pricing and supply chain management in electronic commerce
TRANSCRIPT
![Page 1: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/1.jpg)
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
![Page 2: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/2.jpg)
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
![Page 3: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/3.jpg)
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
3
Economic Factors Driving Supply Chain DevelopmentsComplementarities Between
![Page 4: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/4.jpg)
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
![Page 5: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/5.jpg)
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
![Page 6: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/6.jpg)
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?
![Page 7: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/7.jpg)
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
![Page 8: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/8.jpg)
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
![Page 9: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/9.jpg)
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
9
Central Printers, Continued
• Before:
• Printer --- Super Market Chain --- Packer
![Page 10: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/10.jpg)
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
10
Central Printers, Continued, • After:
• Printer --- Super Market Chain --- Packer
![Page 11: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/11.jpg)
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
![Page 12: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/12.jpg)
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
![Page 13: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/13.jpg)
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
![Page 14: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/14.jpg)
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
![Page 15: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/15.jpg)
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
![Page 16: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/16.jpg)
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
![Page 17: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/17.jpg)
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
![Page 18: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/18.jpg)
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
![Page 19: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/19.jpg)
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
![Page 20: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/20.jpg)
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
![Page 21: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/21.jpg)
05/24/10 ©Professor Phillip J. LedererWilliam E. Simon Graduate School of Business Administration
21
Example: Sunny Delight
*
*
* *
x
![Page 22: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/22.jpg)
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’
![Page 23: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/23.jpg)
We Assume Demand Drops With Price
mill site
factory 2 factory 1 factory 3
delivered mill price
demand
mill price
![Page 24: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/24.jpg)
Pattern of Costs, Demand Under Mill Pricing
mill site
factory 2 factory 1 factory 3
delivered mill price
demand
mill price
t1t’
![Page 25: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/25.jpg)
Pattern of Margins, Demand Under Mill Pricing
mill site
factory 2 factory 1 factory 3
delivered mill price
demand
mill price
t1t’
![Page 26: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/26.jpg)
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
![Page 27: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/27.jpg)
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
![Page 28: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/28.jpg)
Pattern of Costs, Demand Under Uniform Pricing
mill site
factory 2 factory 1 factory 3
delivered mill price
demand
mill price
t1t’
![Page 29: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/29.jpg)
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
![Page 30: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/30.jpg)
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
![Page 31: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/31.jpg)
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
![Page 32: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/32.jpg)
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
![Page 33: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/33.jpg)
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:
![Page 34: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/34.jpg)
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
![Page 35: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/35.jpg)
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
![Page 36: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/36.jpg)
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
![Page 37: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/37.jpg)
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
![Page 38: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/38.jpg)
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
![Page 39: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/39.jpg)
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
![Page 40: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/40.jpg)
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
![Page 41: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/41.jpg)
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
![Page 42: Pricing and Supply Chain Management in Electronic Commerce](https://reader034.vdocument.in/reader034/viewer/2022042817/559c47451a28ab9a218b47a8/html5/thumbnails/42.jpg)
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