Warehouse

Management

Week 9 – October 15-17, 2024

 What is a Warehouse

Warehouse - building or an open space facility

where the supply chain holds or stores goods.
➢ typically viewed as a place to store
inventory.
➢ However, in many logistical system designs,
the role of the warehouse is more properly
viewed as a switching facility to mix
inventory assortments to meet customer
requirements
Objectives of a Warehouse
 better customer service
 low operating cost

 maximum utilization of storage space

 higher labor productivity

 maximum asset utilization

 reduction in material handling

 increase in inventory turnover

 reduce order filing time

 Types of Warehouses
1. Private warehouse
– operated by a company for shipping, and
storing its own products. Owned and
managed by manufacturers or traders
2. Public warehouse
– provide storage and physical distribution
services on rental basis. These are used by
small and large firms.
 Types of Warehouse

3. Contract Warehouse
– Companies offer to build, own and operate
warehouse facilities for the benefit of clients
who do not want to undertake those
responsibilities themselves
4. Co-operative warehouse
– owned, managed, and controlled by
cooperative societies.
 Types of Warehouses

5. Bonded warehouse
– licensed to accept imported goods for storage
before payment of customs duty
6. Distribution centers
– designed to move goods, highly automated.
– Receive goods and efficiently deliver to
customers.
7. Cold storage
– temperature is controlled here for sensitive
products.
 Types of Warehouses

7. Export/ Import warehouse

– located near ports where international trade
is undertaken. These provide storage facilities
for goods awaiting onward movements.
8. Climate – controlled warehouse
– provide storage of many products which
need special handling conditions.
 Warehousing
 Warehousing refers to the activities
involving storage of goods on a large-
scale in a systematic and orderly manner
and making them available conveniently
when needed
 important goal
in warehousing
is to maximize
flexibility
 Warehousing Management
Warehouse management encompasses the principles
and processes involved in running the day-to-day
operations of a warehouse.
 this includes receiving and organizing warehouse
space, scheduling labor, managing inventory and
fulfilling orders.
 involves optimizing and integrating each of the
processes to ensure all aspects of a warehouse
operation work together to increase productivity
and keep costs low
Basic Warehousing Operation
 Basic Warehousing Operation
1. Receiving and Unloading
 Inbound shipments must be received and
unloaded from the transportation vehicles
 Part of this activity may also involve checking
the shipment for the correct quantities and for
potential damage to products
2. In-Storage Handling (Put Away)
 Once unloaded the goods must be moved to the
desired destination within the facility, whether
this is an actual storage location or a shipping
area in the case of a cross-dock facility
 Basic Warehousing Operation

3. Storage
 Products are held, even if for only a few
minutes in a storage area
4. Order-Picking
 The products are removed from storage and
assembled into appropriate quantities and
assortments to fill customer orders
 Basic Warehousing Operation
5. Staging (Packing)
 The assembled orders are moved to an
area in the warehouse in readiness for
loading into a transportation vehicle
bound for customer locations
6. Shipping
 Involves verifying that the assembled orders
are correct and the actual loading of the
transportation vehicles
Diagrams
 Primary Functions of
Warehousing
1. Trans-Shipment Point
– A facility where products are received, sorted,
sequenced and selected into loads consistent
with the customers’ needs
2. Stockpiling
– The storage of inventories in warehouses to
protect against seasonality either in supply or
demand
3. Production Support
– A warehouse dedicated to storing parts and
components needed to support a plant’s
operations
 Primary Functions
of Warehousing
4. Break-Bulk
– Splitting a large shipment into individual orders
and arranging for local delivery to customers
– occurs when a warehouse receives a single large
shipment and arranges for delivery to multiple
destinations
 Primary Functions
of Warehousing
5. Warehouse Consolidation
– Combining shipments from a number of sources
into one larger shipment going to a single
location
– occurs when a warehouse receives materials
from a number of sources and combines them
into exact quantities for a specific destination
 Primary Functions
of Warehousing
6. Cross-Docking
– Combines inventory from multiple origins into a
prespecified assortment for a specific customer
– used extensively by retailers to replenish store
inventories
 Primary Functions of
Warehousing
7. Reverse Logistics Support
– The logistics needed to send products or
packaging materials back to disassembly,
reclamation or disposal sites
– Returned products can be remanufactured or
updated for resale
 Primary Functions of
Warehousing

8. Value-Added Services
– Any work that creates greater value for customers
– Services may change the physical features or
configuration of products so they are presented
to customers in a unique or customized manner
 Warehousing decisions

 Site Selection
 Design
 Product-Mix Analysis
 Expansion
 Materials Handling
 Layout
 Sizing
 Warehouse management system
 Accuracy and audit
 Security
 Safety and maintenance
 Site Selection
 Site selection is driven by service availability
and cost factors
 Identify broad geography where an active
warehouse meets service, economic and
strategic requirements
 Selection and number of retail outlets drives
location of support warehouses
 Final selection should be preceded by
extensive analysis
 Warehouse Layout and Design
 Develop a demand forecast.
 Determine each item’s order
quantity.
 Convert units into cubic
footage requirements.
 Allow for growth.
 Allow for adequate aisle
space for materials handling
equipment.
 Principles for
Warehouse Design
 Use one story facilities where possible.
 Move goods in a straight-line.
 Use the most efficient materials handling
equipment.
 Minimize aisle space.
 Use full building
height.
 Warehouse Management System

 Warehouse management systems (WMS)-

a software solution that aims to simplify
the complexity of managing a warehouse
storage and handling work procedures
 Often provided as part of an integrated
enterprise resource planning (ERP) suite
of business applications, a WMS can
support and help to optimize every
aspect of warehouse management
 Warehouse Management System
Key Features of WMS:
 Leverage data and automation to conduct demand analyses,
forecast sales and create efficient daily operating plans.
 Provide real-time insight into inventory location and quantity.
 Share data with other ERP modules or standalone software
products, such as accounting software and transportation
management solutions, to increase the efficiency of business
operations.
 Monitor and report productivity to offer a deeper
understanding of how efficiently your warehouse is operating
and where you can make improvements to warehouse
geography and optimize space.
 Create step by step directions to guide users through daily
processes—such as receiving, picking and packing orders—
using predefined rules.
 MODERN TRENDS
➢ JUST IN TIME (JIT) system promotes product
delivery directly from suppliers to consumers
without the use of warehouse
➢ Retailing trends led to development of
WAREHOUSE- STYLE RETAIL STORES
➢ INTERNET BASED STORES do not require
physical retail space but still require
warehouse to store goods
 MODERN TRENDS

➢ Warehousing Companies are transforming

into third- party logistics providers or 3PLs .
➢ RADIO FREQUENCY IDENTIFICATION (RFID)
➢ TRANSPORTATION MANAGEMENT SYSTEMS
➢ PICK-TO-LIGHT TECHNOLOGY
➢ VOICE-ACTIVATED RECEIVING ANG
PACKAGING
Questions?
THANK YOU
Logistics Management
– Materials Handling
 What is Logistics
Logistics - the flow of goods, information and
other resources, including energy and
people, between the point of origin and
the point of consumption in order to meet
the requirements of consumers.
Logistics involve the integration of information,
transportation, inventory, warehousing,
material- handling and packaging.
 Logistics Management
➢ Logistics Management is the process of planning,
implementing and controlling the efficient, effective
flow and storage of goods, services and related
information from point of origin to point of
consumption for the purpose of conforming the
customer requirement”.
➢ Logistic management includes the design and
administration of systems to control the flow of
material, work- in – process, and finished inventory to
support business unit strategy.
Evolution of Logistics

"To coordinate all efforts of the company to

maintain a cost effective flow of goods."
 Phases of Logistics

1. Materials Management - the timely

movement of raw materials, parts,
and supplies.
2. Physical Distribution - the movement
of the firm's finished products to the
customers.
 Physical Distribution
➢ The area of physical distribution
concerns movement of a finished
product to customers.
➢ In physical distribution, the customer is
the final destination of a marketing
channel.
➢ Physical distribution links a marketing
channel with its customers
 Physical Distribution
➢ Allphysical distribution systems have
one common feature:
• they link manufacturers, wholesalers,
and retailers into marketing channels
that provide product availability as an
integral aspect of the overall
marketing process
 Materials Handling
➢ Material handling is an important activity in
the logistics system.
➢ According to American society of material
engineers:
▪ Material handling is an art & science
involving the moving, packing & storing of
substances in any form.
▪ It involves movement of material
mechanically & manually in batches or one
by one within the plant.
 Concept of Material Handling
➢ Material handling is focused on the
efficiency and speed of warehousing
operations, which ultimately result in
elongated or compressed order
completion cycles.
➢ Material handing is strategic in nature
and is always based on long term
requirements, considering product
volumes and varieties
 Functions of Material Handling

1. Loading & unloading

2. Material Movement
3. Order filing
 Objectives of Material Handling

➢ Inventory Reduction
➢ Reliable
and consistent delivery
performance
➢ Freight economy
➢ Minimum product damage
➢ Quick Response
 Importance of Material Handling

➢ Material handling system enhance the

speed and throughput of material
movement through the supply chain.
➢ The efficiency of material handling
equipment adds to the performance level
of the warehouse.
➢ Material handling system ensure
reliability and productivity for both
consumers and producers
 Tools of Materials Handling

1. Manual
2. Mechanized
3. Semiautomatic
4. Automatic
5. Information guided
 Manual System
➢ The cheapest and the most common method
of material movement used in warehousing.
➢ The limitations of this system are low
volumes, slow speed, physical characteristics
of the product, and distances.
➢ In warehouses where cartoons do not weigh
more than 20 kg and volume handled are not
large, material loading, unloading, and
movement are done manually.
 Mechanized System
➢ Mechanized equipment requires space for
free movement across the warehousing.
➢ Mechanization enhances system
productivity.
➢ Helps to improve space utilization,
reduction of time taken for material
movement, speeding up the overall material
flow, reduction in material damages during
material handling.
 Mechanized System
➢ The equipment most commonly used are:
• Wheeled trolley,
• Forklift,
• Pallet truck,
• Tractor-trailer device,
• Conveyors, cranes and carousels etc.
Mechanized System
 Overview of
Materials Handling Equipment
Material handling equipment includes:
▪ Transport Equipment: industrial trucks,
Automated Guided vehicles (AGVs),
monorails, conveyors, cranes and hoists.
▪ Storage Systems: bulk storage, rack systems,
shelving and bins, drawer storage, automated
storage systems.
▪ Unitizing Equipment: palletizers
▪ Identification and Tracking systems
 PACKAGING
➢ Packaging is the science, art and technology of enclosing or
protecting products for distribution, storage, sale or use.
➢ Packaging also refers to the process of design, evaluation
and production of packages.
➢ Packaging can be described as a coordinated system of
preparing goods of transport, warehousing, logistics, sale
and end use.
➢ Packaging contents, protects, preserves, transports, informs
and sells.
➢ Packaging is a marketing tool and is related to the
performance of marketing function.
 Concept of Packaging
➢ Packaging is the essential for the success
of any product which can make the
difference between an expensive failure
or a big win.
➢ The most important aspects of
Packaging is for the product to reach the
consumer in the same condition as it
left the manufacturer.
 Concept of Packaging

➢ Self-Service-Packaging helps the buyer

to buy the product individually without
the help of anyone.
➢ Consumer Affluence- A good consumer
who is ready to pay a good amount for a
product is easily attracted by the
packing style.
 Concept of Packaging
➢ Company/Brand Image- Packaging helps
build an image of the product as well as
the brand. It distinguishes the product
from other competitive products in the
market.
➢ Innovation Opportunity- Packaging also
gives the brand an opportunity to make
its products attractive to the buyers
with new and innovative packaging.
 Functions of Packaging
• Physical Protection
• Barrier Protection
• Containment or Agglomeration
• Information Transmission
• Marketing
• Security
• Convenience
Types of Logistical Packaging
 Types of Packaging

1. Primary packaging The

material that first envelops
the product and hold it. This
usually is the smallest unit of
distribution or use and is the
package which is in direct
contact with the contents.
 Types of Packaging

2. Secondary packaging
Secondary Packaging is
outside the primary
packaging – perhaps used
to group or unitize
primary packages
together.
 Types of Packaging

3. Tertiary packaging Tertiary Packaging is

used for bulk handling, warehouse storage
and transport shipping. The most common
form is a palletized unit load that packs
tightly into containers.
 Role of Packaging in
Physical Distribution
 Packing is the ‘indispensable’ for shopping as
we know it today – supermarkets could not
exist without it.
 Product wastage in supply chain is now
minimal.
 Product presentation and information are key .
 Many markets owe their existence to
developments in packaging, i.e.,
 Packaged fruit juices
 Packaged milk with longer shelf life
 Paradigm Shift in Logistics
➢ Trade is expanding at an exponential rate,
technologies are advancing and becoming
integrating force, customers are demanding
value for money; marketers are experiencing
competitive pressure; and businesses are
struggling, not just for growth but even for
survival.
➢ Business firms across the world have started
looking beyond organizational boundaries to
improve costs, quality, reliability,
responsiveness, and relationships with
customers to manage uncertainty.
 Paradigm Shift in Logistics
➢ Business firms are focusing on production,
marketing, and finance, greater attention
should be focused towards achieving
customer satisfaction through effective and
efficient logistics.
➢ Today, Business firms can not afford to
ignore the crucial role of logistics in the
supply chain of business. If ignored it will
probably be suicidal for the business firm,
not only in terms of its growth but even for
its very survival.
 Major Areas in Paradigm Shift

 Logistics management is based on the

system concept and cost approach.
 Efficiency and effectiveness in material
and information movement is possible
with integrated logistics operations only.
 Major Areas in Paradigm Shift
 Logistics cover the following functional areas,
and are termed as ‘Logistics Mix’
Questions?
THANK YOU
 Logistics and
Transportation
Management
 What is Logistics
Logistics - the flow of goods, information and
other resources, including energy and
people, between the point of origin and
the point of consumption in order to meet
the requirements of consumers.
Logistics involve the integration of information,
transportation, inventory, warehousing,
material- handling and packaging.
 Logistics Management
➢ Logistics Management is the process of planning,
implementing and controlling the efficient, effective
flow and storage of goods, services and related
information from point of origin to point of
consumption for the purpose of conforming the
customer requirement”.
➢ Logistic management includes the design and
administration of systems to control the flow of
material, work- in – process, and finished inventory to
support business unit strategy.
 Difference between
Logistics Mgmt and SCM
 Logistics Management

 The efficient management of the flow of materials

inbound-through and outbound of an organization.
 Two primary product flows:
 Physical supply (materials management): Flows
that provide raw materials, components, and
supplies to the production process.
 Physical distribution management (transportation
management): Flows that deliver the completed
product to customers and channel intermediaries
Evolution of Logistics

"To coordinate all efforts of the company to

maintain a cost effective flow of goods."
 Phases of Logistics

1. Materials Management - the timely

movement of raw materials, parts,
and supplies.
2. Physical Distribution - the movement
of the firm's finished products to the
customers.
Logistics Management
 Physical Distribution

 Physical Distribution or Transportation is

the movement of goods and people
between two points.
 Physical distribution cost can represent
20% or more of the selling price of a
production
 Physical Distribution
➢ Transportation influences or is influenced
by the following logistics activities:
▪ Transportation costs are affected by
location of the firm’s plants, warehouses,
vendors, retail locations, and customers.
▪ Inventory requirements are influenced by
the mode of transport used.
▪ Packaging requirements and materials
handling equipment and design of the
docks are dictated by the mode of
transportation used
 Definition of Terms
 Cargo

 Container

 Carrier

 Courier

 Freight

 Forwarder

 Shipment
 Transportation management
decisions
The overall goal in transportation is to connect
sourcing locations with customers at the lowest
possible transportation cost within the constraints of
the customer service policy.

Transport Management decisions involves:

▪ How much to move?
▪ When to move?
▪ Where to move?
▪ By what mode, or combination of modes to
move?
 Transportation management
decisions
The considerations in making these
decisions are:
▪ The lead time for stock replenishment
▪ Sales expected in the territory in the
intervening time
▪ The normal cycles of inventory build
up at the warehouse/dealer points
 Transportation management
decisions
 If a firm can estimate these factors fairly
accurately, it can make the basic decisions on
transportation.
 In a fundamental sense, transportation has to
be based on the sales forecast.
 Decisions on when to move, how much to
move and where to move will essentially
depend on the sales forecast
 Mode of Transportation

 A mode identifies the basic transportation method

or form.
 Bulk goods are typically transported in large
shipment sizes. Therefore, dedicated vehicles and
specialized modes of transport and handling are
important. Industrial goods have high value and are
often critical. Therefore, there is a need for speedier
transport of goods.
 Transportation Mode
Basic mode of transportation includes:
 Railroads

Rail Network have handled the largest number of

ton-miles continental.
As a result of the early establishment of a
comprehensive rail network connecting almost all
cities and towns, railroads dominated intercity
freight tonnage until after World War II.
The capability to transport large shipments
economically and to offer frequent service.
 Railroads

Railroad operations incur high fixed costs

because of expensive equipment, right of way
(railroads must maintain their own track),
switching yards, and terminals.
However, rail experiences relatively low
variable operating costs
 Motor Trucks

 Highway/Motor Carriers/Trucks
 Motor Carriers Highway transportation has
expanded rapidly since the end of World War II.
 Motor carriers have flexibility because they are
able to operate on all types of roadways.
Motor Trucks
 Motor Trucks

 In comparison to railroads, motor carriers

have relatively small fixed investments and
operate on publicly maintained highways.
 Although the cost of license fees, user fees
and tolls is considerable
 The variable cost per mile is high
 Water Transport
 A distinction is generally made between deep-
water and navigable inland water transport.
 The main advantage of water transportation is
the capacity to move extremely large
shipments.
 Water transport ranks between rail and motor
carrier in respect to fixed cost.
 The right-of-way is developed and maintained
by the government and results in moderate
fixed costs compared to rail and highway
 Water Transport

Larger container ships can hold 4,000 to 6,000 containers.

 Air Transport
➢ Air transport still remains more of a potential
opportunity than a reality. Although the mileage
is almost unlimited, airfreight accounts for
significantly less than 1 percent of all intercity
ton miles.
➢ Air transport capability is limited by lift capacity
(i.e., load size constraints) and aircraft
availability. Traditionally, most intercity
airfreight utilized scheduled passenger flights.
 Air Transport

➢ While this practice was economical, it resulted in

a reduction of both capacity and flexibility
➢ Its significant advantage lies in the speed with
which a shipment can be transported. A coast-
to-coast shipment via air requires only a few
hours contrasted to days with other modes of
transportation.
 Air Transport

➢ One prohibitive aspect of air transport is the

high cost. However, this can be traded off for
high speed, which allows other elements of
logistical design, such as warehousing or
inventory, to be reduced or eliminated.
➢ Best suited for high-value, lower-volume urgent,
perishable or time-specific deliveries
 Pipelines

It operates on a twenty-four-hour, seven days, and

is limited only by commodity changeover and
maintenance.
There is no empty “container” or “vehicle” that
must be returned.
Pipelines have the highest fixed cost and lowest
variable cost among transport modes.
Pipelines are not labor-intensive.
 Pipelines

An obvious disadvantage is that pipelines are

not flexible and are limited with respect to
commodities that can be transported: only
products in the form of Gas, Liquid, Slurry
 Intermodal

Use of more than one mode of transportation to

move a shipment
 Grown considerably with increased use of
containers
 May be the only option for global trade
 More convenient for shippers one entity
 Key issue exchange of information to facilitate
transfer between different modes
Major Advantages by Mode
Major Advantages by Mode
 Factors in Transportation/
Choosing Transportation Modes
1. Cost of transport is the payment for shipment
between two geographical locations and the
expenses related to maintaining in-transit
inventory. Logistical systems should utilize
transportation that minimizes total system
cost.
Least expensive method of transportation
may not result in the lowest total cost of
logistics
 Factors in Transportation/
Choosing Transportation Modes
2. Speed of transportation is the time required
to complete a specific movement.
▪ Transport firms capable of offering faster
service typically charge higher rates.
▪ Second, the faster the transportation service is,
the shorter is the time interval during which
inventory is in transit and unavailable.
▪ Thus, a critical aspect of selecting the most
desirable method of transportation is to balance
speed and cost of service.
 Factors in Transportation/
Choosing Transportation Modes
3. Consistency of transportation refers to
variations in time required to perform a
specific movement over a number of
shipments.
Consistency reflects the dependability,
capability and availability of transportation.
 Controlling Transportation Costs

➢ Optimizing the mix of the transport modes

➢ Reducing the transport lead-time through
effective routing and other means, and
➢ Eliminating multiple and wasteful transfer,
and handling of products
 Transportation Infrastructure
and Policies
Transportation infrastructure consists of the
rights-of-way, vehicles, and carrier organizations
that offer transportation services on a for-hire or
internal basis.
Governments generally take full responsibility or
played a significant role in building and
managing infrastructure elements
Pricing should reflect the marginal impact on the
cost to society
Questions?
THANK YOU
 Pricing and Revenue
Management
in Supply Chain

Week 12 – July 4, 2024

 Pricing

 Pricing is the process by which a firm

decides how much to charge customers
for its goods and services.
 Pricing
is a factor that gears up profits in
supply chain through an appropriate
match of supply and demand
 Pricing

 Pricing affects the customer segments

that choose to buy the product, as well
as influencing the customer’s
expectations.
 Revenue Management
➢ Revenue management is the use of
pricing to increase the profit generated
from a limited supply of supply chain
assets
▪ Supply assets exist in two forms:
• capacity and inventory
 Revenue Management
➢ Revenue management can be defined as
the application of pricing to increase the
profit produced from a limited supply of
supply chain assets
➢ Revenue management may also be defined
as the use of differential pricing based on
customer segment, time of use, and
product or capacity availability to increase
supply chain profits
 Role of Revenue Management
in the Supply Chain
Revenue management has a significant impact on
supply chain profitability when one or more of the
following four conditions exist:
1. The value of the product varies in different market
segments
2. The product is highly perishable, or product
wastage occurs.
3. Demand has seasonal and other peaks
4. The product is sold both in bulk and on the spot
market
 REVENUE MANAGEMENT FOR
MULTIPLE CUSTOMER SEGMENTS

In the concept of revenue management, we need to

take care of two fundamental issues.
 The first one is how to distinguish between two
segments and design their pricing to make one
segment pay more than the other.
 Secondly, how to control the demand so that the
lower price segment does not use the complete
asset that is available.
 REVENUE MANAGEMENT FOR
MULTIPLE CUSTOMER SEGMENTS

 To gain completely from revenue management, the

manufacturer needs to minimize the volume of
capacity devoted to lower price segment even if
enough demand is available from the lower price
segment to utilize the complete volume.
 The general trade-off is in between placing an order
from a lower price or waiting for a high price to
arrive later on.
 REVENUE MANAGEMENT FOR
MULTIPLE CUSTOMER SEGMENTS

 These types of situations invite risks like spoilage

and spill. Spoilage appears when volumes of goods
are wasted due to demand from high rate that does
not materialize.
 Similarly, spill appears if higher rate segments need
to be rejected due to the commitment of volume
goods given to the lower price segment.
 REVENUE MANAGEMENT
FOR PERISHABLE ASSETS
 Any asset that loses its value in due course of time is
considered as a perishable item, for example, all fruits,
vegetables and pharmaceuticals. We can also include
computers, cell phones, fashion apparels, etc.; whatever
loses its value after the launch of new model is considered as
perishable.
 We use two approaches for perishable assets in the revenue
management. These approaches are:
o Fluctuate cost over time to maximize expected revenue.
o Overbook sales of the assets to cope or deal with
cancellations.
 REVENUE MANAGEMENT
FOR PERISHABLE ASSETS
 The first approach is highly recommended for goods like
fashion apparels that have a precise date across which
they lose a lot of their value; for example, apparel
designed for season doesn’t have much value in the end
of the season.
 The manufacturer should try using effective pricing
strategy and predict the effect of rate on customer
demand to increase total profit. Here the general trade-
off is to demand high price initially and allow the
remaining products to be sold later at lower price.
 REVENUE MANAGEMENT
FOR SEASONAL DEMANDS

 One of the major applications of revenue

management can be seen in the seasonal
demand. Here we see a demand shift from
the peak to the off-peak duration; hence a
better balance can be maintained between
supply and demand.
 It also generates higher overall profit.
 REVENUE MANAGEMENT
FOR SEASONAL DEMANDS
 The commonly used effective and efficient
revenue management approach to cope with
seasonal demand is to demand higher price
during peak time duration and a lower price
during off-peak time duration.
 This approach leads to transferring demand
from peak to off-peak period.
 REVENUE MANAGEMENT FOR
BULK AND SPOT DEMANDS
 When we talk about managing revenue for
bulk and spot demand, the basic trade-off is
somewhat congruent to that of revenue
management for multiple customer
segments.
 The company has to make a decision
regarding the quantity of asset to be booked
for spot market, which is higher price.
 REVENUE MANAGEMENT FOR
BULK AND SPOT DEMANDS
 The booked quantity will depend upon the
differences in order between the spot market
and the bulk sale, along with the distribution
of demand from the spot market.
 There is a similar situation for the client who
tends to make the buying decision for
production, warehousing and transportation
assets.
 Tactics for
Multiple Customer Segments
 Separate segments effectively on some
service dimension (e.g. response time)
 Charge different prices based on the value
assigned by each segment
 Forecast demand at the segment level
 Save appropriate amount of the asset for the
late arriving high price segments
 Dynamic Pricing and
Overbooking for Perishable Assets

Any asset that loses value over time is perishable

Two basic approaches:
 Vary price dynamically over time to maximize
expected revenue, dynamic pricing
 Overbook sales of the asset to account for
cancellation
 Dynamic Pricing

Effective differential pricing generally increases

the level of product availability for the
consumer willing to pay full price and total
profits for the retailer
 Overbooking in the
Presence of Cancellation

Basic trade-off is between having wasted

capacity because of excessive cancellations or
having a shortage of capacity because of few
cancellations requiring expensive backup
 Discounting and Peak Pricing
for Seasonal Demand

 Seasonal peaks of demand common in many supply

chains
 Off-peak discounting can shift demand from peak to
non-peak periods
 Charge higher price during peak periods and a lower
price during off-peak periods
 Increases profits for the owner of assets, decreases
the price paid by a fraction of customers, and brings
in new customers during the off-peak discount
period
 Constructing a Portfolio of
Bulk Contracts and Spot Buying
 Problems constructing a portfolio of long-
term bulk contracts and short-term spot
market contracts
 Decide what fraction of the asset to sell in
bulk and what fraction of the asset to save
for the spot market
 The amount reserved for the spot market
should be such that the expected marginal
revenue from the spot market equals the
current revenue from a bulk sale
 Using RM in Practice
Evaluate your market carefully
– Understand customer requirements for
services and products
– Price, flexibility (time, specs), value-added
services, etc.
– Based on requirements identify customer
segments (groups)
– Differentiate products/services and their
pricing according to customer segments
 Using RM in Practice
 Quantify the benefits of revenue
management
 Implement a forecasting process

 Apply optimization to obtain the revenue

management decision
 Involve both sales and operations

 Understand and inform the customer

 Integrate supply planning with revenue

management
 Some Practical Challenges When
Using Revenue Management
Potential pitfalls if not used carefully
 Consumer preference must be accounted
for
 Salesforce and operations must be fully
informed and trained to deal with the
consequences of revenue management
 Inform the customer when implementing
revenue management
 Keep revenue management techniques
simple
Questions?
THANK YOU
 Differential Pricing for
Multiple Customer Segments
➢ Differential pricing increases total profits for a
firm
➢ Two fundamental issues must be handled in
practice
 How can the firm differentiate between the two
segments and structure its pricing to make one
segment pay more than the other?
 How can the firm control demand such that the
lower paying segment does not utilize the entire
availability of the asset?
 Differential Pricing for
Multiple Customer Segments

Two problems to solve when using revenue

management across multiple segments
 What price should be charged for each
segment?
 How should limited capacity be allocated
among the segments?
 Allocating Capacity to
Segments under Uncertainty

Basic trade-off is between committing to an

order from a lower-price buyer or waiting for a
higher-price buyer to arrive which can result to
Spoilage and Spill
 RM for Multiple
Customer Segments
 If a supplier serves multiple customer segments
with a fixed asset, the supplier can improve
revenues by setting different prices for each
segment
– Must figure out customer segments
Prices must be set with barriers such that the
segment willing to pay more is not able to pay the
lower price
– Barriers: Time, location, prestige, inconvenience,
extra service
In the case of time barrier,
– The amount of the asset reserved for the higher
price segment is such that quantities below are equal
 RM for Perishable Assets
Any asset that loses value over time is perishable
Examples: high-tech products such as computers and
cell phones, high fashion apparel, underutilized
capacity, fruits and vegetables
Two basic approaches:
– Dynamic Pricing: Vary price over time to maximize
expected revenue
– Overbooking: Overbook sales of the asset to account
for cancellations
– Dynamic pricing belongs to RM while overbooking can
be said to more within the domain of Yield
management.
 RM for Perishable Assets
 Overbooking or overselling of a supply chain asset is
valuable if order cancellations occur and the asset is
perishable
 The level of overbooking is based on the trade-off
between the cost of wasting the asset if too many
cancellations lead to unused assets (spoilage) and
the cost of arranging a backup (offload) if too few
cancellations lead to committed orders being larger
than the available capacity Spoilage and offload are
actually terms used in the airline industry
 RM for Bulk and Spot Customers
Most consumers of production, warehousing, and
transportation assets in a supply chain face the
problem of constructing a portfolio of long-term
bulk contracts and short-term spot market
contracts
– Long-term contracts for low cost
– Short-term contracts for flexibility
The basic decision is the size of the bulk contract
The fundamental trade-off is between wasting a
portion of the low-cost bulk contract and paying
more for the asset on the spot market.