Revenue Management Flashcards
1
Q
What is the traditional perspective of supply chain management?
A
- Capacity adjustment
- Inventory adjustment
- Marketing activities
- Traditional approach of production and logistics management
- Goal mainly minimizing costs
2
Q
What is revenue management as supply chain management?
A
- Dynamic pricing
- Differential pricing
- Overbooking
- Capacity allocation
- Design and management of the interface to the market (demand management)
- Goal: increasing revenue
3
Q
Define revenue management
A
- Revenue management encompasses a range of quantitative methods to support decision-making on accepting or rejecting uncertain, dynamic demand of varying value. The objective is to use the inflexible and perishable capacity as efficiently as possible
4
Q
What is price-based revenue management?
A
- Pricing as primary decision variable
→ Dynamic pricing
5
Q
What is quantitiy-based revenue management?
A
- Allocation of inventory and capacity as primary decision variable
→ Revenue Management (strict sense)
6
Q
What are instruments for revenue management?
A
- Overbooking
- Differential Pricing
- Capacity Allocation
7
Q
What is overbooking?
A
- Compromise perished capacity and capacity shortages
- Goal: Full utilization of capacity despite uncertain demand
8
Q
What is differential pricing?
A
- Adjusting prices to exploit customers’ willingness to pay
- Goal: Exploit market potentials by forming customer segments with
different willingness to pay
9
Q
What is capacity allocation?
A
- Allocating capacities to different customer segments
- Goal: Maximizing profit by accepting or rejecting low-price requests in anticipation of buyers with higher willingness to pay that might arrive at a later point in time
10
Q
Define multiple customer segments?
A
- Companies with fixed capacities serving multiple demand segments can increase their profitability by tactical pricing
- Important: Determining customer (demand) groups and fencing demand!
- Sufficient capacities should be reserved for high-priced demand (such that the expected marginal revenue corresponds to the marginal revenue of low-priced demand)
11
Q
What are the steps of forming multiple customer segments?
A
- Temporal differentiation (time of purchase, time of use)
- Channel/regional differentiation
- Flexibility
- Group affiliation
- Product and service variations
12
Q
What is differential pricing with deterministic demand?
A
- Customers with a different willingness to pay, separated into several customer segments
- Assumption: Demand is price dependent & price-demand function is known
- Objective: What price to charge for each customer segment to maximize total revenue?
13
Q
What is capacity allocation under uncertainty?
A
- Customers have different willingness to pay and differ in behavior competing for capacity
- Idea: ex-ante allocation (reservation) of capacity (quota) for uncertain, high-priced demand
- Trade-off: If too much capacity is allocated for high-priced segments, capacity “expires”
← → If too little capacity is reserved, profitable requests need to be declined (spill) - Objective: Determine capacity quota, such that revenue / profit is maximized
14
Q
What are the characteristics of Littlewood’s two-class model (1972): Calculating expected revenue (EMR)
A
- Fixed capacity
- Two classes of products (demand segments – high-price p1 / low-price p2 ) with 𝑝1 > 𝑝2
- Uncertain demand
- Demand for segment 1 (high-price segment) is realized after demand for segment 2
- How much capacity should be reserved for segment 1?
- Optimal protection limit is reached when the expected marginal profit of segment 1 is equal to the marginal profit of segment 2 (Littlewood’s Rule)
15
Q
What are perishable goods?
A
- If demand sensitivity changes over time, dynamic pricing can be an effective instrument to increase profitability (e.g., articles of clothing)
- Overbooking or overselling of a supply chain asset is valuable if order cancellations occur and the asset is perishable
- Level of overbooking 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
16
Q
What is dynamic pricing ((deterministic case)?
A
- Perishable good, i.e., the value decreases over time (e.g., fruits, fashion articles, electronics)
- Assumptions: Demand is price-dependent & price-demand function is known
- Idea: Exploit varying elasticities in demand over time to maximize revenue / profits
17
Q
What is overbooking under uncertainty?
A
- Customers often cancel their bookings, book at short notice only, or do not use a ticket
- Results into spoilage of the limited capacity and utilization decreases
- Capacity released by “no-shows” is not known with certainty until shortly before the service is performed and can therefore no longer be sold
- Idea: Overbooking the available capacity
- Target: Minimizing total costs
18
Q
What is capacity allocation with multiple resources?
A
- So far: Consider a single resource
- Extension: Consider n resources
19
Q
What are bid-price controls?
A
- Idea: Calculating opportunity costs (as an acceptance threshold) by multiplying the capacity utilization and dual prices (bid-prices) from the production planning program
- Accept a request only if: Sufficient available capacities, Revenue of request greater or equal to opportunity costs
- Bid prices vary for each resource, at each point in time, and for each capacity level
20
Q
What are important aspects of revenue management implementation?
A
- Evaluate your market carefully
- Quantify the benefits of revenue management
- Implement a forecasting process
- Use mathematical optimization methods for revenue management decisions
- Involve both sales and operations
- Understand and inform the customer
- Integrate supply planning with revenue management
21
Q
How is the intercompany / supply chain perspective defined?
A
- Managing demand leads to more stable resource requirements for suppliers
- Reduced effort of coordination because of lower demand variability
- Mitigation of bullwhip effect
- Increased utilization of supply chain assets
22
Q
How is the company perspective defined?
A
- Decision support for dealing with the heterogenous requirements of different supply chains in B2B
- Increasing profitability
- Increasing delivery quality (individualized offer with respect to customer / product / time)
