Price Discounts in Exchange for Reduced Customer Demand Variability and Applications to Advance Demand Information Acquisition
By Sumit Kunnumkal, Huseyin Topaloglu
International Journal of Production Economics | 2008
International Journal of Production Economics | 2008
DOI
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Citation
Kunnumkal, Sumit., Huseyin Topaloglu. Price Discounts in Exchange for Reduced Customer Demand Variability and Applications to Advance Demand Information Acquisition International Journal of Production Economics pdf.sciencedirectassets.com/271692/1-s2.0-S0925527307X01853/1-s2.0-S0925527307000989/main.pdf?X-Amz-Security-Token=IQoJb3JpZ2luX2VjEND%2F%2F%2F%2F%2F%2F%2F%2F%2F%2FwEaCXVzLWVhc3QtMSJHMEUCIQCUhLOObweEbMoDtFuUVAmM4NUSFfgNrTzWyTh4VDJBXgIgT6gy%2F0pcG0BvHei5bZWJN%2FUN5XhwVseljI0ancuCcaEquwUIuf%2F%2F%2F%2F%2F%2F%2F%2F%2F%2FARAFGgwwNTkwMDM1NDY4NjUiDCsPlhJ%2Bcr6Oa3N9DiqPBR0FQ42mLVgF30y0kH1Osag%2FPF84Ml6X8uj9POsoY8J%2B4ah0pxX2%2FqRSYbMQgRFlOVtFcPRn%2FJ1NM%2BCobLPsTelXUOOA3kDvLG36Hs2BsrTVgGAoYH9doe4EdxQHiLKW1obCWKHTa9qXQ4telPFwkmBVWinSG%2FM6FRiQl5mnnnrW0Vg%2BngALXLjRZ8KHyqIX6TZr8jVE3e2NJB8oRSFSJKnqVGMtZAm5eQNKpZ59pFR8lWyIHiEHmbArfy2%2BEqRCZZPUgr2EX0nANYd6zX%2Ba4L%2FraJmRdmsTxNT4jmCi9BZbO2ftY4ZgwLRib7nf%2Fz4mP5%2F4mPTeH2%2FSGuK5jFSLJU1EHq2QmDHjtNHb8TB82Dh0ldBr8uopSvf7eUgdt7lcLv4cCFbEkgEJajMLvdwXSIfEj4yREKLc%2BcQBezVbtj9R8DV36YEhQtoiIW98rxwjLr9yzVoe0JLXxyb0HbCnDCWeKeYjYBmZmZvriu%2FdB8R%2FIkL8aKKiSkSJJQqvvoNB%2BFrc8VTe%2FQ7bb%2Fo%2BhbfP2PapOp0wPDdQh0jlkzzjIrOZHPymxLRBETiR9MEg7c%2FRaQgiGD3CMJ%2F51WsF8hHlulrefS81YTLtMA9Gcq0VAVzbKFGT2aY0paFl%2BE0IEE%2Fw2lDgZWal1%2BXMk%2BS1rujPX9F9BfzMM4rhkRaOLIeLMgd3xdjWc6yZsZNIlVrDiwPJIl8%2BvdFMIuD%2FnXnDN%2FydQvK%2BP9Qg%2Fi%2BSfI7%2BRxt7B7Y0Qrq53Gm0plYZteCMTxtFnLjVOTH2i6zBRFgJXPRILXq2psNgl5ZmM9euQuVcb17k07YGVHSzICdoXS9yCtnalEBV1ZkiXRkcs8iyo3hJ8w6l9U0wxVBhe3UHNnodh98w%2Br7ZoQY6sQHAXZ6h%2BJ2A53qGJuOo58zfj1WrJDBFLSmTnwkj13n85nOxTvf6UvIeMvQM5%2BPFVTHOSGIvdfwY6ZfC5m4AcK3HuMQLC0l41%2BTelEv7gUdcDIT7EUqFmf78orQT%2FknYRemFsj57afMZdwplFp%2BJtNXfR9rB%2FyVguPv4LQe2JODh723LtAR492ij%2FwqUfSRwmnW1F0n76TLcpo5U95GHXvysQn5RQWa5OPo%2BKK9nQvkypcA%3D&X-Amz-Algorithm=AWS4-HMAC-SHA256&X-Amz-Date=20230412T084746Z&X-Amz-SignedHeaders=host&X-Amz-Expires=300&X-Amz-Credential=ASIAQ3PHCVTYVS6JAEMA%2F20230412%2Fus-east-1%2Fs3%2Faws4_request&X-Amz-Signature=4d93a4bd3251d4a3f54df16d96d70bf762bb30810f24d1605db44e7e95c300fe&hash=2d130753d931c599a6ad6af6200848d68bcc6a61fdabb8856a644b5f0bdfae6f&host=68042c943591013ac2b2430a89b270f6af2c76d8dfd086a07176afe7c76c2c61&pii=S0925527307000989&tid=spdf-4bdf43e4-476b-4fe6-b5d9-638fa1be3c65&sid=4b8ab7e650b9934cb81a29b60f3945aab730gxrqb&type=client&tsoh=d3d3LnNjaWVuY2VkaXJlY3QuY29t&ua=1308560357065654075456&rr=7b6a34d7083c4ae0&cc=in.
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International Journal of Production Economics, 2008
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Abstract
We consider a supplier and a customer operating under a service agreement that requires the
supplier to cover the random customer demand with high probability. To fulfill the service agreement, the supplier carries a certain amount of safety stock. The customer has some bearing on its demand variability, possibly through activities such as acquiring advance demand information, employing more sophisticated forecasting techniques or smoothing its product consumption, but these activities bring an extra cost to the customer. Since a reduction in the customer demand variability helps the supplier reduce its safety stock, the supplier is willing to o®er a price discount in exchange for reduced demand variability. We examine a pricing scheme where the supplier assesses its potential cost savings from a reduction in the customer demand variability and returns a fraction of these cost savings back to the customer through a price discount. We show that both parties realize cost savings under such a pricing scheme, examine the efficiency issues and consider the case where the customer does not reveal certain cost components accurately.
supplier to cover the random customer demand with high probability. To fulfill the service agreement, the supplier carries a certain amount of safety stock. The customer has some bearing on its demand variability, possibly through activities such as acquiring advance demand information, employing more sophisticated forecasting techniques or smoothing its product consumption, but these activities bring an extra cost to the customer. Since a reduction in the customer demand variability helps the supplier reduce its safety stock, the supplier is willing to o®er a price discount in exchange for reduced demand variability. We examine a pricing scheme where the supplier assesses its potential cost savings from a reduction in the customer demand variability and returns a fraction of these cost savings back to the customer through a price discount. We show that both parties realize cost savings under such a pricing scheme, examine the efficiency issues and consider the case where the customer does not reveal certain cost components accurately.
Sumit Kunnumkal is a Professor and Area Leader of Operations Management at the Indian School of Business (ISB). He holds a PhD in Operations Research from Cornell University. He received his MS in Transportation from the Massachusetts Institute of Technology and a B.Tech in Civil Engineering from the Indian Institute of Technology, Madras.
Professor Kunnumkal has previously taught at the Smith School of Business, Queen’s University, and has held visiting positions at the Singapore University of Technology and Design and Universitat Pompeu Fabra. His research interests lie in the areas of pricing and revenue management, retail operations, assortment planning, and approximate dynamic programming.
At ISB, he has taught in the PGP programme, the Fellow programme, and various Advanced Management and Executive Education programmes.
Sumit Kunnumkal