Consumer-Driven Demand and Operations Management Models: A Systematic Study of Information-Technology-Enabled Sales Mechanisms PDF
Preview Consumer-Driven Demand and Operations Management Models: A Systematic Study of Information-Technology-Enabled Sales Mechanisms
Consumer-Driven Demand and Operations Management Models A Systematic Study of Information- Technology-Enabled Sales Mechanisms INT.SERIESINOPERATIONSRESEARCH&MANAGEMENTSCIENCE SeriesEditor:FrederickS.Hillier,StanfordUniversity SpecialEditorialConsultant:CamilleC.Price,StephenF.AustinStateUniversity Titleswithanasterisk(*)wererecommendedbyDr.Price Netessine&Tang/CONSUMER-DRIVENDEMANDANDOPERATIONSMANAGEMENTMODELS: ASystematicStudyofInformation-Technology-EnabledSalesMechanisms Saaty&Vargas/DECISIONMAKINGWITHTHEANALYTICNETWORKPROCESS:Economic, Political,Social&TechnologicalApplicationsw.Benefits,Opportunities,Costs&Risks Yu/TECHNOLOGYPORTFOLIOPLANNINGANDMANAGEMENT:PracticalConceptsandTools Kandiller/PRINCIPLESOFMATHEMATICSINOPERATIONSRESEARCH Lee&Lee/BUILDINGSUPPLYCHAINEXCELLENCEINEMERGINGECONOMIES Weintraub/MANAGEMENTOFNATURALRESOURCES:AHandbookofOperationsResearch Models,Algorithms,andImplementations Hooker/INTEGRATEDMETHODSFOROPTIMIZATION Dawandeetal/THROUGHPUTOPTIMIZATIONINROBOTICCELLS Friesz/NETWORKSCIENCE,NONLINEARSCIENCEandINFRASTRUCTURESYSTEMS Cai,Sha&Wong/TIME-VARYINGNETWORKOPTIMIZATION Mamon&Elliott/HIDDENMARKOVMODELSINFINANCE delCastillo/PROCESSOPTIMIZATION:AStatisticalApproach Jo´zefowska/JUST-IN-TIMESCHEDULING:Models&AlgorithmsforComputer&Manufacturing Systems Yu,Wang&Lai/FOREIGN-EXCHANGE-RATEFORECASTINGWITHARTIFICIALNEURAL NETWORKS Beyeretal/MARKOVIANDEMANDINVENTORYMODELS Shi&Olafsson/NESTEDPARTITIONSOPTIMIZATION:MethodologyandApplications Samaniego/SYSTEMSIGNATURESANDTHEIRAPPLICATIONSINENGINEERINGRELIABILITY Kleijnen/DESIGNANDANALYSISOFSIMULATIONEXPERIMENTS Førsund/HYDROPOWERECONOMICS Kogan&Tapiero/SUPPLYCHAINGAMES:OperationsManagementandRiskValuation Vanderbei/LINEARPROGRAMMING:Foundations&Extensions,3rdEdition Chhajed&Lowe/BUILDINGINTUITION:InsightsfromBasicOperationsMgmt.Modelsand Principles Luenberger&Ye/LINEARANDNONLINEARPROGRAMMING,3rdEdition Drewetal/COMPUTATIONALPROBABILITY:AlgorithmsandApplicationsintheMathematical Sciences* Chinneck/FEASIBILITYANDINFEASIBILITYINOPTIMIZATION:AlgorithmsandComputation Methods Tang,Teo&Wei/SUPPLYCHAINANALYSIS:AHandbookontheInteractionofInformation,System andOptimization Ozcan/HEALTHCAREBENCHMARKINGANDPERFORMANCEEVALUATION:AnAssessment usingDataEnvelopmentAnalysis(DEA) Wierenga/HANDBOOKOFMARKETINGDECISIONMODELS Agrawal&Smith/RETAILSUPPLYCHAINMANAGEMENT:QuantitativeModelsandEmpirical Studies Brill/LEVELCROSSINGMETHODSINSTOCHASTICMODELS Zsidisin&Ritchie/SUPPLYCHAINRISK:AHandbookofAssessment,Management&Performance Matsui/MANUFACTURINGANDSERVICEENTERPRISEWITHRISKS:AStochasticManagement Approach Zhu/QUANTITATIVEMODELSFORPERFORMANCEEVALUATIONANDBENCHMARKING:Data EnvelopmentAnalysiswithSpreadsheets Kubiak/PROPORTIONALOPTIMIZATIONANDFAIRNESS* Bier&Azaiez/GAMETHEORETICRISKANALYSISOFSECURITYTHREATS* ∼Alistoftheearlypublicationsintheseriesisfoundattheendofthebook∼ Consumer-Driven Demand and Operations Management Models A Systematic Study of Information- Technology-Enabled Sales Mechanisms Edited by Serguei Netessine Christopher S. Tang 123 Editors SergueiNetessine ChristopherS.Tang TheWhartonSchool UCLAAndersonSchoolofManagement UniversityofPennsylvania Box951481 3730WalnutSt. LosAngeles,CA90095–1481 Philadelphia,PA19104-6340 [email protected] USA [email protected] SeriesEditor FrederickS.Hillier StanfordUniversity Stanford,CA,USA ISSN0884-8289 ISBN978-0-387-98018-8 e-ISBN978-0-387-98026-3 DOI10.1007/978-0-387-98026-3 SpringerDordrechtHeidelbergLondonNewYork LibraryofCongressControlNumber:2008944171 (cid:2)c SpringerScience+BusinessMedia,LLC2009 Allrightsreserved.Thisworkmaynotbetranslatedorcopiedinwholeorinpartwithoutthewritten permissionofthepublisher(SpringerScience+BusinessMedia,LLC,233SpringStreet,NewYork,NY 10013,USA),exceptforbriefexcerptsinconnectionwithreviewsorscholarlyanalysis.Useinconnec- tionwithanyformofinformationstorageandretrieval,electronicadaptation,computersoftware,orby similarordissimilarmethodologynowknownorhereafterdevelopedisforbidden. Theuseinthispublicationoftradenames,trademarks,servicemarks,andsimilarterms,eveniftheyare notidentifiedassuch,isnottobetakenasanexpressionofopinionastowhetherornottheyaresubject toproprietaryrights. Printedonacid-freepaper SpringerispartofSpringerScience+BusinessMedia(www.springer.com) Preface To compete in today’s volatile market with rapidly changing consumer tastes and fierce competition, companies in the manufacturing and service industries are de- ploying new mechanisms to increase sales, market shares, and profits. As an ef- fective mechanism to segment a market comprising of consumers with different needs, preferences, and willingness-to-pay, many firms have used product (or ser- vice) variety with different price points to serve different segments of the market, see Ho (1998). Ideally, the price of each of these products (or services) targets a particular segment of customers. For example, airlines often use different terms ofsales(refundable/non-refundable,upgradable/non-upgradable,direct/connecting flight, etc.) to sell economy class tickets at different prices. Likewise, retailers of- ten sell the same product at different prices in different channels (company’s own website,dealers’websites,orcompany’sphysicalstores)oratdifferenttimes(be- fore,during,andafterthesellingseason),seeTalluriandvanRyzin(2005).Ample academic literature in Operations Management and other areas considered these strategies.However,asconsumersbecomemoreknowledgeableabouttheproduct, pricing,organizationalandoperationalpoliciesthatthecompaniesdeployforprod- uctsandservices,theirpurchasingbeginstochangedramatically. In the academic Operations Management literature, consumer demand is often assumedtobeexogenoussothatdemandfunctionsareusuallymodeledaswellde- fined and exogenously specified functions of price and/or other product attributes suchasquality.Thistypeofmodelingapproachcapturesthe“macro”viewofcon- sumerdemandandmanyOMmodelsshedlightonstrategicandmanagerialissues ranging from revenue management to supply chain management. Today, however, manycompaniesarebeginningtotakethe“micro”viewbysellingeachproductand servicetoatargetsegmentbyutilizingmoresophisticatedsellingmechanismsen- abledbyinformationtechnologies(say,one-on-onemarketing).Someofthesesales mechanismsarethefollowing: 1. Mixed sales channels – To offer customers more options and price points, Amazon.comsellsbothnewbooks(ownedbyAmazon)andusedbooks(ownedby independentusedbooksellers)whichcompetefordemandfromconsumers. v vi Preface 2. Automatic markdown pricing – To clear overstocked items, Landsend.com pre-announces their price markdown schedule in advance so that consumers can timetheirpurchasesaccordingtothemarkdownschedule. 3. Portals – To provide the one-stop shopping experience for their customers, Orbitz.comsellsairlineticketsformultipleairlinesthusputtingthemindirectcom- petitionwitheachother. 4.Groupbuying–Toprovideeachindividualconsumerwiththebuyingpower of the collective group, thebuyinggroup.com offers their members group discount pricesonitemsrangingfromcellphonestoofficesupplies. 5.Auctions–Tocreateanonlinemarketforconsumerswhowanttobuyorsell theiritems,ebay.comconstructsdifferentonlineauctionmechanisms. Anecdotalandempiricalevidencessuggestthat,inthesesalesmechanisms,con- sumer purchasing behavior is fundamentally different from that arising in more traditional retailing environments. For instance, there is plenty of anecdotal evi- dence suggesting that many consumers are becoming more strategic in the sense thattheypostponetheirpurchasesduetoananticipationoffuturepricedecreases. Besides strategic purchasing behavior, there is empirical evidence indicating that consumer’s purchasing decision is often affected by the purchasing decisions of other consumers. For instance, Bikhchandani et al. (1992) develop a theory to ex- plain how information cascades can induce the herd behavior among customers. Ifaconsumer’spurchasingdecisionisaffectedbyinformationalfactorspertaining to pricing, product availability, product characteristics, and other consumers’ pur- chasing decisions, the consumer demand becomes endogenous in the sense that it now depends on the underlying sales mechanism as well as on the realized (total) pricethattheconsumeractuallypays.Asthedemandpatternchangesinresponseto firms’actions,firmsmustmanagetheirsupplyoperationseffectivelyandefficiently inordertomeetthesenewchallenges.Thus,thestudyofdifferentsalesmechanisms andtheirimplicationsforconsumerdemandsandsupplyoperationsisverytimely andisofimmediatepracticalrelevance. Thisbookcontainsacollectionofstate-of-the-artOMmodelsthatexaminethe implications of rational or strategic purchasing behavior under different retail for- mats. These models provide new insights into how firms should operate in these newchannelsusingdifferentsalesmechanisms.Thechaptersinthisbookarewrit- tenbyleadingscholarswhohaveinitiatedthequestforadeeper understanding of consumer’s rational purchasing behavior under various sales mechanisms. More- over,thesescholarshavecontinuedtheireffortsindevelopinginnovativewaysfor companiestorespondtothisrationalpurchasingbehavior. Weenjoyedtheexperienceofworkingonthisbookandwesincerelyhopethat this book will stimulate researchers in Operations Management and other areas to explorefurtherthisexcitingemergingareaofresearch. Preface vii References Bikhchandani S, Hirshleifer D, Welch I (1992) A theory of fads, fashion, custom, and cultural changeasinformationalcascades.JournalofPoliticalEconomy100(5):992–1026 Ho TH, Tang CS (1998) Product variety management: Research advances. Kluwer Publishers, Massachusetts TalluriK,vanRyzinG(2005)Thetheoryandpracticeofrevenuemanagement.Springer,NewYork Fontainebleau,France,November2008 SergueiNetessine LosAngeles,November2008 ChristopherS.Tang Introduction One primary focus of research in Operations Management field is to find ways to makesupplymeetconsumerdemand.Fordecades,manyOMresearchershavede- velopedvariousproductionplanningandinventorycontrolmodelsandmathemati- calsolutiontechniqueswiththeintentofhelpingcompaniesmeetconsumerdemand effectivelyandatalowcost.Thesemodelshavecertainlyhelpedmanycompanies improvetheirinternaloperations.Ourfieldcontinuestodevelopmoresophisticated solutiontechniquesforsolvingvariousclassicalOperationsManagementproblems. However,anotheritemontheagendaofourfieldistobroadenthescopeofOpera- tionsManagement,whichisthekeygoalofthisbook. In most Operations Management models consumer demand is assumed to be exogenous so that demand is usually taken to be a well-defined and pre-specified functionofpriceand/orotherproductattributessuchasquality.Thismodelingas- sumption is quite reasonable for capturing the consumer demand on an aggregate level. For example, there are many existing models explaining how firms can use product (or service) variety with different price points to serve different segments of the market (Ho and Tang 1998). However, to compete for market share, com- panies in the manufacturing and service industries are now deploying other novel mechanisms to segment a market comprising of consumers with different needs, preferences,andwillingness-to-pay. Whenbuyingdifferentvariantsofabasicproduct(orservice)atdifferentprices with different terms of sales, consumers often need to process information about product characteristics and make their choices in a rational manner. Hence, each consumer’s purchasing decision is affected by the way information is being con- veyed to them, by the way information is being analyzed by the consumer, and by other consumers’ decisions (such as the herding effect in Bikhchandani et al. 1992).Inaddition,organizationalfactorssuchasthechoiceofsaleschannels,mar- keting factors pertaining to product assortments (such as horizontal competition, seeHotelling1929)andverticalcompetition(seeLilienetal.1992),differentsales mechanismssuchasauctions(cf.,Krishna2002),andpricing(seeCoase1972and BesankoandWinston1990)aswellasoperationalfactorsrelatedtoproductavail- ability can have direct impact on consumers’ purchasing behavior. If these factors ix x Introduction are considered by consumers, the consumer demand becomes endogenous in the sensethatitdependsontheunderlyingsalesmechanismaswellasontherealized pricethattheconsumeractuallypays. To address these recent developments, this book presents a collection of state- of-the-art Operations Management models with consumer-driven demand. This is an emerging research area that focuses on the evaluation of different innovative product, services, and sales initiatives, and in all of these chapters it is critical to obtain a deeper understanding of consumer purchasing behavior first and then to develop efficient response to this behavior. Not only is each chapter motivated by variousinnovativeservice/productdeliverymechanismsfoundinpractice,butalso themodelspresentedineachchapterarebasedonvariouswell-establishedtheories in economics, marketing, operations management, and psychology that deal with consumerpurchasingbehavior. OverallStructure This book is comprised of 18 chapters that are divided into 5 parts. The first part (Chapters1,2,3,and4)examinesconsumers’rationalorstrategicpurchasingbe- havior under different business environments. Anticipating consumers’ behavior, firmsinthesechaptersusedifferentresponsemechanismstomitigatethenegative effect caused by the consumers’ rational/strategic purchasing behavior. As a re- sponsetostrategiccustomers,thesecondpart(Chapters5,6,and7)examineshow different organizational strategies (such as sales channels and customer selection processes)canbedeployedtoincreaseprofits.Chaptersinthethirdpart(Chapters8, 9,10,and11)examinehowcompaniescanuseproductstrategiestoincreaseprof- itswhenconsumersarestrategic.Tocounteractthestrategiccustomers’purchasing behavior, the fourth part (Chapters 12, 13, 14, and 15) examines how companies can use certain operational strategies (such as capacity/inventory/product avail- ability and inventory display formats) to increase profits. Finally, in the fifth part (Chapters 16, 17, and 18) the book describes how different pricing strategies can enablefirmstoimproveprofitsinthepresenceofstrategicconsumers. ChapterHighlights PartI:RationalConsumerBehavior:EndogenousDecision MakingMechanisms In Chapter 1, Gad Allon and Achal Bassamboo set the stage for the book by ex- amining situations in which consumers treat information provided by the sellers regarding product/service availability as unreliable. Thus, customers are strategic Introduction xi in the way they treat information and use it in decisions that they make regard- ingbuying/waiting.Whileitisoftenassumedthatconsumers’purchasingbehavior is purely driven by utility optimization, in Chapter 2, Matulya Bansal and Costis Maglaras examine a situation in which customers are “satisficers” instead of “op- timizers”. Specifically, the authors consider the case in which the customers seek to buy the cheapest product with quality above a certain customer-specific thresh- oldwhichmayreflect,forexample,boundedrationalityofconsumers.Inthesame vein, in Chapter 3, Felipe Caro and Victor Marinez-de-Albeniz consider the case whencustomersareinsatiablesothatcompaniescanincreasesalesbyfrequentnew product introduction, and they determine how often the company should rotate its assortment.LaurensDeboandSenthilVeeraraghavaninChapter4studyconsumer behavior in queues. In particular, they consider the issue of how customers might be able to infer product quality from the length of the queue and they endogenize customers’decisiontoselectthequeuetojoin. Part 1 sets the stage by proposing that consumers are either rational (e.g., op- timizers, satisficers, insatiable) or strategic. Specifically, consumers are strategic whentheyrationallyanticipateandrespondtofutureconditions.Forexample,an- ticipatingfuturepricedrops,astrategicconsumermaydelayhis/herpurchasingde- cision.Therefore,dealingwithrational/strategicconsumerscanbecostly.Assuch, companiesneedtodevelopeffectivemechanismstomitigatethenegativeeffectsof rational/strategiccustomers.Thisisthefocusoftheremainderofthisbook. PartII:OrganizationalStrategiesforManagingRational/Strategic ConsumerBehavior Motivated by proliferation of multiple channels that target multiple customer seg- ments,BarchiGillaiandHauLeeexamineinChapter5theuseofasecondary(e.g., Internet)marketthatcanenableretailerstoclearinventoriesunsoldintheprimary market. They demonstrate benefits of such strategies for retailers, manufacturers, andconsumers.InChapter6,BasakKalkanciandJinWhanghighlightthefactthat it can be very costly to satisfy rational consumers (clients in a supply chain) in a heterogeneous market since their aggregate orders may induce the bullwhip ef- fect. Instead, they suggest that a supplier can improve profitability by focusing on an optimal portfolio of clients that maximizes supplier’s long-run expected profit. Considering situations when consumers are strategic and rationally respond to fu- ture market conditions, Xuanming Su and Fuqiang Zhang review several existing papersthatdemonstratehowdecentralizationcanbebeneficialtosupplychainper- formance in Chapter 7. Interestingly, they find that, when customers are strategic, decentralizedsystemscanoutperformacentralizedorganization.
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