Dynamic Pricing

Dynamic pricing – Current realities

Every person is willing to pay a specific price for a product or service. Some people can pay high price while others can pay low price. So, instead of going for fixed price, why not go for dynamic price through which we can ensure that no money is left on table and more customers can be served? The idea is to change the price based on time of the day, demand and season. Through dynamic pricing, the cost of airline ticket to electronics changes from week to week.

Advantages

Dynamic pricing not only helps the companies but also consumers. Companies in hospitality industry can raise their prices in peak season and keep minimum price in off season. Retailers can raise the price of product in high demand and lower price for low demand products. Consumer, who could not afford a fixed price airline ticket, can travel via airline through dynamic pricing. The peak electricity load can be reduced by charging more during peak hours and low during other times. The electricity utility corporation would need less capacity to cater to its consumers which would drive down their cost and consumers can reduce their bills.

Limitations

In spite of many advantages of dynamic pricing, it is easier said than done. There are many factors which should be considered before going ahead with dynamic pricing. One of the factors is a signal sent to consumers. By charging high price for in demand products, we are telling consumers that the products which are discounted are unwanted. It would be a self-fulfilling prophecy and the demand for cheap/discounted product would go down.

Another factor would be “menu costs”. It is difficult for managers keep track of demand, adjust prices and post those prices. If the manager was running a hotel, he would have to revise and reprint the menu on weekly basis which would raise the cost. Industries like airline and movie don’t have menus, so dynamic pricing could be easily implemented there.

The third factor would be consumer perception. For example, Amazon tested selling DVD’s at different price based on consumer’s browser. Consumers did not like it and Amazon had to refund the consumers who had paid more. Coca-cola tried dynamic pricing based on surrounding temperature. The idea was to charge more in hot weather due to high demand and low in other case. The idea did not resonate well and was abandoned. Some companies learnt from this experience and have developed better strategies. Instead of offering same product for different prices, companies like Orbitz are serving different products for different consumer based on their operating system. By calling it “personalized experience”, they have been able to manage consumer perception.

The next factor is based on behavioral economics. Consumers place a lot of value on predictability. They are guided by “loss aversion”. If a product is cheaper than expected, one would be a little happy but if it is costlier than expected, one would be very disappointed. This gives firms some incentive to keep the prices stable.

Effective Application

Dynamic pricing can’t be implemented in any industry and it should be implemented effectively. The customers should be willing to pay for the additional service/feature. We should be able to locate these consumers. Multiplexes locate them based on time of the day. Cost of implementing dynamic pricing like menu cost or software cost should not exceed the increased expected revenue from dynamic pricing. Apart from airline industry, major league baseball has successfully implemented dynamic pricing of ticket. One of the team was able to raise the ticket revenue by $500,000.

Conclusion

Dynamic Pricing strategy is very helpful in raising revenue, profits and getting the highest value for the product. It is being adopted at a quick space in various industries. However, effective execution of this strategy is critical in long term success of the firm. Various behavioral and cost factors should be studied before implementation. Dynamic pricing offers lot of opportunities but one has to implement it effectively and at a right place to get the best out of it.

References

http://www.artsjournal.com/worth/2013/02/why-is-dynamic-pricing-so-rarely-used/

http://www.iprospect.com/blog/featured/dynamic-pricing-an-old-practice-is-making-a-comeback-online.html

http://www.csmonitor.com/Business/Saving-Money/2013/1104/Everything-you-need-to-know-about-dynamic-pricing

About the Author

Sujay Deo Shashank is a first year PGDM student. He can be reached at deos2015@email.iimcal.ac.in

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Bacteria and lizards too can play Rock-paper-scissors!

Game Theory provides the foundation for understanding competition in industries with a few producers. Simply speaking, it is a study of strategic decision making. There are 2 types of Games: 1 stage or 2 stage. In a 1 stage game, each participant makes all of his choices before observing any choice by another participant. A very common example of a 1 stage game is ‘Rock-paper-scissors’.

Overview

Rock-paper-scissors is a hand game usually played by two people. It is a game based on random selection like throwing a dice or flipping a coin where the two participants need to make one of the three hand gestures randomly – rock, paper and scissors. Rock represented by clenched fist; paper represented by an  open hand, fingers touching and the third gesture, scissors, represented by two fingers extended and separated. The objective is to select a gesture which defeats that of the opponent. The rules of the game are- The "rock" beats scissors, the "scissors" beat paper and the "paper" beats rock; if both players throw the same shape, the game is tied.

We are not alone to play Rock-Paper-Scissor !

And we thought only kids play it right! Well the amazing thing is nature has evolved its own strategies to make use of this game. Certain species in nature use this game to allow each of the genetic variants to co-exist with equal advantage. Two such species are known to us- Common side-blotched lizard and certain bacterial species but nature may have many such species which use this strategy for survival which are yet unknown to man.

Common side-blotched lizards have evolved a very interesting adaptation to allow all of its genetic variants/morphs to equally survive. And how does it do that? Well by using our very own rock-paper-scissors game in mating! Male side-blotched lizards exhibit distinct throat colorations, and can be divided into three different categories – orange, blue, yellow. Orange-throated males are very aggressive with lots of females in a big territory. Blue-throated males are less aggressive and guard a single mate in a small territory. The yellow-throated males are particularly clever – they can mimic side-blotched females. Thus by feigning as a female they can sneak into others territories, particularly orange-throated males, and steal their mates. Similar to rock-paper-scissor games, orange beats blue, the orange-throated males being more aggressive. Blue beats yellow as it guards only one female, they are better at catching yellow-throated sneaks. Yellow beats orange, the yellow males can easily mimic as a female and enter into the orange-throated males’ territory and steal mates. Just as in the rock-paper-scissors game, each sexual strategy has advantages over one competitor and a vulnerability to another, so that all strategies have a reasonable chance of prevailing.

The same survival strategy is also used in certain bacterial species too. They exhibit a rock-paper-scissors strategy when they engage in antibiotic production which again allows different genetic variants to co-exist. This is how the rock-paper-scissors game strategy is used - antibiotic-producers defeat antibiotic-sensitives; antibiotic-resisters multiply and withstand and out-compete the antibiotic-producers, letting antibiotic-sensitives multiply and out-compete others; until antibiotic-producers multiply again. Thus the cycle continues and each of the genetic variants has equal opportunities at survival.

With these examples, we can see that nature has up its sleeve its very own rock-paper-scissor game to allow for the co-existence of various genetic variants.

Conclusion

                There have been programming competitions for algorithms that play rock-paper-scissors. Algorithms based on Markov Chains have been developed for its strategy. Also there has been a World Body for this game which standardizes the set of rules for international play, called World Rock Paper Scissors Society. And yes, there are international tournaments for this game, which apart from attracting widespread media attention and participants, have also been broadcast live on TV. And we thought it was a kid’s game.

References

Alonzo, S.H.; Barry Sinervo (2001). "Mate choice games, context-dependent good genes, and genetic cycles in the side-blotched lizard, Uta stansburiana". Behavioral Ecology and Sociobiology 49 (2-3): 176–186

About the Author

Sayantan Das is a PGDM student of 2013-2015 batch. He can be reached at sayantand2015@email.iimcal.ac.in

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Challenges faced in Food Processing Industry with a focus on Rice Mills

Much hullabaloo has been raised both by intellectuals and the media over the recent approval of Food Security Bill (September 12, 2013). Many have claimed that such a law would aggravate the food price inflation, add subsidy burden to the already weak economy exacerbating macro level inflationary pressure. Another view that came out in the debate was the shift in farm produce towards cereal production and away from other farm produce such as proteins. This behavior is attributed to the fact that our current food processing industry primarily the rice mills are not optimized and such a shift is inevitable in order to sustain the large population. Thus an attempt has been made to understand the major challenges faced by the Food Processing Industry with a focus on the Rice Mills.

Overview

Rice is the major staple food and is considered more than just food as it has a strong cultural connotation, not just in India but the whole of South Asia. India is the second largest producer of rice in the world with a production of around 104.2 million tonnes in 2012-13 and exports amounting to 10.3 million tonnes.
Food processing industry is said to be the connection between the agriculturists/producer to the consumers. It is a value-add to the food commodity and provides convenience to the consumers. It also provides the producers with a ready business market and helps them by fetching a good price for their produce. The rice processing is fairly simple and is as old as rice consumption itself, obviously! The rice milling has evolved from mortar and pestle to the current day highly advanced machinery available to do the job. But have the Indian rice millers actually adopted them?

Issues in modernizing Rice Mills in India

Let’s discuss the challenges faced by the Indian Food Processing Industry in modernizing the rice mill industry in India.There are more than 1 lakh rice mills in India. Since the yield rate of full rice grain needs to be maximized the rice mills need to be modernized  But Huller mills, rubber shellers and their combination- the types of rice mills which yield high broken rice component are still very prevalent. To encourage modernization  Government of India has repealed the Rice Milling Industry Act facilitating setting up of modern rice mills without government permission. And also, subsidies are being provided by the government for setting up of rice mills and also the grants are disbursed in a much decentralized way by roping in many scheduled banks to ease up the process.The Ministry of Food Processing Industries states-

“The Ministry of Food Processing Industry has re-opened the Flour Milling, Pulse Milling and Rice sector w.e.f. 01/04/07 which was closed since 31/3/04. Under the Plan Scheme of the Ministry grant will be provided up to 25% in general areas and 33.33% in difficult areas up to a maximum of Rs. 50 lakhs and Rs.75 lakhs respectively on Plant & Machinery and Technical Civil Work for setting up/modernization /expansion of Food Processing Industries.”

The modernization of rice mills accelerated because of the high demand of the polished rice which led to the natural death of the traditional rice mills.

However the cost of setting up a rice mill is very high. NABARD quotes a very conservative figure of about 52,76,600 INR for setting up the rice mill. But the actual costs can run up to 5 crores. With the profit margin of a rice mill running as low as 5 – 6%, it doesn't makes a  lucrative business to be taken up.

Also the power requirements are about 100 HP and requires a reliable water supply for producing parboiled rice or operating sortex polishers. Although the number of labors employed in a modern rice mill is substantially low, owing to greater degree of automation, but the stricter labor laws have increased the labor costs.

Besides, the most important point that affects the rice mill industry is the monsoon. The supply of paddy can be affected by a low monsoon or crop destruction by floods bringing in a high level of uncertainty. Also the location of paddy cultivation and rice milling tend to be concentrated.

The greatest culprit has been the fragmented land holdings which leads to the inconsistency in the rice quality. The changes in quality creep in even when similar resources are utilized in cultivation like fertilizers, seeds, etc. Cooperative Joint farming societies should help keep this to a minimum.

Conclusion

The food processing capability in rice sector has a lot of potential for improvement. However it is necessary that the above challenges are addressed so that India utilizes its rice production capacity to its optimum.

About the Author

Varsha Kalyankar K. is a PGDM student of 2013-2015 batch. She loves visiting new places and is a big time foodie. She can be reached at varshak2015@email.iimcal.ac.in

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In-sourcing - Back to America

Last December, Apple’s CEO Tim Cook surprised many. Not through another outstanding product but rather through an announcement. Apple wants to bring some of its manufacturing back to US from apparently low cost China. And it is not only Apple who is working on this line. Companies like Ford, Honda, General Electric, Caterpillar, Dow Chemicals and Intel are also working on the same. Is there a new trend of ‘in-sourcing’ happening to the American manufacturing?

Looking Back

last decade was all about outsourcing of manufacturing operations to developing world. China received by far the largest chuck of it. The primary reason for such was low labor cost in China. American manufacturing companies reduced their cost by shifting to China and thus gain substantial competitive advantage. But in recent years things are changing which reduced this advantage and thus reversing the trend from‘Outsourcing’ to ‘in-sourcing’. 

Current Reality

Firstly, labor cost in china has been increasing drastically at 20 % over last few years and is expected to continue. In contrast, in the United States it was only 3%. Even though the labor cost in absolute term is still much lower in China, the advantage from it is unquestionably reducing. But labor cost is not the only concern especially for industries with high automation.

In 2012, United States witnessed a boom in Natural Gas. This reduced the energy cost substantially. Currently, natural gas is four time cheaper in United States than in Asia. Another factor is logistical cost of outsourcing. Oil price is three times of what it was in 2000. As a consequence, the shipping cost has increased reducing outsourcing advantage. Lead time is also a major concern especially for companies needing rapid on- demand replenishments. As Taphandles, producer of a beer-marketing product, shifting to US from China sighted that lead time of three weeks is out of place with their customers’ demand.

Beyond this there are elements which are more subtle. Control, innovation, quality and image are few of them. The companies are finding it difficult to control the distant factories. Unavailability of supply chain expertise along with cultural and language barrier is the prime reason for it. Keeping designer and assembly workers close and interacting is one way to stay innovative which is missing with distant factories. Quality and Image are concern for companies like Apple. These cost elements are difficult to quantify and possibly not thoroughly accounted for while taking the outsourcing route in the first place.

Conclusion

So does this In-sourcing trend imply that all manufacturing will shift back to United States? Definitely, it is not going to be so. In short to medium run, companies with high automation, requiring high skilled workers, requiring high precision on quality and rapid replenishment will probably shift back to United States. Others especially with high percent of total cost in labour such as T-shirts, toys, and small electronics producers will continue to be in Chinese shore. In the long run disruptive technological advancement in the field of artificial intelligence, 3D printing, and nanotechnology might set new equations to solve.

References

http://www.theatlantic.com/magazine/archive/2012/12/the-insourcing- boom/309166/?single_page=true

http://www.nytimes.com/2011/10/13/business/smallbusiness/bringing- manufacturing-back-to-the-united-states.html?pagewanted=all&_r=0

http://www.ciras.iastate.edu/productivity/supplychain/CIRAS101m.pdf

http://news.yahoo.com/blogs/ticket/obama-plan-insourcing-help-revive-u- manufacturing-182159316.html

About the Author

Subhronil Bose is a PGDM student of 2012-14 batch. He is an avid reader and a good orator. He can be reached at subhronilb2014@email.iimcal.ac.in













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Chief Green Officer – A Myth or a Reality

Traditionally the ‘X’ in CXO has been occupied by ‘Executive’, ‘Financial’ or ‘Operations’ (broadly speaking). However The Chief Green Officer is fast becoming the most influential position in an organization. Apart from responsibilities covering various aspects of organizational functionalities, the final ‘go-ahead’ decision would be coming from CGO.

There has been a plethora of cases where organizations simply had to pull out since they did not comply with the local green policies and norms. Take the example of a major aluminium company which had to bite the dust after spending nearly ₹ 50,000 cr. in Orissa. In 2005, a national Iron Ore company had to face the ire of Supreme Court because it had went ahead with its expansion plan in the forest areas despite the fact that its lease period of 25 years was about to expire. And the list goes on.

Role of the Green Officer

The role of the Green Officer becomes very vital under these circumstances. The Chief Green Officer should have the ability to foresee the possible impact on the organization due to the various green issues. His primary responsibility would be to oversee the company’s green initiatives and programmes and ensure compliance with the environmental regulations. It goes without saying that the CGO should be well-versed with the Operational practices in his organization and the industry ‘best practices’. It should be his continuous endeavour to minimise the gap existing between his organization and the industry best practices.

The overall responsibility of a Green Officer can be broadly categorized as follows:

• Reduction of Carbon Footprints in the organization
• Build a Green Supply Chain connecting the suppliers, manufacturing facility, distributors and the end consumers
• Find new revenue opportunity through environmental sustainability programs

What it takes to be a Green Officer

The CGO must have the ability to perform a Cost-Benefit analysis on the new projects that are to be undertaken by his organization from environmental point of view and the possible impact on the various stakeholders of the project. The CGO must be an expert in Green Supply Chain Management, a field of Operation Management which aims to adopt industry practice that helps in promoting environmental sustainability.
All the above may create a Good CGO however an effective CGO would be the one who would have the ability to create a culture of environmental sustainability, not only among his employees but also among the suppliers and distributors.

With all of the diverse knowledge and skill sets required to perform well as the Chief Green Officer, it’s easy to see why the executives in this position are rapidly gaining power and prestige within their companies. Because the position of Chief Green Officer is such an important and influential one, companies seek to hire the most qualified applicants and carefully evaluate a candidate’s training and credentials.

Industry view on the concept of ‘Green Officers’

Still today many companies feel that Environmental Sustainability adds burden to its financials. However the facts are quite opposite. Wal-Mart’s green supply chain initiatives – which include saving 667,000 metric tons of carbon dioxide and 66.7 million gallons of diesel fuel – are anticipated to help it reach $14.3 billion in profits this year. Green supply chain practices can lead not only to improved environmental conditions, but to a much stronger bottom line.

There are companies which are increasingly becoming aware of the need of the Green Officers and professionals with Green Supply Chain training are much sought after.

Conclusion

Companies today can no longer afford to overlook the environmental impact of their operations. In order to have a sustainable base, it is highly recommended that organization creates a point of responsibility within the organization to understand the above impacts. However it is essential that the organizations do not limit itself to create a position, but build a culture of environmental sustainability within the organization, where each employee will do his bit in creating an effective green supply chain.

About the Author

Subhasis Maji is a PGDM student of the 2012-2014 batch. He loves to explore new places and blogs about the same. He can be reached at subhasism2014@email.iimcal.ac.in

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