Matching Supply with Demand An Introduction to Operations

Matching Supply with Demand: An Introduction to Operations Management Gérard Cachon Christian. Terwiesch All slides in this file are copyrighted by Gerard Cachon and Christian Terwiesch. Any instructor that adopts Matching Supply with Demand: An Introduction to Operations Management as a required text for their course is free to use and modify these slides as desired. All others must obtain explicit written permission from the authors to use these slides. Slide 1

Two paths to business model innovation § What do customers want? Net Utility = Utility – Price § What does the firm want? Profit = Flow rate x (Price – Cost) § There is a tension with Price…. § So the best paths to business model innovation are (1) Increase consumers’ utility, so that the firm’s flow rate increases (2) Lower the firm’s cost Slide 2

The demand side of business model innovation § Four ways to increase a consumer’s net utility - (1) Lower your price not very creative and often not helpful for profit u - (2) Increase preference fit (i. e. , offer more variety) - (3) Improve transactional efficiency Reduce the effort a customer needs to exert to deal with you Reduce the time a customer needs to commit to deal with you u u - (4) Enhance quality Conformance quality – does your product or service match what it is suppose to be. Performance quality – a notion of absolute quality, as in filet mignon is better than cube steak. u u Slide 3

Examples of business model innovation § Netflix: - Customer orders a DVD from home - Netflix mails the DVD to the customer - The customer can keep N DVDs at a time - There are no late fees § Zipcar: - Cars are located close to customers - Cars can be rented for less than a day - Customers get into the car, drop off the car, refuel the car and clean the car without a Zipcar employee present. Slide 4

Smart sacrifice § Smart sacrifice means giving customers little on one dimension but excelling in another dimension § Netflix: - Customers have to wait to receive their DVD (low time transactional efficiency) but they have a huge library to choose from (high preference fit) § Zipcar: - A limited selection of cars (low preference fit) but a car within walking distance of a customer’s home (high transactional efficiency). Slide 5

The supply side of business model innovation § Shifting the customer value curve is useful only if it can be done profitably § To ensure costs are low enough to generate value, an innovation can take one of the following three approaches to the supply side: - Change the process timing - Change the process location - Change the level of process standardization Slide 6

Process timing § Change when the process occurs relative to when the customer requests the good/service. § Mass customization/make-to-order: - Start final assembly only after receiving the order e. g. , Dell and personal computers u § Delaying the process timing allows the firm to dramatically expand variety (high preference fit) without incurring high inventory costs. § But now customers must wait longer for their product/service (low transactional efficiency) Slide 7

Process location § Change where the process occurs relative to where the customer is. § Electronic commerce: - Hold inventory in a warehouse far from customers and ship the inventory to customers upon order - This allows the firm to expand variety (high preference fit) – items with too little demand for a local store can be profitably carried in a warehouse that serves a large region - Customers can order from home (desirable transactional effort) but customers have to wait (low time transactional efficiency) and shipping costs must be incurred. Slide 8

Process standardization § Change how a process is done – in particular, change employee discretion in the process § Standardization… - Allows the firm to hire lower skilled and less costly employees. - Lowers employee training costs. - Increases conformance quality - But probably reduces performance quality § Mc. Donalds produces hamburgers consistently but does not produce “high quality cuisine” Slide 9