chopra_scm5_tif_ch16.doc

Supply Chain Management, 5e (Chopra/Meindl) Chapter 16 Pricing and Revenue Management in a Supply Chain 16.1 True/False Questions 1) Revenue management is the use of marketing to increase the profit generated from a limited supply of supply chain assets. Answer: FALSE Diff: 2 Topic: 16.1 The Role of Pricing and Revenue Management in a Supply Chain Learning Outcome: Compare common approaches to supply chain design 2) Pricing may influence demand if customers are price sensitive. Answer: TRUE Diff: 2 Topic: 16.1 The Role of Pricing and Revenue Management in a Supply Chain Learning Outcome: Compare common approaches to supply chain design 3) 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 surplus. Answer: TRUE Diff: 2 Topic: 16.1 The Role of Pricing and Revenue Management in a Supply Chain AACSB: Analytic Skills Learning Outcome: Compare common approaches to supply chain design 4) Revenue management adjusts the pricing and available supply of assets to maximize profits. Answer: TRUE Diff: 1 Topic: 16.1 The Role of Pricing and Revenue Management in a Supply Chain Learning Outcome: Compare common approaches to supply chain design 5) In theory, the concept of differential pricing decreases total cost for a firm. Answer: FALSE Diff: 2 Topic: 16.1 The Role of Pricing and Revenue Management in a Supply Chain Learning Outcome: Compare common approaches to supply chain design 6) To differentiate between the various market segments, the firm must either eliminate barriers that identify product or service attributes the segments value differently. Answer: FALSE Diff: 1 Topic: 16.1 The Role of Pricing and Revenue Management in a Supply Chain AACSB: Analytic Skills Learning Outcome: Compare common approaches to supply chain design 16-1 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 7) In most instances of differential pricing, demand from the segment paying the lower price arises earlier in time than demand from the segment paying the higher price. Answer: TRUE Diff: 2 Topic: 16.1 The Role of Pricing and Revenue Management in a Supply Chain AACSB: Analytic Skills Learning Outcome: Compare common approaches to supply chain design 8) Spoilage occurs when the capacity reserved for higher price buyers is wasted because demand from the higher price segment does not materialize. Answer: TRUE Diff: 1 Topic: 16.2 Pricing and Revenue Management for Multiple Customer Segments Learning Outcome: Compare common approaches to supply chain design 9) Wastage occurs if higher price buyers have to be turned away because the capacity has already been committed to lower price buyers. Answer: FALSE Diff: 2 Topic: 16.2 Pricing and Revenue Management for Multiple Customer Segments Learning Outcome: Compare common approaches to supply chain design 10) An order from a lower price buyer should be accepted if the expected revenue from a higher price buyer is lower than the current revenue from the lower price buyer. Answer: TRUE Diff: 1 Topic: 16.3 Pricing and Revenue Management for Perishable Assets AACSB: Analytic Skills Learning Outcome: Compare common approaches to supply chain design 11) The amount of the asset reserved for the higher price segment is such that the expected marginal revenue from the higher priced segment is less than the price to the lower price segment. Answer: FALSE Diff: 1 Topic: 16.4 Pricing and Revenue Management for Seasonal Demand AACSB: Analytic Skills Learning Outcome: Compare common approaches to supply chain design 12) Any asset that loses value over time is perishable. Answer: TRUE Diff: 3 Topic: 16.5 Pricing and Revenue Management for Bulk and Spot Contracts Learning Outcome: Compare common approaches to supply chain design 16-2 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Answer: TRUE Diff: 1 Topic: 16.13) Unused capacity from the past is extremely valuable. Inc. Answer: TRUE Diff: 1 Topic: 16. but will decrease total profits for the retailer. publishing as Prentice Hall .3 Pricing and Revenue Management for Perishable Assets AACSB: Analytic Skills Learning Outcome: Compare common approaches to supply chain design 16) The tactic of overbooking or overselling the available asset is suitable in any situation where customers are able to cancel orders and the value of the asset drops significantly after a deadline. Answer: FALSE Diff: 2 Topic: 16.3 Pricing and Revenue Management for Perishable Assets AACSB: Analytic Skills Learning Outcome: Compare common approaches to supply chain design 18) The cost of wasted capacity is the margin that would have been generated if the capacity had been used for production.3 Pricing and Revenue Management for Perishable Assets Learning Outcome: Compare common approaches to supply chain design 16-3 Copyright © 2013 Pearson Education. Answer: FALSE Diff: 2 Topic: 16.3 Pricing and Revenue Management for Perishable Assets AACSB: Analytic Skills Learning Outcome: Compare common approaches to supply chain design 17) The basic trade-off to consider during overbooking is between having wasted capacity (or inventory) because of few cancellations or having a shortage of capacity (or inventory) because of excessive cancellations.3 Pricing and Revenue Management for Perishable Assets Learning Outcome: Compare common approaches to supply chain design 14) The tactic of varying price over time is suitable for assets such as fashion apparel that have a clear date beyond which they lose a lot of their value.3 Pricing and Revenue Management for Perishable Assets AACSB: Analytic Skills Learning Outcome: Compare common approaches to supply chain design 15) Effective differential pricing over time will generally increase the level of product availability for the consumer willing to pay full price. Answer: TRUE Diff: 2 Topic: 16. Answer: FALSE Diff: 1 Topic: 16. 3 Pricing and Revenue Management for Perishable Assets 20) The goal when making the overbooking decision is to maximize supply chain profits by minimizing the cost of wasted capacity and the cost of capacity shortage.4 Pricing and Revenue Management for Seasonal Demand AACSB: Analytic Skills Learning Outcome: Compare common approaches to supply chain design 23) 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. Answer: FALSE Diff: 2 Topic: 16. Answer: TRUE Diff: 2 Topic: 16. Answer: TRUE Diff: 2 Topic: 16. Answer: TRUE Diff: 1 Topic: 16. Answer: FALSE Diff: 2 Topic: 16.4 Pricing and Revenue Management for Seasonal Demand AACSB: Analytic Skills Learning Outcome: Compare common approaches to supply chain design 22) Shifting demand from peak to off-peak periods is beneficial if the discount given during the off-peak period is more than offset by the decrease in cost because of a smaller peak and the increase in revenue during the off-peak period.19) The cost of a capacity shortage is the increase in productivity that results from having to go to a backup source.3 Pricing and Revenue Management for Perishable Assets AACSB: Analytic Skills Learning Outcome: Compare common approaches to supply chain design 21) Faced with seasonal peaks. Answer: FALSE Diff: 3 Topic: 16. Inc. publishing as Prentice Hall .4 Pricing and Revenue Management for Seasonal Demand Learning Outcome: Compare common approaches to supply chain design 24) The reserved quantity will be affected by the difference in margin between the spot market and the bulk sale. an effective revenue management tactic is to charge a higher price during the peak period and a higher price during off-peak periods. but not the distribution of demand from the spot market.4 Pricing and Revenue Management for Seasonal Demand AACSB: Analytic Skills Learning Outcome: Compare common approaches to supply chain design 16-4 Copyright © 2013 Pearson Education. Answer: FALSE Diff: 2 Topic: 16. Answer: TRUE Diff: 1 Topic: 16.6 Using Pricing and Revenue Management in Practice Learning Outcome: Compare common approaches to supply chain design 16-5 Copyright © 2013 Pearson Education.25) Ultimately. Answer: FALSE Diff: 1 Topic: 16.6 Using Pricing and Revenue Management in Practice Learning Outcome: Compare common approaches to supply chain design 28) Too high a level of overbooking will lead to unutilized assets and lost revenue. Answer: TRUE Diff: 1 Topic: 16.6 Using Pricing and Revenue Management in Practice AACSB: Analytic Skills Learning Outcome: Compare common approaches to supply chain design 29) Too low a level of overbooking will lead to unutilized assets and lost revenue. Answer: TRUE Diff: 1 Topic: 16.6 Using Pricing and Revenue Management in Practice Learning Outcome: Compare common approaches to supply chain design 27) The goal of optimization is to use forecasts of customer behavior to identify a revenue management tactic that will be most effective. Answer: TRUE Diff: 2 Topic: 16. Inc. publishing as Prentice Hall . a proper understanding of customer preferences and a quantification of the impact of various tactics on consumer behavior are at the core of successful revenue management.4 Pricing and Revenue Management for Seasonal Demand Learning Outcome: Compare common approaches to supply chain design 26) The forecasting function is not necessary for most revenue management systems.6 Using Pricing and Revenue Management in Practice AACSB: Analytic Skills Learning Outcome: Compare common approaches to supply chain design 30) Salespeople must understand the revenue management tactic in place so they can align their sales pitch accordingly. 1 The Role of Pricing and Revenue Management in a Supply Chain AACSB: Analytic Skills Learning Outcome: Compare common approaches to supply chain design 34) Airline seats are a good example of a product whose value is the same across different market segments.6 Using Pricing and Revenue Management in Practice Learning Outcome: Compare common approaches to supply chain design 32) Revenue management is the use of pricing to increase the supply chain surplus and profit generated from a limited availability of supply chain assets. Answer: TRUE Diff: 1 Topic: 16.1 The Role of Pricing and Revenue Management in a Supply Chain AACSB: Analytic Skills Learning Outcome: Compare common approaches to supply chain design 16-6 Copyright © 2013 Pearson Education. Answer: TRUE Diff: 1 Topic: 16. Answer: TRUE Diff: 1 Topic: 16.31) Customers will have a negative perception of revenue management tactics if they are simply presented as a mechanism for extracting maximum revenue. publishing as Prentice Hall . Answer: FALSE Diff: 2 Topic: 16.1 The Role of Pricing and Revenue Management in a Supply Chain Learning Outcome: Compare common approaches to supply chain design 33) Airline seats are a good example of a product whose value varies by market segment. Inc. and product or capacity availability to decrease supply chain surplus. and product or capacity availability to increase supply chain surplus. D) inventory and warehouse space.2 Multiple Choice Questions 1) Pricing can be used to A) change available supply. time of use. B) capacity and revenue. B) reduce supply chain costs. C) inventory and revenue. Answer: B Diff: 3 Topic: 16. and product or capacity availability to increase profitability. B) the use of pricing to increase the profit generated from a limited supply of supply chain assets. D) the use of accounting tools to monitor cash flow.1 The Role of Pricing and Revenue Management in a Supply Chain Learning Outcome: Compare common approaches to supply chain design 2) Revenue management is A) the use of marketing tools to increase revenue. time of use. Inc.16.1 The Role of Pricing and Revenue Management in a Supply Chain Learning Outcome: Compare common approaches to supply chain design 4) Revenue management may be defined as A) the use of differential costing based on product or capacity availability to decrease supply chain cost. C) a process designed to determine the best use of funds generated through sales.1 The Role of Pricing and Revenue Management in a Supply Chain Learning Outcome: Compare common approaches to supply chain design 3) The two forms of supply chain assets are A) capacity and inventory. D) the use of differential pricing based on customer segment. publishing as Prentice Hall . D) all of the above Answer: C Diff: 2 Topic: 16. time of use. Answer: A Diff: 1 Topic: 16.1 The Role of Pricing and Revenue Management in a Supply Chain Learning Outcome: Compare common approaches to supply chain design 16-7 Copyright © 2013 Pearson Education. C) influence demand if customers are price sensitive. B) the use of differential costing based on customer segment. C) the use of differential pricing based on customer segment. Answer: D Diff: 2 Topic: 16. 5) The use of differential pricing should A) decrease total profits for a firm. Answer: B Diff: 2 Topic: 16.2 Pricing and Revenue Management for Multiple Customer Segments AACSB: Reflective Thinking Skills Learning Outcome: Compare common approaches to supply chain design 6) Which of the following are issues that must be dealt with in order for differential pricing to be effective? A) The firm must differentiate between the market segments and structure its pricing to make one segment pay more than the other. publishing as Prentice Hall . D) decrease capacity utilization for a firm. D) A and B only Answer: D Diff: 2 Topic: 16.2 Pricing and Revenue Management for Multiple Customer Segments AACSB: Reflective Thinking Skills Learning Outcome: Compare common approaches to supply chain design 7) To differentiate between the various market segments. B) increase total profits for a firm. C) increase capacity for a firm. the firm must A) create barriers by identifying product or service attributes that the segments value differently. B) The firm must control demand such that the lower paying segment does not utilize the entire availability of the asset. B) eliminate barriers that identify product or service attributes that the segments value differently. D) develop pricing structures based on the volume of various product or service attributes. C) negotiate separately with different market segments that value product or service attributes differently. Inc.2 Pricing and Revenue Management for Multiple Customer Segments AACSB: Reflective Thinking Skills Learning Outcome: Compare common approaches to supply chain design 16-8 Copyright © 2013 Pearson Education. Answer: A Diff: 2 Topic: 16. C) The firm must secure enough capacity to meet demand from each segment. demand from the segment paying the lower price A) arises earlier in time than demand from the segment paying the higher price.8) In most instances of differential pricing. this is A) spill. publishing as Prentice Hall . Answer: A Diff: 2 Topic: 16. B) arises later in time than demand from the segment paying the higher price.2 Pricing and Revenue Management for Multiple Customer Segments Learning Outcome: Compare common approaches to supply chain design 10) When the capacity reserved for higher price buyers is wasted because demand from the higher price segment does not materialize.2 Pricing and Revenue Management for Multiple Customer Segments Learning Outcome: Compare common approaches to supply chain design 11) If higher price buyers have to be turned away because the capacity has already been committed to lower price buyers. D) having marketing or operations establish the constraints within which orders are accepted. Answer: B Diff: 1 Topic: 16. B) spoilage. C) allowing the market to be controlled by price or capacity. D) arises both earlier and later in time than demand from the segment paying the higher price.2 Pricing and Revenue Management for Multiple Customer Segments AACSB: Reflective Thinking Skills Learning Outcome: Compare common approaches to supply chain design 9) The basic trade-off to be considered by the supplier with production capacity is between A) committing to an order from a high-price buyer or waiting for a lower price buyer to arrive later on. B) spoilage. Answer: B Diff: 2 Topic: 16. D) excess. C) wastage. B) committing to an order from a lower price buyer or waiting for a high-price buyer to arrive later on.2 Pricing and Revenue Management for Multiple Customer Segments Learning Outcome: Compare common approaches to supply chain design 16-9 Copyright © 2013 Pearson Education. C) arises about the same time as demand from the segment paying the higher price. D) excess. this is A) spill. Answer: A Diff: 2 Topic: 16. C) wastage. Inc. C) should be accepted if the expected revenue from a higher price buyer is lower than the current revenue from the lower price buyer. publishing as Prentice Hall . Inc. a firm must use which of the following tactics effectively? A) Price based on the value assigned by each segment B) Use different prices for each segment C) Forecast at the segment level D) all of the above Answer: D Diff: 2 Topic: 16. B) the expected marginal revenue from the higher priced segment is more than the price to the lower price segment.2 Pricing and Revenue Management for Multiple Customer Segments AACSB: Reflective Thinking Skills Learning Outcome: Compare common approaches to supply chain design 13) To successfully use revenue management when serving multiple customer segments. Answer: D Diff: 2 Topic: 16.12) An order from a lower price buyer A) should always be accepted rather than waiting for potential revenue from a higher price buyer.2 Pricing and Revenue Management for Multiple Customer Segments AACSB: Reflective Thinking Skills Learning Outcome: Compare common approaches to supply chain design 16-10 Copyright © 2013 Pearson Education. B) should only be accepted if the expected revenue from a higher price buyer is higher than the current revenue from the lower price buyer. Answer: C Diff: 1 Topic: 16. C) the expected marginal revenue from the higher priced segment is less than the price to the lower price segment. D) the expected marginal revenue from the higher priced segment equals the price to the lower price segment.2 Pricing and Revenue Management for Multiple Customer Segments AACSB: Reflective Thinking Skills Learning Outcome: Compare common approaches to supply chain design 14) The amount of the asset reserved for the higher price segment is such that A) all orders from the lower priced segment will be accepted and filled. D) should not be accepted if the expected revenue from a higher price buyer is lower than the current revenue from the lower price buyer. 3 Pricing and Revenue Management for Perishable Assets AACSB: Reflective Thinking Skills Learning Outcome: Compare common approaches to supply chain design 16-11 Copyright © 2013 Pearson Education. C) any asset that loses value over time. D) all of the above Answer: C Diff: 2 Topic: 16.3 Pricing and Revenue Management for Perishable Assets AACSB: Reflective Thinking Skills Learning Outcome: Compare common approaches to supply chain design 17) The tactic of varying price over time is suitable for assets A) that do not have a clear date beyond which they lose a lot of their value. Inc. Answer: B Diff: 2 Topic: 16.15) A perishable asset is A) something that decays or deteriorates. C) where customers are able to cancel orders and the value of the asset drops significantly after a deadline. B) that have a clear date beyond which they lose a lot of their value. B) an item that has a short life span. publishing as Prentice Hall . D) where customers are unable to cancel orders and the value of the asset drops significantly after a deadline.3 Pricing and Revenue Management for Perishable Assets Learning Outcome: Compare common approaches to supply chain design 16) Which of the following is (are) revenue management tactics appropriate for perishable assets? A) Vary price over time to maximize expected revenue B) Under book sales of the asset to account for unexpected demand C) Overbook sales of the asset to account for cancellations D) all of the above Answer: D Diff: 2 Topic: 16. B) decrease the level of product availability for the consumer willing to pay full price but will increase total profits for the retailer. Answer: C Diff: 2 Topic: 16.3 Pricing and Revenue Management for Perishable Assets Learning Outcome: Compare common approaches to supply chain design 16-12 Copyright © 2013 Pearson Education. D) all of the above Answer: A Diff: 1 Topic: 16. D) customers are unable to cancel orders and the value of the asset drops significantly after a deadline. B) there are few cancellations. D) increase the level of product availability for the consumer willing to pay full price but will decrease total profits for the retailer. Answer: A Diff: 2 Topic: 16. B) having lost sales or a shortage of capacity (or inventory).3 Pricing and Revenue Management for Perishable Assets Learning Outcome: Compare common approaches to supply chain design 21) Wasted capacity (or inventory) occurs when A) there are excessive cancellations. Answer: C Diff: 2 Topic: 16.18) Effective differential pricing over time will generally A) decrease the level of product availability for the consumer willing to pay full price and also decrease total profits for the retailer. C) customers are able to cancel orders and the value of the asset drops significantly after a deadline.3 Pricing and Revenue Management for Perishable Assets AACSB: Reflective Thinking Skills Learning Outcome: Compare common approaches to supply chain design 20) The basic trade-off to consider during overbooking is between A) having wasted capacity (or inventory) or a shortage of capacity (or inventory). C) an expensive backup needs to be arranged. B) there is no clear date beyond which the asset loses a lot of its value. Inc. C) having wasted capacity (or inventory) or excess capacity (or inventory). publishing as Prentice Hall .3 Pricing and Revenue Management for Perishable Assets AACSB: Reflective Thinking Skills Learning Outcome: Compare common approaches to supply chain design 19) The tactic of overbooking or overselling the available asset is suitable where A) there is a clear date beyond which the asset loses a lot of its value. D) having high sales or a shortage of capacity (or inventory). C) increase the level of product availability for the consumer willing to pay full price and also increase total profits for the retailer. 3 Pricing and Revenue Management for Perishable Assets Learning Outcome: Compare common approaches to supply chain design 23) The cost of wasted capacity is A) the reduction in margin that results from having to go to a backup source. B) the margin that would have been generated if the capacity had been used for production. C) an expensive backup needs to be arranged.22) A shortage of capacity (or inventory) occurs when A) there are excessive cancellations.3 Pricing and Revenue Management for Perishable Assets Learning Outcome: Compare common approaches to supply chain design 24) The cost of a capacity shortage is A) the reduction in margin that results from having to go to a backup source. Answer: B Diff: 2 Topic: 16. C) minimizing the cost of wasted capacity and the cost of capacity shortage. Inc.3 Pricing and Revenue Management for Perishable Assets Learning Outcome: Compare common approaches to supply chain design 25) The goal when making the overbooking decision is to maximize supply chain profits by A) maximizing the value of wasted capacity and the cost of capacity shortage. B) the margin that would have been generated if the capacity had been used for production. C) the productivity increase generated when the capacity is used for production. D) the sales potential of excess capacity kept in reserve for emergency production. B) there are few cancellations. publishing as Prentice Hall . D) the sales potential of excess capacity kept in reserve for emergency production. D) B and C only Answer: B Diff: 1 Topic: 16.3 Pricing and Revenue Management for Perishable Assets Learning Outcome: Compare common approaches to supply chain design 16-13 Copyright © 2013 Pearson Education. B) maximizing supply chain profits. Answer: C Diff: 2 Topic: 16. C) the productivity increase generated when the capacity is used for production. Answer: A Diff: 2 Topic: 16. D) minimizing the cost of wasted capacity and minimizing capacity shortages. Answer: A Diff: 2 Topic: 16. C) save for emergencies and what fraction of the asset to rework.4 Pricing and Revenue Management for Seasonal Demand AACSB: Reflective Thinking Skills Learning Outcome: Compare common approaches to supply chain design 28) Most firms must decide what fraction of an asset to A) sell in bulk and what fraction of the asset to discard. C) lower price during the peak period and a higher price during off-peak periods.5 Pricing and Revenue Management for Bulk and Spot Contracts AACSB: Reflective Thinking Skills Learning Outcome: Compare common approaches to supply chain design 16-14 Copyright © 2013 Pearson Education. D) similar to the case where a firm has a perishable asset. C) during the peak period is more than offset by the decrease in cost because of a smaller peak.26) An effective revenue management tactic when faced with seasonal peaks is to charge a A) high price during the peak period and a higher price during off-peak periods. publishing as Prentice Hall . B) during the off-peak period is more than offset by the decrease in cost because of a smaller peak.4 Pricing and Revenue Management for Seasonal Demand AACSB: Reflective Thinking Skills Learning Outcome: Compare common approaches to supply chain design 29) The fundamental trade-off between selling in bulk or on the spot market is A) different from the situation where a firm serves two market segments. D) during the peak period is more than offset by the decrease in cost because of a larger peak. Answer: B Diff: 2 Topic: 16. C) similar to the case where a firm must deal with seasonal demand. B) similar to the case when a firm serves two market segments. D) low price during the peak period and a lower price during off-peak periods. B) save for the spot market and what fraction of the asset to discard. B) higher price during the peak period and a lower price during off-peak periods. Inc.3 Pricing and Revenue Management for Perishable Assets AACSB: Reflective Thinking Skills Learning Outcome: Compare common approaches to supply chain design 27) Shifting demand from peak to off-peak periods is beneficial if the discount given A) during the off-peak period is more than offset by the decrease in cost because of a larger peak. Answer: B Diff: 3 Topic: 16. Answer: D Diff: 2 Topic: 16. D) sell in bulk and what fraction of the asset to save for the spot market. B) unnecessary for a revenue management system.30) The amount reserved for the spot market should be A) such that the expected marginal revenue from the spot market equals the current revenue from a bulk sale.5 Pricing and Revenue Management for Bulk and Spot Contracts Learning Outcome: Compare common approaches to supply chain design 33) The forecasting function is A) the foundation of any revenue management system. D) likely to create problems for any revenue management system. B) such that the expected marginal revenue from the spot market exceeds the current revenue from a bulk sale. Answer: A Diff: 3 Topic: 16.5 Pricing and Revenue Management for Bulk and Spot Contracts Learning Outcome: Compare common approaches to supply chain design 31) The reserved quantity for the spot market will be affected by A) the difference in margin between the spot market and the bulk sale. D) A and B only Answer: D Diff: 2 Topic: 16. D) equal to the maximum revenue available from the spot. C) an added plus for any revenue management system. Answer: A Diff: 2 Topic: 16.6 Using Pricing and Revenue Management in Practice Learning Outcome: Describe major approaches to forecasting 16-15 Copyright © 2013 Pearson Education. Inc. D) A and C only Answer: D Diff: 2 Topic: 16. B) a quantification of the impact of various tactics on consumer behavior. C) a clear focus on profitability.5 Pricing and Revenue Management for Bulk and Spot Contracts Learning Outcome: Compare common approaches to supply chain design 32) Successful revenue management requires A) a proper understanding of customer preferences. publishing as Prentice Hall . C) the distribution of demand from the spot market. B) the distribution of demand from the bulk sale. C) such that the expected marginal revenue from the spot market is less than the current revenue from a bulk sale. 6 Using Pricing and Revenue Management in Practice Learning Outcome: Compare common approaches to supply chain design 37) It is important for the firm to structure its revenue management program in a way that A) it is presented simply as a mechanism for extracting maximum revenue. C) using linear regression that will minimize cost.6 Using Pricing and Revenue Management in Practice Learning Outcome: Describe major approaches to forecasting 35) The decision to use overbooking will A) lead to upset customers and a high cost of providing them space.6 Using Pricing and Revenue Management in Practice AACSB: Reflective Thinking Skills Learning Outcome: Compare common approaches to supply chain design 16-16 Copyright © 2013 Pearson Education. C) lead to reduced profits. Answer: D Diff: 2 Topic: 16. B) using linear regression that will maximize revenue. C) in order to identify those customers that will benefit from moving their order to the off-peak period. B) in order to identify those customers who truly need the supply chain asset during the peak period. B) lead to unutilized assets and lost revenue.34) The goal of optimization in revenue management is to identify a tactic A) using forecasts of customer behavior that will be most effective. D) all of the above Answer: D Diff: 2 Topic: 16. D) depend upon optimization to be successful. publishing as Prentice Hall . Answer: A Diff: 2 Topic: 16. B) revenue increases while improving service along some dimension that is important to customers that pay the highest price. Inc. D) all of the above Answer: B Diff: 2 Topic: 16. D) that will not have to be altered.6 Using Pricing and Revenue Management in Practice AACSB: Reflective Thinking Skills Learning Outcome: Compare common approaches to supply chain design 36) The sales force must understand the revenue management tactic in place A) in order to align their sales pitch accordingly. C) profit is maximized. B) supply planning should be completed first. C) hotels. Answer: C Diff: 1 Topic: 16. Inc.1 The Role of Pricing and Revenue Management in a Supply Chain Learning Outcome: Compare common approaches to supply chain design 40) Revenue management adjusts the pricing and available supply of assets and has a significant impact on supply chain profitability when one of four conditions exist. B) production. D) The value of the product is the same across different market segments. Which is not one of the four conditions listed in the textbook? A) The product is highly perishable or product wastage occurs. D) car rental companies. C) inventory.6 Using Pricing and Revenue Management in Practice Learning Outcome: Compare common approaches to supply chain design 39) Capacity assets in the supply chain do not exist for A) transportation. A) supply planning and revenue management should be performed separately.1 The Role of Pricing and Revenue Management in a Supply Chain AACSB: Reflective Thinking Skills Learning Outcome: Compare common approaches to supply chain design 16-17 Copyright © 2013 Pearson Education. B) Demand has seasonal and other peaks. D) revenue management should be completed first. Answer: C Diff: 3 Topic: 16.1 The Role of Pricing and Revenue Management in a Supply Chain AACSB: Analytic Skills Learning Outcome: Compare common approaches to supply chain design 41) Example industries of a product whose value varies by market segment would not include A) airlines. Answer: B Diff: 2 Topic: 16. C) The product is sold both in bulk and on the spot market. Answer: D Diff: 3 Topic: 16.38) In order to achieve the greatest value. D) storage. B) grocery stores. publishing as Prentice Hall . C) supply planning and revenue management should be combined. C) computers. B) Implement a forecasting process.3 Pricing and Revenue Management for Perishable Assets Learning Outcome: Compare common approaches to supply chain design 45) Which of the following is not listed as a step in revenue management? A) Quantify the benefits of revenue management. Which of the following would not be an example of this? A) Computers B) Airlines seats C) Production capacity D) Items designed for a specific holiday Answer: A Diff: 2 Topic: 16. Inc.42) Examples of perishable assets would not include A) high-fashion apparel. C) airline.6 Using Pricing and Revenue Management in Practice Learning Outcome: Compare common approaches to supply chain design 16-18 Copyright © 2013 Pearson Education. it has not been used as much as possible in the following industry: A) hotels. Answer: C Diff: 1 Topic: 16. C) Involve sales and not operations D) Understand and inform the customer. However. Answer: D Diff: 2 Topic: 16. D) transportation capacity. Answer: D Diff: 2 Topic: 16. D) ink jet printers.3 Pricing and Revenue Management for Perishable Assets AACSB: Reflective Thinking Skills Learning Outcome: Compare common approaches to supply chain design 43) The tactic of overbooking or overselling of the available asset is suitable in any situation in which customers are able to cancel orders and the value of the asset drops significantly after a deadline.3 Pricing and Revenue Management for Perishable Assets AACSB: Reflective Thinking Skills Learning Outcome: Compare common approaches to supply chain design 44) Overbooking as a tactic has been used in many industries. publishing as Prentice Hall . B) passenger rail. B) fruits. Revenue management is essential for owners of any perishable inventory. publishing as Prentice Hall . Diff: 2 Topic: 16. including price. and there is another segment that wants a lower price and is willing to commit far in advance.1 The Role of Pricing and Revenue Management in a Supply Chain AACSB: Reflective Thinking Skills Learning Outcome: Compare common approaches to supply chain design 2) Explain how revenue management is beneficial. time of use. Answer: Revenue management adjusts the pricing and available supply of assets to maximize profits. Management decisions should try to maximize the total margin earned from these assets. 2.1 The Role of Pricing and Revenue Management in a Supply Chain AACSB: Reflective Thinking Skills Learning Outcome: Compare common approaches to supply chain design 16-19 Copyright © 2013 Pearson Education. Revenue management can have a similar impact on all stages of a supply chain that satisfy one or more of these four conditions. transportation. transportation. firms have often invested in or eliminated assets to reduce the imbalance between supply and demand. Traditionally. This is the primary role of revenue management. and hotels. Inc. Answer: Pricing is an important lever to increase supply chain profits by better matching supply and demand. Pricing may influence demand if customers are price sensitive. Demand has seasonal and other peaks. The product is highly perishable or product wastage occurs. To increase the total margin. The product is sold both in bulk and the spot market. Diff: 2 Topic: 16. Firms build additional capacity during the growth part of a business cycle and shut some of the capacity down during a downturn. car rentals. 3. Capacity assets in the supply chain exist for production. and product or capacity availability to increase supply chain surplus. Revenue management can be a powerful tool for every owner of assets in a supply chain. or storage) can use revenue management if there is seasonal demand or if there are segments that are willing to pay different prices for different lead times to use the capacity.3 Essay Questions 1) Describe the role of revenue management. and only then invest in or eliminate assets. managers must use all available levers. Owners of any form of capacity (production. Ideas from revenue management suggest that a firm should first use pricing to achieve some balance between supply and demand. 4. Most successful examples of the use of revenue management are from the travel and hospitality industry and include airlines. and storage. Revenue management can be effective if there is a segment that wants to use capacity at the last minute and is willing to pay for it. Inventory assets exist throughout the supply chain and are carried to improve product availability. Revenue management may also be defined as the use of differential pricing based on customer segment. The value of the product varies in different market segments. Supply chain assets exist in two forms–capacity and inventory. Revenue management has a significant impact on supply chain profitability when one or more of the following four conditions exist: 1. Revenue management is the use of pricing to increase the profit generated from a limited supply of supply chain assets.16. In theory. the concept of differential pricing increases total profits for a firm. Spoilage occurs when the capacity reserved for higher price buyers is wasted because demand from the higher price segment does not materialize. the firm must create barriers by identifying product or service attributes that the segments value differently. The order from the lower price buyer should be accepted if the expected revenue from the higher price buyer is lower than the current revenue from the lower price buyer. The two risks in such a situation are spoilage and spill. ∙ Forecast at the segment level. Answer: If a supplier serves multiple customer segments with a fixed asset. Second. Diff: 2 Topic: 16. To differentiate between the various segments. Prices must be set with barriers such that the segment willing to pay more is not able to pay the lower price. There are two fundamental issues. Inc.3) Explain how differential pricing can benefit a firm. ∙ Use different prices for each segment. the firm must control demand such that the lower paying segment does not utilize the entire availability of the asset. however.2 Pricing and Revenue Management for Multiple Customer Segments AACSB: Reflective Thinking Skills Learning Outcome: Compare common approaches to supply chain design 16-20 Copyright © 2013 Pearson Education. Diff: 2 Topic: 16. First. The amount of the asset reserved for the higher price segment is such that the expected marginal revenue from the higher priced segment equals the price to the lower price segment. demand from the segment paying the lower price arises earlier in time than demand from the segment paying the higher price. Spill occurs if higher price buyers have to be turned away because the capacity has already been committed to lower price buyers. The supplier should decide on the capacity to commit for the higher price buyers so as to minimize the expected cost of spoilage and spill.1 The Role of Pricing and Revenue Management in a Supply Chain AACSB: Reflective Thinking Skills Learning Outcome: Compare common approaches to supply chain design 4) How do firms address the problems of spoilage and spill? Answer: In most instances of differential pricing. A current order from a lower price buyer should be compared with the expected revenue from waiting for a higher price buyer. the firm must differentiate between the two segments and structure its pricing to make one segment pay more than the other. that must be handled in practice. To successfully use revenue management when serving multiple customer segments. The basic trade-off to be considered by the supplier with production capacity is between committing to an order from a lower price buyer and waiting for a high-price buyer to arrive later on. a firm must use the following tactics effectively: ∙ Price based on the value assigned by each segment. publishing as Prentice Hall . he or she can improve revenues by setting different prices for each segment. the forecast and the revenue management decision should be evaluated after every transaction. The frequency of forecasting will depend on the amount of market activity. The cost of a capacity shortage is the reduction in margin that results from having to go to a backup source. The cost of wasted capacity is the margin that would have been generated if the capacity had been used for production. Overbook sales of the asset to account for cancellations. 2. The goal when making the overbooking decision is to maximize supply chain profits by minimizing the cost of wasted capacity and the cost of capacity shortage. publishing as Prentice Hall . Answer: The foundation of any revenue management system is the forecasting function.6 Using Pricing and Revenue Management in Practice AACSB: Reflective Thinking Skills Learning Outcome: Compare common approaches to supply chain design 16-21 Copyright © 2013 Pearson Education. Both the estimated value and the expected error are important inputs into any revenue management model. Inc. Diff: 2 Topic: 16. Forecasting involves estimating demand and also attributing an expected error to the forecast itself. the asset owner must be able to estimate the value of the asset over time and effectively forecast the impact of price on customer demand. as new information becomes available. Ideally. Forecasting does not mean obtaining an estimate that is always accurate. in which case an expensive backup needs to be arranged. To effectively vary price over time for a perishable asset. the cancellation or return rate is uncertain. Diff: 2 Topic: 16. Finally. In practice. The two revenue management tactics used for perishable assets are 1. however.5) How can firms address the problem of perishable assets? Answer: Any asset that loses value over time is perishable. The basic trade-off to consider during overbooking is between having wasted capacity (or inventory) because of excessive cancellations and having a shortage of capacity (or inventory) because of few cancellations.3 Pricing and Revenue Management for Perishable Assets AACSB: Reflective Thinking Skills Learning Outcome: Compare common approaches to supply chain design 6) Explain why forecasting is important to revenue management. To use overbooking with any degree of success. If the cancellation or the return rate can be predicted accurately. The tactic of varying price over time is suitable for assets such as fashion apparel that have a clear date beyond which they lose a lot of their value. The tactic of overbooking or overselling the available asset is suitable in any situation where customers are able to cancel orders and the value of the asset drops significantly after a deadline. a firm must be able to forecast cancellation patterns. reforecast to see if the revenue management tactics currently in place are still appropriate. Effective differential pricing over time will generally increase the level of product availability for the consumer willing to pay full price and also increase total profits for the retailer. the overbooking level is easy to determine. Vary price over time to maximize expected revenue. A group of customers have said that they would be willing to pay $15 per unit if capacity was available on the last day.7) A manufacturer of industrial sales has production capacity of 1. publishing as Prentice Hall . all production capacity gets booked about one week in advance.6 Using Pricing and Revenue Management in Practice AACSB: Use of Information Technology Learning Outcome: Compare common approaches to supply chain design 16-22 Copyright © 2013 Pearson Education.000 units per day. pB = $10 per unit Mean demand for segment A. the firm sells production capacity for $10 per unit. 250.10/15. DA. At this price.pB/pA. DA = 250 units Standard deviation of demand for segment A. pA = $15 per unit Revenue from segment B. 100) = 206. How much production capacity should the manufacturer reserve for the last day? Answer: Revenue from segment A. Inc. σA = 100 units CA = NORMINV(1 . Currently.9272 ≈ 207 units of capacity Diff: 2 Topic: 16. demand for the high-price segment is normally distributed with a mean of 250 and a standard deviation of 100. σA) = NORMINV(1 . About ten days in advance.