Transcript Session 01 - Introduction

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.
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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
Slide ‹#›
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.

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Slide ‹#›
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.
Slide ‹#›
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).
Slide ‹#›
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
Slide ‹#›
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)
Slide ‹#›
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.
Slide ‹#›
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”
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