Chapter15

PricingandRevenueManagementintheSupplyChainSupplyChainManagement

(3rdEdition)

15-1OutlineTheRoleofRevenueManagementinthe

SupplyChainRevenueManagementforMultipleCustomerSegmentsRevenueManagementforPerishableAssetsRevenueManagementforSeasonableDemandRevenueManagementforBulkandSpotCustomersUsingRevenueManagementinPracticeSummaryofLearningObjectives2TheRoleofRevenueManagementintheSupplyChainRevenuemanagementistheuseofpricingtoincreasetheprofitgeneratedfromalimitedsupplyofsupplychainassetsSupplyassetsexistintwoforms:capacityandinventoryRevenuemanagementmayalsobedefinedastheuseofdifferentialpricingbasedoncustomersegment,timeofuse,andproductorcapacityavailabilitytoincreasesupplychainprofitsMostcommonexampleisprobablyinairlinepricing3ConditionsUnderWhichRevenueManagementHastheGreatestEffectThevalueoftheproductvariesindifferentmarketsegments(Example:airlineseats)Theproductishighlyperishableorproductwasteoccurs(Example:fashionandseasonalapparel)Demandhasseasonalandotherpeaks(Example:productsorderedatA)Theproductissoldbothinbulkandonthespotmarket(Example:ownerofwarehousewhocandecidewhethertoleasetheentirewarehousethroughlong-termcontractsorsaveaportionofthewarehouseforuseinthespotmarket)4RevenueManagementfor

MultipleCustomerSegmentsIfasupplierservesmultiplecustomersegmentswithafixedasset,thesuppliercanimproverevenuesbysettingdifferentpricesforeachsegmentPricesmustbesetwithbarrierssuchthatthesegmentwillingtopaymoreisnotabletopaythelowerpriceTheamountoftheassetreservedforthehigherpricesegmentissuchthattheexpectedmarginalrevenuefromthehigherpricedsegmentequalsthepriceofthelowerpricesegment5RevenueManagementfor

MultipleCustomerSegmentspL=thepricechargedtothelowerpricesegmentpH=thepricechargedtothehigherpricesegmentDH=meandemandforthehigherpricesegmentsH=standarddeviationofdemandforthehigherpricesegmentCH=capacityreservedforthehigherpricesegmentRH(CH)=expectedmarginalrevenuefromreservingmorecapacity=Probability(demandfromhigherpricesegment>CH)xpHRH(CH)=pL

Probability(demandfromhigherpricesegment>CH)=pL/pHCH=F-1(1-pL/pH,DH,sH)=NORMINV(1-pL/pH,DH,sH)6Example15.2:ToFromTruckingRevenuefromsegmentA=pA=$3.50percubicftRevenuefromsegmentB=pB=$3.50percubicftMeandemandforsegmentA=DA=3,000cubicftStddevofsegmentAdemand=sA=1,000cubicftCA =NORMINV(1-pB/pA,DA,sA) =NORMINV(1-(2.00/3.50),3000,1000) =2,820cubicftIfpAincreasesto$5.00percubicfoot,thenCA =NORMINV(1-pB/pA,DA,sA) =NORMINV(1-(2.00/5.00),3000,1000) =3,253cubicft7RevenueManagement

forPerishableAssetsAnyassetthatlosesvalueovertimeisperishableExamples:high-techproductssuchascomputersandcellphones,highfashionapparel,underutilizedcapacity,fruitsandvegetablesTwobasicapproaches:VarypriceovertimetomaximizeexpectedrevenueOverbooksalesoftheassettoaccountforcancellations8RevenueManagement

forPerishableAssetsOverbookingoroversellingofasupplychainassetisvaluableifordercancellationsoccurandtheassetisperishableThelevelofoverbookingisbasedonthetrade-offbetweenthecostofwastingtheassetiftoomanycancellationsleadtounusedassetsandthecostofarrangingabackupiftoofewcancellationsleadtocommittedordersbeinglargerthantheavailablecapacity9RevenueManagement

forPerishableAssetsp=priceatwhicheachunitoftheassetissoldc=costofusingorproducingeachunitoftheassetb=costperunitatwhichabackupcanbeusedinthecaseofassetshortageCw=p–c=marginalcostofwastedcapacityCs=b–c=marginalcostofacapacityshortageO*=optimaloverbookinglevels*=Probability(cancellations

<O*)=Cw/(Cw+Cs)10RevenueManagement

forPerishableAssetsIfthedistributionofcancellationsisknowntobenormalwithmeanmcandstandarddeviationscthenO*=F-1(s*,mc,sc)=NORMINV(s*,mc,sc)Ifthedistributionofcancellationsisknownonlyasafunctionofthebookinglevel(capacityL+overbookingO)tohaveameanofm(L+O)andstddeviationofs(L+O),theoptimaloverbookinglevelisthesolutiontothefollowingequation:O =F-1(s*,m(L+O),s(L+O)) =NORMINV(s*,m(L+O),s(L+O))11Example15.5Costofwastedcapacity=Cw=$10perdressCostofcapacityshortage=Cs=$5perdresss*=Cw/(Cw+Cs)=10/(10+5)=0.667mc=800;sc=400O* =NORMINV(s*,mc,sc) =NORMINV(0.667,800,400)=973Ifthemeanis15%ofthebookinglevelandthecoefficientofvariationis0.5,thentheoptimaloverbookinglevelisthesolutionofthefollowingequation:O=NORMINV(0.667,0.15(5000+O),0.075(5000+O))UsingExcelSolver,O*=1,11512RevenueManagement

forSeasonalDemandSeasonalpeaksofdemandarecommoninmanysupplychainsExamples:MostretailersachievealargeportionoftotalannualdemandinDecember(A)Off-peakdiscountingcanshiftdemandfrompeaktonon-peakperiodsChargehigherpriceduringpeakperiodsandalowerpriceduringoff-peakperiods13RevenueManagementfor

BulkandSpotCustomersMostconsumersofproduction,warehousing,andtransportationassetsinasupplychainfacetheproblemofconstructingaportfoliooflong-termbulkcontractsandshort-termspotmarketcontractsThebasicdecisionisthesizeofthebulkcontractThefundamentaltrade-offisbetweenwastingaportionofthelow-costbulkcontractandpayingmorefortheassetonthespotmarketGiventhatboththespotmarketpriceandthepurchaser’sneedfortheassetareuncertain,adecisiontreeapproachasdiscussedinChapter6shouldbeusedtoevaluatetheamountoflong-termbulkcontracttosign14RevenueManagementfor

BulkandSpotCustomersForthesimplecasewherethespotmarketpriceisknownbutdemandisuncertain,aformulacanbeusedcB=bulkratecS=spotmarketpriceQ*=optimalamountoftheassettobepurchasedinbulkp*=probabilitythatthedemandfortheassetdoesnotexceedQ*MarginalcostofpurchasinganotherunitinbulkiscB.Theexpectedmarginalcostofnotpurchasinganotherunitinbulkandthenpurchasingitinthespotmarketis(1-p*)cS.15RevenueManagementfor

BulkandSpotCustomersIftheoptimalamountoftheassetispurchasedinbulk,themarginalcostofthebulkpurchaseshouldequaltheexpectedmarginalcostofthespotmarketpurchase,orcB=(1-p*)cS

Solvingforp*yieldsp*=(cS–cB)/cSIfdemandisnormalwithmeanmandstddeviations,theoptimalamountQ*tobepurchasedinbulkisQ*=F-1(p*,m,s)=NORMINV(p*,m,s)16Example15.6Bulkcontractcost=cB=$10,000permillionunitsSpotmarketcost=cS=$12,500permillionunitsm=10millionunitss=4millionunitsp*=(cS–cB)/cS=(1