Pricing and Supply Chain Management in Electronic Commerce Professor Phillip J. Lederer William E. Simon Graduate School o...
Trends in Supply Chains & Electronic Commerce <ul><li>ECR, CRP </li></ul><ul><li>New Distribution Channels </li></ul><ul>...
Economic Factors Driving Supply Chain Developments Complementarities Between Reduced IS Costs Operations Efficiency New Co...
Economic Trends Driving These Developments <ul><li>Lower IS Costs </li></ul><ul><ul><li>IS Costs Drive </li></ul></ul><ul...
Economic Trends Continued <ul><li>More Efficient Operations Technologies </li></ul><ul><ul><li>BPR </li></ul></ul><ul><ul>...
How Pricing/Contracting Interacts With Supply Chains In Electronic Commerce <ul><li>Why Have New Contracting Forms Arisen...
We Present Three Case Studies <ul><li>ECR For Custom Manufacturer </li></ul><ul><ul><li>New Contract Relationship </li></u...
Case Study I: Central Printers <ul><li>Largest Printer of Canned Labels In US </li></ul><ul><li>Has Adopted A Number of I...
Central Printers, Continued <ul><li>Before: </li></ul><ul><li>Printer --- Super Market Chain --- Packer </li></ul>
Central Printers, Continued, <ul><li>After: </li></ul><ul><li>Printer --- Super Market Chain --- Packer </li></ul>
Key Changes That Central Printer Made <ul><li>Eliminated One-Echelon </li></ul><ul><li>Changed Contract Agreement </li></u...
Improvement Required New Contract Arrangement <ul><li>Key Change Was Central Printer Guaranteeing Service Level </li></ul>...
Generalization <ul><li>An “Agency” Problem Exists When One Party Makes Production Decisions and Another Makes Inventory Le...
Examples of Literature <ul><ul><li>Kandel 1990 </li></ul></ul><ul><ul><li>Lariviere and Porteus 1995 </li></ul></ul><ul>...
Key Problem: “Double Marginalization” <ul><li>To Maximize Chain Profit, Agent’s Profit Incentives Must Be Aligned; </li><...
Problems Creating Alignment <ul><li>Differences in Profit Margins </li></ul><ul><li>Differences In Inventory Holding Costs...
Typically <ul><li>Decentralized Inventory Decisions </li></ul><ul><ul><li>Reduce Chain Profit Due to </li></ul></ul><ul><u...
Solutions <ul><li>Service Levels Are Set With Penalties For Stockouts </li></ul><ul><li>Return Policy For Output </li></ul...
Case Study II: P&G’s ELP Pricing Policy <ul><li>Identical Delivered Prices To All Customers </li></ul><ul><ul><li>Formerl...
Case Study, Continued <ul><li>We Study The Effect of ELP On Pricing Strategy and Profits </li></ul>
Example: Sunny Delight
Analysis: Let A Firm Have Three Plants <ul><li>It Sets A Mill Price From One of Them </li></ul><ul><li>Profile of Prices ...
We Assume Demand Drops With Price
Pattern of Costs, Demand Under Mill Pricing
Pattern of Margins, Demand Under Mill Pricing
Now, Let Us Evaluate ELP- <ul><li>Every Customer Pays The Same Delivered Price </li></ul>
Pattern of Margins, Demand Under Uniform Pricing Uniform Price Uniform Demand
Pattern of Costs, Demand Under Uniform Pricing
Profits Increase With Uniform Pricing <ul><li>Further Opportunities Due To </li></ul><ul><ul><li>Optimization of Plant/War...
Case Study III: Home Banking Services <ul><li>Banks Have The Opportunity Of A New Distribution Channel </li></ul>
Opportunity of New Distribution Channels <ul><li>Reduces Bank Long Term Cost </li></ul><ul><li>Increases Service Level To ...
Creation of Pricing and Segmentation Strategies For Home Banking Is A Key Issue <ul><li>This Is Also A Key Issue For Many ...
Segmentation Is A Key Issue <ul><li>Example of Segmentation Model: </li></ul>
A Model of Bank Distribution System Design <ul><li>Two Segments </li></ul><ul><ul><li>E (Disposed To Electronic Distribut...
Each Segment Values Distribution Channel Differently <ul><li>Utility of e by B </li></ul><ul><ul><li>= - Price(e) </li>...
Individual Rationality <ul><li>Customers Are Offered Services By Non-Bank Providers </li></ul><ul><li>Net Utility To Custo...
Incentive Compatibility <ul><li>If Branch and Electronic Services Are Offered, </li></ul><ul><ul><li>Then Pricing Decisio...
Profit Maximization and Market Entry <ul><li>Banks Decide on Branch Locations </li></ul><ul><li>Banks Decide Whether to O...
We Seek To Find The Equilibrium Number and Type of Banks Assuming: <ul><li>Profit Maximizing Behavior </li></ul><ul><li>In...
Results <ul><li>Industry Channel Choice </li></ul><ul><ul><li>Considering Cost/Transaction </li></ul></ul>
Mixed Delivery System Blocks Entry <ul><li>A Prediction of the Model Is That E-Banks Will Not Succeed </li></ul>
Avenues For Further Research <ul><li>Explore the Impact of Partition of Decisions on Inventory/Capacity /Stocking Location...
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Pricing and Supply Chain Management in Electronic Commerce

Published on: Mar 4, 2016
Source: www.slideshare.net


Transcripts - Pricing and Supply Chain Management in Electronic Commerce

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

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