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Supply Chain Management

Chapter 15 Pricing and Revenue Management in the Supply Chain

2007 Pearson Education

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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 Airline pricing

2007 Pearson Education

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Conditions Under Which Revenue Management Has the Greatest Effect


The value of the product varies in multiple customer segments
Example: airline seats

The product is perishable or product waste occurs


Example: fashion and seasonal apparel

Demand has seasonal peaks


Example: products ordered on Flipkart, Myntra

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

2007 Pearson Education

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Revenue Management for Multiple 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
Example: Airline seats and Hotel tariffs

Prices must be set with barriers such that the segment willing to pay more is not able to pay the lower price
Example: Business travelers v/s Holiday travelers

2007 Pearson Education

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Revenue Management for Perishable products


Any product that loses value over time is perishable
(Examples: pharmaceuticals, fruits and vegetables, seasonal apparel)

Approaches for maximizing revenues:


Vary price over time to maximize expected revenue (Example Discounted prices for apparel/footwear) Overbook sales of the asset to account for cancellations (Example airline seats). But a trade-off needs to be made if there is shortage of capacity due to very few cancellations and an expensive back-up needs to be arranged.

2007 Pearson Education

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Revenue Management for Seasonal Demand products


Seasonal peaks of demand are common in many supply chains
(Example: Retailers receive a large portion of demand during festive season September to December)

Discounting can shift demand from peak to off-peak times. Charge higher price during peak time and lower price during off-peak time in order to maximize revenues
(Example: Discounts given by retailers in Jan/Feb and July/Aug)

2007 Pearson Education

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Revenue Management for Bulk and Spot Customers


Problem of deciding on long-term bulk contracts or short-term spot (smaller lot) market contracts The basic decision is the size of the bulk contract based on which discounts are obtained 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

2007 Pearson Education

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