Supply chain management

Asian Institute of Technology AIT SUPPLY CHAIN MANAGEMENT Lecturer: HUYNH T LUONG, D.Eng    Industrial & Manufacturing Engineering FoS Industrial Systems Engineering Program School of Engineering & Technology 1-1 Chapter Introduction to Supply Chain Management 1-2 What Is a Supply Chain? Flow of products and services from:      • • Raw materials manufacturers Intermediate products manufacturers End product manufacturers Wholesalers and distributors and Retailers Connected by transportation and storage activities Integrated through information, planning, and integration activities Aim at: Reduce cost & improve service levels 1-3 What Is Supply Chain Management?  Supply chain management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize system wide costs while satisfying service level requirements 1-4 Two Other Formal Definitions The design and management of seamless, valueadded process across organizational boundaries to meet the real needs of the end customer Institute for Supply Management Managing supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customer The Supply Chain Council 1-5 SCM Definition SCM Definition Material Flow Supplier Converter Distributor Retailer Source Converter Supplier Distributor Consumers End-User Value-Added Services Funds/Demand Flow Information Flow Reuse/Maintenance/After Sales Service Flow 1-6 The SCM Network The logistics network 1-7 Key Observations  Every facility that impacts costs need to be considered    Efficiency and cost-effectiveness throughout the system is required   Suppliers’ suppliers Customers’ customers System level approach Multiple levels of activities  Strategic – Tactical – Operational 1-8 Other Related Observations Supply chain strategy linked to the “Development Chain” associated with new product development  Challenging to minimize system costs and maximize system service levels  Inherent presence of uncertainty and risk: demand forecasts, travel times, machine breakdowns,…  1-9 The Development Chain  Set of activities and processes associated with new product introduction Includes: product design phase  associated capabilities and knowledge  sourcing decisions  production plans  1-10 Complexities of the Real Systems     Variety of flight classes Different hierarchies of classes More complex demand information Network management    A flight can be part of many ultimate origin-destination pairs System needs to account for this by allocating seats to particular flights Prices change over time   Flight may be expensive on some days and times If a plane is not filling up, the airline might increase the allocation of lower price fares to that flight over time 10-29 Smart Pricing  American Airlines’ success prompted other industries to adopt similar practices regarding pricing  Specific techniques and tools of airline revenue management don’t necessarily apply to very different industries  Many of the underlying principles and concepts of revenue management 10-30 Fundamental Approaches to Smart Pricing  Differential Pricing   Charging different prices to different customers Dynamic pricing  Charging different prices over time 10-31 Differential Pricing  Charge different customers different prices according to their price sensitivity  Dell does this by distinguishing between private consumers, small or large businesses, government agencies, and health care providers  It is frequently difficult to in many cases 10-32 Differential Pricing Strategies  Group Pricing     Channel Pricing     Giving discounts to specific groups of customers is very common in many industries Senior citizen discounts at diners, software discounts to universities, student discounts at movie theaters, “ladies night” at bars Works only when there is a correlation between group members and price sensitivity Charging different prices for the same product sold through different channels Different prices on web sites vs retail stores Works only if customers who use different channels have different price sensitivities Regional Pricing   Exploiting different price sensitivities at different locations Beer is much more expensive in a typical stadium than in a bar 10-33 Differential Pricing Strategies  Time-based Differentiation  Similar products differentiated based on time  Amazon.com charges different rates for different delivery times    A technique for segmenting price sensitive customers and customers who are more delivery time sensitive Dell charges different prices for repair contracts that complete repairs in different amounts of time (overnight vs within a week) Product Versioning  Offer slightly different products in order to differentiate price sensitivities  May take the form of branding   Store brand vs Generic brand Additional features added to products at the higher end of the line    High end buyers are inclined to buy the higher-end products in the line Pay significantly more than the lower end products Cost very little more to manufacture 10-34 Differential Pricing Strategies  Coupons and Rebates    Distinguish between customers that place a high value on time or flexibility Those who are willing to spend the time to get a lower price by using a coupon or submitting a rebate form Mail-in rebates at the point of sale     Adds a significant hurdle to the buying process Customers willing to pay the higher price will not necessarily send the coupon Do not incorporate fences Require a more detailed analysis (see next slide!) 10-35 Analysis of Rebates  No rebate     Each retailer decides on the price and the amount to order from the manufacturer to maximize its profit Retailer needs to find a price and an order quantity so as to maximize its expected profit But , manufacturer would like the retailer to order as much as possible at the wholesale price Mail-in-rebates      Manufacturer influences customer demand Provides an upside incentive to the retailer to increase its order quantity Retailer’s profit increases Increase in demand forces the retailer to order more from the manufacturer Optimal order quantity:  Compensates for the rebate/ Implies an increase in the manufacturer’s expected profit 10-36 Why Not Discount the Wholesale Price?  Rebate strategy implies not every consumer will mail the coupon to the manufacturer  If the manufacturer merely reduces the wholesale price, the retailer may keep the discount and not transfer it to the customers 10-37 Why Not Discount the Wholesale Price? Even if the retailer uses the discounted wholesale price to optimize its pricing and ordering decisions, and even if every consumer mails back the rebate, the mail-in rebate strategy is a better strategy for the manufacturer – WHY? Suppose that retailer orders the same amount in both strategy   If order quantity < realized demand: the two strategies give manufacturer the same profit If order quantity > realized demand, rebate strategy is better for manufacturer because in wholesale price discount, the excess order quantity “has been discounted”! 10-38 Dynamic Pricing  Retailers change price at the end of the season to get rid of excess inventory  Manufacturers change price during the season to distinguish between low and high reservation price customers  Use pricing to affect demand 10-39 Dynamic Pricing Better than Fixed-Price Strategy  Dynamic Pricing may increase profit by 2-6%  Significant in industries with low margins  Retail industry  Computers industry 10-40 Conditions under which Dynamic Pricing Is Superior  Available capacity   Demand variability   Benefit of dynamic pricing increases as the degree of demand uncertainty increases Seasonality in demand pattern   Smaller the production capacity relative to average demand, the larger the benefit from dynamic pricing Benefit of dynamic pricing increases as the level of demand seasonality increases Length of the planning horizon  Longer the planning horizon, the smaller the benefit from dynamic pricing 10-41 Caveats  Must avoid the appearance of unfair treatment of customers    Amazon.com’s failed in the experiment with a pricing strategy in which customers were paying different amounts for the same DVD based on demographics or the browser used  Customers were distressed! Coke’s development of a soda machine that would measure the outside temperature, and increase prices as the temperature increased  Customer dissatisfaction! On-line sites Priceline and Hotwire.com provide:    An outlet for last-minute, unsold seats and hotel rooms through “opaque” fares “Protects” the published fares promoted by the airlines and hotels themselves because the deep discounts are offered without specifying who are selling In an unstable economy, when many published fares are about as good as the opaque fares, it is harder to attract customers to the Priceline and Hotwire sites 10-42 SUMMARY     Pricing and promotion can be used to influence the level of demand Traditionally, fashion retailers have used price markdowns to sell off excess inventory at the end of the season Mid-1980’s: airline executives began to use a set of more sophisticated approaches to manipulating demand Revenue management has two goals    Variety of techniques    Differentiate demand Use pricing to adjust aggregate demand Differential pricing Dynamic pricing Caveat that customer should not be unfairly treated 10-43 ... 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