Auto manufacturers ) Availability is important
Buyer supplierCritical Items than Price relationship is long term.
General Items Bulk purchase Items Indirect Materials Chemicals ,
Packaging Goal is To keep the materials. Use of well cost of
acquisition or designed auctions for transaction cost low.)
procurement. LOW LOW High Value / Cost
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35. Sourcing Planning and Analysis One important analysis is
the aggregation of spending across and within categories and
suppliers. Aggregation provides visibility into what a company is
purchasing and from whom the product is being purchased. Managers
can use this information to determine economic order quantities,
volume discounts and projected quantity discounts on future
volumes. The second piece of analysis relates to supplier
performance. Supplier performance should be measured against plan
on all dimensions that affect total cost, such as responsiveness,
lead times, on-time delivery, and quality.
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36. Suppliers Portfolio Spending and supplier performance
should be used to decide on the portfolio of suppliers to be used
and the allocation of demand among the chosen suppliers. Portfolio
of suppliers with complementary strengths, to be balanced Cheaper,
but lower performing, suppliers to be used to supply base and
regular demand. Higher performing but more expensive, suppliers
should be used to buffer against variation in demand.
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37. Pricing and Revenue Management(PRM) Revenue Management is
the use of pricing to increase the profit generated from a limited
supply of supply chain assets. 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 surplus.
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38. Contd.Revenue management adjusts the pricing and available
supply of assets to maximize profits. Revenue management has a
significant impact on supply chain profitability when one or more
of the following four conditions exist :1. The value of the product
varies in different market segments.2. The product is highly
perishable or product wastage occurs.3. Demand has seasonal and
other peaks.4. The product is sold both in bulk and on the spot
market.Airline seats are a good example of a product whose value
varies by market segment. A business traveler is willing to pay a
higher fare for a flight that matches his or her schedule. In
contrast, a leisure traveler will often alter his or her schedule
to get a lower fare. An airline that can extract a higher price
from the business traveler compared to the leisure traveler
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39. Pricing and Revenue Managementfor Multiple Customer
segments1. Example of multiple customer segment: - Business
traveler, willing to pay high a higher fare to travel a specific
schedule. - Leisure traveler, ready to shift their schedule to take
advantage of lower fares. 2. Trucking firm has 6 Trucks : 6000 Cft
x $ 2.50 = $15,000 A1 (Ordinary) 3000 Cft x $ 3.50 = $ 10500 3000
Cft x $ 2.00 = $ 6000 A2 ( By PRM) Total = $ 16500 Additional
Revenue......$ 1500 https://www.facebook.com/ialwaysthink
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40. Allocating Capacity to a Segmentunder Uncertainty In most
instances of differential pricing, demand from the segment paying
the lower price arises earlier in time than demand from the segment
paying the higher price. A supplier may charge a lower price to a
buyer willing to commit far in advance and a higher price to buyers
wanting to place their orders at the last minute. The basic trade
off to be considered by the supplier with production capacity is
between committing to an order from a lower price buyer or waiting
for a high price buyer to arrive later
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41. Contd. The two risks in such a situation are spoilage and
spill. Spoilage occurs when the capacity reserved for higher price
buyers is wasted because demand from the higher price segment does
not materialize. Spill occurs if higher price buyers have to be
turned away because the capacity has already been committed to
lower price buyers. Another approach to differential pricing is to
create different versions of a product targeted at different
segments. Publishers introduce new books from best-selling authors
as hard-cover editions and charge a higher price. The same books
are introduced later as paperback editions at a lower price.
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42. Different versions can also be created by bundling
different options and services with the same basic product.
Automobile manufacturers create a high-end, a mid- level and a
low-end version of the most popular models based on the options
provided. This policy allows them to charge differential prices to
different segments for the same core product. Many contact lens
manufacturers sell the same lens with a one-week, one-month and
six-month https://www.facebook.com/ialwaysthink warranty.
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43. Tactics to be followed when servingMultiple Customer
segments 1. Price based on the value assigned by each segment 2.
Use different price for each segment 3. Forecast at the segment
level https://www.facebook.com/ialwaysthink prettythings
44. Pricing and Revenue ManagementFor Perishable Assets Any
Asset that loses Value over Time is called perishable. Fruits,
Vegetables, Pharmaceuticals etc, Products such as computers and
cell phones that lose value as new models are introduced. High
fashion apparels All forms of production, transportation, storage
capacity, seating capacity, travelling capacity etc, that is wasted
if not fully utilized. Example of revenue management for a
perishable asset is the use of overbooking by the airline industry.
An airplane seat loses all value once the plane takes off. Given
that people often do not show up for a plane even when they have a
reservation, airlines sell more reservations than the capacity of
the plane, to maximize expected revenue.
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45. Two RM tactics used for perishableassets 1. Vary price
dynamically over time to maximize expected revenue ( Dynamic
Pricing) 2. Overbook sales of assets ,to account for cancellations
(eg. In Airlines and Railways) Dynamic Pricing is the tactic of
varying price over time, is suitable for assets such as fashion
apparel that have a clear date beyond which they lose a lot of
their value. Apparel designed for the winter does not have much
value by April. https://www.facebook.com/ialwaysthink
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46. Pricing & Revenue Management ForSeasonal Demand
Seasonal peak of demand is a common occurrence. 1. For Amazon.com,
Peak sales period is December. As a result of the seasonal peak,
there is a significant increase in the requirement for picking and
packing as well as transportation capacity. Bringing in short- term
capacity is expensive and decreases Amazons margin. Off-peak
discounting is followed for shifting demand to November. Free
pickup and shipping is offered to customers in Nov, encouraging
customers to shift demand from December to November. 2. Tactic is,
to charge a higher price during the peak period and a lower price
during off-peak period . Trade-off between revenue increase due to
low-price https://www.facebook.com/ialwaysthink prettythings
47. Marriott Corporation ( Hotel) Hotel industry uses
differential pricing by day of week and time of year. Here goal is
not to shift demand- but to increase demand during periods of low
demand by attracting price-sensitive customers, such as vacationing
families, with a price discount. For business customers, peak
demand days occur in the middle of the week. Lower rates during
weekends to encourage families to use the hotel. Charge customers a
Lower rate if families stay over a longer period that also covers
low demand days. This tactics increase the profit of the owner of
assets, and brings in potentially new customers
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period. prettythings
48. Pricing & Revenue Management forBulk and Spot Contracts
Most firms face a market in which some customers purchase in bulk
at a discount and others buy single units or small lots at a higher
place. Warehousing capacity may be leased in bulk to a large
company or in small amounts to large companies for their emergency
needs or to small companies. In most instances, owners of supply
chain assets prefer to fulfill all demand that arises from bulk
sales and try to serve small customers only if any assets are left
over. For a firm that wants to be a niche player, targeting one of
the two extremes is a sensible strategy. It allows the firm to
focus its operations on serving either only the bulk segment or
only the spot market. For other firms, however, a hybrid strategy
of serving both segments is appropriate.
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49. PRM - Guidelines1) Evaluate your market carefully The first
step in revenue management is to identify the customer segments
being served and their needs.2) Quantify the benefits of Revenue
Management It is critical to quantify the expected benefits from
revenue management before starting the project.3) Implement
forecasting process To use overbooking with any degree of success,
an airline must be able to forecast cancellation patterns.4) Apply
optimization to obtain the revenue management decision The goal of
optimization is to use forecasts of customer behavior to identify a
revenue management tactic that will be most effective.
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50. Contd.5) Involve both sales and operation Salespeople must
understand the revenue management tactic in place so they can align
their sales pitch accordingly.6) Understand and Inform customer
Customers will have a negative perception of revenue management
tactics if they are simply presented as a mechanism for extracting
maximum revenue.7) Integrate supply planning with revenue
management The point is not to use revenue management in isolation,
but rather to combine it with decisions on the supply side.
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