Matching Supply with Demand: An Introduction to Operations Management Gérard Cachon ChristianTerwiesch 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.

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

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 (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 (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.

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.

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).

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

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 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)

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.

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 McDonalds produces hamburgers consistently but does not produce “high quality cuisine”