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Airlines' Dynamic Pricing Model Comes to the Supply Chain

Tom Bacon, consultant with Revenue Optimization, discusses how supply chains can embrace the model of dynamic pricing that was pioneered by the airline industry.

Dynamic pricing is a familiar, well-tested concept in the airline industry. It’s used as a means of tying supply to demand, and pricing seats accordingly. Now, Bacon believes that concept can be applied to the supply chains of multiple industries.

“We can all use price as a way of gauging demand,” Bacon says. The practice can help to avoid the accumulation of expensive buffer stock, accompanied by procedures for responding to inevitable stockouts. Another alternative is to vary the price over time, “so that demand and supply can converge on each other when delivery is taking place.”

For airlines, dynamic pricing is relatively easy to apply, given that they have a direct line to customers. “That’s not the case in a complex supply chain with multiple downstream tiers,” admits Bacon. Still, the age of Big Data is giving companies more information about their customers than ever before. The internet, social media and point-of-sale data are providing merchandisers with an unprecedented level of intelligence.

Companies are just beginning to understand how to make use of that wealth of data, Bacon says. Yet there’s a growing need to respond more quickly to shifts in consumer behavior. “The sales and operations process needs to be on a lean basis, where you can compress the time frame [to react],” he says.

There’s an element of risk involved. Forecasts are never perfect, and stockouts are bound to occur. But it’s important to be able to monetize that risk, placing some of the burden on the customer. The trick is to vary the price, “such that the customer gets a discount if he bears more of that inventory or demand risk, and pays a premium if the supplier or airline needs to take more risk on his behalf,” Bacon says.

“It’s a new area,” he says. “I’m excited about pricing, and I’m here to preach about how it can help the S&OP process.”

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