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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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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
R evenue Management
Price
No. seats
2000
1000
P=2000-2Q
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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
R evenue ManagementPrice
No. seats
P 0=1200
C=400
Revenue =480,000
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R evenue ManagementPrice
No. seats
P 0=1200
C=400
Mo ney o n the Table =160,000
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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
R evenue ManagementPrice
No. seats
P 2=1600
Q2=200
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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
R evenue ManagementPrice
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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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
R evenue ManagementPrice
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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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
R evenue Management:
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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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
R evenue Management:
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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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
R evenue Management:
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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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
O ptimality Condition
Margina Revenue Business
0
50
100
150
200
250
300
0 5 10 15 20 25 30 35
M arginal Revenue L eisure
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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
O ptimality Condition
Margina Revenue Business
0
50
100
150
200
250
300
0 5 10 15 20 25 30 35
M arginal Revenue L eisure
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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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
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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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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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R etailer Ex pected Profit
($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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R etailer Ex pected Profit
($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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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi
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.