Pricing and Assortment Selection with Demand Uncertainty.

Assortment planning and pricing are among the most important strategic questions for many firms. These decisions are particularly challenging when inventory considerations need to be taken into account. Unfortunately, the trade-offs created by the assortment, pricing and inventory decisions are complicated enough to push many firms to make these decisions separately, ignoring their synergy. This dissertation targets this gap by presenting joint assortment and pricing models with inventory considerations. The first setting studied in this dissertation is a single firm selling a configurable product (e.g. a laptop computer), formed by putting together two components: one required (e.g. processor) and one optional (e.g. DVD writer). This dissertation finds that the optimal prices are such that all variants of a component share the same effective profit margin, defined as the unit gross margin net of unit inventory-related cost, which itself depends on unit underage and overage costs, service level and demand variability. As for assortment selection, the importance of a variant's surplus is shown. When variants are put together to form a product configuration, their surpluses combine to yield the attractiveness of the product configuration, whose role in selecting the assortment is highlighted in this dissertation. Furthermore, this dissertation finds that if the optional component's assortment and margin influence the customer's decision to purchase from the firm, then the component must be priced at effective cost. This is no longer true if only the required component affects the customer's decision to purchase from the firm. The second setting studied here involves a dual-channel supply chain, where a manufacturer sells substitutable products directly to the customer and also through an independent retailer. This dissertation finds that the wholesale prices in such a supply chain exhibit a structure in which the wholesale margins weighted by a function of service levels and demand variability must be common across all variants. In addition, this work characterizes scenarios where the manufacturer's and retailer's assortment preferences are in conflict. In particular, this work shows that the manufacturer may prefer the retailer to carry items with high demand variability while the retailer prefers items with low demand variability.Ph.D.Industrial & Operations EngineeringUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/75935/1/betzabe_1.pd

CONVENIENCE STORE PRACTICES AND PROGRESS WITH EFFICIENT CONSUMER RESPONSE: THE MINNESOTA CASE

The adoption of Efficient Consumer Response (ECR) practices by Minnesota convenience store (C- store) is explained in this study. Data were collected through a mail survey distributed to more than 250 Minnesota C-stores ranging in size from single, independently owned stores to over 100 store chains. The survey instrument was developed to collect data on the following components important to C-store operations and the implementation of ECR: information systems, ordering, receiving, inventory management, and pricing practices. Findings are presented from three distinct perspectives: 1. Location: Rural C-stores, which often meet customer needs that were once met by small supermarkets, carried a wider range of products and offered more services than C-stores in urban and suburban locations. However, rural stores had the lowest adoption rate for practices related to the ECR initiative. Urban chains coordinated business practices with suppliers to a greater degree than suburban and rural chains. 2. Chain size: Larger chains were more likely to have implemented the more costly technological practices than were small chains. This was expected since large chains can spread the fixed costs of ECR adoption over a larger number of stores. Larger chains also cooperated and communicated more with their suppliers than small chains. Again, this was expected, since larger chains can economize on transaction costs involved in maintaining these business relationships. 3. ECR practices: ECR adoption and superior performance were positively related. Having adopted six to nine practices was positively correlated with higher inside and outside sales per square foot of selling area and higher annual inventory turns. However, it was not clear whether there was a causal relationship in either direction between ECR practices and store performance. The C-store industry is changing, as new information technologies, new business practices, and new retail strategies are developed. The results from this survey can serve as a baseline for future research monitoring the adoption of these innovations and assessing their impact on productivity and profitability. Minnesota C-Stores appear to be smaller but more productive than the national average. Overall, it appears ECR is just beginning to impact the Minnesota C-store industry. Nonetheless, regression analyses confirmed ECR practices are positively related to store sales performance and those stores adopting the most practices had higher productivity measures.Industrial Organization, Marketing,

Coordination of inventory distribution & price markdowns for clearance sales at Zara

Thesis (M.B.A.)--Massachusetts Institute of Technology, Sloan School of Management; and, (S.M.)--Massachusetts Institute of Technology, Engineering Systems Division; in conjunction with the Leaders for Global Operations Program at MIT, 2010.Cataloged from PDF version of thesis.Includes bibliographical references (p. 83-86).There is an essential need in the retail industry, of integrating inventory planning and pricing strategies. In the fast-fashion world of retail, inventory is treated as a perishable item leading to short selling periods. It is a common practice for retailers to liquidate unsold merchandise via clearance markdown policies. Joint marketing and production decisions are important and challenging in retailing. Clearance sales depend on the pricing, seasonal effects, and the assortment of goods available to the customer. Errors in inventory distribution and clearance pricing result in loss of potential revenue or excess inventory to be salvaged. In the case of Spanish-based retailer Zara, thirteen percent of annual revenues are attributed to clearance sales. To maximize these revenues a supply chain tool is designed to facilitate the inventory distribution decisions for the clearance season while considering price markdowns. A two part linear optimization model considers the demand forecast, pricing decisions, and logistic costs in determining the allocation of excess inventory. The business case is very similar to other retailers where revenues need to be maximized. However, Zara's business model and vertically integrated supply chain makes this case very unique. In a forecast error comparison test, the proposed solution improved the forecast error from 8 to 4 percent in respect to the current forecast process.by Orietta Parra Verdugo.S.M.M.B.A

ADOPTION OF ECR PRACTICES IN MINNESOTA GROCERY STORES

Efficient Consumer Response (ECR) is an industry-wide, collaborative initiative to re-engineer the grocery supply chain. This report presents findings from a study of ECR adoption in Minnesota grocery stores. Data were collected through interviews with managers of forty stores that are broadly distributed over store sizes, locations, and organizational forms. The interviews focused on business practices and technologies related to inventory management and ordering, shelf-space allocation and product assortment decisions, and product pricing and promotions. Findings are presented from three distinct perspectives: (1) stores grouped by location (metro and out- state), (2) stores grouped by organizational form (corporate chain, independent chain, and single store), and (3) stores grouped by levels of an ECR "readiness index" that indicates the level of adoption for key business practices and technologies that support ECR initiatives. The following general conclusions can be drawn from the detailed results presented in this report. 1. Location in the Twin Cities metropolitan area makes an important difference in implementing some components of the ECR initiative. On average, metro and out-state stores differ little with respect to store size or the adoption of technologies that support ECR. Metro stores are much more likely than out-state stores, however, to coordinate shelf space and product assortment decisions and pricing and promotion activities with outside trading partners. 2. On average, stores that are part of a chain, especially a large corporate chain, are making faster progress toward implementation of ECR initiatives than are single stores. However, three independently owned single stores were also among the most innovative of those we visited. In these stores, it appears that a visionary, energetic owner/manager is able to quickly respond to new opportunities. 3. ECR adoption and superior performance are closely associated. Stores with a high ECR "readiness index" have much higher sales per labor hour, sales per square foot, and annual inventory turns. We cannot determine whether ECR readiness leads to better performance or better performance makes it easier to adopt business practices and technologies that support ECR. We can conclude, however, that competitive forces will almost certainly drive more stores toward adoption of a wider range of technologies and business practices that support the ECR initiative. In summary, ECR is changing the way Minnesota grocers do business, and adopting ECR practices goes hand-in-hand with better financial performance. Findings from this study suggest that stores of any size and organizational form that are willing and able to adopt new technologies, to develop cooperative relationships with their trading partners, and to respond to the unique needs of their customers will increase their chance of success in this competitive market.Agribusiness, Industrial Organization, Land Economics/Use,

Static Pricing Problems under Mixed Multinomial Logit Demand

Price differentiation is a common strategy for many transport operators. In this paper, we study a static multiproduct price optimization problem with demand given by a continuous mixed multinomial logit model. To solve this new problem, we design an efficient iterative optimization algorithm that asymptotically converges to the optimal solution. To this end, a linear optimization (LO) problem is formulated, based on the trust-region approach, to find a "good" feasible solution and approximate the problem from below. Another LO problem is designed using piecewise linear relaxations to approximate the optimization problem from above. Then, we develop a new branching method to tighten the optimality gap. Numerical experiments show the effectiveness of our method on a published, non-trivial, parking choice model

Smart Pricing: Linking Pricing Decisions with Operational Insights

The past decade has seen a virtual explosion of information about customers and their preferences. This information potentially allows companies to increase their revenues, in particular since modern technology enables price changes to be effected at minimal cost. At the same time, companies have taken major strides in understanding and managing the dynamics of the supply chain, both their internal operations and their relationships with supply chain partners. These two developments are narrowly intertwined. Pricing decisions have a direct effect on operations and visa versa. Yet, the systematic integration of operational and marketing insights is in an emerging stage, both in academia and in business practice. This article reviews a number of key linkages between pricing and operations. In particular, it highlights different drivers for dynamic pricing strategies. Through the discussion of key references and related software developments we aim to provide a snapshot into a rich and evolving field.supply chain management;inventory;capacity;dynamic pricing;operations-marketing interface

Think Local-Act Local: Is It Time to Slow Down the Accelerated Move to Global Marketing?

In view of the accelerated move of great corporations towards global marketing, the strategic changes of such companies raise interesting questions. Is marketing globalization reaching its limits after years of implementation? Is it time for companies to rethink their strategies and move back, like Coca-Cola, to a multi-domestic marketing approach?Global Marketing, Multi-Domestic Marketing Approach, Brand Equity, Drawbacks of Marketing Globalization, Coca-Cola

Optimizing Consumer-Centric Assortment Planning under Cross-Selling Effects

Central to modern-time, consumer-focused retailing is the ability to provide attractive and reasonably-priced product assortments for different customer profiles. To this end, retailers can benefit from the use of data analytics in order to identify distinct customer segments, each characterized by their buying power, shopping behavior, and preferences. Further, retailers can also benefit from a careful examination of alternative procurement options and cost levers associated with products that are considered for inclusion in the assortment. Issues of assortment planning lie at the interface of operations and marketing. Profitable planning trade-offs can be identified using an optimization methodology and are simultaneously driven by consumer preferences and supply cost considerations. This dissertation proposes and investigates novel, integrated optimization models for assortment planning with the following overarching objectives: (i) To reveal insights into assortment decisions under product substitutability or complementarity and multiple customer segments; (ii) to improve the computational tractability of (nonlinear discrete) optimization models that arise in such contexts and to demonstrate their efficacy for large-scale data instances. In the first essay, we investigate the joint optimization of assortment and pricing decisions for complementary retail categories with relatively popular products having high and stable sales volumes, such as fast-moving consumer goods. Each category comprises substitutable items (e.g., different coffee brands) and the categories are related by cross-selling considerations that are empirically observed in marketing studies to be asymmetric in nature. That is, a subset of customers who purchase a product from a primary category (e.g., coffee) can typically opt to also buy from one or several complementary categories (e.g., sugar and/or coffee creamer). We propose a mixed-integer nonlinear program that maximizes the retailer\u27s profit by jointly optimizing assortment and pricing decisions for multiple categories using a deterministic maximum-surplus consumer choice model. A linear mixed-integer reformulation is developed, which effectively enables an exact solution to large, industry-sized problem instances using commercial optimization solvers. Our computational study indicates that overlooking cross-selling between retail categories can result in substantial profit losses, suboptimal (narrower) assortments, and inadequate prices. The demonstrated tractability of the proposed model paves the way for store-wide optimization of categories that exhibit significant complementarity, which retailers can infer from market basket analysis. The second essay addresses an assortment packing problem where a decision maker optimizes the assortment and release times of products that belong to different categories over a multi-period planning horizon. Products in a same category are substitutable, whereas products across categories may exhibit complementarity relationships. All products have a longevity over which their attractiveness gradually decays (e.g., electronics or fashion products), while being positively or negatively impacted by the specific mix of substitutable or complementary products that the retailer has introduced. Our proposed 0-1 fractional program employs an attraction demand model and subsumes recent assortment packing models in the literature. We highlight the effect of overlooking cross-selling and cannibalization on the profit using an illustrative example. We develop linearized reformulation that afford exact solutions to small-sized problem instances. Furthermore, a linear programming-based heuristic approach is devised and is demonstrated to yield near-optimal solutions for large-scale computationally challenging problem instances in manageable times. Model extensions are discussed, especially in the context of the movie industry where exhibitors have to decide on the assortment of movies to display and their optimal display times

Innovation in Marketing Channels

In more recent years, the context of globalization in which market channel structures and strategies are developing is bringing to a more complex concept of marketing channels, with disintermediation or reintermediation, multichanneling and new roles/specializations that are emerging as new issues.In this context, innovation in marketing channels becomes a complex, multiorganizational, multidisciplinary activity that requires collaboration and interactions across various entities within the supply chain network. In recent years, the innovation processes in marketing channels have occurred with high intensity and speed, especially following the changes spurred by technology that allowed the adoption of more efficient organizational solutions.Retail; Channel Structure; Innovation in Marketing Channels; Retail Technological Innovation; Global Markets