Pricing and Supply Chain Management in Electronic Commerce
-
Upload
thesupplychainniche -
Category
Documents
-
view
346 -
download
3
Transcript of Pricing and Supply Chain Management in Electronic Commerce
Pricing and Supply Chain Management in Electronic
Commerce
Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
University of Rochester
Rochester NY
14627
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
2
Trends in Supply Chains & Electronic Commerce
• ECR, CRP
• New Distribution Channels
• Outsourcing of Supply Activities
Pricing Issues Are Important In All of These
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
3
Economic Factors Driving Supply Chain DevelopmentsComplementarities Between
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
4
Economic Trends Driving These Developments
• Lower IS Costs – IS Costs Drive
• Search and information costs• Monitoring and control costs
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
5
Economic Trends Continued
• More Efficient Operations Technologies– BPR– JIT
• Innovative Contracts– Redefining Services– Longer Term Relationships– Joint Investments and Risk Sharing
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
6
How Pricing/Contracting Interacts With Supply Chains In
Electronic Commerce
• Why Have New Contracting Forms Arisen In Supply Chains?
• What Are Pricing Opportunities With ELP?
• How Do New Distribution Channels Affect Technology Adoption and Pricing Policies?
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
7
We Present Three Case Studies
• ECR For Custom Manufacturer– New Contract Relationship
• P&G ELP Pricing Policy – Use of Uniform Delivered Pricing
• Distribution Channels For Banking Services– Electronic Channels & Branches– Pricing These Services
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
8
Case Study I: Central Printers
• Largest Printer of Canned Labels In US
• Has Adopted A Number of Innovative Supply Chain Strategies
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
9
Central Printers, Continued
• Before:
• Printer --- Super Market Chain --- Packer
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
10
Central Printers, Continued, • After:
• Printer --- Super Market Chain --- Packer
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
11
Key Changes That Central Printer Made
• Eliminated One-Echelon
• Changed Contract Agreement– Printer Managed (and Owned) Inventory For
Client– Service Terms plus Price Negotiated– Obsolescence Costs Imposed on Client
• Improved Operational Capability
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
12
Improvement Required New Contract Arrangement
• Key Change Was Central Printer Guaranteeing Service Level
• Central Printer Needs To Make Both The Capacity and The Inventory Decision
• An Agency Conflict Occurs If Central Printers Makes Inventory Decision For Client
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
13
Generalization• An “Agency” Problem Exists When One
Party Makes Production Decisions and Another Makes Inventory Level Decision
• Typical Decisions Made In Chain– Supplier: Wholesale Price
Factory Inventory– Customer Retail Price
Local Inventory
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
14
Examples of Literature
– Kandel 1990 – Lariviere and Porteus 1995 – Zipkin and Cashon 1997– Anupindi and Bassock 1998
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
15
Key Problem: “Double Marginalization”
• To Maximize Chain Profit, Agent’s Profit Incentives Must Be Aligned;
• Decentralized Decisions Are Suboptimal
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
16
Problems Creating Alignment
• Differences in Profit Margins
• Differences In Inventory Holding Costs and Stockout Costs
• Differences In Information About The Demand Distribution
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
17
Typically
• Decentralized Inventory Decisions– Reduce Chain Profit Due to
• High Prices• Low Service Levels• Low Inventory
• Independent of the Agency Problem– Inventory Stocking Locations Not Optimized
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
18
Solutions• Service Levels Are Set With Penalties For
Stockouts
• Return Policy For Output
• Producer Makes Production and Inventory Decisions– Vendor Managed Inventory– Consignment System
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
19
Case Study II: P&G’s ELP Pricing Policy
• Identical Delivered Prices To All Customers– Formerly, Customers Paid Freight
• Fixed Prices With Allowances For Yearly Volume– Eliminated Forward Buying– Reduced Variability in Factory Loading– Reduced Billing Errors
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
20
Case Study, Continued
• We Study The Effect of ELP On Pricing Strategy and Profits
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
21
Example: Sunny Delight
*
*
* *
x
Analysis: Let A Firm Have Three Plants
• It Sets A Mill Price From One of ThemProfile of Prices and Costs
mill site
factory 2 factory 1 factory 3
delivered mill price
mill price
t1t’
We Assume Demand Drops With Price
mill site
factory 2 factory 1 factory 3
delivered mill price
demand
mill price
Pattern of Costs, Demand Under Mill Pricing
mill site
factory 2 factory 1 factory 3
delivered mill price
demand
mill price
t1t’
Pattern of Margins, Demand Under Mill Pricing
mill site
factory 2 factory 1 factory 3
delivered mill price
demand
mill price
t1t’
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
26
Now, Let Us Evaluate ELP-
• Every Customer Pays The Same Delivered Price
Pattern of Margins, Demand Under Uniform Pricing
mill site
factory 2 factory 1 factory 3
delivered mill price
demand
mill price
t1t’
Uniform Price
Uniform Demand
Pattern of Costs, Demand Under Uniform Pricing
mill site
factory 2 factory 1 factory 3
delivered mill price
demand
mill price
t1t’
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
29
Profits Increase With Uniform Pricing
• Further Opportunities Due To– Optimization of Plant/Warehouse Locations– Avoidance of Product Diversion to Other
Channels/Customers
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
30
Case Study III: Home Banking Services
• Banks Have The Opportunity Of A New Distribution Channel
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
31
Opportunity of New Distribution Channels
• Reduces Bank Long Term Cost
• Increases Service Level To Some Segments and Allows New Products That This Segment Favors
• Threat Potential Entry By E-Banks Sidestepping Traditional Retail Banking
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
32
Creation of Pricing and Segmentation Strategies For
Home Banking Is A Key Issue
• This Is Also A Key Issue For Many Firms Selling Products Into Supply Chains
• Especially Supply Chains That The Firm Does Not Have Control Over
Table: Segmentation of Bank CustomersHigh-Profit Caut ious Professional Homet own
Balances High High Med/ Low Med/ LowBranch-basedt ransactions
Low/M ed high Low High
Usage ofelect ronicsystems (ATM,direct deposit ,etc ...)
Med/H igh Low High Low
Usage of fee-generatingservices
High Low Med/H igh Low
Profitability High Marginal High/M edium Unprof it able
Segmentation Is A Key Issue
• Example of Segmentation Model:
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
34
A Model of Bank Distribution System Design
• Two Segments – E (Disposed To Electronic Distribution)– B (More Comfortable With Branch Based)
• Two Distribution Channels:
–e- Electronic Distribution
–b-Branch or ATM Distribution
Each Segment Values Distribution Channel Differently
• Utility of e by B = - Price(e)
• Utility of b by E = - Price(b)- travel cost*distance
• Utility of b by B = - Price(b) - travel cost*distance
• Utility of e by E = - Price(e)
RBeUB
e
UEb RE
b
UBb RB
b
UEe RE
e
Individual Rationality
• Customers Are Offered Services By Non-Bank Providers
• Net Utility To Customer Must Exceed This Utility:
Max(UEb ,UE
e ) ≥ UE
Max(UBb ,UB
e ) ≥ UB
Incentive Compatibility
• If Branch and Electronic Services Are Offered, – Then Pricing Decisions Must Induce The
Segments To Purchase The Appropriate Product:
UEe ≥ UE
b
UBb ≥ UB
e
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
38
Profit Maximization and Market Entry
• Banks Decide on Branch Locations
• Banks Decide Whether to Offer Branch and Electronic Services, and Their Prices
• Bank’s Objective Is To Maximize Profit
• There Will Be Entry and Expansion Into The Market So Long As Profit Opportunity Exists
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
39
We Seek To Find The Equilibrium Number and Type of
Banks Assuming:
• Profit Maximizing Behavior
• Incentive Compatibility and Individual Rationality of Customers
• Free Entry
Results
• Industry Channel Choice– Considering Cost/Transaction
Electronic
Mixed
0.5 0.75 10.25
0.25
0.5
0.75
1
1.25
1.5
1,75
2
2.25
2.5
ce
cb
2.75
3
Thisregion notallowed inmodel
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
41
Mixed Delivery System Blocks Entry
• A Prediction of the Model Is That E-Banks Will Not Succeed
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
42
Avenues For Further Research
• Explore the Impact of Partition of Decisions on Inventory/Capacity /Stocking Locations on Chain Performance
• Empirical Research on Use of Uniform Pricing
• Further Exploration of Channel Pricing Models Considering IR/IC