Revenue Management

Question 1

What is the traditional perspective of supply chain management?

Answer 1

• Capacity adjustment
• Inventory adjustment
• Marketing activities
• Traditional approach of production and logistics management
• Goal mainly minimizing costs

Question 2

What is revenue management as supply chain management?

Answer 2

• Dynamic pricing
• Differential pricing
• Overbooking
• Capacity allocation
• Design and management of the interface to the market (demand management)
• Goal: increasing revenue

Question 3

Define revenue management

Answer 3

• 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

Question 4

What is price-based revenue management?

Answer 4

• Pricing as primary decision variable
  → Dynamic pricing

Question 5

What is quantitiy-based revenue management?

Answer 5

• Allocation of inventory and capacity as primary decision variable
  → Revenue Management (strict sense)

Question 6

What are instruments for revenue management?

Answer 6

• Overbooking
• Differential Pricing
• Capacity Allocation

Question 7

What is overbooking?

Answer 7

• Compromise perished capacity and capacity shortages
• Goal: Full utilization of capacity despite uncertain demand

Question 8

What is differential pricing?

Answer 8

• Adjusting prices to exploit customers’ willingness to pay
• Goal: Exploit market potentials by forming customer segments with
  different willingness to pay

Question 9

What is capacity allocation?

Answer 9

• 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

Question 10

Define multiple customer segments?

Answer 10

• 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)

Question 11

What are the steps of forming multiple customer segments?

Answer 11

1. Temporal differentiation (time of purchase, time of use)
2. Channel/regional differentiation
3. Flexibility
4. Group affiliation
5. Product and service variations

Question 12

What is differential pricing with deterministic demand?

Answer 12

• 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?

Question 13

What is capacity allocation under uncertainty?

Answer 13

• 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

Question 14

What are the characteristics of Littlewood’s two-class model (1972): Calculating expected revenue (EMR)

Answer 14

• 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)

Question 15

What are perishable goods?

Answer 15

• 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

Question 16

What is dynamic pricing ((deterministic case)?

Answer 16

• 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

Question 17

What is overbooking under uncertainty?

Answer 17

• 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

Question 18

What is capacity allocation with multiple resources?

Answer 18

• So far: Consider a single resource
• Extension: Consider n resources

Question 19

What are bid-price controls?

Answer 19

• 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

Question 20

What are important aspects of revenue management implementation?

Answer 20

• 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

Question 21

How is the intercompany / supply chain perspective defined?

Answer 21

• 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

Question 22

How is the company perspective defined?

Answer 22

• 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)