Pricing Strategies and Product Life Cycle

• Part 3 problems will focus on forecasting, so review all forecasting slides, homework, and assignments.
• Understand both weighted moving average calculation methods, including the class-taught trickier method.
• If data is missing for Naive forecasting, it's a viable alternative.

Stockout Outcomes

• The buyer waits for product availability.
• The buyer backorders the product.
• The seller expedites shipment.
• The seller substitutes a product if possible.
• If possible, the seller buys from a competitor, resulting in a loss of revenue (buyout).
• The seller loses current revenue and a buyer for the future.

Pricing Definitions

• F.O.B. destination: Supplier covers goods in transit until delivered.
• F.O.B. origin: Supplier is responsible for goods in transit once shipped.
• Zone Pricing: Prices are consistent within a defined zone.
• Package shipping often uses zone pricing based on distance/logistics network.
• Shipping time is similar to all locations within a zone.
• Single Uniform Pricing: One price for all customers.
• Freight Equalization Pricing: Equal efficiency leads to similar factory costs; competitive pricing relies on transportation costs.
• Firms with higher transport costs might absorb added costs to stay competitive.
• Basing-Point Price: Price is computed from a specific point, potentially a competitor's location to match prices.
• Incentive Pricing: Short-term price reductions.

Product Life Cycle Phases

Introduction Phase

• Product design and development are critical.
• Frequent product and process design changes occur.
• Production runs are short with high costs.
• Model options are limited, with a focus on quality.

Growth Phase

• Forecasting is critical.
• Product and process reliability are key.
• Competitive product improvements and options are introduced.

Maturity Phase

• Standardization increases.
• Product changes are less rapid and more minor.
• Focus shifts to optimum capacity and increasing process stability.
• Production runs are longer as product improvement and cost-cutting efforts increase.

Decline Phase

• Product differentiation is minimal.
• Emphasis on cost minimization.
• Overcapacity is typical.
• Pruning the product line to remove low-margin items and reduce capacity.

Pareto's Law (80/20 Rule)

• It is useful in distribution planning and inventory control.
• The vital few issues cause 80% of the problem.
• The trivial many issues contribute to 20% of the problem.
• Items are classified as A, B, or C, with A items needing the most attention. Different ABC classifications exist.

ABC classifications

• Based on sales.
• Based on hits (customer purchase frequency).
• Based on profit margin on inventory investment.
• D - very slow items.
• Dead items.
• New items (no sales history).
• X and Y items (if you do not stock them).
• Math example in PP 6.

Customer Relationship Management Steps

• Segment the customer base by profitability.
• Identify the product/service package for each customer segment.
• Develop and execute the best processes.
• Measure performance and improve continuously.

Forecasting Error Metrics

• Focus on MAD, MSE, and RSFE.
• RSFE indicates if forecasts are over or under actual demand based on its sign.

Exponential Smoothing

• Lower alpha spreads weight across periods, smoothing the forecast.
• Higher alpha weights the most recent period, making it more responsive.

Activity-Based Costing (ABC)

• It measures the cost and performance of activities, resources, and cost objects.
• Assigns resources to activities, which are then assigned to cost objects based on use.
• Suited for situations where output and allocation are highly correlated.
• Less effective when output is not correlated with the allocation base.

External Forces Driving Change

• Globalization raises economic/political risks, shortens product life cycles, and blurs organizational boundaries.
• Technology facilitates supply chain transformation.
• Organizational Consolidation shifts supply chain power to the retail end.
• Empowered consumers demand competitive prices, high quality & customized products.
• Government Policy and Regulations result in more competition.

Supply Chain Management and Flows

• Supply chain management includes the flow of materials, products, services, cash, and information.
• In the 1980s inbound logistics was incorporated.
• Product, information flow & decision-making is vital.

Supply Chain Strategy

• Supply chain collaborations, cash flow management, and demand-driven practices are essential.
• Detect/understand demand signals and synchronize demand vs. supply.

Strategy

• Mission defines the organization's boundaries and direction.
• Vision involves strategy development and unconventional approaches through SWOT analysis.

Competitive Priorities

• Focus on Cost, Quality (Dependability), Flexibility, Lead Time, Time to market, & Innovation

Logistics Strategy

• Implement with Total Cost, Differentiated Distribution, & Postponement with a goal of Consolidation

Postponement

• Capitalize on firm customer orders.
• Eliminate forecast error.
• Control LeadTime variability.
• Decrease average lead times.

Customer Service

• Customer service should consider the customers needs during pre-transaction, transaction and post-transaction.
• Elements include written statements of policy, system flexibility, technical services, stockout level, ability to backorder, elements of order cycle

Key Customer Measurements

• These include Time, Transship, System accuracy, Order conveniences, Product substitution, Installation, Warranty, Product tracking

CRM

• Segment customer base by profitability.
• Identify the product/service package for each customer segment.
• Develop and execute best processes.
• Measure performance and continuously improve.
• Optimize cost to serve.

Customer Service Elements

• Bill of lading prep.
• Credit clearance
• Order assembly occur during Order processing.
• Shipping time from warehouse happens during Delivery time.

Performance Measures for Customer Service

• Orders are accurately received on time, complete, and damage-free and billed accurately.

Order Management Impact

• Affects product availability.
• Improves both seller/buyer inventory.
• Internal metrics: Item fill rate, line fill rate, stock availability.
• External metrics: order fill rate & perfect order performance.

Cost of Stockouts

• Includes waiting for product availability, expediting shipment, or substituting a product.

Relationships

• Include traditional vertical linkages or parallel horizontal agreements.

Relationship Types

• May be transactional, collaborative, or strategic & focus on Implementation

3PLs (Third-Party Logistics)

• 3PL firms perform a company's logistics functions.
• Types include transportation, warehouse/distribution, forwarder, financial, information, and corporate subsidiaries based.

Explore pricing strategies like FOB destination, zone pricing, and incentive pricing. Understand the importance of forecasting during the product life cycle and operational changes during the growth phase. Identify focus during the maturity stage.