RM for Bulk and Spot Demands

RM for Bulk and Spot Demands

When we talk about managing revenue for bulk and spot demand, the basic trade-off is somewhat congruent to that of revenue management for multiple customer segments.
The company has to make a decision regarding the quantity of asset to be booked for spot market, which is a higher price. The booked quantity will depend upon the differences in order between the spot market and the bulk sale, along with the distribution of demand from the spot market.
There is a similar situation for the client who tends to make the buying decision for production, warehousing and transportation assets. Here the basic tradeoff is between signing on a long-term bulk agreement with a fixed, lower price that can be wasted if not used and buying in the spot market with a higher price that can never be wasted. The basic decision to be made here is the size of the bulk contract.
A formula that can be applied to achieve the optimal amount of the asset to be purchased in bulk is given below. If demand is normal with mean µ and standard deviation σ, the optimal amount Q* to be purchased in bulk is
Q* = F-1 (p*, μ, σ) = NORMINV (p*, μ, σ)
Where,
p* = probability demand for the asset doesn’t exceed Q*
Q* = the optimal amount of the asset to be purchased in bulk
A number of bulk purchase increases if either the spot market price increases or the bulk price decreases.
We can now conclude that revenue management is nothing but an application of differential pricing on the basis of customer segments, time of use, and product or capacity availability to increase supply chain profit. It comprises marketing, finance, and operation functions to maximise the net profit earned.

revenue management