Chopra and Meindl’s reserve, Supply Chain Management: Strategy, Planning, and Operation, is a thorough introduction on source chain management. Pricing is an important lever to increase supply chain revenue by better matching source and demand. Revenue management is the use of pricing to increase the profit generated from currently limited supply chain assets. Ideas from revenue management claim that a company should first use pricing to accomplish some balance between supply and demand in support of then spend money on or eliminate resources. Supply chain assets can be found in two forms, inventory and capacity. Capacity assets in the supply chain exist for production, transportation, and storage while inventory assets exist throughout the supply chain and are carried to improve product availability.
Low priced carriers were initially very successful in their operations. But once, the regular airlines offered low fares as part of their income and pricing management, the capacity utilization of low priced companies became low plus some of them went of business. Revenue management also could be defined as the utilization of differential pricing predicated on customer segment, time useful and product or capacity availability to increase supply string surplus. Revenue management technique has been successfully put on airline, railway, hotel and resort, cruise ship, health care, publishing and printing. Revenue management has considerable prospect of manufacturing functions as well. Airline seats are good exemplory case of market with multiple customer sections.
Airline use progress purchase service at lower rates to portion its customer into different fare classes and dynamically modify their chair capacity assigned to those fare classes as advance sales orders arrive. For example business travelers are prepared to pay a higher fare to travel a specific schedule for convenience and even order at the last minute, while leisure travelers are willing to shift their plan to take benefit of lower fares.
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There are two fundamental issues than must be managed to apply the idea of income management. First, how to distinguish between two segments and structure its prices to make one portion pay more than the other. Second, how much to cater to cheap demand. To differentiate between various segments, the company must create by determining services or product attributes that segments value differently.
For example, business travelers on an flight want to book at the last minute and only stay just as long as they must. In other hand leisure travelers are willing to book far in advance and adapt the duration of stay. Thus the versatility on booking and schedule differentiate the business travelers from leisure travelers. For transportation provider the segment can be differentiated based about how far beforehand a person is willing to commit and pay for transportation capacity. Similar parting may appear for production and storage-related property in supply string also.
The basic trade-off here is between investing in an order from a lower price or looking forward to a high price to arrive later on. The risks in such situation are spoilage and spill. Spoilage occurs when capacity is wasted because demand from high price doesn’t materialize. Spill occurs if higher price sections have to be refused because capacity has already been committed to lower price segment.
