Category: Operations Strategy

Price optimization: Q&A with Professor Simchi-Levi

Posted by MIT Sloan Executive Education - 4 months and 3 days ago

MIT Sloan Executive Education recently hosted the latest in its INNOVATION@WORKTM webinar series, entitled “The New Frontier in Price Optimization," with MIT Professor David Simchi-Levi. The webinar, now available on demand, which drew hundreds of attendees from across the world, presented recent breakthroughs in the development of models that combine machine learning and optimization for pricing that significantly improve revenue and reduce inventory risks

During the webinar, Simchi-Levi presented a case study on Rue La La—an online retailer with whom he worked that offers invitation-only flash sales—to answer the question: “How can we generate an effective forecast for a product we’ve never sold before?” His second example, Groupon, a daily deal website and mobile application offering things to do, see, eat, and buy, focused on how to combine forecasting with learning on the fly to understand the probability that a customer will purchase a product at a specific price. Simchi-Levi’s third case-in-point was the story of B2W Digital, the leading e-commerce company in Latin America, which took price optimization even further by leveraging forecasting, learning on the fly, and optimization.

The event included a live question and answer session and was immediately followed by a Facebook chat with the webinar audience. Recently we spoke with Professor Simch-Levi to dig deeper into the topic of pricing optimization.

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Will surge pricing work at Disney?

Posted by MIT Sloan Executive Education - 6 months and 11 days ago

Disney crowds

One man's surge pricing (or demand pricing) may be another's price gouging. Uber, the ride sharing platform, has brought the idea of surge pricing to the forefront--when the cars are in high demand, the platform company raises its fares. Uber justifies the surge as a means to ensure reliability and availability for those who agree to pay a bit more.

Uber is not alone in adopting the demand pricing model. At the end of February 2016, Disney announced it would be adopting demand pricing for its amusement parks in California and Florida. This move has resulted in some backlash: The Economist, for example, wrote that "what Disney World is doing is old-fashioned price discrimination."  

Disney's new pricing model is more nuanced than just raising prices when its parks are in high demand. In fact, the demand pricing only affects single-day tickets to the company’s parks. As The New York Times explained, "At Disneyland, located in Anaheim, Calif., which attracts roughly 17 million visitors annually, single-day tickets now cost $99...'value' tickets, for Mondays through Thursdays during weeks when most schools are in session, will drop to $95." There will be separate prices for "regular" tickets and "peak" tickets. However, the new pricing has no impact on multi-day park passes. This is a key point, particularly for the Orlando-based parks, as most families vacationing at or near Disney World opt for multi-day park packages. It is worth noting that demand-based pricing, which is commonly used in the lodging and airline industries, has already been adopted by other themes park operators in the United States, including Universal Studios.

Along for the ride? The logic behind Disney’s surge pricing

While families spending their vacation at Disney will be mostly unaffected by the pricing strategy, day trippers will be more likely to feel the pinch. The new pricing model is designed to encourage day trippers to schedule their visits during non-peak days and seasons. Those day trippers are essentially provided an incentive to visit the park when there are fewer people. In theory, that could decrease the congestion at the parks during peak times and, accordingly, decrease the amount of time spent waiting in line for rides.

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Why commonality sometimes fails

Posted by MIT Sloan Executive Education - 1 year and 1 month and 16 days ago

Commonality, or the reuse and sharing of components, manufacturing processes, architectures, interfaces, and infrastructure across the members of a product family, is a strategy targeted at improving corporate profitability. Companies from Toyota to GE use product platform strategies to deliver more variety to their customers and compete more effectively. For example, Black and Decker uses shared motors and batteries across a range of power tools. Volkswagen models such as the Jett and TT share similar underbody components and other aspects.

Typical benefits of a commonality, or a product platform strategy, include:

  • Shared development costs
  • Common testing procedures
  • Production economies of scale
  • Amortized fixed costs
  • Reduced inventory

By definition, commonality seems like an obviously good thing. Why incur the cost of making different parts for different products if the parts do the same thing?  Because as it turns out, commonality is not always the right thing to do. And even when it is right, it can be difficult to achieve.

Dr. Bruce Cameron is a lecturer in MIT's Engineering Systems Division and a consultant on platform strategies. His research at MIT uses a healthy dose of systems thinking to tease out when commonality makes sense and how to get companies to pull it off. Cameron oversaw the MIT Commonality Study, which closely examined 30 firms over eight years. The study was the first work to uncover that many firms fail to achieve their desired commonality targets, showing weaker investment return on their platform investments. "That type of behavior and phenomenon is seen in studies that we did in automotive, consumer products, and transport," says Cameron.

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Market Basket: One year later

Posted by MIT Sloan Executive Education - 1 year and 2 months and 4 days ago

Market Basket

Last summer, New England's consumers and much of the business world were mesmerized by the public saga of Market Basket, a privately held, small chain of grocery stores in Massachusetts, New Hampshire and Maine. Market Basket is owned by the DeMoulas family, which saw a long-running battle over control of the chain by two of its family members, Arthur T. DeMoulas and his cousin Arthur S. DeMoulas. 

Disputes like this are often confined to board rooms, but this one also played out in the public arena. After the board voted to oust the president, Arthur T. DeMoulas (commonly referred to as Artie T.), Market Basket employees (who are not unionized) decided to walk out on their jobs as a sign of solidarity with Artie T. Eventually the public, and even Market Basket's vendors, supported the walk out, leaving shelves empty and the chain’s business in jeopardy. Arthur T. was reinstated to the management ranks on Aug. 28, 2014, after reaching an agreement to buy the 50.5 percent of Market Basket owned by Arthur S. and other relatives. Employees worked day and night to replenish shelves stripped bare by the summer-long family standoff over the business.

So why did non-unionized employees, many of whom are paid by the hour, risk their jobs for a multi-millionaire? Because for decades they had been treated well and shared in the company's profits. As the business drama unfolded, the public heard dozens of stories by Market Basket employees about the ethical and generous gestures of Artie T.

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Complex risk management--as seen on TV

Posted by MIT Sloan Executive Education - 1 year and 4 months and 13 days ago

FV Northwestern

Reality TV is largely a wasteland of odd, meaningless drivel, in which business leaders rarely have the time (nor should they make the time) to invest watching. But within the very broad category, there are some meaningful glimpses of how people solve complex business problems. The stands-out show in this category might be  Discovery Channel's Deadliest Catch, which some herald as the "original" reality TV show.

For those not familiar with the show, now in its eleventh TV season, it focuses on a handful of boats fishing for crab in the Bering Sea off the coast of Alaska. And while many fans watch the show for the drama of the cold, vicious waters and the inherent danger in the job, others can glean some secrets for managing complex business operations. More than just entertaining TV, Alaskan red king crab (just one species caught and sold by the boats on the show) was valued at more than $90 million in 2012.

The title Deadliest Catch reflects the stark reality of the commercial fishing industry: since 1992, when the Bureau of Labor Statistics started publishing fatality rates by occupation, fishing has consistently ranked as the most deadly occupation. In 2006, the bureau found commercial fishing has an almost 75% higher fatality rate than that for pilots, flight engineers, and loggers (the next most deadly occupations). The fatality and injury statistics for Alaskan crab fisherman are even higher than the average for the industry, due to the dangerous conditions out on the Bering Sea.

When one watches the show with a discerning eye, it's apparent that crab fishing is, in fact, a very complex business. Each captain must manage multiple aspects of risk against hard deadlines, in real time. 

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Managing the seasonality of products

Posted by MIT Sloan Executive Education - 1 year and 11 months and 8 days ago

The seasonality of products is an issue that manufacturers, distributors, retailers, and consumers are well aware of. We all know back-to-school advertising, products, and sales hit stores in July. Soon after, we see Halloween items. And before Halloween even arrives, we start to see Christmas advertisements and promotions. Getting ahead of the season has become standard operating procedure.

But when is it too early to issue a seasonal product? Many craft beer aficionados are beginning to argue that the practice of "seasonal creep" has gone too far. Simply put, seasonal creep is when a beer specific to a season appears on store shelves way before the season actually hits. The best example is the category of pumpkin beers.

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Can the cab industry innovate?

Posted by MIT Sloan Executive Education - 2 years and 3 months and 17 days ago

Those of us who work and/or live in Cambridge are quite familiar with the controversies stirred up by the wildly successful business, Uber Technologies, Inc. Uber considers itself a technology company, offering a mobile app that connects riders with drivers. The company has taken an innovative approach to making it easier to get from one point to another, eliminating the need to hail a cab on the street.

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It’s time to rethink wages

Posted by MIT Sloan Executive Education - 2 years and 3 months and 25 days ago

For the last year or so, there’s been a significant amount of news coverage around the wages paid to low-income earners, such as those working at fast food outlets and in retail stores. There have been public protests, calls for boycotts, and legislation to raise the minimum wage in some states.

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