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Using Revenue Management in Multiproduct Production/Inventory Systems: a Survey Study

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Using Revenue Management in Multiproduct Production/Inventory Systems: a Survey Study Using Revenue Management in Multiproduct Production/Inventory Systems: A Survey Study Master’s Thesis Department of Production economics Linköping Institute of Technology Hadi Esmaeili Ahangarkolaei Mohammad Saeid Zandi LIU-IEI-TEK-A--10/00962—SE Using Revenue Management in Multiproduct Production-Inventory Systems: A Survey Study Hadi Esmaeili Ahangarkolaei [email protected] Mohammad Saeid Zandi [email protected] Master Thesis Subject Category: Technology Linköping University, Institute of Technology, Department of Management and Engineering SE 58183 Linköping Examiner: Ou Tang Supervisor: Ou Tang [email protected] +46 13 281773 Keywords: Revenue Management, Multiproduct, Bundling Product, Substitute Product, Assortment Planning, Pricing, Inventory Management II Acknowledgments We would like to thank all the people who have been directly or indirectly involved in this master thesis. Especially we would like to express our sincere thanks to our nice teacher and supervisor Dr. Ou Tang; who has kindly helped and supported us over this thesis as well as over our study period at Linköping University. III Abstract The study aims at investigating how revenue management techniques can be applied in industries which offer multiple products. Most of the companies nowadays trend to produce multiperoducts and they try to find the best method of selling. Therefore, revenue management can be considered as a new direction which should be developed for these firms. In this study, multi-product firms are mainly referred as firms offering a bundle of products or substitute products. In this regard, models and techniques applied in multiproduct firms are discussed and it is tried to provide basic models to better understand the problems, variables, customer choice models and constraints. The main methodology in this study is literature review. In order to carry out the research first revenue management applications and techniques are discussed to find a fit to this kind of industries. The main findings of this study are (1) identifying and analyzing the most important factors affecting decision making regarding managing of bundling and substitute products and ultimately total revenue of multiproduct firms. (2) Summarizing the results and knowledge obtained from various studies within fields of bundling and substitute products. (3) Discussing the possibility of applying different revenue management techniques to these fields. (4) Identifying potentials and new directions for future study with respect to both revenue management techniques and multiproduct firms. Keywords: Revenue Management, Multiproduct, Bundling Product, Substitute Product, Assortment Planning, Pricing, Inventory Management. IV Table of Contents 1 Introduction ......................................................................................................................................... 2 1.1 Introduction and Motivation ........................................................................................................ 2 1.2 Aim and Scope .............................................................................................................................. 3 1.3 Limitation ...................................................................................................................................... 4 1.4 Thesis outline ................................................................................................................................ 5 2 Basics of Revenue Management .......................................................................................................... 8 2.1 Introduction and Definition of Revenue Management ................................................................ 8 2.2 Concepts and Techniques of Revenue Management ................................................................... 9 2.3 Applications of Revenue Management ....................................................................................... 11 2.4 Revenue Management Techniques ............................................................................................ 14 2.4.1 Quantity Based Techniques ................................................................................................. 14 2.4.2 Price based techniques ........................................................................................................ 15 3 Bundling Products .............................................................................................................................. 18 3.1 Bundling definitions .................................................................................................................... 18 3.2 Motivations for bundling ............................................................................................................ 20 3.2.1 Promotion of Sale ................................................................................................................ 20 3.2.2 Reduction in customer value variation ................................................................................ 21 3.2.3 Cost saving ........................................................................................................................... 22 3.2.4 Increasing sale of products that are about to be expired .................................................... 22 3.3 Bundling strategies...................................................................................................................... 23 3.4 Bundling from marketing perspective ........................................................................................ 24 3.4.1 Bundling and General Perceived value by Customers ......................................................... 24 3.4.2 Bundling psychological effects ............................................................................................. 26 3.5 Comparing different bundling strategies .................................................................................... 31 3.6 Bundling from Revenue Management Perspective .................................................................... 33 3.6.1 Bundling in Monopoly Market ............................................................................................. 33 3.6.2 Bundling in Non‐monopoly Market ..................................................................................... 43 3.7 Summery ..................................................................................................................................... 46 4 Substitute Products ............................................................................................................................ 50 4.1 Introduction to substitute products ........................................................................................... 50 4.1.1 Consumer Preferences and Economics view of Substitute products .................................. 51 V 4.1.2 Substitution Definitions ....................................................................................................... 53 4.2 Problem Description ................................................................................................................... 53 4.3 Significance of Substitute products problems ............................................................................ 58 4.3.1 Assortment planning problem with substitute products ..................................................... 58 4.3.2 Inventory management problem of substitute products .................................................... 62 4.3.3 Pricing problem of substitute products ............................................................................... 62 4.4 Problem Modeling ...................................................................................................................... 63 4.4.1 Demand models ................................................................................................................... 65 4.4.2 Consumer choice .................................................................................................................. 66 4.4.3 Multinomial Logit demand model ....................................................................................... 68 4.4.4 Exogenous Demand Model .................................................................................................. 71 4.5 Literature Review: ....................................................................................................................... 74 4.5.1 Inventory management with product substitution ............................................................. 75 4.5.2 Assortment planning Problem ............................................................................................. 83 4.5.3 Dynamic Pricing for substitute products: ............................................................................ 95 4.5.4 Joint Optimization of Inventory and Price for substitute products: .................................... 97 4.6 Summary and results ................................................................................................................ 102 5 Conclusion ........................................................................................................................................ 106 5.1 Introduction .............................................................................................................................. 106 5.2 Decision Categories of bundling and substitute problems ....................................................... 106
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