Ch 10 Customer Value and Supply Chain Management

8/8/2019 Ch 10 Customer Value and Supply Chain Management

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Customer Value andSupply Chain

Management

Phil [email protected]

David Simchi-LeviPhilip Kaminsky

Edith Simchi-Levi


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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi

O utline

Cu stomer Val u e

The Fu

ndamentals of Pricing Strategies Reven u e Management & Cu stomized PricingMail-in-Rebate strategiesD

ynamic Pricing in SC

M D elayed Pricing vs. D elayed Prod u ction


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Customer Value

H ow sho u ld a company meas u re the val u e of its prod u cts or services?The emphasis has moved from internal meas u res s u ch as q u ality tocu stomer satisfaction meas u res.

The su

pply chain has a hu

ge impact on perceived cu

stomer valu

e: Prices vs. service? D elivery speed vs. price? Specialization or one-stop shopping?Recall that responding to c u stomer req u irements is a basic part of s u pply chain management.Cu

stomer valu

e drives changes in the su

pply chain, and is a criticalinpu t in determining the type of s u pply chain for a partic u lar prod u ct Large inventories H igh level of c u stomization


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T he Dimensions of

Customer ValueC onformance to req u irements Offer what the c u stomer wants D emand impacts the s u pply chainProd u ct Selection A proliferation of options makes the s u pply chain diffic u lt to manage Three trends

Specialty stores (Starb u cks, S u bway)Megastores (Wal-Mart, Target)Specialized Megastores ( H ome D epot, OfficeMax)

D ealing with the proliferation:Bu ild-to-order C entralized inventories

A fixed set of options


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T he Dimensions of

Customer ValuePrice and Brand Pricing is a key part of the c u stomer experience

The correct s u pply chain s u pports the correct priceWal-mart

Brand works hand in hand with price As the n u mber of salespeople decreases, the val u e of brand increasesThis is partic u larly tr u e on the internet

Val u e Added Services It is hard to compete on price alone Val u e added services are on the rise d u e to

C ommoditization of prod u ctsThe need to get closer to the c u stomer Improving information technology

Relationships and Experiences An increased connection between the firm and its c u stomers

D ell manages the P C s of large c u stomers3PLThe Sony store


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Smart Pricing?

D ell: Same prod u ct is sold at a different price to different cons u mers

(private/small or large b u siness/government/academia/health care) Price of the same prod u ct for the same ind u stry varies

Amazon Books.com had a lower price than Amazon 99% of the time, yet

Amazon had 80% of the market in 2000 while Books.com only 2%

Nikon, Sharp Mail-In-Rebate

Boise C ascade office Prices of 12,000 items sold on-line may change as often as daily


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R evenue Management

Example: A cr u ise ship with C=4 00 identical cabins The Price-Q u antity relationship


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R evenue Management

Price

No. seats

2000

1000

P=2000-2Q


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R evenue Management

Example: A cr u ise ship with C=4 00 identical cabins The Price-Q u antity relationship

What is the price that the company sho u ldcharge to maximize reven u e?


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R evenue ManagementPrice

No. seats

P 0=1200

C=400

Revenue =480,000


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No. seats

P 0=1200

C=400

Mo ney o n the Table =160,000


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No. seats

P 2=1600

Q2=200


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No. seatsQ1 =400

P 1=1200

Q2=200

P 2=1600

Revenue =1600(200) + 1200(400-200)=560,000


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R evenue Management

C an we increase reven u e more?


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No. seatsQ1 =400

P 1=1200

Q2=200

P 2=1600

P3=1800

Q3=100

Revenue =1800(100) + 1600(200-100) + 1200(400-200)=580,000


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H ow can the firm prevent customersfrom moving from one class to another?

L eisure

Travelers

Business

TravelersN

o

Offer

No

D emand

Sensitivityto

P rice

Sensitivity t o D urati o nSensitivity t o Flexibility

High L ow

L ow

High


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R evenue Management

Allocating the right type of capacity to the rightkind of c u stomer at the right price so as to

maximize reven u e or yieldTraditional Ind u stries: Airlines H otels Rental C ar Agencies Retail Ind u stry


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T raditional R equirements

Perishable inventoryLimited capacity

Ability to segment markets early-bird booking over the weekend

Prod u ct sold in advanceFlu ctu ating demand


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A irline R evenue

ManagementTwo components of airline reven u emaximization: Cu stomized Pricing:

Vario u s fare prod u cts offered at different prices for travel in the same O- D market

Yield Management (YM):D etermines the n u mber of seats available to each fare class on a flight, by setting booking limits onlow fare seats


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R evenue Management:

Yield ManagementThere are only two price classes Leis u re: (f 2) $100 per ticket Bu siness: (f 1) $250 per ticket

Total available capacity = 80 seatsD istribu tion of demand for b u siness class isknown


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Capacity A llocationThere are only two price classes Leis u re: (f 2) $100 per ticket Bu siness: (f 1) $250 per ticket

Total available capacity = 80 seatsD istribu tion of demand for b u siness class isknownEno u gh demand for the leis u re class


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Capacity A llocationObject iv e : H ow many seats to allocate tothe b u siness class to maximize expectedreven u e


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Ex pected R evenue

Expected Revenue

7500

8000

8500

9000

9500

10000

0 5 10 15 20 25 30 35

Business Class


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Ex pected R evenue

Expected Revenue

7500

8000

8500

9000

9500

10000

0 5 10 15 20 25 30 35

Business Class


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Capacity A llocationOpt i li ty it i : C hoose the n u mber of seats for the b u siness class s u ch thatmarginal reven u e from each class is thesame


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O ptimality Condition

Margina Revenue Business

0

50

100

150

200

250

300

0 5 10 15 20 25 30 35


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0

50

100

150

200

250

300

0 5 10 15 20 25 30 35

M arginal Revenue L eisure


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0

50

100

150

200

250

300

0 5 10 15 20 25 30 35

M arginal Revenue L eisure


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B enefits of R evenue Managementin the A irline Industry

Evidence of airline reven u e increases of 4 to 6percent:

With effectively no increase in flight operating costsRM allows for tactical matching of demand vs.s u pply: Booking limits can help channel low-fare demand to

empty flights Protect seats for highest fare passengers on forecast

f u ll flights


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Mail-in- R ebate

What is the man u fact u rer trying to achievewith the rebate? Why the man u fact u rer and not the retailer?Sho u ld the man u fact u rer red u ce thewholesale price instead of the rebate?

Are there other strategies that can be u sedto achieve the same effect?


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Mail-in- R ebate A Retailer and a man u fact u rer. Retailer faces c u stomer demand. Retailer orders from man u fact u rer.

Selling Price = ?

Wholesale Price = $900

Retailer Man u fact u rer

Variable Prod u ction C ost = $200


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Demand-PriceR elationship

D emand

Price

10000

2000

P=2000-0.2Q


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R etailer Ex pected Profit

(No R ebate)

0

200,000

400,000

600,000

800,000

1,000 ,000

1,200 ,000

1,400 ,000

1,600 ,000

5 00 1 ,0 00 1 ,5 00 2 ,0 00 2 ,50 0 3 ,00 0 3 ,50 0 3 ,65 4 4 ,11 0 4 ,56 7 4 ,547

Ord e r

R e

a i l e r

E x

e c

e d

P r o

f i t


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(No R ebate)

0

200,000

400,000

600,000

800,000

1,000 ,000

1,200 ,000

1,400 ,000

1,600 ,000

5 00 1 ,0 00 1 ,5 00 2 ,0 00 2 ,50 0 3 ,00 0 3 ,50 0 3 ,65 4 4 ,11 0 4 ,56 7 4 ,547

Ord e r

R e

t a

i l e r

E x

e c

t e

d P

r o

f i t

$ 1,370,096


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Manufacturer Profit

(No R ebate)

0

1 000 000

2 000 000

3 000 000

4 000 000

5 000 000

6 000 000

5 0 0

10 0 0

15 0 0

20 0 0

25 0 0

30 0 0

35 0 0

36 5

4

41 1 0

45 6 7

45 4 7

49 6

1

53 7

4

57 8 8

62 0

1

66 1

4

70 2 8

74 4

1

78 5 5

r d e r

M a

f a c

t u r e r

P r o

f i t


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Manufacturer Profit

(No R ebate)

0

1 000 000

2 000 000

3 000 000

4 000 000

5 000 000

6 000 000

5 0 0

10 0 0

15 0 0

20 0 0

25 0 0

30 0 0

35 0 0

36 5

4

41 1 0

45 6 7

45 4 7

49 6

1

53 7

4

57 8 8

62 0

1

66 1

4

70 2 8

74 4

1

78 5 5

r d e r

M a

u f a c

t u r e r

P r o

f i t

$1,750,000


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($100 R ebate)

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,110 4,567 4,547 4,961

O r e r

R e

t a i l

e r

E

p e c

t e d

P r

f i t


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($100 R ebate)

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,110 4,567 4,547 4,961

O r de r

R e

t a i l

e r

E

p e c

t e d

P r

f i t

$ 1,644,115


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Manufacturer Profit

($100 R ebate)

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

1 , 0 0

0 1 , 5 0

0 2 ,

0 0 0

2 , 5 0

0 3 ,

0 0 0

3 , 5 0

0 4 , 0 0

0 4 ,

1 1 0

4 , 5 6

7 4 , 5 4

7 4 , 9 6

1 5 ,

3 7 4

5 , 7 8

8 6 ,

2 0 1

6 , 6 1

4 7 ,

0 2 8

7 , 4 4

1 7 ,

8 5 5

8 , 2 6

8

O r de r

a n u

f a c

t u r e r

P r

f i t

$ 1,810,392


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R etailer Ex pected Profit(R educed Wholesale Price $100 )

0

200 ,000

400 ,000

600 ,000

800 ,000

1 ,000 ,000

1 ,200 ,000

1 ,400 ,000

1 ,600 ,000

1 ,800 ,000

500 1 ,000 1 ,500 2 ,000 2 ,500 3 ,000 3 ,500 4 ,000 4 ,110 4 ,567 5 ,024

r d e r

R e t a i l e r

E x

e c t e d P r o

f i t


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Manufacturer Profit(R educed Wholesale Price $100)

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,110 4,567 5,024 4,961 5,374 5,788 6,201 6,614 7,028 7,441 7,855

O r e r

a

f a c

t r e r

r f t


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Manufacturer Profit(R educed Wholesale Price $100)

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,110 4,567 5,024 4,961 5,374 5,788 6,201 6,614 7,028 7,441 7,855

O r e r

a

f a c

t r e r

r f t

$ 1,800,000


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Mail-in- R ebate

Strategy Retailer Manufacturer Total

No Rebate 1,370,096 1,750,000 3,120,096 With Rebate ($100) 1,644,115 1,810,392 3,454,507 Reduce Wholesale P ($100) 1,654,508 1,800,000 3,454,508


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Managerial Insights

Mail in Rebate allows s u pply chain partnersto move away from seq u ential strategies

toward g l ba l pt i iz at i n Provides retailers with u ps ide in ce n t iv eMail in Rebate o u tpe rf o r s wholesale pricedisco u nt for man u fact u rer Other advantages of rebates: Not all c u stomers will remember to mail them in Gives man u fact u rer better control of pricing


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Smart Pricing

Cu stomized Pricing Reven u e Management Techniq u es

D istingu ish between c u stomers according to their price sensitivity

Influ ence retailer pricing strategies Move s u pply chain partners toward global

optimization


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Smart Pricing

D ynamic Pricing C hanging prices over time witho u t necessarily

disting u ishing between different c u stomers Find the optimal trade-off between high price

and low demand vers u s low price and highdemand


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When does Dynamic PricingProvide Significant Profit B enefit?

Limited C apacityD emand VariabilitySeasonality in D emand PatternShort Planning H orizon


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T he Internet makes

Smart Pricing PossibleLow Men u C ostLow Bu yer Search C ost

Visibility To the back-end of the s u pply chain allows to

coordinate pricing, prod u ction and distrib u tionCu stomer Segmentation

D ifficu lt in conventional stores and easier on the InternetTesting C apability


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A Word of Caution

Amazon.com experimented with dynamicpricing c u stomers responded negativelyC oca- C ola distrib u tors rebelled against aseasonal pricing schemeOpaq u e fares (priceline.com, hotwire.com) D etermining the correct mix of opaq u e and

reg u lar fares is diffic u lt.

Documents

Ch 10 Customer Value and Supply Chain Management