Perishable Services vs. No-show problem. Can technology help to improve operations?

For this week, the course will focus on the role of technology and the web on global supply chains. Therefore, I will discuss in this blog submission a particular case on how technology has helped to improve the hotel and airline industry operations. The reason why I chose these two industries is because they both offer perishable services. As we saw during a few weeks ago, a perishable service “…cannot be produced and stockpiled (inventoried) before consumption: they exist only at the time of their production.” [1]. The example given during class was the newspaper industry.

Airlines and hotels, however, share a problem  in common: “customers are allowed to make reservations and then either are allowed to cancel their reservations with relatively short notice, or just fail to show up to receive their service.” [2].This problem is known as the no-show problem and a common strategy to overcome this problem is by overbooking or overselling.  The level of overbooking is determined as “a trade-off between the cost of wasting the asset if […] unused […] (spoilage) and the cost of arranging a backup (offload)” [3]. Overselling has also its drawbacks as it can affect reliability on a service and damage a company’s reputation.

A possible strategy to mitigate the costs of the no-show problem –and that also complements with overselling- is to provide flash sales with attractive discounts to customers, which helps to reduce offload costs and reduce the number of overbooked rooms/flights.

Nowadays this methodology has become more efficient with smart dynamic pricing algorithms, and increased availability of websites and app that offer this service. An article called “Conquer Flash Sales and Bidding to Book Your Next Hotel Stay” provides a guide for travelers explaining different alternatives of flash sales available in the market. For instance, “Hotel Tonight is an app that lets you book day-of hotel rooms for reduced rates” [4]. Another example is Hotwire that offers “generous” discounts of hotel rooms for travelers that are willing to book a hotel without knowing the name of the place you are staying until you make the reservation. Other sites that offer discounts for airline tickets are Travelocity and Cheaptickets.

Finally, I would like the reader to reflect on the drawbacks of dynamic pricing. Dynamic pricing is not necessarily used to improve operations but can also be used to attract customers or do price discrimination. Staples, for instance, seems to be using dynamic pricing to offer discounts to people located close to competitors stores [5]. Then, how is dynamic pricing perceived by customers and what are the costs behind using this methodology?

REFERENCES

[1]Business Dictionary, Perishability definition, Business Dictionary.com webpage. Retrieved from:  http://www.businessdictionary.com/definition/perishability.html (Accessed 9/29/14)

[2] Gerard Cachon, Christian Terwiesch, Matching Supply with Demand: An Introduction to Operations Management, 3^rd edition, Mc Graw Hill, 2012 .Retrieved from: https://www.inkling.com/read/matching-supply-with-demand-cachon-3rd/chapter-16/16-3-overbooking (Accessed 9/29/14)

[3] N.A. (n.d.), Chapter 15: Pricing and Revenue Management, UT Dallas Webpage. Retrieved from: https://www.utdallas.edu/~metin/FuJen/Folios/scpricing_s.pdf (Accessed 9/29/14)

 [4]Lyn Mettler (September 25^th, 2014), Conquer Flash Sales and Bidding to Book Your Next Hotel Stay, Huff Post webpage. Retrieved from: http://www.huffingtonpost.com/us-news-travel/conquer-flash-sales-and-b_b_5857458.html (Accessed 9/29/14)

[5] Jennifer Valentino-Devries, Jeremy Singer-Vine and Ashkan Soltani (December 24^th, 2012), Website Vary Prices, Deals based on user information, The Wall Street Journal webpage. Retrieved from: http://online.wsj.com/news/articles/SB10001424127887323777204578189391813881534 (Accessed 9/29/14)