Pricing and Revenue Management in the Supply Chain

Pricing and Revenue Management in the Supply Chain

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第十二單元 (2) ： Pricing and Revenue Management in the Supply Chain

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蔣明晃教授

OutlineOutline

► 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

► Using Revenue Management in Practice

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The Role of Revenue Management in the Supply

Chain

The Role of 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

► Most common example is probably in airline pricing

Example : AA use revenue management to defeat PeopleExpress

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► The value of the product varies in different market segments (Example: airline seats)

► The product is highly perishable or product waste occurs (Example: fashion and seasonal apparel)

► Demand has seasonal and other peaks (Example: products ordered at Amazon.com)

► The product is sold both in bulk and on the spot market (Example: owner of warehouse who can decide whether to lease the entire warehouse through long-term contracts or save a portion of the warehouse for use in the spot market)

Conditions Under Which Revenue Management Has the

Greatest Effect

Conditions Under Which Revenue Management Has the

Greatest Effect

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Revenue Management forMultiple Customer

Segments

Revenue Management forMultiple Customer

Segments

► If a supplier serves multiple customer segments with a fixed asset, the supplier can improve revenues by setting different prices for each segment

► Prices must be set with barriers such that the segment willing to pay more is not able to pay the lower price

► The amount of the asset reserved for the higher price segment is such that the expected marginal revenue from the higher priced segment equals the price of the lower price segment

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Revenue Management forMultiple Customer

Segments

Revenue Management forMultiple Customer

Segments

pL = the price charged to the lower price segment

pH = the price charged to the higher price segment

DH = mean demand for the higher price segment

H = standard deviation of demand for the higher price segment

CH = capacity reserved for the higher price segment

RH(CH) = expected marginal revenue from reserving more capacity

= Probability (demand from higher price segment > CH) x pH

RH(CH) = pL

Probability (demand from higher price segment > CH) = pL / pH

CH = F-1(1- pL/pH, DH,sH) = NORMINV(1- pL/pH, DH, H)

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Example 15.1: ToFrom Trucking

Example 15.1: ToFrom Trucking

◈ Revenue from segment A = pA = $3.50 per cubic ft

◈ Revenue from segment B = pB = $3.50 per cubic ft

◈ Mean demand for segment A = DA = 3,000 cubic ft

◈ Std dev of segment A demand = A = 1,000 cubic ft

◈ If pA increases to $5.00 per cubic foot, then CA = NORMINV(1- pB/pA, DA, A)

= NORMINV(1- (2.00/5.00), 3000, 1000)

= 3,253 cubic ft

CA = NORMINV(1- pB/pA, DA, A)

= NORMINV(1- (2.00/3.50), 3000, 1000)

= 2,820 cubic ft

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► Demand forecast should be revised after a period of time

► Use different versions of a product:

》New books (hardcover and paperback)

》Automobile manufacturers create high-end, mid-level, and low-end version for the most popular models

》Contact lens manufactures sell the same lens with different periods of warranty

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Revenue Management forMultiple Customer Segments

Revenue Management forMultiple Customer Segments

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Revenue Management forMultiple Customer Segments

Revenue Management forMultiple Customer Segments

► Effective tactics:

》Price based on the value assigned by each segment

》Use different prices for each segment

》Forecast at segment level

》Prices must be set with barriers such that the segment willing to pay more is not able to pay the lower price

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Revenue Managementfor Perishable AssetsRevenue Managementfor Perishable Assets

► Any asset that loses value over time is perishable

► Examples: high-tech products such as computers and cell phones, high fashion apparel, underutilized capacity, fruits and vegetables. Can be extended to production, warehousing and transportation.

► Two basic approaches:

》Vary price over time to maximize expected revenue

》Overbook sales of the asset to account for cancellations

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Revenue Managementfor Perishable AssetsRevenue Managementfor Perishable Assets

► Overbooking 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 between the cost of wasting the asset if too many cancellations lead to unused assets and the cost of arranging a backup if too few cancellations lead to committed orders being larger than the available capacity

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Revenue Managementfor Perishable AssetsRevenue Managementfor Perishable Assets

◈ p = price at which each unit of the asset is sold

◈ c = cost of using or producing each unit of the asset

◈ b = cost per unit at which a backup can be used in the

case of asset shortage

◈ Cw = p – c = marginal cost of wasted capacity

◈ Cs = b – c = marginal cost of a capacity shortage

◈ O* = optimal overbooking level

◈ s* = Probability (cancellations < O*) = Cw / (Cw + Cs)

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Revenue Managementfor Perishable AssetsRevenue Managementfor Perishable Assets

◈ If the distribution of cancellations is known to be normal with mean c and standard deviation c then

O* = F-1(s*, c, c) = NORMINV(s*, c, c)

◈ If the distribution of cancellations is known only as a function of the booking level (capacity L + overbooking O) to have a mean of (L+O) and std deviation of (L+O), the optimal overbooking level is the solution to the following equation:

O = F-1(s*, (L+O), (L+O))

= NORMINV(s*, (L+O), (L+O))

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Example 15.2Example 15.2

◈ Cost of wasted capacity = Cw = $10 per dress

◈ Cost of capacity shortage = Cs = $5 per dress

◈ s* = Cw / (Cw + Cs) = 10/(10+5) = 0.667

◈ c = 800; c = 400

◈ O* = NORMINV(s*, c, c)

= NORMINV(0.667,800,400) = 973

◈ If the mean is 15% of the booking level and the coefficient of variation is 0.5, then the optimal overbooking level is the solution of the following equation:

O = NORMINV(0.667,0.15(5000+O),0.075(5000+O))

Using Excel Solver, O* = 1,115

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Revenue Managementfor Seasonal DemandRevenue Managementfor Seasonal Demand

► Seasonal peaks of demand are common in many supply chains

► Examples: Most retailers achieve a large portion of total annual demand in December (Amazon.com); Hotel and entertainment industry

► 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

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Revenue Management forBulk and Spot CustomersRevenue Management forBulk and Spot Customers

► Most consumers of production, warehousing, and transportation assets in a supply chain face the problem of constructing a portfolio of long-term bulk contracts and short-term spot market contracts

► The basic decision is the size of the bulk contract

► The fundamental trade-off is between wasting a portion of the low-cost bulk contract and paying more for the asset on the spot market

► Given that both the spot market price and the purchaser’s need for the asset are uncertain, a decision tree approach should be used to evaluate the amount of long-term bulk contract to sign

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Revenue Management forBulk and Spot CustomersRevenue Management forBulk and Spot Customers

◈ For the simple case where the spot market price is known but demand is uncertain, a formula can be used

◈ cB = bulk rate

◈ cS = spot market price

◈ Q* = optimal amount of the asset to be purchased in bulk

◈ p* = probability that the demand for the asset does not exceed Q*

◈ Marginal cost of purchasing another unit in bulk is cB.

The expected marginal cost of not purchasing another

unit in bulk and then purchasing it in the spot market is

(1-p*)cS.

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Revenue Management forBulk and Spot CustomersRevenue Management forBulk and Spot Customers

◈ If the optimal amount of the asset is purchased in bulk,

the marginal cost of the bulk purchase should equal the

expected marginal cost of the spot market purchase, or

cB = (1-p*)cS

Solving for p* yields p* = (cS – cB) / cS

◈ If demand is normal with mean and std deviation ,

the optimal amount Q* to be purchased in bulk is

Q* = F-1(p*, , ) = NORMINV(p*, , )

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Example 15.3Example 15.3

◙ Bulk contract cost = cB = $10,000 per million units

◙ Spot market cost = cS = $12,500 per million units

◙ = 10 million units

◙ = 4 million units

◙ p* = (cS – cB) / cS = (12,500 – 10,000) / 12,500 = 0.2

◙ Q* = NORMINV(p*, , ) = NORMINV(0.2,10,4) = 6.63

◙ The manufacturer should sign a long-term bulk contract for 6.63 million units per month and purchase any transportation capacity beyond that on the spot market

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Using Revenue Managementin Practice

Using Revenue Managementin Practice

► Evaluate your market carefully

► Quantify the benefits of revenue management

► Implement a forecasting process

► Apply optimization to obtain the revenue management decision

► Involve both sales and operations

► Understand and inform the customer

► Integrate supply planning with revenue management

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版權聲明頁碼 作品 授權條件 作者 /來源

3 VECTORLOGO(http://www.brandsoftheworld.com/logo/peoplexpress-airlines)本作品轉載自 VECTORLOGO網站 ，依據其版權聲明 (http://www.allfreelogo.com/privacy-policy/)與著作權法第 46、 52、 65 條合理使用。

3VECTORLOGO(http://www.brandsoftheworld.com/logo/aacom-american-airlines) 本作品轉載自 VECTORLOGO網站，依據其版權聲明 ( http://www.webmediabrands.com/corporate/legal.html?nav=ftc ) 與著作權法第 46、 52、 65 條合理使用。

4Imageshack.us(http://imageshack.us/photo/my-images/715/0102012329300.jpg/)本作品轉載自 Imageshack.us 。依據其版權聲明 (http://imageshack.us/p/aboutus/)與著作權法第 46、52、 65 條合理使用。

4本作品轉載自 China airlines 網站(http://www.china-airlines.com/ch/newsch/newsch000155.htm) 。依據著作權法第 46、 52、 65 條合理使用。

4本作品轉載自 Microsoft Office 2007 多媒體藝廊，依據 Microsoft 服務合約及著作權法第 46、 52、65 條合理使用。

4Amazon.com 。本作品轉載自亞馬遜網站 (http://www.amazon.com)，瀏覽日期2011/12/22。依據著作權法第 46、52、 65 條合理使用。 ( 因網站商品隨時更新，故此頁面無永久性網址。 )

4Amazon.com 。本作品轉載自亞馬遜網站 (http://www.amazon.com)，瀏覽日期2011/12/22。依據著作權法第 46、52、 65 條合理使用。 ( 因網站商品隨時更新，故此頁面無永久性網址。 )

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版權聲明頁碼 作品 授權條件 作者 /來源

4Amazon.com 。本作品轉載自亞馬遜網站 (http://www.amazon.com)，瀏覽日期2011/12/22。依據著作權法第 46、 52、 65 條合理使用。 ( 因網站商品隨時更新，故此頁面無永久性網址。 )

4GSM Arena.com(http://www.gsmarena.com/nokia_7370-pictures-1331.php)本作品轉載自 GSM Arena.com網站。依據其版權聲明 (http://www.gsmarena.com/terms.php3)與著作權法第 46、 52、 65 條合理使用。

4GSM Arena.com(http://www.gsmarena.com/nokia_7380-pictures-1332.php)本作品轉載自 GSM Arena.com網站。依據其版權聲明 (http://www.gsmarena.com/terms.php3) 與著作權法第 46、 52、 65 條合理使用。

4本作品轉載自 Microsoft Office 2007 多媒體藝廊，依據 Microsoft 服務合約及著作權法第 46、 52、 65 條合理使用。

4本作品轉載自 Microsoft Office 2007 多媒體藝廊，依據 Microsoft 服務合約及著作權法第 46、 52、 65 條合理使用。

4本作品轉載自 Microsoft Office 2007 多媒體藝廊，依據 Microsoft 服務合約及著作權法第 46、 52、 65 條合理使用。

8Flickr.com ，作者： M93。 (http://www.flickr.com/photos/55391407@N03/5210799355/sizes/n/in/photostream/) ，本作品採取創用CC「姓名標示」2.0版授權釋出 。

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版權聲明

頁碼 作品 授權條件 作者 /來源

8Wikimedia Commons本作品轉載自 http://zh.wikipedia.org/wiki/File:Best_Buy_Logo.svg, 瀏覽日期 2011/12/6 。

8

VECTORLOGO(http://www.brandsoftheworld.com/logo/synnex-corporation)本作品轉載自 VECTORLOGO網站 ，依據其版權聲明 (http://www.allfreelogo.com/privacy-policy/) 與著作權法第 46、 52、 65 條合理使用。

8 本作品轉載自 Microsoft Office 2007 多媒體藝廊，依據 Microsoft 服務合約及著作權法第 46、 52、 65 條合理使用。

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