1. 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.

2. 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

3. 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.

4. 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.

5. 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).

6. 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

7. 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)

8. 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.

9. 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”