The role of e-marketplaces in relationship-based supply chains: a survey

IBM Systems Journal,  March, 2005  by W. Grey,  T. Olavson,  D. Shi

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Fundamentally, the exchange is in a better position to manage the demand risk for spare parts than HP because it can aggregate different sources of demand and match them to a pool of highly fragmented sources of after-market supply. The lower search, transaction, and negotiation costs associated with the exchange enable the spare-parts market to reach a "critical mass" that was not previously possible. This "critical mass" permits the exchange partner to contract with HP to fill demand with very little risk of shortage. HP accepts some price risk, but in return manages its availability risk at much lower cost than before (for inventory that can depreciate 50 percent or more in value).

Without the exchange, it was deemed too risky for HP to try to fill all demand for spare parts from brokers. There is still a point in the spare-parts life cycle where HP considers it too risky to rely on the broker market for supply, but using the exchange allows HP to postpone that point by a critical one to two years after the part has been discontinued by the manufacturer. Nevertheless, the savings have been so dramatic that HPCS now sources nearly all of its microprocessors through spot market brokers and plans to extend the approach to other components.

Managing demand risk by using dynamic pricing and revenue management

The advent of sophisticated information technology systems enabled airlines to practice dynamic pricing to manage demand for airline seats. In a similar fashion, real-time pricing systems on e-marketplaces may lead to the diffusion of dynamic-pricing techniques such as revenue management from service industries to markets for manufacturing capacity. Service industries in which dynamic pricing has successfully been applied share many characteristics with some direct materials markets for customized capacity. These include job shops, contract manufacturing, semiconductor foundries, and application specific integrated circuits (ASICs) manufacturing. (34)

In essence, revenue management (RM) systems allow sellers to make price a dynamic function of lead time and available capacity. When excess capacity cannot be productively used to build inventory or satisfy a different segment of demand, and when different customers have different willingness to pay for flexibility, dynamic pricing can better match supply and demand. For example, airlines monitor demand in real time and impose "booking limits" on economy class fares as the departure date approaches. Seats are reserved for business class travelers, who place a higher value on flexibility and short lead times. As a consequence, economy class passengers are shifted away from peak demand flights to flights with more available capacity. There are rarely "shortages," in the sense that seats are generally available if a buyer is willing to pay a high enough price. The end result is better use of supplier capacity, and thus better management of both the supplier's demand risk as well as the capital risk associated with capital investments. References 35 and 36 provide overviews of RM problems and models. References 37 and 38 provide evidence and models that suggest that RM does not depend on price discrimination, but rather brings system-wide efficiency gains by shifting demand from peak times to off-peak times.